Corning - Q1 2023

Transcript

Operator (participant)

Welcome to the Corning Incorporated Quarter One 2023 earnings call. To place yourself into the Q&A queue, please push star one one. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.

Ann Nicholson (VP of Investor Relations)

Thank you, and good morning, everybody. Welcome to Corning's first quarter 2023 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Ed Schlesinger, Executive Vice President and 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'll be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are Non-GAAP measures used by management to analyze the business.

For the first quarter, the primary differences between GAAP and core EPS stem from restructuring charges and from non-cash mark-to-market adjustments associated with the company's currency hedging contracts and Japanese yen-denominated debt. In total, these increased core earnings in Q1 by $97 million. As a reminder, the mark-to-market accounting has no impact on our cash flow. 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're also available on our website for downloading. Now I'll turn the call over to Wendell.

Wendell Weeks (Chairman and CEO)

Thank you, Ann. Good morning, everyone. Last quarter, we told you that markets constituting about half of our sales were experiencing recession-level demand, that our first quarter sales would decline by greater than normal seasonality due to pandemic-related disruptions in China, that we would raise prices again to offset additional inflation and also begin to restore our productivity ratios to pre-pandemic levels. As a result, our margins would increase 1 percentage point-2 percentage points sequentially despite lower sales. That is exactly how the first quarter played out. First quarter sales were $3.4 billion and EPS was $0.41. Our actions to raise prices and restore productivity ratios began delivering notable results. Despite a 7% sequential sales decline, gross margin expanded 160 basis points sequentially to 35.2%.

Operating margin expanded 150 basis points from the prior quarter to 15.5%. Although conditions remain weak in multiple markets, we expect our results to improve in the second quarter. We remain focused on profitability and cash flow, and we will continue to align our cost structure to demand. I wanted to provide some context on the dynamics we're experienced in our key markets, and then I'll discuss how we're continuing to build our long-term growth opportunities across our businesses. Let's dive in. In display technologies, sales declined 3% sequentially as both volume and glass price declined slightly. In March, panel maker utilization increased, and we expect our volume in the second quarter to increase significantly from the first quarter.

As conditions continue to improve, we're optimistic that panel maker utilization is beginning to move beyond correction levels and will return to more normal levels in the coming quarters. In optical communications, sales declined 6% sequentially. Our pricing actions partially offset a greater than normal seasonal volume decline in connectivity solutions, which is associated with the pacing of several large customer projects. Our pricing and productivity actions resulted in net income improving 22% sequentially despite the lower sales. Government commitments to connect the unconnected are contributing to robust cable and fiber demand, and we continue to advance our leadership. Last month, we officially opened an optical cable manufacturing campus in North Carolina to help provide U.S. network operators with the cable they need to bring high-speed optical connectivity to underserved communities, particularly in rural America.

Commerce Secretary Gina Raimondo said, quote, "It is past time that every American be connected with affordable internet no matter where they live."We could not do it without the folks at Corning. We wouldn't have the fiber, the innovation or the cable." End quote. Finally, in environmental technologies, we saw increased adoption of gasoline particulate filters in the quarter, which helped drive a 9% sequential improvement in sales despite the languishing car market. Net income grew 19% in the segment based on our productivity actions and growing sales. To sum up the short term, we're seeing improvement in some of our markets, but a series of challenges continues to ripple across the global economy. Nevertheless, we expect to grow sequentially in the second quarter and to improve our key financial metrics.

For the back half of the year, I'd be disappointed if we didn't grow from second quarter levels. Longer term, we will continue to innovate and capture growth opportunities as they materialize. We're energized about Corning's future, and I'd like to review some of the reasons why. It all starts with our focused and cohesive portfolio. We maintain clear leadership in three core technologies and four proprietary manufacturing and engineering platforms that are vital to solving a broad range of significant challenges and shaping new industries. We apply new combinations of our assets and capabilities to advance important secular trends in tandem with our customers. By reapplying and repurposing our insights and assets across multiple opportunities and markets, we increase our profitability. In optical communications, we've been leading in the industry for more than 50 years.

This business is the most fully evolved example of Corning's focused portfolio, using all three of our core technologies and four of our manufacturing and engineering platforms. We will continue to apply these capabilities to help build a more connected world over the next 50 years. In display, by leveraging all three of our core technologies and evolving our fusion platform, we have achieved large scale and broad capabilities that have advanced our leadership position. As our customers evolve, we're helping them create a world with richer, more lifelike and ubiquitous displays. In mobile consumer electronics, we invented the cover glass category and redefined it by integrating glass with ceramics and by combining fusion with vapor deposition. We continue to advance the state-of-the-art with our leading cover materials, which have been deployed on more than 8 billion devices to date.

We've recently entered new product categories that provide opportunities for more of our content. For example, the camera lens covers on devices like the Samsung Galaxy S22 and S23 series. These advancements are excellent examples of our More Corning approach. We're also innovating in emerging technologies like augmented reality and bendable devices, which we expect to contribute to long-term growth. In automotive, we're helping build a world where vehicles are increasingly green and where software and displays are enabling new in-vehicle experiences. Our inventions are enabling industry leaders to meet stringent upcoming EU7 emissions regulations and achieve near zero emissions levels. We're collaborating with LG Electronics, a global technology and vehicle component solutions innovator, to advance in-car connectivity. Overall, we're helping to solve more and more of our customers' challenges in design, connectivity and autonomy.

At CES, we continue to generate strong industry excitement about how our technical glass and optics capabilities can expand the boundaries of what's possible. Finally, in life sciences, we're using Corning's core glass and optical physics technologies, along with our expertise in vapor deposition, precision forming and extrusion, to help support the discovery and delivery of new medicines, including biological treatments that are personalized, effective and safe. As you can see, our investments in distinctive capabilities have placed us at the center of secular trends touching many facets of daily life. We believe we will continue to develop category-defining products to transform industries and enhance lives. I'm also excited by our growth opportunities in the renewable energy industry, where I believe we can make significant additional contributions to a sustainable U.S.-based solar supply chain.

We're proud to make the world just a little bit better wherever we can, that extends to all of our stakeholders, especially in these uncertain times. We recently released our DE&I and sustainability reports, which capture the great progress we've made and underscore our commitment to helping move the world forward. As I wrap up my remarks, here's what I'd like to leave you with today. Moving forward throughout 2023, we will continue to focus on operating each of our businesses well and adjusting to meet the needs of the moment, including aligning our cost structure to the demand environment. At the same time, we're advancing growth initiatives and capabilities that will drive long-term success. We remain well-positioned to continue capturing some very rich sets of long-term opportunities that we've built across our market access platforms. I look forward to updating you on our progress.

I'll turn the call over to Ed, so he can get into the details of our financial priorities, along with our results and outlook. Ed?

Ed Schlesinger (EVP and CFO)

Thank you, Wendell. Morning, everyone. For the first quarter, we delivered results at the higher end of our expectations. Sales were $3.4 billion, and EPS was $0.41. Gross margin was 35.2%, and operating margin was 15.5%, both meaningful improvements from the fourth quarter. Our free cash flow for the quarter was negative $383 million. The first quarter is typically negative due to cash flow cyclicality. This quarter, free cash flow was also impacted by lower sales, reflecting the recession level demand we saw in several of our markets and overall weakness in China. Looking forward, we expect positive free cash flow starting in the second quarter and for the remainder of 2023. Overall, our team demonstrated operational rigor during the quarter.

We continue to make progress on improving our profitability by raising prices to help offset inflation and by adjusting our productivity ratios closer to historical levels. We will continue to align our cost structure to successfully weather the demand environment. We remain confident in our relevance to long-term secular trends and our More Corning approach. We are well-positioned to capture durable, profitable growth as the global economy improves. Let's turn to our first quarter segment results. In optical communications, sales were $1.1 billion, down 6% sequentially, as price increases partially offset a greater than normal seasonal volume decline associated with the pacing of customer projects. Despite the decline in sales, net income grew 22% sequentially to $159 million, primarily driven by pricing and productivity actions taken in late 2022.

We continue to believe the industry's underlying growth drivers are intact. Long-term demand for optical networks is strongly supported by trends in computation and by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population. We're pursuing three significant secular trends: broadband, 5G, and the cloud. We've got major innovation programs underway for each category, and our connectivity solutions offer economic advantages for a broader range of customers than ever before. Display technology sales in the first quarter were $763 million, down 3% sequentially as both volume and glass price declined slightly. Net income was $160 million, down 6% sequentially on lower sales. On our last call, I updated you on panel maker utilization dynamics.

At the beginning of Q4, utilization began to increase from its low point, but it leveled off in December due to pandemic-related disruptions in China. In January, the disruptions persisted, driving utilization back down and below retail demand. Subsequently, conditions in China improved. In March, panel makers increased their utilization and as a result, our volume increased from January and February levels. We're expecting panel makers to run at higher utilization levels in the second quarter than they did in the first quarter, and therefore, we anticipate our sequential glass volume to increase significantly. Favorable pricing is primarily driven by two factors. The first factor is the improving glass supply and demand balance. Glass makers have been taking additional tanks offline for maintenance and repairs.

As we've noted previously, we are taking this opportunity to upgrade our fleet with our latest technology, and we're actively managing the timing of tank restarts to align our supply to demand. The second factor is glass makers' profitability. In Q4, our two major competitors reported net losses, reinforcing our view that it is challenging for glass makers who have high costs to remain profitable at current pricing levels. Moving to specialty materials, demand for our long lead time semiconductor. However, smartphone and IT end market demand remains weak. First quarter sales were $406 million, down 20% sequentially, consistent with typical seasonality. Net income was $39 million, down sequentially due to lower sales.

We expect the continued adoption of our latest glass innovations, such as Gorilla Glass Victus 2, and the introduction of new glass formulations in the second half of 2023 to help offset continued softness in the smartphone and IT markets. We believe that new innovation opportunities and emerging technologies like augmented reality and bendable devices will contribute to long-term growth. Environmental technologies first quarter sales were $431 million. We saw increased GPF adoption in the quarter, which helped drive a 9% sequential improvement in sales. Net income increased 19% sequentially, driven by higher sales and improved productivity. We are not projecting a recovery in the automotive market in the second quarter, and our current view of the full year is that auto sales remain below pre-pandemic levels.

Our content-driven growth strategy continues to help us outperform the market. Turning to life sciences, first quarter sales were $256 million, down 13% sequentially, driven by lower demand for COVID-related products and the impact of customers drawing down their inventory. Net income was $9 million, driven by lower sales and our actions to reduce production levels in the quarter. Let me take a minute to describe the market dynamics impacting this business and what we expect for the year. In 2021 and the first half of 2022, growth was largely driven by pandemic-related demand, customers over-ordered due to supply chain challenges. Pandemic-related demand began tapering in the second half of 2022, the industry was left with elevated inventory levels. We expect our sales and profitability to improve as the industry corrects, we restore productivity ratios back to pre-pandemic levels.

Finally, in Hemlock and emerging growth businesses, sales in the first quarter were $386 million, up year-over-year and down sequentially, driven primarily by seasonally lower volumes in semiconductor polysilicon. Net income increased sequentially. We are seeing continued strong demand for solar-grade polysilicon to meet the need for a transparent, sustainable, and traceable solar supply chain in the U.S. market, and we continue to see strong growth in automotive glass solutions and additional opportunities in pharmaceutical technologies. Now, let's turn to our outlook. For the second quarter, we expect total company sales to grow sequentially, led by display as the industry continues to recover. We're not planning on strong second quarter sales, sequential sales improvements in optical communications, life sciences or specialty materials.

Turning to profitability, we expect to build on our progress from the first quarter and further improve profitability driven by our efforts to offset inflation and return productivity ratios to historical levels. We expect sales in the range of $3.4 billion-$3.6 billion, EPS in the range of $0.42-$0.49. Free cash flow will improve strongly due to normal cyclicality and higher sales. As I said earlier, we expect positive free cash flow in the second quarter. The most likely case for the second half is that sales and earnings increase versus the second quarter, although it's too early to be definitive given continued global economic uncertainty and its impact on consumer demand and infrastructure spending. I'd also like to reiterate our capital allocation priorities. We prioritize organic growth through research and development and capital expenditures.

The investment opportunities we target generate a 20% ROIC or greater. We expect 2023 full year CapEx to be slightly lower than 2022. We are also prioritizing rewarding shareholders with our excess cash in two ways. First is dividends, which we've raised for 13 years in a row. Second is share buybacks. We bought back about 5% of our outstanding shares in 2021 and will continue to be opportunistic. Preserving the financial strength of the company is always a top priority. We maintain a strong balance sheet that provides appropriate durability and flexibility. I'm proud to say Corning maintains one of the longest debt tenors in the S&P 500. Our average maturity is about 25 years, with no significant debt coming due in any given year.

In sum, the actions we are taking position us to come out of this period of uncertainty financially strong and well-positioned for a return to growth.

Now, I'd like to wrap up with a few key takeaways. In the second quarter, we expect sales, profitability, and cash generation to improve, driven by our profit improvement actions, cost controls, and continued recovery in display technologies. We're executing a highly disciplined approach to our investment decisions while maintaining a strong balance sheet. We're particularly focused on aligning our cost structure to the demand environment while maintaining the flexibility to address changing market conditions and capture upside as it occurs. Our long-term growth drivers all remain intact, and we're well-positioned to continue capturing growth tied to key secular trends such as those playing out in the optical communications and solar markets. With that, I'll turn it back over to Ann for Q&A.

Ann Nicholson (VP of Investor Relations)

Thanks, Ed. Okay, operator, we are ready for our first question.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Niknam with Deutsche Bank. Your line is now open.

Matthew Niknam (Director, Equity Research)

Hey, guys. Thank you for taking the question. Congrats on the quarter. Just two, if I could, on optical. If you could just talk about the latest you're hearing from your customers and, you know, maybe speak a little bit more in terms of expectations of what's embedded for the second quarter. Secondly, on optical, I'm just trying to figure out in terms of where you're seeing some of the pause or more near-term softness, is it broadly distributed, or is it maybe more in the sort of subscale or smaller carriers which may be facing tougher, maybe financial conditions which are impacting some of the longer-term investment plans? Thanks.

Wendell Weeks (Chairman and CEO)

Thanks for the questions, Matt, and the congratulations. Appreciate it. Opto. Here's the dynamics we're seeing and what we're hearing from customers and how we're reacting. First, fiber and cable demand remains quite tight. You can see that with exhibited by the success of our recent price increase actions in that space. For us, it's really the connectivity sales. Think of hardware, connectors, and the engineered systems for fiber to the home and large-scale hyper scale data centers are running below last year's levels, largely due to customer project timing. What we hear from customers is the underlying drivers remains very robust. Cloud, AI, ML, 5G, broadband connectivity. We're sort of facing this interesting dichotomy, which is all the long-term drivers remain in place, they're all speaking about very robust deployment plans.

We're just not seeing it in our order book, nor are we seeing it in earth being moved in these large civil works projects. We're taking these words with, you know, a little grain of salt, and we're just not reflecting in our forecast and our guide any real robust recovery yet until we see it. We're seeing this in large players, not just small folks. Some, I think, are seeking to conserve financial resources as they deal with their own uncertainty. At the same time, haven't given up on their long-term strategic plans. It doesn't mean that we won't see, you know, a strong bounce back to the run rate that you'd expect to match with their words on deployment plans. In the back half, we could see it.

We're just not gonna guide it until we have it in our hands. Does that make sense, Matt?

Matthew Niknam (Director, Equity Research)

That's great. Yeah, very much appreciated. I'll hand it over, others can get in the Q&A. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.

Shannon Cross (Managing Director)

Thank you very much. Wendell, can you talk a bit more on the display rebound that you're seeing, particularly what you saw in March, and you know, how you expect that to trend through the year? You know, what key points are you tracking to make sure that, you know, we are seeing a bit of a rebound there? Thank you.

Wendell Weeks (Chairman and CEO)

As you heard in Ed's comments, I thought we're good is that we originally started to see the recovery in quarter four. The pandemic shock fits in and sets in in China, sort of we go backwards. Then we expected that we would work our way through it and then start to see the recovery start again in quarter one. That's what we saw in March. We saw utilization start to climb. We're seeing it continue to climb through this month. As what we watch are what's actually happening with panel maker utilization. How are we seeing the dynamics play out between set makers and panel makers?

It's looking to us like we're gonna move beyond the recovery time, you know, the correction time in this market, and recovery is underway, and we'd expect to see that build in the coming quarters. That's the way it looks to us. That's the way it feels to us. That's what the data is telling us. It's still early, right? We're not coming out hardcore and saying, "Yeah, we're back to normal." We're not there yet, but we're seeing the trends all move in the right direction, Shannon.

Shannon Cross (Managing Director)

Thank you very much.

Operator (participant)

Thank you.

Ann Nicholson (VP of Investor Relations)

Great. Next question.

Operator (participant)

Our next question comes from the line of Steven Fox with Fox Advisors LLC. Your line is now open.

Steven Fox (Founder and CEO)

Hi. Good morning. A bit of a difficult question since it involves not guiding to the second half. Wendell, you mentioned in your opening remarks that you thought you could grow in the second half. Where would you say that, you know, based on what you're seeing today, that there's opportunities for, you know, typical seasonality, where maybe we should, you know, couch our expectations for seasonal improvements? The company's typically very back-end loaded in terms of their earnings growth, half over half. The Street is looking for about 25% quarter-over-quarter improvement in earnings in Q3. Thanks.

Ed Schlesinger (EVP and CFO)

Hey, Steven Fox, this is Ed Schlesinger. I'll take that one. Maybe I'll start with the second quarter, and then I'll go to the second half. As we think about the second quarter in our guide, we're thinking about a significant improvement in display. I think that's the primary driver. We're not expecting significant sales growth in the other businesses. You know, we specifically called out optical, life sciences and specialty materials. When you think about the second half, I think the first thing I'd start with is in specialty materials, we typically see customer product launches happen in the second half. It's a business where usually our second half is higher than our first half. I think that's a dynamic that could play out.

In our thoughts about the most likely case being the second half greater than the first half or greater than the second quarter, that's a place that I would expect to see growth. I think additionally, Wendell described the optical communications situation very well, and we could certainly grow from first to second quarter levels in optical communications. Life sciences, you could see a small increase. Depending on how display plays out, you could see growth there as well.

Steven Fox (Founder and CEO)

Great. That's helpful. Thanks.

Operator (participant)

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

Wamsi Mohan (Senior Equity Research Analyst)

Yes. Thank you. Good morning. Just to follow up on Steven's question, Wendell, when you said you would be disappointed if you did not see growth in second half from second quarter levels. Historically, you have on average seen second half up 7% over first half. It would be, you know, fairly dramatic for you to see not sequential growth. Would you say 2023 though is shaping up in line with that kind of an expectation of second versus first half? Is it more like recessionary years where maybe the dynamic tracked worse? If I could, I know you mentioned in very strong sequential volume growth in 2Q in display. Could you comment on how that looks on a year-on-year basis as well and where inventory levels are in display? Thank you.

Wendell Weeks (Chairman and CEO)

Let's, Ed, take the second one. On the first one, Wamsi, it's an excellent question. Here's the way the dynamics are playing out within even our own company is, our operating groups, our operating leaders, sound very much like you. They sound very much like our customers all sort of pointing towards, you know, what you'd see normally and, the behavior you would expect in our industries.

But what's happening is that's running into tension with us sort of in the center of the company who are looking at this and saying, "You know, I think this is a pretty unusual time we find ourselves in, and it's unclear to us, that, following the historical cycles or following what our customers are telling us is gonna necessarily lead us to the right answer in the short term." You're on top of the tension, which is why sort of we're wording it the way we are, which is we do expect growth. How much growth is under much debate within us, but it's not, I think, what we know, Wamsi, that's making us have that debate. It's the things that we don't know.

That's sort of the way it's playing out, and sort of each passing month brings us a little more clarity. That's where we are, Vamsee. Does that answer make sense to you?

Wamsi Mohan (Senior Equity Research Analyst)

Yeah. Yeah, it does, Wendell. Maybe just to step back for a second, if I could. Like, do you feel that the macro environment relative to 90 days ago for your end markets is getting better or worse?

Wendell Weeks (Chairman and CEO)

I think that the integration of the macro environment into our customers' business plans continues at different rates in different industries. I'd say by and large, people are speaking less robustly than they were 90 days ago. It's changed our point of view much. Well, at the center, probably not so much. In our operating units, probably more. I think the really interesting question isn't so much when does the sort of realization of what the broad economic outlook sets in in all the different industries, it's when does the reverse happen? Like, when do we start to see those more robust signals that shows we're really moving beyond it? I just haven't seen those yet, but that's what I'm looking for. As soon as we see them, you know, we'll tell you, Wamsi.

Wamsi Mohan (Senior Equity Research Analyst)

Yeah. That's very helpful, Wendell. Thank you.

Ed Schlesinger (EVP and CFO)

Yeah. Wamsi, you had asked about display, second quarter, you know, what we've incorporated in our second quarter guide versus the prior year. Just a couple of thoughts. One, remember last year, the way display played out is the first half was really strong. We started to see panel makers drop their utilization at the end of the second quarter, right? Q3 and Q4, they ran at much lower rates. Q1 and Q2, they ran at much higher rates, right? You know, if you think about the way we typically do our guide, we always have a range of outcomes, right? If I think about the second quarter this year for display, we think we'll run, you know. Now I'm gonna go back to sequential for a second.

We think panel makers will run sequentially higher in the second quarter than they did in the first quarter. It's possible they get to the same place as they did last year. That's certainly in the range of outcomes. I don't know that that's necessarily the most likely outcome.

Wamsi Mohan (Senior Equity Research Analyst)

That's super helpful.

Ed Schlesinger (EVP and CFO)

Does that help?

Wamsi Mohan (Senior Equity Research Analyst)

Thank you so much. Yeah. Yes, very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Joshua Spector with UBS. Your line is now open.

James James Cannon (Associate Director, Chemicals Equity Research)

Hey, guys. This is James Cannon on for Josh. I just wanted to touch on some of the dynamics with display pricing as you talked about some supportive dynamics. If I think about what played out in the first quarter, it seemed like you had demand trending sort of in line with weak January improving in March. I was just wondering if you give some color on what happened with pricing that you had guided to being flat and came in down, and how that plays into what we should expect for the second quarter.

Ed Schlesinger (EVP and CFO)

Yeah. I think, James, you know, price was slightly down in the quarter. I think in, you know, the way we think about favorable pricing, you know, it can, in any given quarter can be slightly up, it can be flat, it can be slightly down. I think it's generally in line with the way we were thinking about it.

James James Cannon (Associate Director, Chemicals Equity Research)

All right. Thank you.

Operator (participant)

Next question.

Ed Schlesinger (EVP and CFO)

Thanks.

Operator (participant)

Our next question comes from the line of Asiya Merchant with Citi. Your line is now open.

Asiya Merchant (Director and Equity Research Analyst)

Hey, thank you very much for taking my question. I was just looking into your free cash flow guidance. I know you guys have kind of talked about CapEx being, you know, slightly lower than 2022 levels with $1.6 billion and strong sequential improvement in free cash flow. Should we expect free cash flow, you know, given that earnings should improve from here on, can we expect free cash flow to be higher than what you guys had in 2022? Is that reasonable just given CapEx coming lower and, you know, hopefully operating on the earnings level as well, doing better than 2022?

Ed Schlesinger (EVP and CFO)

Yeah. Asiya, I'm gonna build a little bit on the way Wendell described the way we're thinking about sales and, you know, what could happen in the second quarter and the second half, right? I think there's certainly, you know, in a, in a high-end case, yeah, cash flow should follow our growth through the year. If we, you know, grow at the higher end in the second quarter and we continue to grow from there, yeah, there's certainly a case to be made that that would happen. I think we're taking a little bit more, you know, moderate view of what might happen. You know, again, capital slightly down and free cash flow improving as sales improves, and just our normal cycling of cash flow is stronger in the second quarter and in the second half.

Asiya Merchant (Director and Equity Research Analyst)

All right. I think you guided last time to, you know, seeing significant working capital improvements that should buoy free cash flow generation year. I guess I was just kind of circling back to those comments. Then any update on stock repurchases? Like, are you expecting to resume that, at a level that was, you know, maybe consistent with, like, if we dial it back a couple of years?

Ed Schlesinger (EVP and CFO)

No, no update on stock repurchases. You know, we'll just continue to remain opportunistic there. Maybe I'll make one other comment on your cash flow statement. You know, as I think about inventory, we talked about a lot of the dynamics that have driven it up through 2022 with respect to a very challenging supply chain environment and inflation. Our goal is to continue to drive it down. I think in Q1, it stayed relatively flat, down a little bit. Remember, sales were really low, so we actually feel really good about that.

Asiya Merchant (Director and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

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

Samik Chatterjee (Executive Director and Senior Analyst)

Hi. Thanks for taking my questions. Ed, if I can just follow up on your comment about growth in Specialty Materials in the second half. When I go back and look at it historically, it's been a wide range of as low as 5%, I think, last year to as high as 45%. Just trying to sort of get a better color there in terms of what we should we think about in terms of content growth or with some of your customers into the second half. What's that magnitude and what pulses are from a macro perspective, are you expecting to sort of from the first half versus second half variance there, just to be able to right size sort of what that magnitude looks like?

Wendell, one for you in terms of have you been able to digest Biden's recent plans about pushing electric vehicle adoption to 50% by 2030? How does that impact overall sort of growth outlook for environmental? Thank you.

Ed Schlesinger (EVP and CFO)

Hi, Samik. Yeah, I think, you know, you're certainly hitting on one of the areas that gives us a range of outcomes in the way we're thinking about the back half, you know, that is in specialty. Obviously, smartphone and PCIT demand remains relatively weak. I think it's possible that it's, you know, above the low end of the range you articulated, the sequential growth first, you know, second half over first half. I don't know that I would say it's gonna be at that, you know, at the high end of that range. We're not planning on, you know, growth levels at that, you know, growth at those levels.

Samik Chatterjee (Executive Director and Senior Analyst)

Wendell, any thoughts on the electrification plans by the from the current company?

Wendell Weeks (Chairman and CEO)

Yes. If by that I assume you mean sort of the recent administration announcement from the EPA on what along with some of the industrial policy that goes with it, but at that EPA regulation that they just released for comment. In that, the piece of it that we're most excited about is that they have now adopted the way to measure and the approach that the Europeans have, Chinese have, which will mean gas particulate filters will be required on all ICE vehicles in the U.S. That adds tremendously to our content, adds, you know, 2x-3x to our content level for U.S. vehicles and U.S. markets, not a small market.

What this enables us to do is sort of keep our overall content, that's in our environmental piece of our business, our emissions control piece of our business, sort of More Corning plays out as the number of ICE vehicles shrink. We were quite excited by that. Our core long-term answer to BEV is that that's where we have focused the bulk of our glass and optics and autonomy efforts. At this point in time, really our highest value add vehicles are electric vehicles that have the most content on it, despite not using our emissions control, because that tends to be where we're the most successful on both our interiors and our exteriors and now our autonomy products. Did I get to your question?

Samik Chatterjee (Executive Director and Senior Analyst)

Yep. No, that's interesting. Thank you. Thanks for the color there.

Operator (participant)

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall (Executive Director and Senior Equity Analyst)

Great, thanks. Maybe a question on the gross margin improvement, that you saw in Q1 over Q4, clearly on down volumes. Just how much more fuel is there to some of these activities to improve gross margins throughout the year, maybe kind of with or without volume improvements? I guess I'm just trying to see, have some of the pricing actions or efficiency actions kind of fully reflected in what we see in Q1, or just how much of that can carry throughout the year, and improve margins, even if we don't see kind of meaningful improvements in volumes? Thanks.

Ed Schlesinger (EVP and CFO)

Hi, Meta. Yeah. First, you know, thanks for the question, and maybe I'll just sort of reiterate how we described our margin improvement and what sort of played out in Q1, and then I'll get to sort of what happens from here.

Wendell Weeks (Chairman and CEO)

Yes, we increased the price. That's definitely a big driver of why margins went up. We're also looking to improve our productivity ratios back to the way we ran prior to the pandemic. We've made progress there that takes cost out, and we're certainly taking fixed cost out as well. Those drove our margins up sequentially on lower sales, which is very unnatural. I think there is definitely an opportunity for us to continue to do that. We do expect sales to go up in the second quarter, but we do expect profitability to go up as well from there. I think there's more room to run from where we are now, and we're gonna continue to work on it. It's clearly a priority for us.

Meta Marshall (Executive Director and Senior Equity Analyst)

Great. Thanks. Just does the opening of the North Carolina facility kind of impact optical profitability in the near term, or can you guys still get efficiencies? Or does that plant even add more efficiencies that can help margins there? Thanks.

Wendell Weeks (Chairman and CEO)

As always, you know, as we fire these plants up, get a little bit of drag, as we fill them. We've been able because of the way, because we prioritize protecting our people and our customers through the pandemic, we ran at very high staffing levels, pretty high inventory levels. We're been able with our improvements in those things to more than offset sort of the drag we've seen from opening up some of our new capacity. It's a very astute question. Yeah, we do always get a drag before we get these things all the way filled up and all of our technology deployment.

Meta Marshall (Executive Director and Senior Equity Analyst)

Great. Thanks.

Wendell Weeks (Chairman and CEO)

Very good.

Meta Marshall (Executive Director and Senior Equity Analyst)

Great. Thanks.

Wendell Weeks (Chairman and CEO)

getting productivity movement.

Meta Marshall (Executive Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of George Notter with Jefferies. Your line is now open.

George Notter (Managing Director, Equity Research Analyst)

Hi, guys. Thanks very much. I had a question about the optical business. You were talking about, fiber connectivity, impacts. I think you talked about customer pacing of projects as being the issue there. You know, as I look around the industry, it does seem like there's been some inventory correction out there. I know lead times for fiber connectivity products at one point were quite long, and, now they're, you know, to a significant degree, a lot shorter. Is the issue there really customer pacing, or is it more about, excess inventory and you're going through an inventory correction? Any thoughts would be great.

Wendell Weeks (Chairman and CEO)

George, what an outstanding question. Ed, what an interesting debate, right? The interesting about inventory is how much they put in the ground determines how fast they burn through their inventory, and of course, supply chain folks really across the globe, since they couldn't get everything they needed, for sure over-ordered and did all sorts of things, right? As supply chain times sort, that is certainly part of it, George, no question. I could even, if I was less cynical, right? I could even explain most of the change as being that. I look on the other side, and I'm looking at the pace of, you know, the actual ground getting moved, the actual data centers getting built, right?

There's a little bit of a disconnect there for me, too, in that, if I took my customer's statements of their deployment goals and integrated that with inventory, then I'd say, yeah, we have a very strong bounce back. Start to feel it pretty soon. We're still gonna take a little bit more of a conservative view. I don't know if any of that was helpful, George. You make an excellent point. You could be absolutely right. We're just gonna plan a little bit more conservatively and not plan on sort of a big jump up in the back half, driven by the fact that, you know, inventory came in line with deployments.

George Notter (Managing Director, Equity Research Analyst)

Got it. Just as a follow-up on that, when you think about that fiber connectivity business, is more of the issue then around data center build, or is it more about fiber to the prem type builds or other types of optical networks? What would you kind of pin it on?

Wendell Weeks (Chairman and CEO)

It's probably more fiber to the prem. Okay. The hyperscale is definitely slower, right? It's more fiber to the premise. It's those great big civil works builds that just aren't moving fast enough yet for us to feel comfortable to call, you know, a strong recovery in that business. Now, that being said, you know, that can happen quick, right? That can happen quickly because they haven't come off their stated goals yet. We're just not seeing it yet, George.

George Notter (Managing Director, Equity Research Analyst)

Got it. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Timothy Long with Barclays. Your line is now open.

Timothy Long (Managing Director and Senior Equity Research Analyst)

Thank you. just wanted to go back to, excuse me, display, for two, if I could. First, Ed, could you talk a little bit about, obviously a good recovery coming in the second quarter. I know you guys, you said took a lot of tanks offline and did some retrofitting. Could you talk about kind of how much margin lift we're gonna see, not just from the volume but from some of the changes? Just Wendell, may I just wanna go back to kind of visibility in this business. Obviously, there was, you know, some head fakes last quarter on utilization going up and then going down. What level of visibility do you have into those utilization?

I'm assuming you see well into this month, but how far out can you go with that? Thank you.

Ed Schlesinger (EVP and CFO)

Thanks, Tim. Just to start with your first question, you know, you're right. I think one of the key dynamics we talk about all the time is glass supply-demand balance being key for pricing. Yes, we do manage our tank fleet in that respect. We will continue to do that, you know, make sure that we manage our supply through that process. You know, that does impact profitability, that helps us, you know, going forward. I think a lot will have to do with how high the volume is in the quarter and, you know, how sort of all the dynamics play out.

Wendell Weeks (Chairman and CEO)

I think our visibility will will improve as we get to the end of this month, beginning of next. We have pretty good visibility, but, you know, our negotiations really are still going on given the pretty sharp upward inflection we're seeing in customers' volume requests. That dynamic is still sort of playing out, but, you know, it should get pretty clear over the next week or two.

Timothy Long (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

Ann Nicholson (VP of Investor Relations)

I think, we'll take one last question.

Operator (participant)

Our last question is from the line of Martin Yang with Oppenheimer. Your line is now open.

Martin Yang (Executive Director and Senior Analyst)

Good morning. Thank you for taking my question. There's a reference on the call on new formulations for Gorilla Glass. Can you maybe comment on that? Is it in line with the annual upgrade cycle we have observed in the past, or is that something a bit more significant, similar to Ceramic Shield?

Wendell Weeks (Chairman and CEO)

Martin, could you re-repeat the question? I lost you a little bit in the middle of that. Say that.

Martin Yang (Executive Director and Senior Analyst)

Oh, sure.

Wendell Weeks (Chairman and CEO)

Repeat the question.

Martin Yang (Executive Director and Senior Analyst)

The question is about the reference to Gorilla Glass. This year, There's a comment on new formulation for Gorilla Glass. Is that new formulation a similar upgrade in the past on the annual cycle, or is that new formulation something a little more significant, similar to the Ceramic Shield product?

Wendell Weeks (Chairman and CEO)

Oh, I got it now. It's not a jump up to glass ceramic. It's a pretty significant improvement at the glass level, and we're seeing really wide adoption. You're not seeing that fundamental, very big jump in our value add per device that you see from switching to a fundamentally new material set, with a very different manufacturing dynamics as well as drop dynamics. Pretty significant improvement, but in the same glass material set, doesn't have as much of a pop in terms of how much our sales revenue is per phone as something like the Ceramic Shield.

Martin Yang (Executive Director and Senior Analyst)

Got it. Thank you.

Ann Nicholson (VP of Investor Relations)

Thanks, Wendell. Thanks, Martin. I just wanna thank everybody for joining us today. Before we close, inform you that we will host our 2023 annual meeting of shareholders on April 27th. On May 23rd, we're going to attend the JPMorgan 61st annual Global Technology and Communications Conference. May 31st and June 1st, we will be attending the Bernstein 39th Annual Strategic Decisions Conference. On June 22nd, we'll be attending the Fox Advisors Virtual Transportation Technology Conference. Finally, a web replay of today's call will be available on our site starting later this morning. Thanks for joining us. Operator, you may disconnect all lines.

Operator (participant)

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