Corning Inc

NYSE:GLW

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Corning Incorporated Quarter Three 2020 Earnings Call. [Operator Instructions] It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations.

[Ann Nicholson, Vice President, Investor Relations]

Thank you, Catherine and good morning and welcome to our third quarter 2020 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer.

I would 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. Those 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 relate to GAAP data.

Our core performance measures are non-GAAP measures used by management to analyze the business. 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.

[Wendell Weeks, Chairman and Chief Executive Officer]

Thank you, Ann and good morning everyone. Today, we reported third quarter results demonstrating that the company is strong, financially healthy and well-positioned for growth. Sales were $3 billion, up 16% sequentially, EPS grew 72% sequentially to $0.43 as higher sales and strong manufacturing execution resulted in operating margin expanding to 18.3%, up 710 basis points sequentially and 20 basis points year-over-year. We generated $518 million of free cash flow and finished the quarter with $2.5 billion in cash.

Our financial performance has improved significantly since April and we expect a strong fourth quarter. Nevertheless, we remain vigilant and continue to adapt appropriately to multiple disruptive forces playing out around the world from the pandemic to civil unrest to recession and geopolitical struggles. We have been rising to the challenges since Day 1 and our priorities remain clear. First, we must make our values evident in our actions. Our commitment to the health, safety and well-being of our employees underlined every facet of our operations.

We are dedicating resources and providing leadership to support our communities around the world. We have launched Unity campaigns as well as racial and social equality programs targeting the multitude of hardships people are confronting right now. And when it comes to the global health fight, we are all in mobilizing our capabilities to combat the virus directly. We must also safeguard our financial health. Our third quarter results show that our decisive actions are providing clear benefits as we leverage cost savings and increase efficiencies across the company.

Regardless of the depth or duration of global uncertainty, we are doing everything in our power to keep the company strong and is working. Now to ensure that we emerge even stronger, we are continuing to invest to create additional revenue streams. We are inventing new-to-the-world materials and manufacturing processes as well as co-innovating new solutions in partnership with our customers. The relevance of our portfolio puts Corning at the heart of ongoing innovation with industry leaders and we continue to solve our customers’ toughest technology challenges. You may have seen Apple’s recent promotion of Ceramic Shield for the iPhone 12. They are featuring our new-to-the-world material, which is the world’s first highly transparent, color-free glass ceramic with performance that meets the rigorous demands put on smartphone cover materials. This latest innovation with Apple exemplifies our ongoing strategy of consistent long-term value creation by combining our deep expertise in glass science, ceramic science and optical physics with our unparalleled manufacturing and engineering capabilities.

Ceramic Shield melts the attributes that we love about glass, great optics and retain strength with the attributes we love about ceramics, most notably, its toughness. Ceramic Shield consists of ceramic crystals within a glass matrix. There are two big inventions here. The first was keeping the best damage-resistant attributes of both glass and ceramics. The second was ensuring high-optical transparency by growing index matched nanocrystals inside the glass matrix that are one-tenth the wavelength of light. As you recall, Apple made two investments in Corning, totaling $450 million as part of their advanced manufacturing fund and their commitment to foster innovation among American manufacturers. We take Apple for our longstanding product development partnership and their investments in new manufacturing technology, centered in our Harrodsburg, Kentucky facility. We could not be prouder to be a key component in the iPhone 12.

Now, it’s important to note, the iPhone 12 and many other flagship phones that we are also proud to be part of support 5G. 5G matters to us. The density of fiber necessary to deliver its promise is yet another example. You have seen us illustrate that up to 100x more fiber is required to deploy 5G in the city than 4G. This week, we are announcing a product design to help operators dramatically boost the speed and reduce the cost of their outdoor deployments. And we are embarking on new work to support Verizon’s to extend 5G indoors. The relevance of our portfolio and our deep customer relationships as illustrated by these advancements keep us at the center of the inexorable shift to optical.

Stepping back, in all the industries we serve, important market trends offer new challenges that Corning is uniquely qualified to address and new opportunities to integrate more Corning content into products. This is an especially powerful value creation letter in times of economic uncertainty, because we aren’t exclusively relying on people buying more stuff, we are putting more Corning into the products that people are already buying. We are clearly seeing the benefits of this ladder in today’s results as innovation adoption drove specialty material sales up 23% year-over-year, despite a declining smartphone market. This type of outperformance is not unique. From 2016 to 2019, we added $500 million in sales or 42% cumulatively, while smartphone sales actually went down and we are extending that growth streak this year.

In Environmental Technologies, we grew sales 16% in 2019 much faster than the underlying unit demand as automakers added gas particulate filters to cars and we again saw outperformance this quarter with sequential sales, up 68%. These are additional examples of the more Corning strategy at work and why that content story is so powerful for us. I want to stress one additional point. You often hear us say that our core technologies enabled life changing capabilities. In these times, we are increasing focus on life-saving innovations. Safe widespread vaccine delivery is one of society’s top priorities and glass packaging is critical. Our value innovation will help enable faster filling line speeds and increased patient safety. Right now, we are expanding capacity and supplying glass files for vaccines as part of Operation Warp Speed all while leveraging our leadership in life sciences to help support COVID diagnostic testing and virus research efforts.

Additionally, reduce fine particulate pollution the objective of our filtration products appears to be helpful for reducing infection rates. And we are excited about recent university lab test showing that our Guardiant antimicrobial glass particles kill bacteria and viruses, including SARS-CoV-2. We are also well-positioned to contribute as consumers continue to adapt to a world with social distancing. For example, fiber increases the capacity and performance of networks and glass provides the primary window to information and entertainment.

We are confident that we can bring further innovations to bear in many vital areas as the world addresses and recovers from its current challenges. Overall, we have very strong quarter on almost every dimension. From an innovation perspective, I just reviewed our significant advancements. Financially, we grew sales at double-digit rates sequentially and expanded margins to grow profitability even faster. Operationally, we performed well and I would like to share a few examples. In the midst of the pandemic, we deployed expert engineering teams to startup our Gen 10.5 melting operations in both Wuhan and Guangzhou. These facilities are positioning us well to capture the fast growing demand for large TVs. In mobile consumer electronics, we successfully scaled up a new-to-the-world manufacturing process and product to meet Apple’s iPhone launch. In automotive, we have flexed our operations to adjust to the fast pace ramp-up at OEMs after they significantly reduced production in quarter two.

In optical communications, we successfully adjusted our cost to the current market environment, resulting in significant profitability expansion despite flattish sales on a quarter-over-quarter basis. We also remain vigilant in our actions to safeguard the company’s financial strength. We are proud of our execution, especially given the current global uncertainties. Clearly, our employees around the world are dedicated to living our values and giving their best everyday.

Now, I will turn the call over to Tony, so he can give you some more insights on the quarter.

[Tony Tripeny]

Thank you, Wendell and good morning. We had a very strong third quarter. As Wendell highlighted, we executed effectively and we have bolstered our healthy balance sheet despite the ongoing macroeconomic challenges. Sales growth and cost actions led to strong sequential margin expansion further demonstrating that our operational adjustments are working. We have made significant adjustments to align our cost and operating plan with the lower anticipated sales. In total, Corning continues to demonstrate that it has the resources to deliver on our commitments and extend our leadership as we continue to focus on operational excellence, cash flow generation and prudent capital allocation.

Before I get into the details of our performance and results, I want to call out the changes at Hemlock during Q3 and cover the differences between GAAP and core results. On September 9, Hemlock Semiconductor Group redeemed DuPont’s 40.25% ownership interest in the company, which transforms Corning’s long-time ownership in Hemlock into a majority position. In the second transaction, Hemlock purchased certain manufacturing assets from DuPont and gained control of a critical raw material, thereby becoming a leading low cost producer of ultra-pure polysilicon to the semiconductor industry. Hemlock’s leadership position is backed by attractive, long-term take-or-pay customer contracts with upfront payments. And we are very excited about these transactions that are good for Hemlock, good for Corning and good for our shareholders. We didn’t put any money into the transaction and Hemlock generates a lot of cash. So, it’s debt is mostly paid back in 1 year. Corning improves its financials by adding sales and earnings. In the third quarter, we recognized $31 million of sales from the newly consolidated Hemlock. And Hemlock will add approximately $150 million in annual cash flow. Please see our web disclosure for helpful consolidation details.

Now on to GAAP, the largest differences between our third quarter GAAP and core results are a non-cash gain associated with the Hemlock transaction, ongoing restructuring charges, which are primarily non-cash and a mark-to-market adjustment for our currency hedge contracts. Now, with respect to the mark-to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark-to-market and reported a current value at the end of each quarter even though those contracts will not be settled in the current quarter. For us, this reduced GAAP earnings in Q3 by $103 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 provides highest 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 a constant currency rate 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 $1.7 billion in cash under our hedge contracts since their inception more than 5 years ago.

Now, I walk through our third quarter performance. At the outset of the pandemic, we are committed to preserving our financial strength and positioning the company to emerge even stronger. In Q1 and Q2, we told you we were responding to economic uncertainty by making significant operational adjustments. We said we reduced cost and capital spend to align with lower anticipated sales. And while ramping down production and reducing inventory impacts margins, we said that when sales growth resumed, we expect improved profitability.

Now, looking at the third quarter, we grew 16% – sales grew 16% sequentially to $3 billion and our operating margin expanded by 710 basis points sequentially to 18.3%. This resulted in net income of $380 million and EPS of $0.43, up 72% sequentially. We also said we would maintain a strong cash balance and generate positive free cash flow for the year. In the third quarter, free cash flow grew to $580 million. Cumulative free cash flow for the first three quarters was $484 million. We ended the quarter with a cash balance of $2.5 billion and we expect to generate additional positive free cash flow in the fourth quarter. As we continue to reduce cost, control inventory and execute well overall. As a result, I am confident that we will succeed on our free cash flow goals. These actions – the actions we have taken are clearly working. We have delivered great operational improvements, which started to show results in Q2 and really accelerated in Q3. We expect the benefit of these actions to continue in Q4 contributing to another strong quarter.

Now, let’s review the business segments. In Display Technology, fourth quarter sales were $827 million, up 10% sequentially and net income was $196 million, up 29% sequentially. Display Glass volume grew approximately 10% sequentially as panel makers increase utilization, resulting in strong incrementals. Sequential price declines were moderate as expected. From an end-market perspective, it appears that the impact from COVID-19 has been a positive. In developed markets, consumers are prioritizing in-home entertainment. Globally, work and steady from home trends are growing. This is increasing demand for TV and IT products. On the other hand, smartphone demand has been down. In total, the retail market as measured in square feet of glass is up mid single-digits year-to-date through August. Of course, the upcoming holiday retail season will be a big factor in how the market actually plays out for the full year.

Longer term, we remain confident that TV screen size will continue to grow. TVs at 65 inches or larger grew 40% year-to-date through August and we are well-positioned to capture the majority of that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing. We continue to expect display pricing to decline by mid single-digit percentage in 2020. We believe that three factors drive a favorable glass pricing environment. First, we expect glass supply demand to be down to tight. For Corning, we are ramping our Gen 10.5 tanks to align with panel makers schedules. Second, our competitors continue to face profitability challenges at current pricing levels. And third, display glass manufacturing requires periodic investments in existing capacity to maintain operations. Glass prices must support acceptable returns on those investments.

In Optical Communications, third quarter sales grew 10% sequentially to $909 million as carrier spending and deployments remain stable and enterprise sales grew slightly. Net income grew by $34 million or 42% to $150 million driven by improving cost performance. Looking forward, demand on the network is at an all-time high and we are seeing positive statements on capacity expansion for network operators. Currently, COVID-related factors hamper the ability to invest broadly in networks and operators are focusing efforts on addressing capacity bottlenecks. We believe operators will begin additional investments to reestablish normal network headroom and expand offerings. Large carrier and enterprise capital projects are inevitable, but as I said before, it’s always hard to predict the time.

Environmental Technologies sales in the third quarter were $379 million, up 68% sequentially as markets recover and OEMs continue to adopt GPS in Europe and China. We effectively adjusted our operations to pace with the market recovery and delivered net income of $69 million compared to breakeven in the second quarter. The business team did a great job over the last 6 months in reacting to the rapid shutdown and restart of auto production by controlling cost and maintaining flexibility.

Automotive sales increased 1% year-over-year as continued strong adoption of GPS helped us exceed vehicle production, which declined 6% year-over-year. In the quarter, we saw continued strong market performance in China, up slightly year-over-year. North America and European OEMs more than doubled production sequentially but declined 5% on a year-over-year basis. Diesel sales improved 49% from the second quarter, but were still down 15% year-over-year. The North American heavy-duty truck market improved, but remains in a cyclical downturn with vehicle production down 46% year-over-year. Third quarter sales of heavy-duty vehicles in China, however, continue to exceed 2020 levels and adoption of advanced content increased in preparation for China VI regulations. No doubt, it has been a challenging year for our automotive market access platform. However, we are recovering faster than the market due to increasing content, primarily GPS and advanced heavy-duty products.

Our content-driven strategy continues to drive strong results. Specialty material sales were $570 million in the third quarter, up 23% year-over-year and in sharp contrast to the smartphone market, which declined. Net income grew 59% year-over-year to $146 million. Sales growth was driven by Ceramic Shield, our new-to-the-world glass ceramic on the iPhone 12 as well as premium glass sales, IT and tablet glass sales in support of work from home trends and strength in our advanced optic products. In brief, strong adoption and commercialization of our innovations produced strong year-over-year results for the third quarter for specialty materials and we expect that to be true for full year 2020 as well. In life sciences, North America lab utilization is increasing and the pandemic is driving demand for laboratory diagnostic testing consumables. As a result, we are seeing increased demand for our products. In July, we carried out our long-term plan to ramp a new larger distribution center needed to support our growth and enhance our ability to address our customers’ increased needs around the world.

Starting up this summer in the middle of a pandemic proved to be more difficult than we expected, which constrained third quarter sales. Sales declined 8% sequentially. Net income declined 10% in line with the lower volume. We have added resources where required, implemented recovery plans and are confident that operations will support the required output in Q4. As a result, we expect strong sequential life science growth in the fourth quarter.

Now, I will turn to our balance sheet and our dedication to financial stewardship. As I mentioned at the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger. I have discussed the operational improvements we have implemented and our strong free cash flow generation. It is also important to note that we continue to maintain a conservative balance sheet with a strong cash position at the end of the quarter at $2.5 billion and we have a debt structure that is conservative by design and relatively unique. Today, our average debt maturity is about 25 years, the longest in the S&P 500. Over the next 15 months, we have only $70 million coming due. Less than half of our total debt is due within the next 20 years. And during this time, there is no single year with debt repayments over $500 million.

Our balance sheet is built for times like these. As I have previously mentioned, we expected generally positive free cash flow in the fourth quarter. And for the year we also expect to maintain a strong cash position and to maintain our dividend. We have the financial resources needed for the duration of the economic slowdown. In closing we demonstrated outstanding operational performance. In the quarter with significant sequential improvement in sales, net income, EPS and free cash flow, we are successfully carrying out the operational and financial goals we set up to stay strong during the prices we expect another solid quarter at the end of the year. We remain aware of potential impacts from the pandemic, the global recession, civil unrest and geopolitical tensions. Regardless of how long or what shape the recovery takes, Corning is effectively safe guarding its financial strength, our growth drivers are intact. And we continue advancing important growth initiatives with leaders in industries we serve. We are confident that our execution and market leadership positions us to emerge from the current global uncertainty even stronger. With that, let’s move in to Q&A. Ann?

[Ann Nicholson, Vice President, Investor Relations]

Thanks, Wendell. Okay Catherine, we are ready for the first question.

[Operator]

[Operator Instructions] Our first question comes from Asiya Merchant with Citigroup. Your line is open.

[Asiya Merchant, Citigroup]

Great. Thank you everyone. Good morning. And thank you for the opportunity to ask this question. Wendell, Tony given, the consumer spending has been very strong year to date, obviously, we have seen that in some of the results of our company. How do you guys kind of look into the next couple of quarters? Do you feel like visibility is good based on discussions with customers that consumers spending could continue at these levels? as it relates to smartphones, TVs, notebooks, etcetera, that use up all your products? And then simultaneously on the optical side, clearly starting to see some positive trends here I know it’s lumpy. But just as you look at the next couple of quarters, do you feel like you have good visibility at this point into how these quarters unfold and demand strength continues in the next couple of quarters? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

Asiya, I think that is an excellent question. And I don’t disagree with any of your observations on some of the macro data on both consumer and statements from network operators. That being said, we expect a really solid quarter further we just we are off to really good start this month. But that is really the extent of the guidance that we want to give at this time. And like last quarter, our business segments, as you just highlighted, continue to flash green. The global uncertainties just remind us to be very humble in our ability to precisely predict the future. And exactly how our customers are going to work their way through this uncertainty on the asset side, I totally get where you are coming from, because we have all heard from our customers or from the network operators that they are experiencing very strong demand on their network. I mean, there is some great examples. I mean, they publish this all the time, its great website by the way. The Internet and Television Association reports upstream growth. So, go from your home, up back into the network. It’s up 37%. Also just recently, we have seen the Microsoft Teams set a new single-day record of 4.1 billion minutes, unbelievable, right. And you also hear very strong statements from them that they want to build more capacity to be able to deal with this new baseline of demand that’s on them. Whether it’s AT&T and Verizon or cable TV, companies or the public cloud players, they are all quite public that they are planning increases in their capacity. That being said, predicting the exact quarter when these plans turn into deployment at scale, that’s just challenging. Just so once again, I just think we should be very humble in predicting that exact quarter and wait until we see that surge in shipments out of our factories to claim a rebound in the optical segment.

[Asiya Merchant, Citigroup]

Great, thank you. And if I may for Tony, as a follow-up, Tony, given you guys are kind of managing your CapEx and inventory levels with very prudently. Should we expect the CapEx trends that we have been seeing over the last few quarters to sort of continue here? Are we expecting any upsurge in CapEx at least over the next couple of quarters? Thank you.

[Tony Tripeny]

Yes. I think it’s – I’d say as we have talked about before, we have an ongoing amount of capital spending that we expand, that we spend on expanding our product lines and creating new innovations, but where we really spend a lot of money is when we get into the growth cycle and we are not currently in one of those build cycles and we don’t see ourselves in the build cycle over the next year or so. Of course, we want to eventually get to a build cycle, because when we get to a build cycle that means there is a lot of growth coming and we always get that with some commitments from customers and we actually saw the benefit of that in the third quarter with our work with Apple. But as we lookout over the next several quarters, we will be in the build cycle, so we won’t see a lot of change from a CapEx standpoint.

[Asiya Merchant, Citigroup]

Great, thank you.

[Operator]

Thank you. Our next question comes from Steven Fox with Fox Advisors. Your line is open.

[Steven Fox, Fox Advisors]

Thanks. Good morning. Just following up on the optical question is maybe this is wrong, but my perception is that there wasn’t a lot of content growth in the revenues based on what your customers are spending on right now. Wendell, can you just sort of talk about the outlook for content growth in optical as you eventually at whatever point it is see an optical spending surge? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer]

Once again, really good observation, Steve. Most of our operators have been dealing with this year is how do they eliminate some of the bottlenecks in their network in these challenging times, but while they are being as you say quite public on that they are planning to expand their networks. So, I think the content play is coming. And I believe that it will be quite strong, quite strong, whether it’s in cloud, because there has been such a huge shift in the cloud during this time or whether it’s in our carriers, our networks are just trained and operators don’t want to be in a spot where they are running close to redline and they need to establish that base. It’s higher. So – and I feel really good that it’s inevitable, right, but that being said, I call them the quarter, buddy.

[Steven Fox, Fox Advisors]

No, I wasn’t asking you to, but just to be clear in the capacity expansion ramp is what would start sort of your content growth coming back? Is that correct or am I thinking about it wrong? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

Yes, I think that is correct. That is when you really see it, you are asking actually a super subtle question, which is, we have a sort of more Corning play that is going on here as capacity comes in place more optical. And then we have particular set of innovations that reduce the cost of deployment pretty significantly in the efficacy of it. And those have a higher revenue content for us. So in that subtle question that you are asking, we will begin to see that without an acceleration in capacity growth, but you are not really going to feel we are not all going to feel great about it. Until that those technologies get deployed in new capacity expansions.

[Steven Fox, Fox Advisors]

Great. That is very helpful. Thank you.

[Operator]

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

[Samik Chatterjee, JPMorgan]

Great. Thank you for taking my question. If I can just have a quick clarification first I read up your comment, Wendell about lights flashing green, I just want to make sure I am reading it right that we are applying all segments are here in a positive backdrop where they can improve sequentially from 3Q to 4Q, including life sciences, for which you saying 3Q is the graph. And then in terms of just drilling down a bit on the specialty out performance that you are seeing, how much of this is driven by content increase versus wider adoption of the cover glass, and if we can drill down a bit on the different areas on a smartphone, you are gaining

[Wendell Weeks, Chairman and Chief Executive Officer]

So could you as a favor to me could you repeat the second part of that question? I am not sure that I understand it. Exactly could you do that again for me?

[Samik Chatterjee, JPMorgan]

Yes, the question was about Specialty or performance that you are seeing in your specialty materials and how much of the outperformance rate would be underlying smartphone market is content increase versus wider adoption of your cover glass and which are the areas of smartphone you are gaining content if you can just outline that

[Wendell Weeks, Chairman and Chief Executive Officer]

Okay, so we start with your second question first. So the bulk of that growth that you see is content increase. It’s basically a beating players about the latest innovations that is driving that revenue increase. So that is the primary driver Samik. to your first question, just to be precise, on what I mean by flashing green, I said the same thing, our last quarter. And what I am trying to get at here is not that we are going to have sequential growth or not that this one particular business is going to continue to do a certain thing we are trying to get at is sort of the dissonance that we feel between the demand that our customers are putting on us, and versus sort of the uncertainty we see in around the world. And so what I am trying to do is give you the insight that we see, which is, our businesses are doing well. We have got a good order book, and we are operating well. That being said, we still exist in the world that we exist in and we just got to be humble about giving exact guidance Samik.

[Samik Chatterjee, JPMorgan]

Yes, no sounds fair given the current environment. Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

Okay, thank you.

[Operator]

Thank you. Our next question comes from Rod Hall with Goldman Sachs. Your line is open.

[Rod Hall, Goldman Sachs]

Yes, thanks for the question. I wanted to start off with ceramic shield. And just well first of all, congratulations on being named on Apple’s stage I think that was the first. So, congrats on that. I wanted to, Wendell, just to ask you whether that is an exclusive deal and if it is exclusive is there a duration on that. Are there other OEMs? You could sell it to eventually, just kind of how are you thinking about exclusivity versus not on some materials like that? And also, maybe, I doubt you will tell me but I would be interested in the pricing differential with Gorilla. And then I have a second question for Tony, I noticed the inventory days jumped up a little bit in Q3. Tony, could you give us some maybe color on what drove that increase? Is it related to the smartphones cycle or something else? Thanks.

[Tony Tripeny]

I want to start with, yes, why don’t I start with the inventory one? It’s a pretty easy answer. During the quarter, we did the Hemlock transaction. We had to consolidate their balance sheet, which is increase the inventory for Corning in total, but of course, that just comes from that transaction itself. It’s great transaction. We are really excited about Hemlock. It generates a lot of cash. We really didn’t put any money and it pays back the debt within – most of it within a year, we have $150 million of ongoing free cash flow generation. So, we will make sure it’s clear and we can talk about it in our call later today that how much of the inventory came from that versus our own growth. If you look at the cash flow statement, we actually lowered our inventory about $187 million during the quarter. So, our inventory actually came down during the quarter, but it’s because of the Hemlock consolidation that you see it little bit different on the balance sheet.

[Rod Hall, Goldman Sachs]

Okay. Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer]

And Rod to your question, questions for me. First, your statement, thank you for the congratulations, we are really, really proud of that. Ceramic Shield is a lot of work. I have to tell you that it feels, but not quite right to use Apple’s name out loud. I still don’t think I’ve ever done that, like inside the company, we have a codename for Apple, but like we never even say Apple inside the company. So, if you could see me, I sound like turning a little pink and I am having an anxiety attack, if I read their name out loud. So if I stumble a little, be forgiving, so…

[Rod Hall, Goldman Sachs]

Really soaking it with Apple’s name in the [indiscernible]

[Wendell Weeks, Chairman and Chief Executive Officer]

Yes, exactly right. So, Ceramic Shield, that’s Apple’s. It’s that simple. That’s Apple’s. They helped us develop it. They invested in U.S. manufacturing for it. That’s theirs. And it should be theirs. And so that’s the way that is. Now, because we take a look at other players, we got a whole stream of innovations for them as well. I think what we would love to see ideal scenario would be that Apple has so raised – I can’t believe, I just said Apple again has so raised the bar on performance for everybody that all of the players will be coming to us to say, we need to have a way to compete with this incredible performance. And if that happens, that’s just going to all be good for us. We will not do Ceramic Shield for them, but we have got a lot of great ideas and we have got a lot of great products to help them raise their game to the new level. That was just set I’ve got to revert in Cupertino. So, the next one got to how much that you didn’t think I would answer was, what’s the price delta? I would say once again, Rod, you have effectively predicted the future. I am not going to answer that.

[Rod Hall, Goldman Sachs]

Alright. Thanks a lot. One wasn’t it used on the back of the phone, is it too expensive?

[Wendell Weeks, Chairman and Chief Executive Officer]

You have exhausted my ability to get myself to answer any question about that particular company, I just – I am reverting back to my mode and very sooner we are going to go back into using code words, so…

[Rod Hall, Goldman Sachs]

Alright. Well, thank you very much. Appreciate it.

[Operator]

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

[Wamsi Mohan, Bank of America]

Yes, thank you. Just to stay on this specialty for a second, on the content inquiries that you referred to Wendell, can you talk about whether you meant dollar content or unit content or both? And if both like what the relative split is and just sort of a little bit technical side of this, is the process similar to Gorilla where there is post processing done by finishers or something different that changes the margin structure of this product? And I have a follow-up on display.

[Wendell Weeks, Chairman and Chief Executive Officer]

Thanks for the question. So it started with smartphones, I think the right way to think about it is its content in dollars, right? It’s just reducing the valuable materials. Now, quite often with some of them like, is a great example is more valuable material that we are introducing, but it also reduces finishing cost for our customers. And so as a result, their part cost can be really close to what they had for Gorilla Glasses. So that is sort of a shape of the way that you should think about it. As it’s brand new products that have a higher price point is the primary way to think about it from your modeling perspective. That smartphones, I think you also got this going on in laptops, and the IP piece is also bringing up more content. Once again, the right way to think about this as more value added in our products that rather than increasing a mass of glass or ceramics on the products right now. It is super interesting question that when you think about 5G, where you have seen smartphones evolve to which is this all glass structure pretty much driven by Yes, we make awesome product and like glass is the best thing we have heard other than that. Is that they need the RF transparency. And if you pop open a 5G phone, any of them you will see how much antenna content is in there to be able to handle 5G and the ability to do 4G and to be able to do different players depending on where you are in the world. This same thing, I believe, is going to come to the IT products if they are going to be 5G users we are going to have to see more mass of our product but volume of our product on those devices to make them be truly great 5G devices.

[Wamsi Mohan, Bank of America]

Okay. That’s super helpful.

[Wendell Weeks, Chairman and Chief Executive Officer]

Has that answered your question?

[Wamsi Mohan, Bank of America]

Yes, it does Wendell. Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

Thank you.

[Wamsi Mohan, Bank of America]

And a follow-up, can you talk about the incremental strengthen display? There is some concern in the market that there were some ramp issues in the China glass market that is causing one of your competitors to take some share? Can you comment on that? And maybe just talk about any changes on the pace of like Korea ramp down? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

So I think from an overall standpoint, what is really driving the strength and display is what is happening in the end markets and that’s what always matters from a disclosure standpoint. As we talked about clearly TV demand in the COVID world has been pretty strong. So has IT demand in particularly notebooks and tablets and that’s fundamentally what we are seeing there and you see it in terms of couple of ways one is panel maker utilizations have been high and I think that has slowed down a bit of the exit of from Korea by some of the panel makers there. But in addition to that the value chain is pretty tight right now. So what is really driving this is customer demand from a retail standpoint as we mentioned as measured in glass it is up mid single digits on a year-over-year basis and that feels good.

[Ann Nicholson, Vice President, Investor Relations]

Next question.

[Operator]

Our next question comes from Peter Zdebski with Barclays. Your line is open.

[Peter Zdebski, Barclays]

Hi, this is Peter on for Tim Long. Congratulations on the quarter. One I wanted to ask about GPS. Prior to pandemic, I think we were looking at ahead of target about $350 million of sales in 2020. And given it looks like the auto rebound has been probably a little stronger than expected can you give us an idea of how close you might get to that number for 20? And then maybe your thoughts on timing towards that $500 million target?

[Wendell Weeks, Chairman and Chief Executive Officer]

I think that fundamentally, what is driving the sales from the GPS standpoint, of course is the adoption in Europe and the adoption in China. And on a year-over-year basis, the European market is down, it went down with a lot in Q3, but we are still down on a year-over-year basis, but China is actually up. So, I mean, I think they feel good about where GPS sales are and we certainly feel good that we are outperforming the market because of the content-driven part of GPS.

[Peter Zdebski, Barclays]

Thank you. Thank you.

[Operator]

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

[Meta Marshall, Morgan Stanley]

Great. Couple of questions. On Valor Glass, understanding the FDA has had a more their fast track policy over the last year on vaccines, but just post any vaccines just progress you think Valor Glass is making within the FDA did not need a drug by drug approval? And then maybe second, if there were any kind of administration change to come in the next year, just how quickly could emission standard changes flow through the environmental segment? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer]

Well, I will take the first one and maybe you can take the second coming on if you would like. So, Meta, I think in Valor, we are refueling with the broader adoption as well as strategies by our customers to make the regulatory burden be less. And the way to think about the FDA, they react to the plans of our customers and that will end up providing a basis for how it will evolve in the treatment of Valor Glass. In general, what I would say is ease of qualification is getting better for us as our customers get more sophisticated in how to do the regulatory moves. You just have to remember this is the first change really in vial packaging in 100 years. So, everybody was a little out of practice, right. So, I think with that’s coming in place and getting better. Our really focus though in Valor right now is to support the COVID-19 vaccine efforts. That’s what we are about. And we have focused most of our energy now on supporting various vaccine candidates. And for them, it’s a new drug. So, the new drug is just qualified in our vial. So there is no real additional regulatory burden. It’s the redo that provides an extra burden, not the originals. That product is superior in every way from the current product. So, that’s where we are really focusing our capacity efforts, that’s where we are focusing our technology efforts is to use all the Corning’s capabilities to make all of us and our children safer and that’s where we are aimed.

[Tony Tripeny]

And Meta, I think in terms of the environmental regulations, the way we look at it isn’t as – at least from our business standpoint and when we will start generating sales, it’s not as how quickly the regulations change, it’s when the implementations happened. And on environmental regulations, they always take several years to occur. They have got to change the automotive supply chain and the like. So, while the change in the regulations might be quick in terms of us actually seeing it in sales in North America that would clearly be a couple of years after that.

[Meta Marshall, Morgan Stanley]

Great. Thanks.

[Ann Nicholson, Vice President, Investor Relations]

Next question?

[Operator]

Our next question comes from Shannon Cross with Cross Research. Your line is open.

[Shannon Cross, Cross Research]

Thank you very much. I want to add a question, if we look back to April when you put in place the new operating structure it was sort of centered around your maps in that, what kind of benefits have you seen from that? How is it working just given we are I don’t know 5 months since it was launched? And then I have a follow-up. Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

So, we basically – because our innovations have been successful, we have sort of outgrown our previous structures. And so we put in place this new operating structure with Eric Musser as our President and CEO and named new market access platform leaders, next generation leadership to take each and every one of our major market access platforms. And it’s gone great. And my main evidence for that is look at the results. I mean it is really strong so I have got nothing but good things to say about that and I am overall quite hopeful going forward with this type of outstanding operations performance continues.

[Shannon Cross, Cross Research]

Okay. And then I don’t know Tony can you talk a bit about any operational improvements you could make to unlock now that it, wholly owned, just or is it or we should just assume it will be standalone. And there is not much leverage that we had? Thank you.

[Tony Tripeny]

I think there is plenty of operational improvements that we can make there we are basically based on as we thought about why we’re excited about this is based on their current operating performance and those long-term take-or-pay contracts that come with upfront cash payments there the good controls what they have over their cost both in terms of the assets that they bought from long term energy contracts at very favorable rates. And that’s why we’re confident in that ability to generate the $150 million of annual cash flow that being said we will start working on other kind of operational improvements we can make a good example of that is that we procure a lot more stuff as a company than they do I am sure there is opportunities there and those opportunities, from a technology standpoint, from the general manufacturing standpoint, market access stand point chances to look at different markets than they’ve had before. I mean, they will now get the whole power of the Corning machine to really drive that business. So I think on the whole we would expect improvements over time now how quickly they are happening like all we are just at the beginning stages of that and the fact it is going to have $150 million a year free cash flow generation is very exciting.

[Shannon Cross, Cross Research]

Thank you, Wendell.

[Ann Nicholson, Vice President, Investor Relations]

Okay. We will take one last question.

[Operator]

Our last question comes from Martin Yang with Oppenheimer & Company. Your line is open.

[Martin Yang, Oppenheimer & Company]

Hi good morning. Thank you for squeezing again. And my question is about Display Glass prices, is there any opportunity for you to see price improvement even more, I understand at the current structure protects your downside but given the tight supply on demand, right now is there any way for you to raise price?

[Wendell Weeks, Chairman and Chief Executive Officer]

I would say it did like you often heard me say Martin about display is it right way to think about it. To investment standpoint, in my opinion, I have so my operating folks who believe we can make this be back into a growth machine. But I continue to believe we should just count on it is aging gracefully generating tons of cash flow pricing, being moderate alright and that will decide normally in maturing business. That way the price declining and I think that’s the way to think about it. And right now our primary focus here is to make sure we bring up those Generation 10.5 plants that we have put in place and you can remember that was when we did this we did this with largely money support and from various Chinese players, where we kept 100% of the profit stream. And that move when we did it was really a bet on the growth of large size TV and a bet on the Chinese LCD manufacturers that bet is playing out really well. And the key for us is to grow that into its full capability as fast as we can.

[Ann Nicholson, Vice President, Investor Relations]

Thanks, Wendell. Great and thanks everybody for joining us today. Before we close, I wanted to let you know that we will be at the Baird Virtual Global Industrial Conference on November 10 and Morgan Stanley Virtual Life after COVID Conference on November 11, Credit Suisse Annual Technology Conference on November 30 and the Barclays Global Technology Media and Telecom Conference on December 10. Finally, the replay of today’s call will be available on our site starting later this morning. Operator, that concludes our call. Please disconnect our lines.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.