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Corning (NYSE:GLW)
Q3 2020 Earnings Call
Oct 27, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the Corning Inc. Quarter 3 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'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.

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 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. And now, I'll 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, the civil unrest to recession and geopolitical struggles. We've been rising to the challenges since day one, 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 underlines every facet of our operations. We're dedicating resources and providing leadership to support our communities around the world. We've 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're 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're doing everything in our power to keep the company strong, and it's working.

Now to ensure that we emerge even stronger, we're continuing to invest to create additional revenue streams. We're 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.

Their featuring are 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 melds the attributes that we love about glass, create optics and retain strength with the attributes we love about ceramics, most notably, it's toughness. Ceramics shield consist of ceramic crystals within a glass matrix.

There were 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 late. 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 thank Apple for our long-standing product development partnership and their investments in new manufacturing technology centered in our Harrisburg, 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've seen us illustrate that up to 100x more fiber is required to deploy 5G in a city than 4G. This week, we announced a new product design to help operators dramatically boost the speed and reduce the cost of their outdoor deployments. And we're embarking on new work to support Verizon's efforts 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. The Corning is uniquely qualified to address and new opportunities to integrate more Corning content into products. This is an especially powerful value creation lever in times of economic uncertainty, because we aren't exclusively relying on people buying more stuff.

We're putting more Corning into the products that people are already buying. We are clearly seeing the benefits of this lever in today's results as innovation adoption drove specialty materials 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're 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 the content story is so powerful for us.

I want to stress one additional point. You often hear us say that our core technologies enable life-changing capabilities. In these times, we're increasing focus on life-saving innovations. Safe widespread vaccine delivery is one of society's top priorities, and glass packaging is critical.

Our Valor innovation will help enable faster filling line speeds and increased patient safety. Right now, we're expanding capacity and supplying glass vials for vaccines as part of operation work speed, all while leveraging our leadership in life sciences to help support COVID diagnostic testing and virus research efforts. Additionally, reduced fine particulate pollution, the objective of our filtration products, appears to be helpful for reducing infection rates. And we're excited about recent university lab test, showing that our guardian antimicrobial glass particles, kill bacteria and viruses, including SARS-COV2.

We're 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're confident that we can bring further innovations to bear in many vital areas as the world addresses and recovers from these current challenges. Overall, we had a very strong quarter on almost every dimension.

From an innovation perspective, I just reviewed our significant advancements. Financially, we grew sales at double-digit rate sequentially and expanded margins to grow profitability even faster. Operationally, we performed well, and I'd like to share a few examples. In the midst of the pandemic, we deployed expert engineering teams to start-up our Gen 10.5 melting operations in both Wuhan and Guangzhou.

These facilities are positioning on 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 flexed our operations to adjust to the fast pace ramp-up at OEMs after they significantly reduced production in Quarter 2. 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're 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 every day. Now, I'll turn the call over to Tony, so he can give you some more insights on the quarter.

Tony Tripeny -- Executive Vice President and Chief Financial Officer

Thank you, Wendell, and good morning. We had a very strong third quarter. As Wendell highlighted, we executed effectively, and we 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've 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 transformed Corning's longtime 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 the long-term take-or-pay customer contracts with upfront payments. Now, we're very excited about these transactions. They 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 its debt is mostly paid back in one 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 noncash gain associated with the Hemlock transaction, ongoing restructuring charges, which are primarily noncash, 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 recorded at current value at the end of each quarter even though those contracts will not be settled in the current quarter.

For us, this 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 provide higher certainty for our earnings and cash flow, our ability to invest for growth, and our future shareholder distributions. Our non-GAAP or core results provide additional transparency into operations by using a constant-currency rate aligned with the economics of our underlying transactions.

We're very pleased with our hedging program and the economic certainty it provides. We've received $1.7 billion in cash under our hedge contracts since our inception more than five years ago. Now, I'll walk through our third quarter performance. At the outset of the pandemic, we 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 $518 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 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'm confident that we will succeed on our free cash flow goals. These actions -- the actions we're taking 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 technologies, third 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 study 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 a 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 balanced 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 $115 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 from network operators. Currently, COVID-related factors hampered 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 we've said before, it's always hard to predict the timing. Environmental technology sales in the third quarter were $379 million, up 68% sequentially as markets recovered and OEMs continued 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 six 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 we're 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 2019 levels, and adoption of advanced content increased in preparation for China 6 regulations.

No doubt, this 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 materials 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 test in 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 center 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'll 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've discussed the operational improvements we've 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 that ended 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 under $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 repayment over $500 million.

Our balance sheet is built for times like these. As I've previously mentioned, we expect to generate 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 crisis. We expect another solid quarter to end 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 safeguarding 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 to Q&A. Ann?

Ann Nicholson -- Vice President, Investor Relations

Thanks, Tony. OK, Catherine. We're ready for our first question.

Questions & Answers:


Operator

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

Asiya Merchant -- Citi -- Analyst

Great. Thank you, everyone. Good morning, and thank you for the opportunity to ask a question. Wendell, Tony, given the consumer spending has been very strong year-to-date, obviously, we've seen that in some of the results of our companies.

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 consumer spending could continue at these levels, you know, as it relates to smartphones, TVs, notebooks, etc., 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 trend continues in the next couple of quarters? Thank you.

Wendell Weeks -- Chairman and Chief Executive Officer

Asiya, I think that's 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 4. And we're just -- and we're off to a really good start this month. But that's really the extent of the guidance that we want to give at this time.

Like last quarter, our business segments, as you just highlighted, continue to flash green. The global uncertainty just reminds 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 opto side, I totally get where you're coming from because we've all heard from our customers, from the network operators that they're experiencing very strong demand on their network. I mean, there's some great examples.

I mean, they publish this all the time. It's a great website, by the way. The Internet and Television Association reports upstream growth. So, go from your home, up back into the network, that's up 37%.

And also, just recently seen the Microsoft teams set a new single day record of 4.1 billion minutes. Unbelievable, right? And you also hear really 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. Whether it's AT&T and Verizon or cable TV, companies, or even the public cloud players, they're all quite public that they're planning increases in their capacity. That being said, predicting the exact quarter when these plans turn into deployment at scale, well, 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, you know, to claim a rebound in the optical segment.

Asiya Merchant -- Citi -- Analyst

Great. Thank you. And if I may, for Tony, as a follow-up, Tony, given you guys are kind of, you know, managing your capex and inventory levels with very prudently. Should we expect the capex trend 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 -- Executive Vice President and Chief Financial Officer

Yes. I think -- I'll say, as we've talked about before, we have an ongoing amount of capital spending that we expand -- you know, that we spend on kind of expanding our product lines and creating new innovations. But where we really spend a lot of money is when we get into the build cycle, and we're not currently in one of those build cycles, and we don't see ourselves in a 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's a lot of growth coming, and we always get that with some commitments from customers.

And, you know, we actually saw the benefit of that in the third quarter with our work with Apple. But as we look out over the next several quarters, no, we don't -- we won't be in a build cycle, so we won't see a lot of change from a capex standpoint.

Asiya Merchant -- Citi -- Analyst

Great. Thank you.

Operator

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

Steven Fox -- Fox Advisors -- Analyst

Thanks. Good morning. Just following up on the optical question. 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

All right. 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, you know, in these challenging times. But while they're being, as you say, you know, quite public on that they're 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's 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're running close to red line, and they need to establish that base that is higher. So, I feel really good that it's inevitable, right? But that being said, I call them the quarter, buddy.

Steven Fox -- Fox Advisors -- Analyst

No, I wasn't asking you to. But just to be clear, I know 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's when you really see it. You're asking actually a super subtle question, which is we have a sort of more Corning play that's 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're asking, we'll begin to see that without an acceleration in capacity growth, but you're not really going to feel it. We're not all going to feel great about it until that -- those technologies get deployed in new capacity expansions.

Operator

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

Samik Chatterjee -- J.P. Morgan -- Analyst

Great. Thank you for taking my question. If I can just have a quick clarification. First, right to your comment when -- about light flashing green, I just want to make sure I'm reading it right that you're implying all segments are here in a positive backdrop, where they can improve sequentially from 3Q to 4Q, including Life Sciences, for which you're saying 3Q is that trough.

And then in terms of just drilling down a bit on the specialty outperformance that you're seeing, how much of this is driven by content increase versus wider adoption of the cover glass? And if you can drill down a bit on the different areas on a smartphone, you're gaining content?

Wendell Weeks -- Chairman and Chief Executive Officer

Samik, could you -- as a favor to me, could you repeat the second part of that question, I'm not sure that I understand it exactly. Could you do that again for me?

Samik Chatterjee -- J.P. Morgan -- Analyst

Yeah. The question was about specialty outperformance that you're seeing in specialty materials? And how much of the outperformance relative to the underlying smartphone market is content increase versus wider adoption of your cover glass? And which are the areas on a smartphone you're gaining content, if you can just outline that?

Wendell Weeks -- Chairman and Chief Executive Officer

OK. So, let me start with your second question first. So, the bulk of that growth that you see is content increase. It's basically of beating players adopting our 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 last quarter. And what I'm trying to get at here is not that we're going to have sequential growth, and not that this one particular business is going to continue to do in a certain thing. What I'm 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'm trying to do is give you the insight that we see, which is our businesses are doing well. We've got a good order book, and we're operating well. That being said, you know, we still exist in the world that we exist in. We just got to be humble about giving exact guidance.

Does that make sense to you, Samik?

Samik Chatterjee -- J.P. Morgan -- Analyst

Yes. No. Fair. Sound fair given the current environment.

Thank you.

Wendell Weeks -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Rod Hall -- Goldman Sachs -- Analyst

Yeah, thanks for the question. So, 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 ask you whether that's an exclusive deal. And if it is exclusive, did that -- 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'll tell me, but I'd 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 smartphone cycle or something else? Thanks.

Wendell Weeks -- Chairman and Chief Executive Officer

Start with...

Tony Tripeny -- Executive Vice President and Chief Financial Officer

Yeah, why don't I start with the inventory. One, it's a pretty easy answer. You know, during the quarter, we did the Hemlock transaction, and 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 a great transaction. We're really excited about Hemlock. Generates a lot of cash. It pays -- we didn't put any money in.

It pays back the debt, you know, within most of it within a year, we have $150 million of ongoing free cash flow generation. So, you know, what we'll make sure is clear, and we can talk about it in our call later today that how much of the inventory came from that versus our own build. If you look at the cash flow statement, we actually lowered our inventory, about $187 million during the quarter. So, our inventories actually came down during the quarter, but it's because of the Hemlock consolidation that you see a little bit different on the balance sheet.

Rod Hall -- Goldman Sachs -- Analyst

OK. Thanks.

Wendell Weeks -- Chairman and Chief Executive Officer

And Rob, to your questions for me. First, your statement. Thank you for the congratulations. We're really proud of that for Ceramic Shield.

It was a lot of work. I have to tell you that it feels, but not quite right to use, Apple's name out loud. I don't think I've ever done that. Like any size of the company, we have a code name for Apple.

And like, we never even say Apple inside the company. So, like, if you could see me, I sound like turning a little pink, and I'm having an anxiety attack that I'm using your name out loud. So, if I stumble a little, please be forgiving. So...

Rod Hall -- Goldman Sachs -- Analyst

Really soaking it with Apple's name in the [Inaudible].

Wendell Weeks -- Chairman and Chief Executive Officer

That's 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, as we take a look at other players, we got a whole stream of innovations for them as well. I think what we're -- 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've got a lot of great ideas and we've 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 -- Analyst

All right. Thanks. Why wasn't it used on the back of the phone? 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'm reverting back to my mode. And very soon, we're going to go back into using code words. So...

Rod Hall -- Goldman Sachs -- Analyst

OK. All right. Well, thank you very much. I 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 Merrill Lynch -- Analyst

Yes. Thank you. Just to stay on this specialty for a second. On the content increase 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.

In the -- is the process similar to Gorilla where there's 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, starting with smartphones, I think the right way to think about it is its content in dollars, right? It's just we're introducing more valuable materials, right? Now, quite often with some of them like [Inaudible] is a great example, is it is a more valuable material that we're 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 Glass 6. So that's sort of the shape of the way, but 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've also got this going on in laptops in the IT piece is we're also bringing up more content. Once again, the right way to think about this is more value added in our product set rather than increasing a mass of glass or ceramics on the products right now. But super interesting question to when you think about 5G, where you've seen smartphones evolve to, which is this all-glass structure, pretty much, is driven by, yes, we make awesome product, and like glass is the best thing.

I mean, but 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 an 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 there are going to be big 5G users, we're going to have to see more mass of our product or volume of our product on those devices to make them be truly great 5G devices. That answer your question, Wamsi?

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Yes. Yes, it does, Wendell. And if I could follow-up, can you talk about the incremental strength in display? There's some concern in the market that there were some ramp issues in the China glass market that's causing one of your competitors to take some share. Can you comment on that? And maybe just talk about any changes in the pace of Korea ramp down? Thank you.

Tony Tripeny -- Executive Vice President and Chief Financial Officer

So, I think from an overall standpoint, what's really driving the strength in display is what's happening in the end markets, and that's what always, you know, matters from a display standpoint. And as – you know, as we talked about, clearly, TV demand in the COVID world has been pretty strong, but so has IT demand. In particular, notebooks and tablets. And, you know, that's fundamentally what we're seeing there.

And you see it in terms of -- in a 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, you know, what is really driving this is in customer demand. And even, from a retail standpoint, as we mentioned, as measured in glass, it's 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 -- Analyst

Hi. This is Peter, on for Tim Long. Congratulations on the quarter. I wanted to ask about GPS.

Prior to the pandemic, I think we were looking at a target of about $350 million of sales in 2020. And given that it looks like the auto rebound has been probably a little stronger than expected. Could you give us an idea of how close you might get to that number for '20? And then maybe your thoughts on timing toward that $500 million target?

Tony Tripeny -- Executive Vice President and Chief Financial Officer

Yeah. You know, I think that, you know, fundamentally, what is driving the sales from a GPS standpoint, of course, is the adoption in Europe and the adoption in China. And, you know, on a year-over-year basis, the European market is down. It rebounded a lot in Q3, but it's still down on a year-over-year basis, but China is actually up.

So, I mean, I think we feel good about where GPS sales are. We certainly feel good that we are outperforming the market because of the content-driven part of GPS.

Peter Zdebski -- Barclays -- Analyst

Thank you, Tony.

Operator

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

Meta Marshall -- Morgan Stanley -- Analyst

Great. A couple of questions. On Valor Glass, you know, understanding, you know, the FDA has had a more -- you know, 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 do 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'll take the first one, and maybe you can take the second. Comment on, if you'd like. So, Meta, I think in Valor, we're refueling the broader adoption as well as strategies by our customers to make the regulatory burden be less. I think the way to think about the FDA is they'll 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 a hundred years. So, everybody was a little out of practice, right? So, we're -- I think with that coming in place, we're getting better. Our real focus though in Valor right now is to support the COVID-19 vaccine efforts.

That's what we're about. And we have focused most of our energy now on supporting various vaccine candidates. And for them, it's a new drug. So, it's -- the new drug is just qualified in our vial because there's no real additional regulatory burden, right? It's the redo that provides an extra burden, not the original.

Our product is superior in every way. From the current product. So that's where we're really focusing our capacity efforts. That's where we're focusing our technology efforts is to use all of Corning's capabilities to make all of us and our children safer, and that's where we're aimed.

Tony Tripeny -- Executive Vice President and Chief Financial Officer

And, Meta, I think in terms of the environmental regulations, you know, 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 happen. And on environmental regulations, they always take several years to occur. They've 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 -- Analyst

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 -- Analyst

Thank you very much. I wanted to add a question. You know, 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, you know, just given we're, I don't know, five months since it was launched? And then I have a follow-up.

Wendell Weeks -- Chairman and Chief Executive Officer

So, we basically -- because our innovations have been successful, we've sort of outgrown our previous structures. And so, we put in place this new operating structure, with Eric Musser as our President and COO, 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's really strong. So, I've got nothing but good things to say about that. And I -- and we are all quite hopeful going forward of this type of outstanding operations performance continues.

Shannon Cross -- Cross Research -- Analyst

OK. And then, I don't know, Tony, can you talk a bit about any operational improvements you could make to hemlock now that it's, you know, wholly owned? Just -- or is it where we should just assume it will be stand-alone and there's not much leverage that we had? Thank you.

Tony Tripeny -- Executive Vice President and Chief Financial Officer

I think there is plenty of operational improvements that we can make there. You know, we obviously, based our -- as we thought about why we're excited about this is based on their current operating performance, those long-term take-or-pay contracts that come with upfront cash payments, the good controls that they have over their costs, both in terms of the assets that they bought from DuPont, but also some, you know, long-term energy contracts that are 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 there.

And a good example of that is that we procure a lot more stuff as a company than they do. And so, I'm sure there's opportunities there. I think there's opportunities from a technology standpoint, from a general manufacturing standpoint, market access standpoint, you know, chances to, you know, 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, you know, I think on the whole, you know, we would expect improvements over time. Now, how quickly that happen and the like all, we're just at the beginning stages of that. And the fact it's going to have the $150 million a year of free cash flow generation is very exciting.

Shannon Cross -- Cross Research -- Analyst

Thank you.

Ann Nicholson -- Vice President, Investor Relations

Catherine, we'll take one last question.

Operator

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

Martin Yang -- Oppenheimer and Company -- Analyst

Hi. Good morning. Thank you for squeezing me in. And my question is about display glass prices.

Is there any opportunity for you to see price improvement even more? I understand that the current structure protects your downside. Just given the tight supply demand right now, is there any way for you to raise price?

Wendell Weeks -- Chairman and Chief Executive Officer

I would say that, like you'd often heard me say, Martin, about display. It's the right way to think about it from an investment standpoint. In my opinion, I have some of 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 as aging gracefully, generating tons of cash flow and pricing being moderate, right? And that we just like normally in a maturing business.

That rate of price decline declining. And I think that's the way to think about it. Yeah, and right now, our primary focus is to make sure we bring up those Gen 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 from various Chinese players while we kept 100% of the profit stream.

And that move, when we did it, was really a bet on the growth of large-sized 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'll be at the Baird Virtual Global Industrial Conference on November 10, the Morgan Stanley Virtual Life After COVID Conference on November 11, the 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 all lines.

Operator

[Operator signoff]

Duration: 67 minutes

Call participants:

Ann Nicholson -- Vice President, Investor Relations

Wendell Weeks -- Chairman and Chief Executive Officer

Tony Tripeny -- Executive Vice President and Chief Financial Officer

Asiya Merchant -- Citi -- Analyst

Steven Fox -- Fox Advisors -- Analyst

Samik Chatterjee -- J.P. Morgan -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Peter Zdebski -- Barclays -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Shannon Cross -- Cross Research -- Analyst

Martin Yang -- Oppenheimer and Company -- Analyst

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