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Edited Transcript of 5201.T earnings conference call or presentation 30-Oct-19 7:00am GMT

Q3 2019 AGC Inc Earnings Presentation

Tokyo Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of AGC Inc earnings conference call or presentation Wednesday, October 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Shinji Miyaji

AGC Inc. - CFO, CCO, GM of Corporate Planning General Division & Director

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Presentation

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Shinji Miyaji, AGC Inc. - CFO, CCO, GM of Corporate Planning General Division & Director [1]

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This is Shinji Miyaji, the CFO. I would like to review the financial results for the 9 months ended September 30, 2019. Please turn to Page 5.

Here are the highlights of the financial results for the 9 months ended September 30. Net sales were JPY 1,123.8 billion, almost the same as in the previous year. Considering that the impact of foreign exchange was negative JPY 21.4 billion, sales actually increased on a constant currency basis. Positive factors included increase in shipments of life science products, electronic materials, such as optoelectronic materials and glass for display applications as well as newly consolidated subsidiaries while negative factors included a drop in selling prices of caustic soda in Southeast Asia and LCD glass substrates and a decrease in shipments of automotive glass. Operating profit was JPY 73.6 billion, a decrease of JPY 13.4 billion from the previous year. This was due to a decrease in selling price of LCD glass substrates and an increase in depreciation expenses due to the start-up of a new facility, maintenance repair and lower productivity in the domestic automotive glass operation and large-scale maintenance turnaround and deterioration in manufacturing costs in domestic chemicals operation. I will explain the details later.

Please turn to Page 6. Some comments on the business profit and items below that for the 9-month period. Business profit totaled JPY 51.2 billion due to the increase in operating income and recording of impairment losses of JPY 22.3 billion for the North American automotive glass operation and business structure improvement-related expenses and other income and expenses. Profit before tax was JPY 40.5 billion, a decrease of JPY 40.6 billion. Profit for the period attributable to the owners of the parent was JPY 28.9 billion, down JPY 36 billion year-on-year.

Please turn to Page 7. Year-on-year performance comparison by business segment for the 9-month period. The factors will be explained on the following pages.

Please turn to Page 8. Here, you can see the variance analysis on operating profit for the 9-month period year-on-year comparison. Operating profit for the 9 months' period decreased by JPY 13.4 billion year-on-year. Net effect of sales volume and product mix differential was positive JPY 15.1 billion. Although shipments of automotive glass in Europe and the U.S. decreased, there was an increase in shipments of optoelectronic materials, semiconductor-related electronic materials, glass for display applications and an increase in the number of contracts in biopharmaceuticals.

Net effective selling price differential was negative JPY 10.3 billion. Architectural glass prices rose in Europe and Japan, but the selling prices of LCD glass substrates and caustic soda in Southeast Asia declined. Impact of purchase price of fuel and raw material was negative JPY 2.5 billion. This was due to higher domestic electricity costs and raw salt price. Cost reduction and others had an impact of negative JPY 15.7 billion. Major factors included increased depreciation costs associated with the start-up of a new LCD glass substrate facility in China, maintenance repairs and lower productivity in domestic automotive glass operation, deterioration in manufacturing costs associated with the start-up of a new architectural glass facility in Southeast Asia, large-scale maintenance turnaround and deterioration in manufacturing cost in Chemicals.

Please turn to Page 9. Variance analysis and operating profit for the third quarter year-on-year comparison. Operating profit for the third quarter was JPY 32.1 billion, up JPY 5.4 billion year-on-year. Sales volume and product mix was positive JPY 10.7 billion. This was due to the increased shipments of optoelectronics materials, semiconductor-related electronic materials, glass for display applications and an increase in the number of contracts in biopharmaceuticals. Selling price was negative JPY 5.1 billion due to the drop in price of LCD glass substrates and caustic soda in Southeast Asia. Purchase price of fuel and raw material was positive JPY 600 million, coming from lower natural gas prices in Europe. Cost reduction and others was negative JPY 800 million. While specialty glass for display and automotive glass improved, there was an impact of the operational adjustments in architectural glass in regions other than Japan and Asia and deterioration in the manufacturing cost in Chemicals.

Please turn to Page 10. Quarter-on-quarter performance comparison by business segment is shown here. The factors will be explained on the next page.

Please turn to Page 11. Here, you can see the variance analysis on operating profit comparing the third quarter to the second quarter. Sales volume and product mix was positive JPY 8 billion. There was a big contribution from the shipments of optoelectronics materials and semiconductor-related electronic materials. Selling price was negative JPY 900 million due to the drop in selling prices of LCD glass substrates and architectural glass. There was no change in purchase price of fuel and raw material. Cost reduction and others was positive JPY 4.4 billion, coming from decrease in repair costs in LCD glass substrates and chemicals.

Please turn to Page 12. Here, you can see the consolidated statement of financial position comparing to the end of December 2018. Total assets were JPY 2,261 billion, an increase of JPY 25.2 billion from the end of December 2018. Considering that the impact of foreign exchange was negative JPY 68.3 billion, the actual increase on constant currency was JPY 93.5 billion. Inventories increased by JPY 11.2 billion, of which approximately JPY 6 billion was attributable to new consolidated subsidiaries. In addition, there was deliberate buildup of inventories related to synthetic pharmaceuticals and agrochemicals in preparation for a seasonal demand increase.

Please turn to Page 13. Consolidated statement of cash flow for the third quarter. Cash flows from operating activities was positive JPY 154.1 billion. Cash used for investing activities increased to JPY 151.2 billion due to aggressive capital investments, including M&As. As a result, free cash flow was positive JPY 3 billion.

Please turn to Page 14. CapEx, depreciation and R&D expenses for the first 9 months of 2019. Cumulative capital expenditure amounted to JPY 151 billion. Major investments included display-related facility, in-house power generation facility in Indonesian chemicals operation and a new furnace in Brazil.

Depreciation expenses during 9 months increased by JPY 13 billion to JPY 104.9 billion due to the start-up of an LCD glass substrates facility in China and an architectural glass facility and a power generation facility in Southeast Asia in Chemicals.

Next, impact of foreign exchange and change in the scope of consolidation. Please turn to Page 15. Here, you can see the impact of foreign exchange and change in the scope of consolidation compared with the same period of last year. The impact of currency translation was negative JPY 21.4 billion, mainly due to the depreciation of the euro. The impact of the change in scope of consolidation was JPY 14.9 billion, resulting from the consolidation of income statements of printed circuit board material businesses of Park Electrochemical and Taconic and Malgrat Pharma Chemicals, a synthetic pharmaceutical active ingredients' manufacturer.

Next, review of results by business and geographic segments. Please turn to Page 17. First, the Glass segment. Net sales for the 9-month period were JPY 559.2 billion, a decrease of JPY 15.3 billion and operating profit was JPY 9.7 billion, a decrease of JPY 8.7 billion year-on-year. Architectural glass was affected by the weaker euro, but shipments were firm and selling prices improved. As a result, sales totaled JPY 262.1 billion, the same level as in the previous year. Automotive glass sales declined JPY 15.2 billion to JPY 295.9 billion due to the impact of lower demand in regions other than Japan and Russia, in addition to the weaker euro. Operating profit decreased by JPY 8.7 billion at JPY 9.7 billion due to prolonged maintenance repair and lower productivity in domestic automotive glass and deterioration in manufacturing costs associated with the launch of a new architectural glass facility in Southeast Asia. As for the quarterly results, operating profit was JPY 2.3 billion, down JPY 600 million year-on-year. Although natural gas prices in Europe declined, business was affected by the deterioration in manufacturing costs due to the operational adjustment of architectural glass in regions other than Japan and Asia and declining selling prices in Europe and the U.S. In comparison with the second quarter, sales decreased by JPY 5 billion, as both architectural glass and automotive glass were affected by the weaker euro and the seasonality in Europe. Operating profit decreased by JPY 1.6 billion, coming from a decrease in demand due to summer vacation in Europe and a decline in architectural glass selling prices.

Please skip one page and turn to Page 19. The Electronics segment. Net sales for the 9 months were JPY 200.7 billion, an increase of JPY 19.8 billion, and operating profit was JPY 16.9 billion, up JPY 1 billion year-on-year. Displays posted higher sales and lower profit, despite increased sales of glass for display applications due to lower selling prices of LCD glass substrates and increased depreciation expenses due to the start of a new facility in China. Electronic materials posted higher sales and profits, owing to increased shipments of optoelectronics materials and semiconductor-related materials as well as the consolidation of the printed circuit board material businesses of Park Electrochemical and Taconic. Operating income for Q3 of FY 2019 was JPY 10.9 billion, an increase of JPY 4.8 billion from Q3 of 2018. Despite a drop in selling prices for glass substrates for LCDs and an increase in depreciation of new equipment in China, profits increased significantly due to increased shipments of glass substrates for displays and electronic materials. Next, in comparison with the Q2 of 2019, the profit increased by JPY 7.4 billion in Q3. Shipments of optoelectronics materials and semiconductor-related products increased.

Lastly, the volume of LCD glass substrates in Q3 of 2019 stayed flat as the previous quarter, but the price dropped gradually. In addition, the volume of LCD glass substrates in Q4 of 2019 is expected to fall by low single-digit percentage, whereas the prices will continue to decrease moderately in comparison to Q3 of 2019.

Please skip one page and look at Page 21. I will explain the Chemicals segment. Cumulative net sales for FY 2019 were JPY 348.3 billion, and operating income was JPY 43.9 billion, a year-on-year decrease of JPY 6.6 billion in revenue and decrease of JPY 6.4 billion in earnings. Sales and profits of chlor-alkalis and polyurethanes decreased due to the impact of falling caustic soda sales prices in Southeast Asia, worsening manufacturing costs due to maintenance turnarounds in Japan and rising electricity costs. In fluorochemicals and specialty chemicals, although sales of iodine products were strong, profits declined due to a decrease in demand for our semiconductor-related products, the impact of maintenance turnarounds in Japan and deterioration in cost of goods manufactured. In life science, sales and profits increased due to an increase in the number of biopharmaceutical API contracts and the new consolidation of Spanish synthetic biopharmaceutical API manufacturer, Malgrat Pharma Chemicals, from March this year. Operating income for Q3 of 2019 was JPY 17.7 billion, a year-on-year increase of JPY 1.1 billion. This is due to an increase in the number of biopharmaceutical API contracts.

Next, in comparison with Q2 of 2019, the profit increased by JPY 6 billion due to the improvement of spreads due to the fall in ethylene prices in Southeast Asia and the steady performance of life science.

Please skip one page and turn to Page 23. This page shows the performance of Q3 of 2019 by geographic segment. I would like to explain the performance of the U.S. and Europe, comparing the Q1 to Q3 cumulative number, as opposed to the same period of the previous year. In the U.S., sales increased by JPY 7 billion to JPY 130.3 billion. Despite a decrease in sales volume of automotive glass, sales increased by JPY 7 billion due to the consolidation of Park Electrochemicals printed circuit board materials business. Operating income was flat year-on-year due to a decrease in shipments of automotive glass, despite an increase in the number of biopharmaceutical API contracts.

Sales in Europe were JPY 254.4 billion. Although shipments of automotive glass decreased, sales of architectural glass remained strong and the number of biopharmaceutical API contracts increased. However, the impact of the depreciation of the euro was a negative of over JPY 15 billion. Therefore, sales decreased by JPY 12 billion.

Operating income was JPY 13.6 billion, an increase of JPY 700 million, due to a drop in natural gas prices and an increase in the number of biopharmaceutical API contracts, despite the impact of a decline in automotive glass shipments.

Next, I will explain sales and operating profit in Q3 compared to the same period of the previous year. In the U.S., operating profit decreased by JPY 600 million due to a decline in building glass sales prices, despite an increase in the number of biopharmaceutical API contracts. Operating income in Europe increased JPY 1.1 billion due to an increase in the number of biopharmaceutical API contracts.

Next, I will explain the Q-on-Q comparison of geographic segment. Please look at Page 24. Our net sales declined in Europe and the U.S., but sales in Japan and Asia increased significantly. I will explain about America and Europe. In the U.S., sales decreased by JPY 1.2 billion to JPY 43.1 billion. This is due to a decrease in shipments of automotive glass. In the U.S., operating income decreased by JPY 900 million to JPY 800 million due to the deterioration in the profitability of North American automotive glass. In Europe, shipments of architectural glass and automotive glass declined during nondemand periods, resulting in lower sales and profits.

Next, we will move on to the full year outlook. Please skip the next 3 pages and look at Page 28. From here, I will explain the outlook for the full year. No changes from the October 8 revision. Net sales are JPY 1.54 trillion, our operating income is JPY 105 billion, net income attributable to owners of the parent is JPY 41 billion, operating income margin is 6.8%, and ROE is expected to be 3.6%.

Please turn to Page 29. This shows the guidance by segment for the full year. There was no change from the forecast announced in July.

On the next page, we will explain the Q4 forecast by segment. Please look at Page 30. I would like to explain the Q4 outlook for each business compared to the previous quarter.

First is Glass. In architectural glass, shipments are expected to increase in Japan during the demand period. In Europe, demand period starts and shipments increase compared to the previous quarter, but supply and demand are on a softening trend. In the United States, shipments are expected to be flat in North America. South America is expected to increase shipments and prices will rise due to increased capacity. As for automotive glass, Japan's production efficiency is improving. In addition, due to the impairment loss recorded in the North American automotive glass business in the previous quarter, depreciation expenses are expected to decrease by about JPY 1 billion in Q4, and profits are expected to improve. However, our shipments are expected to decline in Japan, Europe and the United States. Overall, automotive glass earnings are expected to deteriorate compared to the previous quarter. And as a result, the Glass segment is expected to achieve lower operating income year-on-year, although profits were improved compared to the previous quarter.

Next is Electronics. The sales volume of glass substrates for LCDs is expected to decrease by low single-digit percentage, and the decline in sales will be milder. Shipments of specialty glass for displays are expected to decline due to the peak shipments in the previous quarter. In electronic components, shipments of optoelectronics materials are expected to decrease compared to the previous quarter, which was the peak of this year. However, shipments of semiconductor-related products are expected to remain firm in Q4. In the fourth quarter, there will be an impact on the start of the amortization of intangible assets and the newly consolidated printed circuit board materials business. As a result, profits for the Electronics segment are expected to deteriorate compared to the previous quarter, and the operating income will fall year-on-year.

Please turn to Page 31. Next is Chemicals. With regard to chlor-alkali and polyurethane, although the price of caustic soda in Southeast Asia is weak, spread continues to improve into Q4 due to falling ethylene prices. Fluoro products, specialty and life science are expected to improve profits due to seasonal factors such as demand for synthetic pharmaceutical and agrochemicals. As a result, the Chemicals segment is expected to see a slight increase in profits Q-on-Q.

Please turn to Page 32. I will explain the business performance of the strategic business. First of all, progress in Q3 of 2019. As you can see in the box in the strategic business, cumulative sales up to Q3 of 2019 increased in all 3 fields: life science, electronics and mobility. In addition, due to the effects of the new consolidation, progress has been made at a pace exceeding initial expectations, reaching JPY 115 billion. Operating income for Q3 of 2019 was JPY 18 billion due to an increase in shipments of semiconductor-related electronic materials such as optoelectronics materials and EUV mask blanks. The strategic business sales forecast for 2019 was raised from JPY 148 billion to JPY 160 billion, reflecting progress in sales and operating income up to the third quarter. Operating profit and strategic business for 2019 has been reduced to JPY 24 billion from the initial forecast of JPY 28 billion, as shipments in the electronics field, such as EUV mask blanks, are lower than expected.

I will explain the sales and operating income forecast for 2020 next February, but sales are expected to exceed the initial forecast of JPY 175 billion.

Please turn to Page 33. This will be the last page. Forecast for CapEx, depreciation and R&D expenses. In all cases, no change has been made since the announcement in July. CapEx is expected to be JPY 220 billion. Depreciation expenses will be JPY 140 billion, and R&D expenses will be JPY 50 billion.

That is all for my explanation. Thank you.