Q2 2019 AGC Inc Earnings Presentation
Tokyo Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of AGC Inc earnings conference call or presentation Tuesday, July 30, 2019 at 7:30:00am GMT
TEXT version of Transcript
* Shinji Miyaji
AGC Inc. - CFO, CCO, GM of Corporate Planning General Division & Director
Shinji Miyaji, AGC Inc. - CFO, CCO, GM of Corporate Planning General Division & Director 
Good evening. This is Shinji Miyaji, the CFO. I would like to go over the financial results for the 6 months ended June 30, 2019.
Please turn to Slide 5. Here, you can see the highlights of the financial results for the first and second quarters. Net sales were JPY 737.5 billion, down JPY 8 billion year-on-year. But this included the adverse impact of exchange rates totaling JPY 10.6 billion, without which sales were actually up year-on-year. This is thanks to such positives as an increase in the number of contracts in biopharmaceuticals and shipments of specialty glass for display applications, and the effect of newly consolidated subsidiaries, which offset such negatives as price declines for LCD glass substrates and caustic soda in Southeast Asia and lower shipments of automotive glass.
Operating income totaled JPY 41.5 billion, down JPY 18.8 billion year-on-year. This was due to selling price decline of LCD glass substrates, increase in depreciation following the start-up of a new LCD glass substrate facility, facility repairs and lower productivity in automotive glass in Japan and large-scale maintenance turnaround and production cost increase in chemicals in Japan. Details will be given later.
Slide 6 shows the consolidated statements of profit or loss. Profit before tax was down JPY 22.4 billion year-on-year at JPY 42.6 billion due to the lower operating profit as well as recording of business restructuring expenses included in other income and expense. Profit for the period attributable to owners of the parent totaled JPY 32.3 billion, down JPY 15.8 billion. As for the foreign exchange, the yen appreciated by about 5% against euro. Crude oil price, Dubai, remained about the same.
Slide 7, year-on-year performance comparison by business segment. For the 6-month period, Electronics and Ceramics and Other posted higher sales, while Glass and Chemicals recorded sales decline. I will explain the factors using the next few slides.
Please turn to Slide 8. Variance analysis on operating profit for the 6-month period year-on-year comparison. Year-on-year, the operating profit declined by JPY 18.8 billion. Sales volume and product mix was plus JPY 4.4 billion. While shipments of automotive glass decreased in Europe and North America, shipments of specialty glass for display applications and the number of contracts in biopharmaceuticals increased. Selling price was minus JPY 5.2 billion. While prices for architectural glass were higher in Europe and Japan, price declined for LCD glass substrates and caustic soda in Southeast Asia. Purchase price of fuels and raw material, minus JPY 3.2 billion, resulting from higher electricity cost and price increases of gas and soda ash in Japan. Cost reduction and Others, minus JPY 14.9 billion due to an increase in depreciation expenses following the start-up of a new LCD glass substrates facility in China, facility repairs and lower productivity in automotive glass in Japan and large-scale maintenance turnaround and production cost increase in Chemicals in Japan.
Please turn to Slide 9. Variance analysis on the second quarter operating profit year-on-year comparison. Operating profit in 2019 was JPY 9 billion less at JPY 20.6 billion. Sales volume and product mix, plus JPY 3.6 billion. While shipments of automotive glass declined, shipments of speciality glass for display applications and the number of contracts in biopharmaceuticals increased. Selling price, minus JPY 5 billion. While prices for architectural glass were higher in Europe and Japan, prices declined for caustic soda in Southeast Asia and LCD glass substrates. Purchase price of fuels and raw material, minus JPY 1.8 billion, coming from higher electricity costs in Japan and higher heavy oil price. Cost reduction and Others, minus JPY 5.8 billion due to an increase in depreciation following the start-up of a new LCD glass substrate facility in China, facility repairs and low productivity in automotive glass in Japan and production cost increase in Chemicals in Japan.
Please turn to Slide 10. Quarter-on-quarter performance comparison by business segment. Net sales were up for all segments. Operating profit was down JPY 300 million. Factors are explained in the next slide.
Please turn to Slide 11. Variance analysis on the second quarter operating profit quarter-on-quarter comparison. Sales volume and product mix was plus JPY 3.8 billion, coming from the increase in sales volume of optoelectronic materials, semiconductors-related products and LCD glass substrates. Selling price was minus JPY 1.7 billion, resulting from price declines for LCD glass substrates and caustic soda in Southeast Asia. Purchase price of fuels and raw material, plus JPY 400 million, thanks to electricity cost declining. Cost reduction and Others, minus JPY 2.8 billion. Main reasons were maintenance turnaround in the Chemicals operation in Indonesia, an increase in R&D expenses and one-off loss recorded at a subsidiary, namely is Ise Chemicals Corporation.
Please turn to Slide 12. Consolidated statement of financial position comparing to the end of December 2018. Total assets were JPY 2,315 billion, up JPY 79.2 billion. The adverse impact of foreign exchange amounted to JPY 36.9 billion. At constant exchange rates, total assets were up JPY 110 billion. This was due to aggressive CapEx programs.
Please turn to Slide 13, which shows the consolidated statement of cash flow. Cash flows from operating activities were net inflow of JPY 102 billion. With aggressive CapEx, including M&As during this period, cash used for investing activities increased year-on-year. Free cash flow was net outflow of JPY 19.1 billion.
Please turn to Slide 14. CapEx remained at a high level, totaling JPY 101.1 billion. Major investments included new furnace construction in Brazil, construction of an in-house power generation facility in Chemicals in Indonesia and display-related facilities. Depreciation expenses increased by JPY 69.5 billion, mainly in relation to the start-up of the new LCD glass substrate facility in China.
Next, some comments on the impact of ForEx and change in the scope of consolidation. Please turn to Slide 15. ForEx had an impact of hurting net sales by JPY 10.6 billion, mainly coming from the weaker euro. The impact of change in the scope of consolidation was positive JPY 8.3 billion. Positive JPY 5.6 billion in Electronics came from the consolidation of the financial results of the Electronics business of Park Electrochemical Corp. that develops and manufactures printed circuit boards for a next-generation, high-speed communications applications. Plus JPY 2.7 billion for Chemicals came from the consolidation of the financial results of the synthetic pharmaceutical active ingredient manufacturing plant, Malgrat Pharma Chemicals.
Moving on to the business and geographic segments, Slide 16. First, the Glass segment. For the 6 months, net sales totaled JPY 375.2 billion, down JPY 12.5 billion, and the operating profit was JPY 7.4 billion, down JPY 8.2 billion. In architectural glass, impact of the weaker euro was felt, but strong shipments in Japan, Europe and North America and improvement in selling prices helped to bring about the same level of sales as in the previous year. In automotive glass, due to the weaker euro and the impact of declining demand in regions other than Japan and Russia, sales were down JPY 12.8 billion at JPY 199.7 billion. Operating profit totaled JPY 7.4 billion, down JPY 8.2 billion due to cost increase in automotive glass caused by lower productivity in Japan and manufacturing cost increase from the start-up of a new facility in Southeast Asia. Operating income for the second quarter was JPY 3.9 billion, down JPY 3.9 billion year-on-year. While there was an effect of improved selling price of architectural glass, profit decreased year-on-year due to lower productivity of automotive glass in Japan and a manufacturing cost increase following the start-up of a new facility in Southeast Asia. Quarter-on-quarter, architectural glass saw an increase in sales despite an impact of the weaker euro as Europe entered the demand season. Sales of automotive glass remained unchanged quarter-on-quarter due to the euro depreciation and seasonality. Operating profit increased by JPY 400 million despite a decline for automotive glass due to seasonality, thanks to the increase in shipments of architectural glass in Europe and North America.
Please skip one slide and go to Slide 19. The Electronics segment. Sales for the 6-month period totaled JPY 124.6 billion, and operating profit, JPY 6 billion. Year-on-year, sales were up JPY 8.3 billion, and operating profit was down JPY 3.8 billion. In display, shipments of specialty glass for display applications increased, but due to declining prices for LCD glass substrates and the increase in depreciation following the start-up of the new facility in China, both sales and profit declined year-on-year. In electronic materials, shipments of optoelectronics materials declined year-on-year, while shipments of semiconductor-related products increased. With the consolidation of the Electronics business of Park Electrochemical starting this year, both sales and profit increased. Operating profit for the second quarter was JPY 3.5 billion, down JPY 600 million year-on-year. While profitability of specialty glass for display applications and electronic materials improved, profit declined year-on-year due to lower selling prices of LCD glass substrates and higher depreciation coming from the new facility in China. Quarter-on-quarter, operating profit increased by JPY 1 billion, thanks to an increase in shipments of LCD glass substrates, optoelectronic materials and semiconductor-related products.
In terms of the shipment and price trend of LCD glass substrates during the second quarter, shipments increased by double-digit percent quarter-on-quarter, while price continued to decline at a moderate rate. As for the trend for the third quarter, we project the shipments to remain unchanged quarter-on-quarter and the price to stay on the moderately declining trend.
Please skip one slide and go to Slide 21. I will now explain about the Chemicals segment. Cumulative sales for fiscal year 2019 totaled JPY 228.5 billion, and operating profit was JPY 26.2 billion. Sales in OP decreased by JPY 1.2 billion and JPY 7.5 billion, respectively. As for chlor-alkali and urethane, sales in OP decreased, reflecting the effects of falling caustic soda selling prices in Southeast Asia, deteriorating cost of goods manufactured due to maintenance turnarounds in Japan and rising electricity costs.
For fluorochemicals and specialty, sales increased due to steady sales of iodine products and others. However, profits fell due to decreased demand for semiconductor-related products, maintenance turnarounds conducted once every 2 years in Japan and deterioration of cost of goods manufactured.
For life science, sales in OP increased as the number of contracts for a biopharmaceutical API increased. OP for Q2 of FY 2019 was JPY 11.8 billion, which was a decline by JPY 4.9 billion year-on-year. Lower sales prices of caustic soda in Southeast Asia and higher raw materials and fuel prices depressed the profit.
Next, as for Q-on-Q comparison with Q1 of FY 2019, OP decreased by JPY 2.6 billion. The factors are: maintenance turnarounds in Indonesia; increased depreciation costs due to the start of operation of the power plant; developmental plans for biopharmaceutical facility; and one-off loss of a subsidiary, as mentioned, of Ise Chemical.
Please skip one page and look at Page 23. We will explain the results by geographical segment. First, U.S. and Europe. First of all, I will explain the cumulative results for FY 2019. Sales in the U.S. increased by JPY 3.5 billion to JPY 87.1 billion. Although sales volume of automotive glass decreased, revenue increased by JPY 3.5 billion due to the consolidation of Park Electronics business. Operating profit increased by JPY 0.5 billion to JPY 3.7 billion, mainly due to an increase in the number of contracts for biopharmaceuticals. Sales in Europe decreased by JPY 9.5 billion to JPY 172.9 billion.
Sales of architectural glass remained steady, and the number of biopharmaceutical contracts increased. However, sales fell by JPY 9.5 billion due to the depreciation of the euro and decreased shipments of automotive glass. Operating profit decreased by JPY 0.3 billion to JPY 9.9 billion due to rising raw material costs, such as soda ash, and a decrease in sales volume of automotive glass.
Next, I will explain the Q2 year-on-year performance. Operating profit in the U.S. was JPY 1.6 billion, on par with the same period last year due to a decrease in shipments of automotive glass, despite an increase in the number of biopharmaceutical contracts. Operating profit in Europe remained at the same level as the previous year at JPY 5.7 billion due to a decrease in demand for automotive glass despite strong sales of architectural glass in Europe.
Next, I will explain the Q-on-Q performance by geographical segment. Please turn to Page 24. This is a comparison with Q1 of FY 2019. Sales increased in all geographical segments. I will talk about operating profit. Sales in the U.S. increased by JPY 1.5 billion to JPY 44.3 billion. Shipments of architectural glass and automotive glass were strong. On the other hand, operating profit decreased by JPY 0.5 billion to JPY 1.6 billion, mainly due to planned repair of biopharmaceutical facility. Sales and profits increased in Europe despite the impact of a decline in demand for automotive glass and the architectural glass reached a high demand period.
Next, we will move on to the full year guidance. Please skip 3 pages and move on to Page 28. I will explain the outlook for the full year results of FY 2019. With sales of JPY 1.54 trillion, operating profit of JPY 105 billion, we expect net income attributable to owners of the parent to be JPY 64 billion. The difference with the previous fiscal year is shown here. But compared to the forecast announced in February 2019, decline is expected in net sales by JPY 60 billion, operating profit by JPY 20 billion and net income attributable to owners of the parent by JPY 14 billion. The operating profit margin is expected to be 6.8% and ROE is 5.6%.
We also reviewed the exchange rate and the price of ethylene. In the second half, euro will move from JPY 125 to JPY 120. Ethylene price will drop from $900 to $800. Because of these revised assumptions, the forecast for the full year is JPY 122.2 for the euro and USD 838 for ethylene.
Please turn to Page 29. I will talk about the points related to the revision of the guidance by segment. Glass sales are expected to be JPY 750 billion, down JPY 30 billion from the initial forecast due to the impact of the slowdown in the automotive market more so than expected and the euro's depreciation. Operating profit is expected to fall below the initial forecast by JPY 10.5 billion mainly due to repairs to automotive raw glass manufacturing furnace in Japan, deterioration in processing productivity and increased costs associated with the launch of new facility for architectural glass in Southeast Asia. We have reduced the forecast for electronic sales by JPY 10 billion. This is because the impact of the slowdown in the smartphone market exceeded our expectations. The outlook for operating profit has not changed as the Asian currencies are trending weak and the start-up of the LCD glass substrate facility in China is progressing steadily.
Sales of chemicals has been reduced by JPY 20 billion. This is because the caustic soda sales prices in Southeast Asia and the demand for semiconductor-related products are trending lower than expected. Operating profit has been reduced by JPY 10 billion. This is due to the fact that the selling price for caustic soda in Southeast Asia and the demand for semiconductor-related products were lower than expected, and raw materials and fuel prices such as electricity costs are higher than expected.
In the next page, I will explain the outlook by segment. Please turn to Page 30. First is the Glass segment. In the case of architectural glass, although there will be an impact by the euro depreciation, the price increase implemented in Japan and Europe last year will make a full contribution this year, and the new furnace in Brazil that started commercial operation from May this year will also make a positive impact. In addition, price increase will be implemented in Japan from October this year, and its effect is also factored in to a certain extent. Automotive glass is expected to be affected by the decrease in demand for automotive glass, reflecting the slowdown in the automotive market. Domestic production efficiency is on an improving trend. However, the impact is expected to remain in the second half of the year. In addition, although the repair of the raw glass manufacturing furnace in Japan has been completed in Q1, it takes time to reduce the inventory of the externally procured raw glass, and the cost is expected to stay high in the second half.
Please turn to Page 31. Next is the outlook for the Electronics segment. With regard to LCD glass substrates, we expect G11 facility in China to start up at the beginning of FY 2019 and our shipment volume will increase more than the market growth. On the other hand, income in FY 2019 is expected to deteriorate as depreciation increases. In specialty display glass, we believe that Dragontrail, which has been increasing shipments since the second half of 2018, will continue to increase shipments. In addition, although the disposal of inventory of some products depressed the profit in 2018, this effect will disappear in 2019 and contribute to profit improvement. In Electronics, shipments of both optoelectronic materials and semiconductor products are expected to increase. In addition, the consolidation of Park Electronic's Electronics business and Taconic's ADD division will start to contribute to business results.
Please look at Page 32. I will explain the outlook for the Chemicals segment. In the chlor-alkali and urethane business, despite the impact of the deterioration of the caustic soda market in Southeast Asia, the price spread of chlor-alkali products is expected to improve as the SME market declines in the second half of the year. The fluorine and specialty business is expected to be affected by the cost of large-scale repairs and fluorine-related investment, in addition to the decrease in demand for our semiconductor-related products. In the life science business, following the acquisition of CMC in FY 2017, proactive CapEx carried out in 2018 and the acquisition of Malgrat Pharma Chemicals in Spain will make a major contribution in the current term.
Please turn to Page 33. This is the final page. The forecast for CapEx, depreciation and R&D. CapEx was revised from the initial forecast of JPY 230 billion to JPY 220 billion. This is because investment in the Electronics segment is expected to fall below expectations. Depreciation is JPY 140 billion, and R&D is JPY 50 billion. No change from the initial expectation.
This is the end of my presentation. Thank you very much.