AGC Inc

TSE:5201

Earnings Call Transcript 2018-Q1

[Shinji Miyaji, executive]

I am Shinji Miyaji, the CFO. I will go over the financial results for the first quarter of 2018.

Please turn to Page 5. First, the highlights of the first quarter results. Net sales increased JPY 37.1 billion year-on-year to JPY 372.5 billion. The product shipments increased in all segments of Glass, Electronics and Chemicals. Operating profit was JPY 30.6 million, an increase of JPY 8.4 billion compared to the same period of the previous year. Profit increased in all segments, particularly the Chemical segment posted a significant growth. I will explain the factors for the increase in more detail later.

Profit before income taxes was JPY 34.4 billion, an increase of JPY 15.1 billion year-on-year owing to an increase in operating income and an increase in other income.

Profit for the period attributable to owners of the parent was JPY 24.8 billion, up JPY 4.8 million year-on-year.

Please turn to Page 6. The consolidated statements of profit and loss were as explained. Regarding foreign exchange, the yen depreciated by about 10% against the euro, and the Dubai crude oil price rose by more than $10. The impact of foreign exchange on sales was plus JPY 6.7 billion.

Please turn to Page 7. I will go over the variance analysis on operating income. First, a comparison of the first quarter of 2018 versus the first quarter of 2017. As I mentioned earlier, a year-on-year increase of JPY 8.4 billion.

The difference in sales volume and product mix plus JPY 4.8 billion. Shipments were strong in all segments, particularly automotive glass and displays, among others. The selling price difference minus 1.1 -- minus JPY 1 billion. Although prices of LCD glass substrates declined, improvement in prices of caustic soda and other chlor-alkali products contributed to limiting to a slight decline overall.

The purchase price of fuels and raw materials minus JPY 1.3 billion. This was mainly due to higher fuel prices.

Cost reduction and others plus JPY 6 billion, mainly due to the cost improvement for LCD glass substrates and the fact that the companies that were consolidated in the middle of the first quarter of 2017 made full profit contribution this year.

Please turn to Page 8. Comparing with the fourth quarter of 2017, down JPY 6.5 billion quarter-on-quarter. Sales volume and product mix minus JPY 10.5 billion, mainly resulting from lower shipments of electronic materials due to seasonal factors and a decrease in shipments of chlor-alkali due to maintenance turnaround of plants in Japan and overseas.

Selling price minus JPY 200 million, little change quarter-on-quarter despite a slight decline in the selling price of LCD glass substrates, thanks to the improvement in the selling price of chlor-alkali products, such as caustic soda. Purchase price of fuels and raw materials minus JPY 1.1 million, mainly due to higher fuel prices.

Cost reduction and others plus JPY 5.2 billion. Drastic improvement was due to a decline in corporate expenses and a decrease in SG&A expenses in the Glass segment in Europe.

Please turn to Page 9. Consolidated statement of financial position, a comparison with the end of December 2017. Due to a decline in other components of equity, primarily foreign exchange impact, the equity decreased by JPY 51.8 billion.

Please turn to Page 10. Consolidated statements of cash flow. Net cash provided by operating activities was JPY 39.7 billion, net cash used for investing activities was JPY 39.9 billion (sic) [ JPY 34.9 billion] and free cash flow was positive JPY 4.8 billion.

Please turn to Page 11. CapEx, depreciation and others. CapEx amounted to JPY 49.7 billion, representing a year-on-year increase. This was due to the investment in in-house power generation facilities in the chemicals operation in Indonesia as well as in the 11th generation LCD glass substrates in China.

Please turn to Page 14. Before looking at results by business and geographic segments, I would like to explain the changes in disclosure segment and breakdown. Starting this term, we are disclosing sales of life science, a strategic business, separately as a subsegment within the Chemicals segment. In addition, sales by subsegment and geographic segment are changed to breakdown based on sales to external customers. In addition, we are now disclosing sales by geographic segment for all business segments.

Please turn to Page 15. Let me move on to information by business and geographic segments. First the Glass segment. Sales for the first quarter totaled JPY 191.2 billion, up JPY 14.2 billion year-on-year and the operating income was JPY 7.6 billion, an increase of JPY 0.5 billion, contributing to the increased sales or larger shipments of architectural glass, mainly in Europe and strong shipments of automotive glass in all regions. In addition to increased shipments, the weaker yen and the stronger euro contributed to higher sales.

Cost increased during this quarter due to small-scale repair work on architectural glass furnaces and an increase in nonrecurring cost for automotive glass and others in Japan and Asia. But thanks to strong shipments, sales increased by JPY 0.5 billion year-on-year. Quarter-on-quarter, sales increased by JPY 2.4 billion. The decline in corporate expenses and a decline in SG&A expenses in Europe were the main factors contributing to the profit increase. Please skip one page and turn to Page 17. The Electronics segment. Sales for the first quarter totaled JPY 8.8 billion (sic) [ JPY 58.8 billion ], a decrease of JPY 1.8 billion year-on-year and the operating profit was JPY 5.7 billion, an increase of JPY 1.6 billion year-on-year.

Although selling prices fell for LCD glass substrates, shipments increased by a lower single-digit percent and the rate of operation improved.

With respect to electronic materials, shipments of optoelectronics materials decreased year-on-year, but shipments of semiconductor-related products increased. Regarding cover glass for car-mounted displays, shipments continue to increase.

In terms of Q-on-Q comparison to Q4 of FY 2017, operating profit fell by JPY 4.7 billion. Due to seasonalities, shipments for both LCD glass substrates and electronic materials fell.

As for volume and pricing trends for LCD glass substrates, volume declined by mid-single-digit percentage and pricing fell rather moderately compared to Q4 of FY 2017.

Please skip one page and proceed to Page 19. This shows the Chemical segment. For Q1 of FY 2018, net sales increased by JPY 23.1 billion to JPY 114.8 billion and operating profit increased by JPY 5.9 billion to JPY 17 billion year-on-year.

In addition to the positive shipments in all businesses, selling prices increased for caustic soda, and Vinythai and CMC acquired in Q1 of FY 2017 made a full year contribution leading to a significant increase in the earnings.

In the fluorochemicals and speciality chemicals subsegment, the shipment for fluorochemicals remained favorable, such as fluorinated resins used for semiconductor-related applications.

Now for the Q-on-Q comparison with Q4 of FY 2017, operating profit fell by JPY 3.9 billion due to the decline in the shipment of chlor-alkali products caused by maintenance turnarounds in Japan and overseas.

Please skip 3 pages and go to Page 23. This is the year-on-year performance comparison by geographic segment and I will explain about Americas and Europe. As mentioned, net sales denote sales to external customers only starting this fiscal term.

Let me explain the year-on-year comparison to Q1 of FY 2017. The operating profit of Americas rose year-on-year by JPY 500 million to JPY 1.5 billion due to the improvement in the automotive glass business and the consolidation of CMC from last year.

The operating profit of Europe also increased due to positive sales in architectural glass and automotive glass, combined with the contribution from CMC, as we have seen in Americas. The earnings improved year-on-year by JPY 2.3 billion to JPY 4.5 billion.

Please turn to Page 24. This is a comparison with the previous quarter. Americas stayed flat from the previous quarter. Europe's operating profit increased by JPY 1.7 billion (sic) [ JPY 2.7 billion ] to JPY 4.5 billion due to the cost reduction in architectural glass and automotive glass operations.

Please move on to Page 28. This is the outlook for FY 2018. The guidance has not been changed from what was announced back in February 2018. Net sales is expected to be JPY 1.55 trillion, operating profit will be JPY 130 billion and profit attributable to owners of the parent will be JPY 77 billion.

Please look at Page 29. Now for the operating profit breakdown by 6 months, we expect JPY 55 billion in the first half and JPY 75 billion in the second half. And again, we have made no change from the February announcement. ForEx and crude oil price assumptions have not been changed either.

Please go to Page 30. I would now like to share the business outlook by segment. First is the Glass segment. Basically, no change in our outlook. Shipments are expected to increase in many regions for architectural glass. Selling price is anticipated to stay at a high level in Europe and price increase is already conducted in Japan. Therefore, the overall pricing is expected to improve year-on-year. Fuel costs will rise; however, we should be able to offset it by cost reduction resulting from improvement in utilization backed by high shipment volume. Automotive glass will continue to have high-level shipments, supported by favorable demand.

Europe's productivity will improve. Last year was fairly tough for us, but it recovered significantly. So we should have more cost reduction, including lower logistics cost.

Manufacturing issues in Asia have been addressed and stable production is expected going forward.

Please move on to Page 31. This is the business outlook for Electronic segment. Again, no change in our guidance. LCD glass substrate market is expected to remain brisk, and the shipments are forecasted to increase by low single-digit percentage. Price erosion will be more moderate compared to last year, remaining around mid-single-digit percentage decline on an annualized basis. Shipments will continue to be favorable for both specialty glass for display applications and cover glass for car-mounted displays. Car-mounted display has established mass production since second half of last year, and stable production is under way.

Please look at Page 32. Electronic materials segment. We'll see some uncertainty in the optoelectronics materials; however, shipments for semiconductor-related products will remain favorable. Therefore, the overall trend is expected to remain brisk. Shipments for new products such as EUVL mask blanks are expanding steadily.

Please move on to Page 33. Next is the outlook for Chemicals. Again, no change in the business outlook. Positive shipments are expected in all businesses. High levels of shipments and pricing for chlor-alkali products will continue in Southeast Asia, backed by strong demand. The start-up of in-house power plant in Indonesia will also contribute to profit growth.

Shipments for fluorochemicals will remain high as previous year.

Net sales for life science is anticipated to grow stronger than expected for both biopharmaceutical and synthetic pharmaceutical businesses.

Please turn to Page 34. This will be the last page of my presentation. No change in our guidance for CapEx, depreciation and R&D, which are JPY 220 billion, JPY 135 billion and JPY 45 billion, respectively.

This concludes my explanation.