AGC Inc

TSE:5201

Earnings Call Transcript 2019-Q1

[Shinji Miyaji, executive]

[Interpreted] This is Shinji Miyaji, the CFO, to brief you on the financial results for the 3 months ended March 31, 2019. Please turn to Page 5.

These are the highlights of the financial results for the first quarter of 2019. Net sales were JPY 361.6 billion, down JPY 10.8 billion year-on-year, mainly due to the decline in selling prices of LCD glass substrates and caustic soda in Southeast Asia, decreased shipments of automotive glass and the impact of the depreciation of the euro.

Operating profit was JPY 20.9 billion, down JPY 9.8 billion year-on-year. This was mainly due to the decrease in selling price of LCD glass substrates and an increase in depreciation associated with the startup of new facilities as well as the increase in manufacturing costs coming from the production issues in automotive glass operation and major maintenance turnaround in chemicals facilities in Japan. Details will be explained later.

Profit for the period attributable to the owners of the parent was JPY 15.6 billion, down JPY 9.2 billion year-on-year. Details will be explained later.

Please turn to Page 6. The foreign exchange had an impact of lowering net sales by JPY 5.3 billion. Profit before tax decreased JPY 11 billion year-on-year at JPY 23.5 billion, mainly due to lower operating profit and the posting of business restructuring costs included in other income or expenses.

Profit for the period decreased JPY 9.3 billion year-on-year to JPY 18 billion. The Japanese yen appreciated by about 6% against the euro, while the crude oil price Dubai remained almost unchanged year-on-year.

Please turn to Page 7. Year-on-year comparison by business segment. Higher sales for Electronics and Ceramics and Other, while lower sales for Glass and Chemicals. Reasons will be explained on the following pages.

Please turn to Page 8. From here, we are showing the variance analysis on operating profit. First, the first quarter of 2019 versus the first quarter of 2018, down JPY 9.8 billion at JPY 20.9 billion. Sales volume and product mix plus JPY 800 million, an increase in the number of contracts in life science and increased shipments of specialty glass for display applications were offset by a decline in shipments of optoelectronics products and automotive glass.

Selling price, minus JPY 200 million. Architectural glass prices rose in all regions other than North America, but were offset by falling selling prices for caustic soda overseas and LCD glass substrates. Purchase price of fuels and raw materials, minus JPY 1.3 billion due to higher electricity cost in Japan.

Cost reduction and others, minus JPY 9 billion. In addition to the increase in depreciation costs associated with the startup of new facilities for LCD glass substrates in China, there were impacts of the production issues in domestic automotive glass operations and major biannual maintenance turnaround at Chemicals facilities in Japan.

Please turn to Page 9. This is the quarter-on-quarter comparison. Net sales decreased in all segments. Operating profit decreased by JPY 12.7 billion. Factors will be explained on the next page.

Please turn to Page 10. This is variance analysis of operating profit quarter-on-quarter. Sales volume and product mix, minus JPY 9.8 billion as a decrease was posted in all segments. Lower sales volume of optoelectronics, chlor-alkali and fluorochemical products dealt a particularly heavy blow.

Selling price, minus JPY 2.6 billion affected by lower prices of LCD glass substrates and caustic soda overseas. Purchase price of fuels and raw materials, plus JPY 2.5 billion, owing to the recording of an oil hedge valuation gain in Japan and Asia.

Cost reduction at Others, minus JPY 2.8 billion mainly resulting from the increase in depreciation expenses associated with the startup of new facilities in China in the display business and the production issues in domestic automotive glass operation. Please turn to Page 11. Consolidated shipment -- or a statement of financial position. This is a comparison with the end of December 2018. Total assets amounted to JPY 2.303 trillion, up JPY 67.3 billion. This was mainly due to the adoption of IFRS 16 leases starting from this year, which resulted in an increase in property, plant and equipment by JPY 38.9 billion and an increase in interest-bearing debt by JPY 39.2 billion. The impact of foreign exchange was plus JPY 1.3 billion.

Please turn to Page 12. Consolidated statement of cash flow was -- as you can see here.

Please turn to Page 13. CapEx remains at a high level at JPY 42.6 billion, including the construction of the new furnace in Brazil and in-house power generation facilities in the Indonesian Chemicals operation. Depreciation expenses increased year-on-year to JPY 33.5 billion due to the startup of new facilities for the LCD glass substrates in China and Others.

Next, the impact of ForEx translation and change in the scope of consolidation. Please turn to Page 14. Interims of the change in the scope of consolidation. From the first quarter of 2019, we started consolidating the income statement of the Electronics business of the Park Electrochemical Corp., which develops and manufactures printed circuit materials for next-generation high-speed communications applications and the synthetic pharmaceutical active ingredient manufacturing plant, Malgrat Pharma Chemicals.

I will now move to the results by the business and geographic segment. Please turn to Page 16. Following the change in the corporate structure that moved the responsibility over cover glass for car-mounted displays from the in-house electronics company to the in-house automotive company, the reportable segment of that business has been transferred from Electronics to Glass. Please note that last year's net sales and operating profit by segment covered in this material have been revised to reflect this change.

Please turn to Page 17. In the Glass segment, operating profit for the first quarter was JPY 3.5 billion, down JPY 4.2 billion year-on-year. Although there was a profit increase coming from the improved selling price of the architectural glass, the profit decreased due to higher new product development cost and the deterioration of the manufacturing cost resulting from demand production issues in domestic automotive glass business and the startup of the new facilities in Southeast Asia.

Quarter-on-quarter, despite an increase in profits coming from improved fuel and material prices, operating profit decreased by JPY 1 billion due to the decline in sales volume and price.

Please skip one page and turn to Page 19. Moving to Electronics segment. Operating profit in the first quarter of FY 2019 was JPY 2.5 billion, down by JPY 3.2 billion year-on-year. In display, sales volume of specialty glass for display application increased. Net selling prices of LCD glass substrate dropped. Depreciation cost for the launch of new facility in China increased and that led to profit decline.

In electronic materials, sales volume of optoelectronics materials decreased year-on-year, but shipments of semiconductor-related products were robust and contribution by Electronics business of Park Electrochemical Corp. started from this year.

Compared with the fourth quarter of FY 2018, operating profit decreased by JPY 5.3 billion. This is due to the increased depreciation cost for the launch of new LCD glass substrate facility in China and sales volume decline of optoelectronics materials. With regard to the volume and price trend of LCD glass substrates, on quarter-on-quarter basis, volume declined in the middle of single-digit percent and the price decline turned more moderate.

Skipping a page, please turn to Page 21. This is for Chemicals segment. Operating profit in the first quarter of FY 2019 was JPY 14.4 billion, down by JPY 2.6 billion year-on-year due to the domestic large maintenance turnaround and the electricity cost increase in Japan.

In chlor-alkali and urethane, OP went down due to the worsened manufacturing cost by the large maintenance turnaround and electricity cost increase in Japan and selling price decline of caustic soda in Southeast Asia.

In fluorochemicals and the specialty, shipments remained almost unchanged from the previous year. Due to the large scale maintenance turnaround in Japan, OP decreased. Life science, due to the strong shipments of biopharmaceuticals' active ingredients, OP increased. Compared with the first quarter of FY 2018, operating profit went down by JPY 6.4 billion, sales volume declines and the domestic large scale maintenance turnaround slashed the profit.

Skipping a page, please turn to Page 23. By geographic segment, let me explain on Americas and Europe. As for operating profit in the first quarter in Americas, despite the sales volume decline in automotive glass due to the production increase in biopharmaceuticals and contributions by the Electronics business of Park Electrochemical Corp., OP increased by JPY 0.6 billion to JPY 2.1 billion.

In Europe, architectural glass continue to be firm. But due to the material cost increase by soda ash among others and sales volume decrease in automotive glass, operating profit decreased by JPY 0.3 billion to JPY 4.1 billion.

For quarter comparison by geographic segment, please turn to Page 24. This is a comparison with the fourth quarter of FY 2018. Americas stayed flat at JPY 2.1 billion, Europe increased by JPY 0.7 billion to JPY 4.1 billion in the operating profit.

Now skipping two pages, please turn to Page 27 for the full year outlook. Outlook for this year remains unchanged from the one announced in February this year. Net sales JPY 1.600 trillion, operating profit JPY 125 billion and profit attributable to owners of the parent will be JPY 78 billion.

Please turn to Page 28. Operating profit in the first half will be JPY 50 billion, in the second half will be JPY 75 billion with no changes from the February announcement. Outlook for ForEx and crude oil are not changed either.

Please turn to Page 29. Business outlook by segment. Let me start with the Glass segment. Basically, there is no change in the outlook. In architectural glass, shipments are expected to be firm in many regions. A new furnace started in Brazil in April and will start to launch in the second quarter.

Selling price increase in Japan and Europe implemented in the previous year will make full contribution this year and manufacturing costs will be reduced by productivity improvement in Japan and Europe. In automotive glass, in addition to the existing business stability, transferred cover glass business for car-mounted displays will make contribution to increase segment sales. Productivity, which worsened in Japan in the second half of 2018, will be stable in the first half and normalize in the second half of 2019.

Please turn to Page 30. Outlook for the Electronics segment. Basically, there is no change in outlook here, too. In LCD glass substrates, with the launch of G11 facilities at the beginning of 2019 in China, our shipments are expected to increase above the market growth. But with the depreciation cost increase, profit contribution will be materialized from FY 2020.

Price decline will be more moderate compared with the previous year. In specialty glass for display applications, shipments of Dragontrail, which started to increase in the second half of 2018, will continue to grow. In FY '18, disposals of some products inventory pushed down the profit, but the absence of the squeeze will boost the profit in FY '19. In electronic materials, shipment of both optoelectronic materials and the semiconductor-related products are expected to increase.

Please turn to Page 31. Outlook for the Chemicals segment. Basically, there is no change in outlook. All businesses will continue to be firm as the previous year. In chlor-alkali and urethane, spread of chlor-alkali will be widened by the [ excellent ] market price decline vis-a-vis the FY '18 among others.

Fluorochemicals and the specialty will continue to be firm. In life science, following the acquisition of CMC in FY '17, in FY '18 capacity increased by the aggressive investments and acquisition of Malgrat Pharma Chemicals in Spain. Following FY '18, business will continue to have this strong growth.

Please turn to Page 32. This is the final page. CapEx depreciation and R&D, all of them remain unchanged from the initial plan. CapEx in FY '19 is flat at JPY 230 billion, depreciation is up JPY 18.3 billion to JPY 140 billion and R&D is up by JPY 4.2 billion to JPY 50 billion.

This concludes my presentation. Thank you for attention. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]