AGC Inc

TSE:5201

Earnings Call Transcript 2020-Q1

[Shinji Miyaji, executive]

Good evening. This is Shinji Miyaji, CFO. Please turn to Slide 3. First, key points of today's briefing. Net sales in the first quarter of 2020 decreased by JPY 4.1 billion year-on-year to JPY 357.5 billion. Operating profit increased JPY 1.5 billion year-on-year to JPY 22.3 billion. Deterioration of business performance in the automotive and architectural glass businesses due to the impact of COVID-19 were outweighed by the strong performance of electronic materials, LCD glass substrates and life science business, resulting in an increase in operating profit year-on-year. Impact from spread of COVID-19 on the first quarter financial results is estimated to be, net sales down JPY 10 billion and operating profit down JPY 3 billion to JPY 4 billion.

Considering this effect, we can summarize the results as growth businesses having canceled out the deterioration of market conditions for the glass business, which indicates a steady progress of the business portfolio transformation that we have been promoting. As for the forecast for the second quarter, we expect the architectural and automotive glass businesses to feel a significant impact of COVID 19. Please turn to Slide 6. Highlights of the financial results for the first quarter of 2020. Net sales decreased JPY 4.1 billion year-on-year to JPY 357.5 billion. Shipments of electronic material, LCD glass substrates and life science products increased, but due to sales volume decline of automotive glass, sales price decline of LCD glass substrates and architectural glass in regions other than Japan and the depreciation of euro sales declined year-on-year. Operating profit increased JPY 1.5 billion year-on-year to JPY 22.3 billion. In addition to the factors behind the change in sales that I mentioned earlier, there was a deterioration in manufacturing costs due to the operational adjustment of architectural glass facilities in Europe. But with contribution from the full operation of G11 facilities for LCD glass substrates that have been ramped up since the first quarter of 2019, profit increased year-on-year. Profit before tax was JPY 15.9 billion, a year-on-year decrease of JPY 7.5 billion. This was mainly because we recorded foreign exchange loss as other expenses. Next, I will go over the year-on-year performance comparison by business segment. Please turn to Slide 7. The glass segment posted lower sales and profit, while the electronics, chemicals, ceramics and others posted higher sales and profit. Details of the impact of COVID-19 and factors behind increase or decrease in each segment are explained on the following slides. Please turn to Slide 8. Impact from the spread of COVID-19 on the first quarter financial results. Impact was primarily on automotive glass in China. In mid-March, full-scale operation adjustments started for architectural glass and automotive glass. By segment, in architectural glass in the glass segment, production and shipments in Japan were generally in line with the plans, thus, very little impact. On the other hand, in Asia, stagnation of the economy and the decrease of demand turned serious in March, and operational adjustments have been implemented. In North America, shipments started to decrease in March, and operation adjustments have been implemented since the end of March. Shipments have decreased also in South America since the end of March. In Europe, shipments have declined markedly since March, and drastic operational adjustments have been implemented since mid-March. In automotive glass, drastic operation adjustments were implemented in China from the middle of February to middle of March. In Japan and Asia, excluding China, impact was minimal in the first quarter and so no operation adjustments. In Europe and the Americas, we started drastic operation adjustments from the end of March. In the Electronics segment, sales of specialty glass for display applications were affected by a decrease in the number of smartphones sold, resulting in a large decrease in shipments. Shipments in other businesses were unaffected. Chemicals felt almost no impact on operations. Please turn to Slide 9. Variance analysis of operating profit for the first quarter, year-on-year comparison. Profit increased JPY 1.5 billion year-on-year to JPY 22.3 billion. Sales volume and product mix differential was plus JPY 2.4 billion. Shipments increased for optoelectronic materials, semiconductor-related electronic material products, LCD glass substrates and others. Selling price differential was minus JPY 6 billion. Selling prices declined for architectural glass in regions other than Japan, caustic soda in Southeast Asia and LCD glass substrates. Purchase price of fuels and raw material was minus JPY 500 million. We recorded a loss related to oil hedging due to lower crude oil prices. Cost reduction and others were plus JPY 5.6 billion. Full operation of new facilities of LCD glass substrates for G11 contributed. In addition, depreciation expenses decreased due to the recording of an impairment loss on automotive glass in North America last year. Please turn to Slide 10. Consolidated statement of financial position comparing with the end of December 2019. Total assets decreased JPY 59.1 billion from the end of December to JPY 2,276.3 billion, with the impact of foreign exchange fluctuation totaling minus JPY 76.3 billion. Other assets decreased by JPY 73.1 billion, reflecting a decrease in trade receivables due to lower sales and a valuation loss in financial assets due to declining stock prices. In response to the spread of COVID-19 inflections, interest-bearing debt was increased by approximately JPY 50 billion to secure liquidity. Please turn to Slide 11. Cash flow statements for the first quarter of 2020. Operating cash flow was plus JPY 64.4 billion. Cash used for investing activities was JPY 49.4 billion, and free cash flow was plus JPY 15 billion. Please turn to Slide 12. CapEx, depreciation and R&D expenses in the first quarter of 2020. CapEx for the first quarter of 2020 was JPY 51.7 billion. Main investments were the production capacity enhancement of LCD glass substrates for G11, Synthetic pharmaceutical intermediate and active ingredients and fluorochemical products. Depreciation expenses were JPY 36.6 billion. Main factor for increase was PT Asahimas Chemicals power plant in Indonesia, which went online in the second quarter of 2019. Due to the impact of COVID-19, the full year forecast on CapEx, depreciation and R&D expenses for fiscal 2020 is subject to review. Moving on to the review of business and geographic segments. Please turn to Slide 14. First, the glass segment. In the first quarter of 2020, net sales were JPY 169.3 billion, and operating income was minus JPY 2.6 billion, down JPY 16.8 billion and JPY 6.1 billion year-on-year, respectively. Sales for architectural glass decreased by JPY 5.5 billion year-on-year to JPY 80.1 billion due to the drop in product selling prices in regions other than Japan primarily in Europe and the impact of the weaker euro. Sales for automotive glass decreased by JPY 11.2 billion year-on-year to JPY 88.9 billion due to a drop in shipments by the AGC Group following a decrease in automobile production in each region and the impact of the stronger yen. Operating income decreased by JPY 6.1 billion year-on-year to minus JPY 2.6 billion. There were such positives as cost reductions and productivity improvements in automotive glass and a decrease in depreciation, resulting from the recording of impairment loss in North America last year. However, in addition to the factors behind decrease in sales, which was explained earlier due to the impact of manufacturing cost deterioration coming from the operation adjustments of architectural glass production facilities, profit declined year-on-year. Operating profit variance analysis year-on-year comparison. Volume and product mix differential was minus JPY 3.7 billion. Automotive glass shipments decreased. Selling price differential was minus JPY 4.1 billion. Selling price of architectural glass fell in regions other than Japan, mainly in Europe. Purchase price of fuel and material is minus JPY 600 million, while natural gas price fell in Europe, losses related to oil hedging in Japan and Asia had a greater impact. Cost reduction and others were plus JPY 2.4 billion, reflecting a decrease in depreciation due to recording of impairment loss in North America last year and improvement in manufacturing costs in automotive glass. Please turn to the next slide, Slide 15. Electronics segment. Net sales were JPY 69.2 billion, and operating income was JPY 8.9 billion, up JPY 9.8 billion and JPY 6.4 billion year-on-year, respectively. In display, while prices for LCD glass substrates for display applications decreased, shipments increased. Shipments of specialty glass for display applications decreased, reflecting a decrease in smartphone sales due to the impact of COVID-19. Higher shipments of LCD glass substrates had a significant effect and sales of display increased year-on-year. Electronic materials increased shipments of semiconductor-related products, such as parts for optoelectronics and EUVL mask blanks. In addition, sales of electronic materials increased year-on-year due to the consolidation of Taconic's printed circuit board materials business from the third quarter of 2019. Operating income increased JPY 6.4 billion year-on-year to JPY 8.9 billion. Profit increased due to the full operation of the new facilities of LCD glass substrates for G11, which was launched in the first quarter of 2019 and an increase in shipments of electronic materials. Variance analysis of operating profit year-on-year comparison. Volume and product mix was plus JPY 4.3 billion. Shipments of electronic materials and LCD as substrates increased. Selling price differential was minus JPY 200 million. While the selling price of LCD glass substrates declined, the selling price of electronic material-related products improved. Fuels, raw materials purchase price was minus JPY 400 million related to oil hedge losses. Cost reduction and others was plus JPY 2.7 billion, with a contribution from full operation of G11 facility for LCD glass substrate launched in first quarter 2019. Shipment of the glass substrate increased slightly. The price drop was slower compared to the same period last year. Please turn to the next page. In the Chemicals segment, net sales for the first quarter of 2020 was JPY 114.2 billion, increase of JPY 1.4 billion. Operating profit was JPY 15.1 billion, increase of JPY 700 million. Chlor-alkali, sales and profit both went down year-on-year due to decline in selling price of caustic soda in Southeast Asia. Fluorochemicals and specialty, decreased the sales but increased the profit. Despite the decline in shipment for semiconductor and aviation products, thanks to the increase of shipment of flurochemicals for electronics.

Life science increased both sales and profit, thanks to the increase in number of contracts in biopharma API and also newly consolidated Malgrat Pharma Chemicals, which is an API synthetic product, manufacturer in Spain, consolidation started from March 2019. Operating profit for first quarter was JPY 15.1 billion, which is an increase of JPY 700 million compared to the same period from last year. This is due to the increase of shipment of electronics fluorochemicals as well as synthetic pharmaceuticals. Looking at the operating profit guidance analysis. Sales volume product mix was plus JPY 1.5 billion, and this is due to increase of shipment of caustic soda in Southeast Asia and also fluorochemicals for electronics. Selling price was minus JPY 1.7 billion due to price drop of caustic soda in Southeast Asia. Fuels and raw materials, purchase price was plus JPY 400 million due to the electricity prices. Cost reductions and others was JPY 400 million, including contribution of profit by Malgrat, which was consolidated newly. Segment-wise operating profit for the first quarter shows that 50% is chlor-alkali/urethane, and 30% is the fluorochemicals/specialty, life science is at 20%, which is a higher level of profit contribution from life science compared to the previous year's same term. Turning to Page 17. Performance of strategic business. Sales for this whole business was JPY 44.5 billion. Operating profit was JPY 7.5 billion. Compared to the first quarter of 2019, the sales was up by JPY 12 billion, and profit was up by JPY 3.2 billion. Mobility was negatively impacted by lower production of automobiles in Europe, but life science is growing steadily with higher level of profit contribution. Full year outlook for strategic business shows JPY 190 billion in sales and JPY 30 billion in operating profit. Due to the nature of strategic business, we do not expect a major impact of COVID-19. However, reflecting the impact on our mobility business, we have reduced the sales by JPY 10 billion and operating profit by JPY 5 billion compared to what we announced in February this year. Please turn to Page 18. This is a slide for performance by geography, comparing first quarter of 2019 versus 2020. Japan and Asia saw sales increase despite decline in the shipment of automotive glass, thanks to the increase of shipment in optoelectronics as well as semiconductor-related EUVL mask blanks and LCD glass substrates. Operating profit was up, thanks to the contribution of collaboration of G11 LCD glass substrate facility launched in the first quarter of 2019. Americas' sales and profit both went down, despite the fact there was a reduction in depreciation compared to the impairment losses posted in the third quarter of 2019 for automotive glass, because of weaker sales of architectural glass, automotive glass and biopharmaceuticals. Europe saw both sales and profit go down despite the increase in the number of contracts for biopharmaceuticals API because of a lower sales price for architectural glass and the lower shipment of automotive glass as well as weaker euro.

Please turn to Page 20. This is the outlook for the full year. There are many uncertain factors that may impact our performance due to the spread of COVID-19, we have not disclosed specific performance or dividend outlook. And we will announce this information at such time when reasonable forecast should be possible. For the first half of 2020, this is the outlook based on the information that's available to us. Net sales is expected at JPY 650 billion, down by JPY 87.5 billion year-on-year. Operating profit, JPY 25 billion, down by JPY 16.5 billion on a year-on-year basis. Exchange rate for the second quarter of FY '20 was changed to JPY 105 to a dollar and JPY 115 to euro. And therefore, for the first half, it will be, again, changed to JPY 107 to a dollar and JPY 117.6 to a euro. For Dubai crude prices, since we have changed the estimate for the second quarter of FY '20 to $30 per barrel for the first half, the number will change to $40 per barrel. Please turn to Page 21. This is the segment-wise performance for the first half. Glass segment will see major decrease in sales and profit due to the impact of spread of COVID-19 in the second quarter. Electronics segment will increase in sales and profit. Chemicals will drop the sales but increase the profit. Please turn to Page 22. Status of business, mostly centering around the impact of COVID-19 is shown on this slide. In mid-May, we have observed improvement in the business activity in China as well as operation of our glass processing for architectural glass in Europe. However, in the second quarter because of production investment and the weaker demand in multibusinesses, we are seeing decrease in shipment, especially in the glass segment, there is a big scale operational adjustment leading to major decline in sales and profit. In Japan, we don't see big impact in architectural glass, but demand is declining in Asia due to weaker economy. In North America, April was bottom, and there we believe that the shipment will improve starting from May. Operational adjustment is continuing still in South America. In Europe, demand is declining rapidly with a big operational adjustment. But lockdown will be lifted in various countries in Europe on a phase-by-phase basis from May. And therefore, we believe that the operation will start to improve from May. For automotive glass, operation has already started to recover in China. And in May, it has already recovered to the level prior to the Lunar New Year. Operational adjustment started from the end of April in Japan, which is still continuing. Major reduction in production took place from April in Thailand and Indonesia, which is still continuing. In Europe, most of the sites were stopped in April. But since the start of May, some of the sites have restarted the operation. Moving on to the Electronics segment. Our city substrates have not really suffered a major impact so far in terms of shipment. However, there's uncertainty in terms of outlook because of weaker demand in TV. Shipment for the second quarter is expected to stay flat year-on-year. Price decline is expected to be slower than the same period of the prior year. Display special glass, which was impacted in the first quarter, is seeing an improvement in shipment, starting from the second quarter, thanks to the recovery of our business of our customers in China. Semiconductor-related and optoelectric materials have not really suffered any major impact. In the Chemicals segment, we saw a decrease of shipment and selling prices due to the impact of lockdown of various Asian countries, and this is specific to chlor-alkali/urethane business. For fluorochemicals, we have not seen any major impact, although there was a slight decrease in shipment of some products for automotive, aviation and architectural. Life science demand is solid and no major impact has been seen in terms of shipment or operation. Please turn to Page 23. This slide shows how we are responding to this COVID-19 situation and the spread of the infection. First of all, our highest priority is ensuring the safety of all the stakeholders in and outside of the company and group, including employees, their families and our customers. We have a thorough spread control measures in place in sites where we continue our operation for production. In terms of on-hand liquidity, we have taken advantage of bank loans and other methods. And by the end of April, we have increased the cash by JPY 200 billion compared to the end of December. We have sufficient liquidity. In terms of reduction of investments and expenses, we will do our best, except for some investments and expenses, which will be allocated to the continuity for strategic business and growth business. Please turn to Page 24. These are some examples of business activities. In life science business, we are receiving a contract for development and manufacturing of vaccine as well as treatment of COVID-19. We have already signed a contract for one treatment and one vaccine, and there are multiple deals that are currently ongoing. And although this is not a big example, we also provide sodium hypochlorite used as disinfectant or disinfectant for drinking water. We also started to increase the production of polycarbonate resin which is used for splash infection prevention. In order to deal with the community, we have provided masks and protective garments to medical institutions located close to our group sites, both inside and outside of Japan. At this point in time, it is impossible for us to foresee how things may return to normal after COVID-19, but we will place the safety of our stakeholders, both within and outside the group as highest priority and thoroughly implement control measures so that we can respond to the demand of the society and customer as much as possible. That concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]