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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Once again, we will now start AGC's financial results briefing for the first quarter of the fiscal year ending December 31, 2023. I am Chikako Ogawa, General Manager of Corporate Communications and Investor Relations. I'll be serving as a moderator.
Today's attendees are Shinji Miyaji, Senior Executive Vice President and CFO; and Toshiro Kasuya, Executive Officer, General Manager of Finance and Control Division. First, CFO, Miyaji, will explain the financial results for the first quarter of 2023, followed by a question-and-answer session. We are planning to finish at 5:00 p.m. Your cooperation is appreciated.
Now I ask Mr. Miyaji to start the presentation.
Thank you, I'm Shinji Miyaji, CFO. Please turn to Page 3. These are the main points. In the first quarter despite the impact of failing falling vinyl chloride prices, net sales increased by JPY 16.5 billion year-on-year at JPY 489.2 billion, thanks to higher sales prices for architectural and automotive glass and favorable exchange rates.
Operating income decreased by JPY 23.5 billion to JPY 34.2 billion due to the deterioration of manufacturing costs and the impact of higher raw material and fuel costs. Net income attributable to the owners of the parent decreased by JPY 8.5 billion to JPY 22.1 billion. The full year outlook remains unchanged from the announcement in February.
Page 5, net sales and operating income were as just mentioned. Income before taxes decreased by JPY 17.8 billion to JPY 36.6 billion. Net income attributable to owners of the parent was JPY 22.1 billion.
Next, results by segment. Please turn to Page 6. Architectural glass and automotive increased sales and profits, Electronics and Chemicals decreased both sales and profits and life science recorded flat sales and decreased profits.
Page 7 various analysis of operating income year-on-year comparison. Sales volume, selling price and product mix, plus JPY 7.7 billion, with an increase in sales prices of architectural and automotive glass. Raw material and fuel purchase prices minus JPY 14.3 billion with higher prices of raw materials and fuels mainly in Japan and Asia. Cost reduction and others, minus JPY 17 billion as manufacturing costs worsened due to lower capacity utilization. As a result of the above, operating income decreased by JPY 23.5 billion from JPY 57.8 billion to JPY 34.2 billion.
Page 8. Next, financial position comparing with the end of December 2022. Total assets were JPY 2,851.2 billion, an increase of JPY 37.1 billion. The debt-to-equity ratio was 0.44.
Please turn to Page 9. Cash flow statements. Operating cash flow was JPY 30.1 billion, Cash used for investing activities was JPY 47.1 billion, resulting in free cash flow of negative JPY 17 billion.
Please turn to Page 10. I CapEx depreciation and R&D expenses CapEx was JPY 48.7 billion. Depreciation was JPY 42.4 billion, and R&D expenses were JPY 13.6 billion.
Next, details by segment. Please turn to Page 12. Starting with the architectural glass segment. Net sales for the first quarter were JPY 120.5 billion and operating profit was JPY 9.3 billion. In Europe and the Americas (sic) [ In Asia ], sales increased by JPY 5.4 billion to JPY 37.3 billion owing to higher prices and favorable exchange rates despite a decrease in shipments in Europe due to economic slowdown.
In Asia (sic) [ In Europe and the Americas ], sales increased by JPY 11.2 billion to JPY 83.1 billion, thanks to higher prices despite decreased shipments in regions other than Japan. Profit breakdown was 40% Asia and 60% Europe and the Americas.
Please turn to Page 13. Next is automotive segment. Net sales were JPY 118.4 billion. Operating profit, JPY 4.8 billion. As global auto production increased, our group's shipment grew. Net sales increased, thanks to the higher sales prices improvement of the product mix and foreign exchange events.
Page 14, please. This is the Electronics segment. Net sales were JPY 70.2 billion, operating profit, JPY 1.9 billion. In display shipments of LCD glass substrates and specialty glass for display applications decreased, Net sales were JPY 35.8 billion, down JPY 9.2 billion year-on-year. Shipment volume of LCD substrates grew low single digit quarter-on-quarter sales prices were flat.
In electronic materials with robust shipments of semiconductor-related products and ForEx impact, sales were JPY 34.1 billion, up JPY 3.6 billion year-on-year. Although electronic materials profit was strong, with major negative impact of higher raw materials and fuel cost and production cost for LCD glass substrates, operating profit decreased year-on-year. Ratio of subsegment, electronics materials was 180%. Display was minus 80%.
Now please go to Page 15. We believe display business earnings improvement is an urgent management challenge for AGC Group. In February earnings call, we explained that we would take drastic measures to realize improvement of the display business earnings. As part of this, we decided to reduce production of glass substrate products for LCDs in Japan significantly. More specifically, we would terminate production in Takasago site in Kansai plant by the end of 2023.
In addition to the withdrawal from the glass substrate with low profitability size and significant reduction of production in Japan, we would implement further measures to improve profitability and quickly pave the way toward 10% ROCE.
Now Page 16. This is the Chemicals segment. Net sales in Q1, FY '23 was JPY 141 billion. Operating profit JPY 17.2 billion. In essential chemicals, sales prices of PVC and others decreased. Sales were JPY 100.9 billion, down JPY 20.8 billion year-on-year.
In performance chemicals, although shipments of the whole chemical-related products decreased with higher sales prices and ForEx impact, sales grew JPY 0.6 billion year-on-year to JPY 39.1 billion. As for the ratio of the subsegments to OP in Chemicals, essential chemicals were 60%, performance chemicals about 40%.
Page 17, please. Let me explain the chlor-alkali market in Southeast Asia. Caustic soda market prices declined due to the slow economic recovery, mainly in the United States and China. PVC market bottomed down at the end of last year and is on the gradual recovery trend. Spread between PVC and ethylene is recovering moderately.
Page 18. Lastly, the Life Science segment. Net sales were JPY 33.2 billion, little change year-on-year and operating income was JPY 600 million, a significant decline. Despite a decrease in biopharmaceutical contract orders due to the absence of COVID-related special demand, sales remained almost the same, thanks to the favorable exchange rates. The decline in operating income was due to upfront costs for capacity expansion in the biopharmaceutical area and some operational instability experienced in starting new production lines.
The next page describes changes in the environment surrounding the biopharmaceutical CDMO business. So please turn to Page 19. As explained previously, we expect our biopharmaceutical CDMO business to grow over the medium to long term along with the expansion of the pharmaceutical and CDMO markets. And this prospect remains unchanged.
In the short term, however, there are concerns given the disappearance of the special demand for COVID-related applications after peaking in 2022 and the impact of reduced inflows of funds into the biotech ventures due to financial uncertainty and instability triggered by a sharp interest rate hike in the U.S.
So there are concerns now and into the future. Since our company has many transactions with small- and medium-sized biotech ventures, there could be some impact, such as a slowdown in the early stage development projects. Given such uncertainties over the future, while keeping our full year outlook unchanged, we will keep a close eye on the situation.
Page 20. Next, results of the strategic business. Net sales for the entire strategic business were JPY 75.1 billion, up JPY 3.7 billion year-on-year. Operating income was JPY 11 billion, down JPY 3.1 billion year-on-year. We were affected by the decrease in profits in the life sciences business, which I explained earlier.
Page 21. This slide shows the results by geographic segments.
Page 23. Next, the full year outlook. We have not changed the earnings forecast and dividend forecast announced in February.
Page 24. Our outlook by segments also remain unchanged.
Please turn to Page 25. Let me explain the highlights of full year outlook for FY 2023 by segment. Starting with architectural glass, no changes to the initial outlook in Europe, Americas and China. As for automotive, as we expected initially, recovery of the auto production will push up our shipments and pricing policy review are expected to bring further effect. In addition, impacts of the structural improvements in Europe and other regions are expected to emerge. In Electronics, both display and electronic materials outlook remain unchanged.
Please go to Page 26. It shows chemicals. Essential chemicals outlook remains unchanged. Market conditions for the year will remain below the previous year's level. After bottoming out at the end of last year, PVC market conditions will recover moderately. In caustic soda market, prices that rose last year will gradually decline. Due to recent delay of economic recovery in U.S. and China, both PVC and caustic soda have been weak. But as economy starts to recover, they are expected to improve. Performance chemicals outlook also remains unchanged.
Although demand of fluoro products for semiconductor process application has weakened, it is expected to improve in the second half. Demand in transportation machinery for cars and airplanes is robust, and our shipment is expected to rise.
Life Science outlook remains unchanged as of now. As I said, special demand for COVID-19-related products is over. So the key is how to win other orders. Recently, there are concerns about the reduced fund inflows into the biotech ventures depending on how the situation changes, outlook could be impacted.
Please go to Page 27. Outlook for strategic businesses remains unchanged. In the medium term, strategic businesses are expected to grow steadily, but the growth will be somewhat slow in FY '23.
Please go to Page 28. The outlook of CapEx depreciation and R&D are not changed.
And with that, I'd like to end my presentation. Thank you very much.
Thank you, Miyaji-san. We will now move to the Q&A session. [Operator Instructions] We will start with the questions that we have received in advance. The first question, the results of Q1, how did they compare to the plan by segment? And what are the projections for Q2 by segment? That's the first question. And Miyaji-san would respond.
Thank you. The first quarter results. As you can see, these were the results. Automotive better than our expectation. Architectural glass, again, the year started better than our anticipation. On the other hand, the operational adjustments for display, we were not expecting high rates of utilization, but we are under the impression that the adjustment is continuing in NaCl chemicals, especially chlor-alkali demand was weaker than our anticipation -- expectation So in that sense, architectural glass, automotive better than expectation. Display weaker than our expectation.
As for the second quarter, compared to the first quarter, a high likelihood of improving in display. And some others we expect quarter-on-quarter improvement. For chlor-alkali market, it's very difficult to predict, but it's not likely that it will get worse than what it is today, but a dramatic improvement is not likely either. So in that sense, for the second quarter, usually, second quarter for AGC is about the same or slightly better than Q1. For this fiscal year, we expect a similar trend. That's the current projection.
So let's move on to the next question about the operating profit of the automotive, vis-a-vis, the full year forecast, there was a good progress in Q1. Do you expect a similar level of profit in the second quarter and onwards? So I will once again ask Mr. Miyaji to respond to this question.
Yes, about the automotive, as I said, in the first quarter, we did see a big recovery. As for the second quarter and onwards, to start with the first half is actually better than the second half for automotive. For this fiscal year in terms of the volume, production of the car is increasing. So probably the trend will be a little bit different from usual. But at the same time, still China and Europe and Americas, there are some uncertainties. So the situation of the first quarter, whether it would continue in Q2 and onwards, it's still uncertain.
So we started off well better than our expectations. But whether this will continue in the second half or not, we are not that optimistic. Thank you very much.
The price increase for automotive glass. Do I understand correctly that your price structure is twofold, the fixed price and variable price? For fixed price, what has been the level of price increase, is the question. Miyaji-san will respond.
For architectural glass. The energy cost increase can be absorbed through energy surcharge for automotive glass, we don't have that kind of formula. And so it is left to individual price negotiations. Of course, last year, with increasing energy costs, we did revise some of our selling prices.considering various elements and factors. So we don't have this concept of fixed price versus variable price. It's very difficult to give you the details of our price structure and system. The energy cost increased portion have been transferred into the higher prices to a certain extent.
Next question is about automotive glass price increase. On Page 13 of the presentation, the positive impact of the sales volume, sales price and the product mix was JPY 13.8 billion. And in comparison, the negative impact from the raw materials and the fuel was JPY 3.7 billion. So it's the major positive impact. And to what extent this positive impact continue? How long would it continue? So Mr. Miyaji, could you respond to this question?
Yes. This is overlapping a little bit with the previous question. We have revised prices and the gas prices after that in Europe have come down. So it's becoming even, but we do not think it is easy to imagine that this will continue. So as I mentioned earlier, a little bit, the shipment volume needs to be considered. So as for the second half, we have to be prudent.
So this sales volume, sales prices and the product mix, most of those positive impact comes from the price revisions. So we increased the base part and the remaining part will probably stay.
Heading on to the next question on our display business. What is the backdrop to the decision to end the production of LCD glass substrates at Takasago plant? And what will be the impact on PL for next fiscal year?
More specifically, the effect of reducing the fixed cost as well as the impact on sales due to the reduction in the sales volume production in Japan. We have [ Nagasaki ] and [ Takasago ] plant and plant within our Kansai area. Our customers' demand are seeing a drastic decline in Japan. Most of the production site capacity have moved overseas, including China. So major customers have left Japan. That's one big factor. And in addition to that, a higher prices, higher cost of fuels and materials are affecting the production in Japan. That's another factor.
Impact on P&L next fiscal year onwards was the question. In February, as part of the profit improvement efforts, termination of glass substrates decided and various other initiatives are currently underway. So we are not going to disclose specifically what the impact is going to be specifically related to this end of production, because there are other factors involved as well. And so we might be able to comment on that sometime later. But as of today, we will refrain from disclosing that information.
Next question. In Q2, could you tell us the outlook of the shipment of the glass substrate for LCDs? So once again, I would ask Mr. Miyaji to respond.
Water shipment volume is gradually improving. In Q2, Q-o-Q, probably 10% increase is what we expect and the shipment increase of AGC probably where will exceed the overall level.
Moving on to the next question. Regarding the EUV mask blanks, competitors are talking about reduction in sales. How about for AGC year-on-year and quarter-on-quarter, what has been the rate of growth? On a full year basis, you are targeting over a 40% increase. Any changes to that forecast? And also, when do you expect the semiconductor materials to hit the bottom?
EUV mask blanks for AGC, compared to Q4 of last fiscal year, we saw an increase in volume, partly due to seasonality and year-on-year sales have declined. Over quarter-on-quarter sales have declined somewhat, but year-on-year, over a 20% increase. So in that sense, with the growth in the market itself and with expansion in our customer base, approximately 40% or higher than 40% increase year-on-year in sales, as we projected. We believe we are still expecting that.
It's very difficult to say when we can expect the semiconductor materials to hit the bottom. I think generally, its believed that it will gradually improve. And we subscribe to that as well. But when exactly that will happen, it's really hard to say. There are so many uncertainties.
Next question is about the outlook of PVC and caustic soda market in Southeast Asia. Mr. Miyaji, would you like to respond to this question?
Yes. I touched upon this earlier, but the PVC, first of all, as you can see in this graph, some improvements are being made or recoveries being made, but it's not a strong recovery, because of the economic recovery in China, which has been delayed. So and look at price of the is kind of pushed down because of this slow recovery and also North America. So it's not a strong recovery. However, the current price for Chinese PVC manufacturer is actually quite tough price level. So probably gradual recovery from this level will be expected.
As for the caustic soda in the second half of last year, European electricity price increased and the production in Europe was not possible. So they became very tight and the caustic soda went up. But now it's in the adjustment period. So in that sense, it's not going to grow that much from now on. So maybe we are close to the bottom now. And towards the second half, gradual recovery will happen. That's what we are thinking.
Moving on to the next question about the chlor-alkali business in Southeast Asia. What do you think is the impact of the capacity expansion by Reliance Group in India?
Reliance Group in India. Well, India has a big demand and great growth potential. Consumption is growing. Caustic soda and PVC are seeing a dramatic increase in demand. So this expansion in capacity I think will be absorbed by this domestic demand growth. So we believe that the impact to rest of the world, Southeast Asia, in particular, it will be limited.
Next question, the caustic soda outlook is lower than what you showed in the graph. And also the business environment around the semiconductor is expected to be tougher than your expectations. So in the second half, is it possible to make a significant earnings recovery under those circumstances? Mr. Miyaji, please.
I think the question is about the overall group profit level. And in Q1, JPY 34.2 billion and JPY 75 billion is the first half and JPY 115 billion for the second half. So as a start, if you look at only the first half, it looks quite good. But the issue is whether we can realize JPY 40 billion increase in the second half. And concerning that, initially, the profit is higher for us in second half. So usually, JPY 115 billion or JPY 120 billion is what we can expect in the second half. And also the economic recovery is also included, and we saw that maybe plus 10 billion.
But when -- if we can achieve that economic recovery portion, it's really up to the chlor-alklai market and -- as I mentioned earlier, the prediction is very difficult to make. But when you consider the cost of , it would gradually reverse the trend. So as of now, today, we haven't changed the outlook. And I think it is possible to achieve this target.
Next question, Life Science. The results for Q1 worsened. To what extent was this in relation to the upfront cost? And how long should we expect this upfront cost effect to continue? Is the question.
As you can see in this graph, in the first quarter of last year, rather high level of profit was generated, compared to that, yes, a big drop year-on-year. This is a business with a second half being larger than first half by nature. So last year was kind of exceptional. As for the upfront cost, we don't disclose the details. But in addition to upfront costs and expenses, as I briefly mentioned in my presentation, the new facilities -- in starting the new facilities, the operation was not very stable and that had a negative impact during the first quarter. And going forward, that will be resolved, and therefore, we believe the first quarter to be the bottom and the profit to improve for the remainder of the year.
[Foreign Language]
[Foreign Language] How can we get the order is something that we have to work on, that was the CDMO.
Next question. There was comment regarding the reduction in the capital inflow into bio ventures. What do you think would be the possible risk? And do you have any ideas regarding the capacity utilization?
That's hard to say. But in addition to biotech ventures, they are, of course, producing products for other applications as well. So what will be the size of the risk, well, that will be up to how the financial market would unfold in the U.S. So it's very hard to say. In any event, the newly acquired facilities, they are operating at low utilization rate, but not only in the U.S., but also in Europe, those utilization rates are going to go up towards next year.
So this capital inflow fund issue regarding the biotech ventures there's too many uncertainties version.
So next question about the EUV mask blanks, the announcement was made to expand the capacity. Shipment growth is being delayed from the outlook. But are you seeing some changes in the growth curve? You are expanding the capacity by 30% in fiscal '24, do you think that your capacity will be exceeding the current production? Could you give us some additional explanation, including the new entrants? So Miyaji-san, would you like to respond to this question?
Well, 2025, more than JPY 40 billion is the target that we are trying to realize. So up to '21, we were growing on track. But in 2022, because of the situation of the customers, there was a kind of a plateau. But once again, exceeding JPY 40 billion is the track that we are currently on. So that's the image that we have. So it's been delayed somewhat. But right now, we have come back to the original track. So that's what I can say.
As for the new entrants, there are players that they plan to enter, but we are not seeing major changes in that sense and capacity is something that we should expand in our case.
The next question will be the last question in the interest of time. The PBR is now below 1. How do you plan to improve the PBR?
0.8 or thereabout is our PBR. The big issue -- the biggest issue is that ROE is not stable. Over 10% in good times, but 5-year average would be 0.5, 0.6, and we believe that is the biggest issue. So improved ROE, so that it will be 0.8 even in the worst case and try to improve that to 1 as much as possible. And when that is achieved, we believe PBR will exceed 1, and for that, we need to reform our portfolio -- business portfolio, not just the strategic business, but in core business as well, we need to achieve stability. That's another important theme.
Architectural glass is more stable, compared to the past. But the core business, which would have a major impact on ROE. We need to focus our efforts to stabilize that and at the same time, grow the strategic business to improve the ROE. Should that happen, PBR is starting to improve.
Thank you. We don't have any questions left, so in the interest of time, we will end here. Thank you very much for taking time out of your busy schedule to join us today. With this, we end the earnings briefing for Q1. When you close the Zoom screen, the feedback screen will appear. Your input is appreciated. It will only take about 2 minutes. If you have any further questions, please contact us. The phone number is 033-218-5096. Thank you for your attention and participation.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]