AGC Inc

TSE:5201

Earnings Call Transcript 2018-Q2

[Takuya Shimamura, executive]

Good evening. Takuya Shimamura, Representative Director, President and CEO. Nice to see you again in this forum after 6 months.

This is the agenda for today's briefing. I would like to go over measures relating to AGC's strategic businesses. This is of the first earnings briefing under the new company name, AGC Inc. As you are aware, we have the AGC Group Vision 2025, in which the core businesses are to provide the solid sources of earnings and the 3 strategic businesses are to be expand, the 3 strategic businesses, comprising of the 3 strategic areas. That is our long-term management strategy. Today, I would like to share with you what we are currently doing as initiatives on strategic businesses as well as the current progress towards achieving the goals.

With regards to the strategic businesses, we aim to increase the contribution ratio of profit to over 25% in 2020 and over 40% in 2025. As initiatives on the strategic businesses, I'd like to share with you 2 points today. First is the 5G next-generation high-speed communications, which is one of the targets in the mobility and electronics areas. Next-generation high-speed communications represented by 5G is one of the essential technologies for realizing IoT, Internet of Things; connected cars; and automated driving. There is no doubt that this will provide a big business opportunity in the future, not just in terms of technological developments but also in terms of social infrastructure development. So how can we contribute leveraging AGC Group's technical foundation? That is we'd like to cover today.

The second is in the area of life science. Since the acquisition of CMC, we have made progress, and this business has seen a steady increase in the number of customers and an expansion in business results. So we are definitely approaching the goal that we envisioned initially. So I would like to share with you the progress made along this line.

First, the 5G, the next-generation high-speed communications. As I said earlier, it's not just about 5G communications. There are various issues that need to be resolved for its dissemination. One is that high-frequency waves have significant propagation loss and attenuate in short distance. For the automated driving, capability to receive and transmit radio waves 360 degrees and bidirectionally while the vehicle is in motion, which dramatically raises the performance requirements for the antenna. We are hoping to solve this challenge by AGC's own antenna design and development technology and expertise.

The second issue is the fact that high-frequency waves have significant transmission loss and have difficulty penetrating vehicle parts. They are the inherent disadvantages. AGC's low-transmission loss materials, such as fluorine resin and synthetic fused quartz glass, which can provide solutions here.

Let me give you some specific examples. First, as was announced on July 25, AGC succeeded in a field trial of the 5G-compatible vehicle glass-mounted antenna or on-glass antenna that we designed and developed. As waves from 5G base stations cannot travel long distance, you need more base stations. And autonomous vehicles need to transmit and receive radio waves coming from various directions while they are in motion for stable, high-speed communications. Especially in the era of automated driving, it becomes an essential technology because it is directly related to protecting human lives and preventing accidents.

AGC has a history of about 40 years in developing glass antennas for automobiles. And AGC has extensive expertise in incorporating a wide variety of antennas in glass, such as for radio, digital broadcasting and LTE communications. Based on the accumulated technology and expertise, we successfully developed this high-speed and high-performance on-glass antenna that we announced recently.

Of course, we cannot advance this technology further on our own. We are collaborating with NTT DOCOMO and Ericsson in conducting the field trial. As the world's first on-glass antenna for 28-gigahertz band, we successfully demonstrated the wireless communications that we acquire driving at 100 kilometer per hour and 5G base stations. This on-glass antenna is unique in that it is a type installed on the automobile window glass, different from the more common shark fin antennas. And the shark fin antennas and conventional glass-mounted antennas cannot satisfy the needs and requirements of 5G communications. As it is mounted on the glass, it provides more freedom to the design of the vehicle. This on-glass antenna that we developed on our own, we believe will become a very important material going forward.

Secondly, as we announced on July 26, we acquired the electronics business of U.S.-based Park Electrochemical Corp., with a view to complementing our existing low-loss materials technology, such as fluorinated resin, with extremely low-loss CCL or copper clad laminate technology. CCL is printed circuit board material made from copper foil and insulating resin, such as fluorine resin. We hope to further commercialize this technology. To realize the low-loss property, you need the insulation resin and surface treatment technology as key technologies.

AGC is not only providing materials, but we are going to develop the multi-materials, the combination of materials. That's the business model that we are going to pursue, and that is the message contained in this business or endeavor. This acquisition has various synergy potential with what we have at the AGC Group. For example, combined with AGC's fluorine resin, we can further enhance CCL property. And also, as applications, CCL can be used for the on-glass antenna, which I mentioned earlier. And it could be deployed in such applications as ultralow-loss high-speed communications antenna as well.

So these are the examples in the next-generation high-speed communications and automatic driving efforts. These 2 themes represent essential technologies and materials in a rapidly changing society. There are still many fields where AGC's strengths can be demonstrated. We have confidence and great expectation, and you can expect to hear more from us in this area. The measures mentioned above, the acquisition in the area of CCL and high-speed communications are upfront investments for the future.

In life science, we are already making acquisitions, and progress is made steadily at the present time. We have already made various announcements. On July 12, we announced the capacity expansion of synthetic pharmaceuticals in Japan. In addition to movements in the biochemicals area, where we focused for the last 2 years or so, we made the expansion in the synthetic pharmaceuticals as well.

Regarding biopharmaceuticals, we plan to increase production capacity in the third quarter of this year so as to ensure the growth of the life science business in concrete and steady manner.

The life science business, combining synthetic pharmaceutical, agrochemical and biopharmaceutical businesses, aims at the sales of JPY 60 billion in 2020 and sales of JPY 100 billion in 2025. Last year, in 2017, sales totaled JPY 36.6 billion. And for the first half of 2018, the sales amounted to approximately JPY 22 billion. At the current rate, we expect to exceed JPY 45 billion for the full year. So the business performance is progressing at a faster rate than we have anticipated.

As shown in red, we increased the manufacturing capacity, compliant with GMP or the Good Manufacturing Practice by 10x. The significance is as follows. AGC has strength in organic synthesis technology cultivated in fluorochemicals, and we can enhance that with this capacity expansion. And as shown in the slide, conventionally, prior to the capacity expansion, we were commissioned to cover only up to the development stage of new drug production due to the limited capacity. Whereas with the tenfold increase in capacity, we have built an integrated production system, from the development stage of new drugs to commercial drug production.

Also, with this facility, we can now produce hard-to-handle active ingredients, such as the highly potent active pharmaceutical ingredients typically used in cancer therapy.

We are making steady progress in this field of life science. As explained in the strategic businesses of mobility, electronics and life science, various projects started since 2016, as you can see on this slide. Each of them is deemed essential for the growth of the AGC Group going forward.

Lastly but not the least, I would like to comment on the shareholder returns. For this year, our shareholder return policy is, as we have been saying, consolidated total return ratio of 50% or more based on maintaining the current dividends. And today, we announced a JPY 20 billion share repurchase. In parallel with active investments, we would like to continuously carry out shareholder returns as well.

As has been said, dividend per share on a full year basis is JPY 110. The JPY 20 billion worth of shares repurchased are to be canceled. Once that's completed, the consolidated total return ratio would be 56%.

That concludes my very brief update on the measures related to the strategic businesses and the shareholder return policy. Thank you for your attention.

[Shinji Miyaji, executive]

This is Shinji Miyaji, CFO. I will cover the results for the second quarter of 2018.

Please turn to Page 15. This is the summary of the results for the first 6 months of 2018. Net sales increased by JPY 55.5 billion year-on-year to JPY 745.5 billion. Operating profit was JPY 60.3 billion, an increase of JPY 11 billion year-on-year, exceeding the initial forecast by JPY 5.3 billion. Details will be explained later.

Profit before tax was JPY 64.9 billion, up JPY 16.1 billion year-on-year. Profit for the period attributable to the owners of the parent was JPY 48.1 billion, an increase of JPY 10.6 billion year-on-year.

Please turn to Page 16. Consolidated statements of profit and loss were already explained. As for the exchange rates, the yen depreciated by about 8% against the euro, and the Dubai crude rose by $17 per barrel compared to the same period last year, reflecting the recent price rise. The impact of foreign exchange on the sales was plus JPY 12.9 billion.

Page 17, year-on-year performance comparison by business segment. The glass and chemicals segments posted a year-on-year increase in both sales and profit. The electronics segment posted a slight decline in sales but an increase in profit. Profit was higher for all 3 segments.

Moving on to the variance analysis on the operating profit, please turn to Page 18. This slide shows the variance analysis on operating profit. As mentioned before, operating profit increased JPY 11 billion year-on-year in the first half of FY 2018. Sales volume and product mix pushed up the profit by JPY 8.5 billion. Shipment increased in all segments, and especially, growth in automotive, glass and the life science were notable. Selling price increased the profit by JPY 1.3 billion. Price of LCD glass substrates dropped, but chlor-alkali price, including the caustic soda, recovered sharply, and the selling prices of architectural glass in all regions went up. And that made positive contributions.

Purchase price of fuels and raw materials pushed down the profit by JPY 3.2 billion. Utility cost increased by high fuel cost and raw material cost increase of fluorochemicals have made impact. Cost reduction and others impact was JPY 4.5 billion. Cost improvement in LCD glass substrate and the full year contribution of subsidiary, which was consolidated in the first quarter of FY '17, are the major factors for improvement.

Page 19. This slide shows the variance analysis on operating profit between the second quarter of FY 2018 and the same quarter of FY '17. Profit increase was JPY 2.6 billion year-on-year. The trend is basically in parallel with the first half comparison. Sales volume, product mix pushed up the profit by JPY 3.7 billion. Shipment in automotive glass and life science increased. Selling price increased the profit by JPY 2.3 billion. Price decline of LCD glass substrate was offset by the selling price increase in chlor-alkali, led by caustic soda and architectural glass.

Purchase price of fuels and raw materials pushed down the profit by JPY 1.9 billion. Utility cost increased by high fuel cost and the price surge in natural gas in EU were the major causes. Cost reduction and others impact was minus JPY 1.5 billion. In LCD glass substrate, cost improvement was offset by the increase in repair cost. SG&A cost increased with the shipment increase in each segment, and R&D cost also increased.

Page 20, quarterly comparison by segment. Net sales were almost flat quarter-on-quarter. Operating profit was down by JPY 1 billion. Let me explain the reasons later.

Please turn to Page 21, quarterly variance analysis on operating profit. Volume and product mix was plus JPY 2 billion. Shipments were firm in all segments. Selling price was plus JPY 2.9 billion. Key driver was the selling price recovery in chlor-alkali, including caustic soda. Purchase pricing for fuels and raw materials was minus JPY 0.4 billion. Utility cost increase pushed down the profit. Cost and others were minus JPY 5.4 billion. In glass segment, fixed cost increased with the production increase of automotive glass in Japan and Asia, and development cost increased. In the electronics segment, the repair cost of LCD glass substrate furnace and the increasing SG&A expenses with the capacity expansion in 11G LCD glass substrate were major factors. R&D cost increased as well as the adjustment at the end of the fiscal year.

Page 22. This slide shows the balance sheet. It shows the comparison with the December 2017. Total assets decreased by JPY 15.1 billion. This includes the FX impact of minus JPY 71.3 billion. Property, plant and equipment increased substantially due to active capital investment, but FX impacts squeezed it by JPY 45.8 billion, and it resulted in the increase of JPY 7.5 billion.

Page 23, for cash flow. Cumulative operating cash flow was JPY 80.4 billion. We have been active in investment, but due to the absence of large M&A as previous year, investing cash flow decreased substantially to minus JPY 78.3 billion, with a positive free cash flow of JPY 2.1 billion.

Page 24, for CapEx. Against the initial forecast of JPY 220 billion, cumulative CapEx up to the second quarter was JPY 117.9 billion. We built the architectural glass facility in Indonesia, and the construction of 11G LCD glass substrate facility in China and investment in power generation facility in chemicals segment in Indonesia pushed up the investment year-on-year.

For the information by segment, please turn to Page 27. This slide shows the glass segment. Net sales were JPY 381.6 billion, operating profit was JPY 15.3 billion, up JPY 24.6 billion and JPY 1.3 billion, respectively. In architectural glass, shipment decreased due to the withdrawal from Philippines, but sales were benefited by a strong shipment in the U.S. and EU and weaker yen and stronger euro. Shipment in automotive glass were strong in all regions, and sales were, again, benefited by the weaker yen and the stronger euro. In addition to the volume increase, selling price in architectural glass recovered in Japan and in Europe. And that led to the operating profit growth of JPY 1.3 billion.

Operating profit in the second quarter was JPY 7.7 billion, up JPY 0.8 billion year-on-year. As was in the case of cumulative results, second quarter profit was also pushed up by the volume and the price increase. In comparison with the first quarter of FY '17, operating profit almost remained unchanged.

Page 29, for electronics segment. Total net sales were JPY 119.9 billion, and operating profit was JPY 10 billion, down by JPY 2.5 billion and up JPY 0.9 billion, respectively. Price in LCD glass substrate fell, but it was offset by the manufacturing cost cut.

In electronic materials, shipment for optoelectronics went down year-on-year. But the semi-related (sic) [ semiconductor-related ] materials, demand was very robust and the sales increased. Shipment of cover glass for car-mounted displays continued to increase.

Operating profit in the second quarter was JPY 4.3 billion, down by JPY 0.7 billion year-on-year. Price decline of LCD glass substrate was offset by the manufacturing cost reduction, but the repair cost in the second quarter squeezed the profit. Compared with the first quarter, operating profit went down by JPY 1.5 billion. As was in the case of year-on-year comparison, the repair cost squeezed the profit.

As for the trend of volume and price of LCD glass substrate, compared with the first quarter, volume increased by low single-digit percentage and price continued the moderate decline.

Page 31, for chemicals. Net sales were JPY 229.7 billion, and operating profit was JPY 33.7 billion, up JPY 33 billion and JPY 7.7 billion, respectively. Shipment in every business was firm, and price of caustic soda increased both in Japan and abroad. The contributions of Vinythai and CMC Biologics that we acquired in the first quarter are fully reflected in this year, and the shipment in life science increased. They led to the substantial increase in profit.

Operating profit in the second quarter was JPY 16.7 billion, up JPY 1.8 billion year-on-year. Key contributor was the selling price increase in caustic soda. Compared with the first quarter, the profit went down by JPY 0.3 billion. This is partly due to the adjustment at the end of the fiscal year, and profit decreased slightly.

Page 33. This is a comparison by geographic segment. Let me comment on Americas and Europe here. Operating profit in Americas was JPY 3.3 billion, up JPY 0.7 billion year-on-year. Life science subsidiary, CMC Biologics, that we acquired last year is contributing to the profit increase. Operating profit in Europe was JPY 10.2 billion, up JPY 4 billion year-on-year. Sales in architectural glass and automotive glass were both strong. And as in the U.S., CMC is again contributing to the profit increase.

As for the second quarter, Americas operating profit was JPY 1.7 billion, up JPY 0.2 billion. In Europe, operating profit was JPY 5.7 billion, up by JPY 1.7 billion. Sales in architectural and automotive glass were both strong. CMC is again contributing to the profit increase.

Page 34. This slide shows the quarterly comparison. Americas profit was almost flat, but in Europe, due to the shipment growth in architectural and automotive glass, profit increased to JPY 5.7 billion, up JPY 1.2 billion.

Page 38, full year forecast. Net sales are JPY 1,550,000,000,000; operating profit, JPY 135 billion; and profit attributable to owners of the parent, JPY 80 billion. Year-on-year change is shown here. And compared with the initial forecast in February, operating profit is up by JPY 5 billion, and profit attributable to owners is up by JPY 3 billion. As a result, operating profit margin will be 8.7%, and ROE will be 6.9%.

We revisited the FX and the crude oil assumption. Second half assumption of euro was revised from JPY 135 to JPY 130 to EUR 1, and crude oil assumption was revised from $65 to $70 per barrel. And as a result, assumption of euro for that year is JPY 130.8 to euro, and $69 per barrel for crude oil.

Page 39, outlook by business segment. Starting with glass. As for architectural glass, shipments are expected to increase year-on-year in many regions. Selling price in Europe and Americas will be kept high. And in the second half, the price hike in Japan will be prevailing, and the price will be up year-on-year. Fuel cost started to increase, and this is one of our concerns. Automotive glass strong demand will continue to sustain the strong shipment. Productivity in Europe recovered, and further cost improvement, including the logistics, is expected.

Page 40, electronics. LCD glass substrate market volume in the third quarter remain flat quarter-on-quarter, and for the full year, it will be flat year-on-year. Price decline in the third quarter will be more moderate than the second quarter. As a result, the price decline in the first 9 months will be smallest in recent years, and the decline in the full year will be in the mid-single-digit percent. Shipment of cover glass for car-mounted display will continue to be firm. As for electronic materials, semi-related (sic) [ semiconductor-related ] products market sustains its robustness. And the shipment of optoelectronic materials are expected to recover in the second half, so the business continues to be firm.

Page 41, chemicals. Shipment will continue to be strong across the segment. Supported by the strong demand in Southeast Asia, the shipment in chlor-alkali will continue to be firm. Caustic soda price increase, which was presented in the first half, will make full contribution in Japan. Shipment in fluorochemicals will remain high as previous year. In life science, sales growth in both biopharmaceutical and synthetic pharmaceutical will exceed our expectations.

Page 42, CapEx, depreciation and R&D. All of them remain unchanged from the initial forecast: CapEx, JPY 220 billion; depreciation, JPY 135 million; and R&D will be JPY 45 billion.

This concludes my presentation. Thank you for your attention.