AGC Inc

TSE:5201

Earnings Call Transcript 2020-Q2

[Shinji Miyaji, executive]

This is Shinji Miyaji, the CFO. Please turn to Slide 4. First, the key points of today's briefing. In the first 6 months, net sales decreased by JPY 82.9 billion year-on-year at JPY 654.5 billion, and operating profit declined by JPY 20.9 billion at JPY 20.6 billion. As an impact of COVID-19, sales were down JPY 99 billion, and operating income was down JPY 36.5 billion.

Despite strong performance of electronic materials, LCD glass substrates and life science, overall sales and profits decreased year-on-year due to a decline in demand for automotive glass and architectural glass, which were greatly affected by COVID-19 and lower selling prices.

Regarding the full year forecast that remained undetermined, we now forecast sales to be JPY 1.35 trillion, down JPY 168 billion year-on-year and operating profit to be JPY 40 billion, down JPY 61.6 billion. The impact of COVID-19 is expected to be JPY 217 billion on sales and JPY 87.5 billion on operating profit, with serious effect projected on Glass and Chemicals.

We believe that had it not been for the effect of COVID-19, the full year forecast announced in February would have been achieved; namely, net sales of JPY 1.55 trillion and operating profit of JPY 120 billion.

Please turn to Slide 6. Highlights of the financial results for the first 6 months. Sales and operating profits were as described earlier. Profit before tax was JPY 16.5 billion, a decrease of JPY 26.1 billion year-on-year.

Profit for the period attributable to owners of the parent was JPY 11.4 billion, down JPY 20.9 billion.

Next, results by segment. Please turn to Slide 7. Sales and profits decreased for Glass, Chemicals, Ceramics and Others, while sales and profits increased for electronics.

Compared to the forecast for the second quarter cumulative results announced on May 18, results for Chemicals were lower. This was because the market conditions for chlor-alkali products in Southeast Asia were worse than expected.

Details of the effects of COVID-19 and the factors contributing to an increase or decrease in profit for each segment are explained on the following slides.

Please turn to Slide 8. I would like to explain the impact of COVID-19 during the second quarter, April to June. Glass and Chemicals felt the greatest impact. Demand for architectural glass has fallen sharply due to the worldwide restrictions on economic activities, which resulted in capacity adjustments in all regions and manufacturing costs deteriorated.

Automotive glass was also greatly affected. But in China, the downward trend bottomed out in February; in Western and Central Europe, Americas and Thailand in April; and in Japan in May.

Impact on electronics was relatively small, but shipments of specialty glass for displays decreased as an effect of a decline in smartphone sales volume.

Among chemicals products, in the chlor-alkali and urethane business, the market conditions for chlor-alkali products in Southeast Asia sharply deteriorated in May onward affected by the lockdown in Asian countries.

In the area of fluorochemicals and specialty, demand declined for fluorochemical-related products for transportation and construction use.

Slide 9. Variance analysis of the second quarter cumulative operating profit compared to the same period last year. A year-on-year decrease of JPY 20.9 billion to JPY 20.6 billion. Sales volume and product mix was minus JPY 8.9 billion, with a decrease in shipments of automotive and architectural glass. The selling price difference was minus JPY 14.8 billion, with prices declining for architectural glass in Europe, chlor-alkali products in Southeast Asia and LCD glass substrates. Purchase price of fuels and raw material, plus JPY 700 million as natural gas prices declined in Europe.

Cost reduction and others, plus JPY 2.1 billion. Manufacturing costs deteriorated due to the capacity adjustments at glass manufacturing facilities, but this was made -- more than made up for by lower depreciation expenses coming from the recording of impairment loss in automotive glass in North America last year and lower SG&A expenses.

Slide 10. Consolidated statement of financial position comparing to the end of 2019. Total assets were JPY 2.535 trillion, an increase of JPY 199.6 billion. As cash and cash equivalents were increased by about JPY 250 billion in response to COVID-19, debt-to-equity ratio temporarily rose to 0.73.

Slide 11. Cash flow statement for 6 months. Operating cash flow was JPY 111.5 billion, and cash flow used for investing activities was JPY 104.4 billion. Free cash flow was JPY 7 billion.

Slide 12. CapEx, depreciation and R&D expenses. CapEx for 6 months totaled JPY 111.6 billion, depreciation was JPY 72.2 billion and R&D expenses were JPY 21.9 billion.

Next, results by segment. Please turn to Slide 14. First is the Glass segment. Net sales for first 6 months were JPY 294.2 billion, down JPY 81 billion year-on-year, and operating profit was minus JPY 20.8 billion, a deterioration of JPY 28.1 billion.

For architectural glass, shipments decreased due to the effects of COVID-19. In addition, due to a decline in product selling prices in Europe and other areas, net sales dropped by JPY 24 billion year-on-year to JPY 150.7 billion.

In automotive glass, the impact of COVID turned full-fledged at the end of March, and the number of vehicles produced declined significantly. As a result, shipments from the AGC Group declined, and net sales fell JPY 57.3 billion year-on-year to JPY 142.3 billion.

Operating profit decreased by JPY 28.1 billion to minus JPY 20.8 billion, reflecting the deterioration of manufacturing costs due to the significant capacity adjustments following declining demand in addition to the sales decreasing factors explained earlier.

Slide 16, Electronics. Net sales were JPY 138.6 billion, up JPY 14 billion year-on-year, and operating profit was JPY 17.4 billion, up JPY 11.4 billion.

In displays, selling prices of LCD glass substrates declined, but shipment volume increased. Shipment of specialty glass for display applications decreased with the decreased sales volume of smartphone affected by COVID-19. Regarding display as a whole, due to major impacts by shipment increase of LCD glass substrate, both of sales and profit increased.

Shipment of LCD glass substrates increased slightly over the previous quarter, and selling price decline was more moderate compared to the previous quarter.

In electronic materials, shipment of optoelectronic materials and semiconductor-related products, including UVL (sic) [ EUVL ] mask blanks increased substantially. Consolidation of printed circuit board business of Taconic since the third quarter in FY 2019 also contributed to the increase both in sales and profit of electronic materials business.

Please turn to Page 17. Let me explain the Chemicals segment. Net sales in the first 2 quarters were JPY 212.4 billion, and OP was JPY 22.7 billion, down by JPY 16.1 billion and JPY 3.5 billion, respectively, year-on-year.

In chlor-alkali and urethane, decrease in selling prices of caustic soda and PVC in Southeast Asia resulted in a decrease both in sales and profit. In fluorochemicals and specialty chemicals, shipment for automotive aircraft and architectural use decreased and both of sales and profit decreased.

In life science, the number of contracts for synthetic pharmaceuticals and biopharmaceuticals increased and both of sales and profit increased.

Please turn to Page 19. Let me explain the performance of Strategic business. Net sales of Strategic business in the first 2 quarters were JPY 89.8 billion, and operating profit was JPY 14.4 billion, up JPY 21.8 billion and up JPY 6 billion, respectively, year-on-year.

Shipment in mobility decreased, affected by COVID-19, but electronics and life science were growing steadily.

Please turn to Page 20. It shows performance comparison of the past 2 quarters of FY 2020 against FY '19 by geographic segment. In Japan and Asia, shipment of optoelectronics and semiconductor-related products, including EUVL blanks and LCD glass substrates increased, but shipment of automotive glass decreased and price of LCD glass substrate fell and the sales and profits decreased.

In Americas, shipment of automotive glass decreased and manufacturing costs worsened due to operational adjustment and sales and profit decreased.

In Europe, number of contracts of synthetic pharmaceuticals and biopharmaceuticals increased. But due to the fall of selling price of architectural glass, decrease in shipment of automotive glass and worsened manufacturing cost by operational adjustment, sales and profit decreased.

Please turn to Page 22. Let me explain the full year outlook. Net sales will decrease by JPY 168 billion year-on-year to JPY 1.350 trillion. Operating profit will decrease by JPY 61.6 billion year-on-year to JPY 40 billion. Impact by COVID-19 this time will be minus JPY 217 billion on sales and minus JPY 87.5 billion on OP.

As for the profit before tax and profit attributable to owners of the parent, since additional expenses for restructuring and other measures are yet to be determined, they will be disclosed when the reasonable estimation is available.

ForEx assumptions for the full year are revised to JPY 109.1 to a dollar and JPY 119.6 to euro. Dubai crude oil prices revised to $42.8 per barrel.

Please turn to Page 23. Shareholder's return policy. We maintained the consolidated total return of 50% or more, including share buyback, and sustain or improve the current annual dividend per share, and that policy remains unchanged.

Year-end dividend will be determined considering such factors as additional expenses for restructuring, future business environment and our business outlook.

Please turn to Page 24. Full year outlook breakdown by segment. Sales and profit of Electronics will increase, but Glass and Chemicals will be affected by COVID-19, and that will lead to substantial year-on-year decline in sales and profit.

Please turn to Page 25. Second half forecast by business segment. In Glass business segment, as for the architectural glass, gradual recovery is expected from the second quarter bottom with the resumption of economic activities in each region.

As for automotive glass in Japan and Asia, our shipment will gradually recover from the second quarter bottom with the resumption of economic activities. China and Japan showed a trend of recovery, but Thailand and Indonesia will remain sluggish in the second half.

In Americas, our shipment gradually recovered from the bottom in April and May, but second half and onward will continue to be sluggish given the uncertainty caused by the spread of COVID-19.

In Europe, shipment gradually recovered in May from the bottom in April with the resumption of economic activities, but the second half and onward will continue to be sluggish.

Utilization in architectural glass and automotive glass show the trend of recovery, but the full recovery on demand side will take some time, particularly for automotive glass.

Please turn to Page 26. Electronics segment. As for display, shipment of LCD glass substrates will be comparable to the previous year when the record high shipment was marked with a stable demand from our main customer.

In specialty glass for display applications, demand for smartphone will be weakened. In electronic materials, semiconductor-related and optoelectronic materials will be solid.

In Chemicals segment, affected by economic slowdown in Southeast Asia and lower demand for transportation and construction business, performance of chlor-alkali and urethane and fluorochemicals and specialty will decline.

Life science will remain robust with increasing contracts related to vaccine development for novel coronavirus.

Please turn to Page 27. Strategic business will expand steadily with limited impact by the COVID-19. Net sales will be JPY 190 billion and OP will be JPY 30 billion in this fiscal year and that forecast is not revised from the announcement in May.

Please turn to Page 28. This last slide shows that CapEx for the full year is JPY 220 billion, and depreciation cost is JPY 150 billion, and they remain unchanged from the initial forecast as of February 5. R&D expenses will be JPY 49 billion, down by JPY 4 billion from the initial forecast as of the February 5 through further scrutiny. That concludes my presentation. Thank you.

[Takuya Shimamura, executive]

This is Takuya Shimamura, President and CEO. I would like to talk about what AGC is doing in terms of measures against COVID-19 crisis, the end of which appears more uncertain than ever. First, I'd like to emphasize that the AGC Group is placing top priority on ensuring the health and safety of all stakeholders, including employees and their families, customers and business partners and is taking measures to prevent the spread of COVID-19. We are committed to continuing with those measures.

And in the business operation, we, of course, have to think about the immediate needs. So with a view to securing smooth business operation, we are ensuring the liquidity on hand. Bank borrowings have increased momentarily, but this is to ensure liquidity on hand for robust business operation to serve the customers and business partners.

Secondly, implementing measures to improve profitability. Regrettably, some businesses are seriously hurt in this environment. But we will implement measures to improve profitability from where we can. And as we have been doing so for some time, taking this opportunity, we are to continue with the digital transformation efforts and implement these more aggressively and accelerate the speed of deployment, so as to increase the speed of business operation and business transformation so that, as a result, we will see improved efficiency in business operation. We would be making a company-wide effort.

Please turn to Slide 32. From here, I would like to talk about the outlook of each business. As our CFO, Miyaji, explained earlier, in the Glass segment, the architectural glass and automotive glass are both facing very difficult situation. Especially in the mainstay markets of Europe and Asia, volume-wise damage, together with deteriorating market conditions, are major factors driving down profit.

As for the market trend, based on various information available, our current view is that it may take at least 2 or 3 years for the market to recover. And as was explained earlier, in the architectural glass in Europe, starting in May, activities have begun to come back, and we are seeing signs of gradual recovery over time from June into July. So we do feel signs of bottoming out, but whether this momentum will accelerate or not, we need some more time to figure that out.

So what are we doing? And what are we going to do in this environment? There are differences from region to region. This is true in Europe, Asia, China, Japan and North America. In each of these regions, things are changing in different ways. So what we need to do is to, first, adapt production to local demand on a site-by-site basis to study and build new supply structure to build appropriate system. Through these activities, we are to improve asset efficiency as well.

As you can see in this chart, there are regions where rather early recovery is expected; while in some other regions, given the growth rate, the speed of recovery appears to be very slow. So what specifically are we doing is described in the box below, adjust capacity in line with demand, including suspending some lines.

In Europe, already at the glass company headquarters in Belgium and in automotive glass plants in Czech Republic, approximately 1,000 redundancies are being planned. And of course, we will be implementing thorough and drastic cost reduction measures as well.

We'd like to clarify the specific measures for Glass segment. I share them with you when they are decided.

Please turn to Page 33 for chlor-alkali business. As for the chlor-alkali business in Southeast Asia, in particular, demand for caustic soda and PVC continue to grow steadily. We have been expanding the capacity. And in the supply-demand balance, the added productions are well absorbed in the solid market fundamentals. We deem COVID-19 is a temporary downturn.

As shown on the right, we have a competitive advantage in terms of market share and potentials. And no electrolysis facility expansion plan is released by other players.

In the case of PVC, partly due to the inflow of shale-derived ethylene from the U.S., our position is -- procuring ethylene in Southeast Asia will be more advantageous. Therefore, although we are temporarily affected by COVID-19, fundamentals for future growth would remain unchanged.

Please turn to Page 34. Life Science. In addition to the CDMO in synthetic pharmaceuticals and biopharmaceuticals, through the acquisition of MolMed, we were able to expand into gene cell therapy CDMO. With this, we have established the foundation of CDMO to cover and supply to the very extensive customer base through 3 lateral business base of Europe, the U.S. and Japan.

Our initial target was to achieve the net sales of JPY 100 billion in 2025. But with the current momentum, we will achieve the target 2 to 3 years earlier.

MolMed deals with gene cell therapy CDMO, but after the decision of acquisition, contract for vaccines in the treatment for novel coronavirus were offered; in a way, turning misfortune into fortune. But we also acknowledge that we need to fulfill the CDMO's responsibility to ensure the stable supply.

Please turn to Page 35. As for the Electronics business segment, as you know, EUVL mask blanks market will grow significantly from 2021, backed by the development of memory-related applications in addition to the logic-related applications.

In response to the demand growth, EUV mask blanks capacity expansion was decided. And our plan to achieve market share of 50% and net sales of JPY 40 billion is unchanged. And we'll continue to progress steadily.

And on the next page, in order to improve manufacturing and operational efficiency in strategic business and core business, digital transformation will play the critical role. We set up the dedicated department to promote digital transformation group wide, and they lead the digital transformation, not only in the manufacturing and R&D, but also in logistics and sales and marketing. We expect that it will serve as a key tool to support the growth of strategic business.

In conclusion, the COVID-19 impacted us significantly, in particularly, the glass business. As mentioned before, we will restructure our business to meet the demand, monitoring supply-demand balance closely. And this occasion provided us with the opportunity to think about the new work style, which will increase earnings and improve business efficiency. Fortunately, even under these environments, strategic business continued to grow steadily, and it is important that our strategy continue to progress as planned.

We continue to invest aggressively into the strategic and growth business. And we will accelerate the business transformation to transform the business portfolio so that it will be least affected by the economic fluctuations. To support this, we'd like to promote digital transformation further.

That concludes my presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]