AGC Inc

TSE:5201

Earnings Call Transcript 2018-Q3

[Shinji Miyaji, executive]

Good afternoon. Shinji Miyaji, the CFO. I will go over the financial results for the 9 months ended September 30, 2018.

Please turn to Page 5. First, the summary of the financial results for the first 9 months. Net sales increased JPY 62.2 billion year-on-year to JPY 1,126.2 billion. Operating profit was JPY 87 billion, an increase of JPY 4.6 billion year-on-year. Although we achieved higher sales and profit as a result of increased shipments in each business, the rate of increase in profit was smaller than that for the first 6 months. Details will be explained later.

Profit before tax was JPY 91 billion, an increase of JPY 10.3 billion year-on-year. Profit for the period attributable to the owners of the parent was JPY 64.9 billion, up JPY 4.3 billion year-on-year. Please turn to Page 6. The consolidated statements of profit or loss were as explained earlier. Foreign exchange saw the Japanese yen depreciate against the euro by about 5%. Dubai crude oil price rose by $19 year-on-year. Also, price of natural gas in Europe is soaring currently. The impact of foreign exchange on sales was positive JPY 11.4 billion.

Please turn to Page 7. Year-on-year performance comparison by segment. For the 9-month period, sales increased in the Glass and Chemicals segments, while profit increase was posted only in the Chemicals segment.

Next variance analysis on operating profit, please turn to Page 8. From here, I will go over the factors for increase or decrease in the operating profit. First, year-on-year comparison for the cumulative 9 months. As explained earlier, it increased by JPY 4.6 billion year-on-year. The difference in sales volume and product mix resulted in positive JPY 9.3 billion. Shipments were favorable in all segments, particularly shipment of automotive glass increased. The selling price had a positive impact totaling JPY 3.9 billion. While the price of LCD glass substrates declined, significant improvement in the price of chlor-alkali products, such as caustic soda, as well as improvement in price of architectural glass in all regions contributed to the higher profit overall.

The purchase price of fuels and raw materials had a negative impact totaling JPY 7.6 billion, resulting from the rise in fuel prices in Japan, Asia and Europe and the soaring price of raw materials for fluorochemicals. Cost reductions and others had a net impact of minus JPY 1 billion. As such positives as profit increase from cost reduction in LCD glass substrates and full-term contribution from companies acquired and consolidated during 2017 were canceled out by increase in direct selling expenses due to the rise in fuel prices and fixed cost increase to meet increased demand for automotive glass as well as higher R&D and advertising expenses. Please turn to Page 9. Next, year-on-year comparison of operating profit for the third quarter, the 3-month period, which went down by JPY 6.4 billion. The sales volume and product mix plus JPY 800 million. Although there was little change year-on-year, shipments increased for architectural glass in Europe and automotive glass in Japan and Asia. Selling price, plus JPY 2.7 billion. Price decline of LCD glass substrates was more than made up for by the selling price improvement of chlor-alkali products such as caustic soda and architectural glass. The purchase price of fuels and raw materials, minus JPY 4.4 billion as a result of the rise in fuel prices in Japan, Asia and Europe and the soaring price of fluorochemicals raw materials. Cost reductions and others, minus JPY 5.5 billion. Cost of LCD glass substrates improved, but as with the 9-month cumulative, there were increase in direct selling expenses due to higher fuel prices, higher fixed costs to respond to increased automotive glass demand and higher R&D and advertising expenses. Please turn to Page 10. Comparison with the previous quarter by segment. Sales grew for Electronics and Chemicals segments. Operating profit decreased by JPY 2.9 billion. Factors will be explained on the following page. Please turn to Page 11. This is the quarter-on-quarter variance analysis, down JPY 2.9 billion as was mentioned earlier. Sales volume and product mix, plus JPY 2.2 billion. Automotive glass fell due to seasonal factors, but shipments were strong in both the Electronics and Chemicals segments. Selling price difference was minus JPY 1.8 billion. Although there was a price increase effect of architectural glass, selling price declined for display and chlor-alkali products. Purchase price of fuels and raw materials, minus JPY 1.8 billion, the main factor was the rise in fuel prices in Japan, Asia and Europe. Cost reduction and others, minus JPY 1.5 billion, mainly due to increased fixed costs to respond to the higher demand for automotive glass and higher R&D and advertising expenses. Please turn to Page 12. Consolidated statement of financial position compared with the end of December 2017. Total assets increased by JPY 64.4 billion. Since the impact of foreign exchange difference of minus JPY 38.7 billion is included, the real increase was about JPY 100 billion. With CapEx being carried out as planned at the beginning of the year, property, plant and equipment increased significantly. Please turn to Page 13. Cash flow statement. Operating cash flow for the 9-month period was positive JPY 121.7 billion. While we are making aggressive capital investment this year as M&A investment declined sharply compared to the last year, net cash used in investing activities declined year-on-year to JPY 119.3 billion. Free cash flow was positive JPY 2.4 billion. Please turn to Page 14. CapEx totaled JPY 172.3 billion for the 9-month period against the initial full year forecast of JPY 220 billion. Year-on-year increase was recorded due to the construction of a new furnace for architectural glass in Indonesia, construction of facilities for glass substrates for the 11th generation LCD in China and investment in in-house power generation facilities at the Indonesian Chemicals plants and others. I will move on to the explanation on results by segment. Please turn to Page 17. Results by business and geographic segments. First, the Glass segment. Sales for 9 months totaled JPY 565.5 billion and operating profit was JPY 18.1 billion. Year-on-year, sales increased by JPY 24.8 billion and operating profit declined by JPY 3.7 billion. As for the architectural glass, shipments declined due to the withdrawal from the Philippines. But strong shipments in Europe and the U.S. and the depreciation of the yen against the euro contributed to higher sales. As for automotive glass, steady shipments in all regions and, just like architectural glass, the yen's depreciation against the euro contributed to the increase in sales. Although an increase in shipments and an improvement in the selling price of flat glass in all areas, cost increased due to the higher fuel prices. Natural gas price in Europe was much higher than the forecast as of the end of July due to abnormal weather in summer. And crude oil price was also much higher than the assumptions as of the end of July. Direct selling expenses also increased due to higher fuel and raw material prices and higher personnel cost.

In automotive glass, profit deteriorated due to changes in sales mix in the North American market. Added with an increase in corporate expenses, segment profit for the 9-month period decreased year-on-year. The quarterly operating profit for the third quarter was JPY 2.8 billion, a decline of JPY 5 billion from the same quarter of the previous year. Despite such positive factors as increase in shipments and selling price improvements, profit declined due to an increase in fuel and raw material prices, a change in sales mix in the North American market and an increase in corporate expenses.

In comparison with the second quarter, in addition to the factors mentioned above for the year-on-year variance on quarterly results, there was a decrease in sales of automotive glass in Europe due to seasonal factors as well as shipment decline in European automotive glass due to an impact of emissions controls, resulting in a quarter-on-quarter decline in profit. Please skip 1 page and turn to Page 19. Electronics segment. Sales for the 9-month period totaled JPY 185 billion, a decrease of JPY 5.5 billion year-on-year, and operating profit was JPY 16.2 billion, down JPY 600 million. Although the selling price of LCD glass substrates declined, improvement in manufacturing costs made up for the impact of the price decline.

With respect to electronic materials, shipments of optoelectronics materials decreased compared with the previous year, but shipments of semiconductor-related products increased. Regarding cover glass for car-mounted displays, shipments continued to increase. Regarding specialty glass for display applications, profit was down due to sluggish sales and inventory clearance of some products.

Quarterly operating profit for the third quarter was JPY 6.2 billion, down JPY 1.5 billion year-on-year. As sales volume for LCD glass substrates declined compared with the same quarter of the previous year, the decline in prices could not be fully covered by improvements in manufacturing costs. Added with sluggishness of specialty glass for display applications, quarterly profit declined year-on-year. Compared to the second quarter, profit increased by JPY 1.9 billion. This was mainly due to seasonal factors. As for the volume and price trends of LCD glass substrates compared to the second quarter, the volume increased by mid-single-digit percent and the rate of price decline turned more moderate. For the full year, we are assuming the rate of price decline from the previous year to be mid-single-digit percent. Please skip a page and turn to Page 21. This page shows the Chemicals segment. Net sales were JPY 354.9 million. Operating profit was JPY 50.3 billion for the third quarter's total and up JPY 42.5 billion and JPY 7.5 billion, respectively. In addition to the strong shipment across the board, selling price increase of caustic soda both in Japan and abroad, the full year contribution of Vinythai and CMC, that were acquired in the first quarter of the previous year, and the shipment growth in life science business have pushed up the profit substantially.

Operating profit in the third quarter of FY 2018 was JPY 16.6 billion, down by JPY 0.1 billion year-on-year. Compared with the second quarter of FY 2018, profit went down by JPY 0.1 billion, volume increase in chlor-alkali was offset by the margin decrease. Please turn to Page 24. This page shows the performance by geographic segment. Here let me comment on Americas and Europe. First on 3 quarters' total. Operating profit in Americas was JPY 4.6 billion, up JPY 1 billion year-on-year. Life science subsidiary, CMC, that was acquired in the previous year, contributed for the profit growth. Operating profit in Europe was JPY 12.8 billion, up JPY 3.7 billion year-on-year. On top of the strong sales in architectural glass, CMC also contributed here for the profit growth as in Americas.

On the third quarter comparison year-on-year, operating profit in Americas was JPY 1.3 billion, up JPY 0.3 billion year-on-year. And operating profit in Europe was JPY 2.7 billion, down by JPY 0.2 billion.

Please turn to Page 25. This shows a comparison with the previous quarter. Operating profit in Americas was JPY 1.3 billion, down JPY 0.4 billion due to the serious mix deterioration in automotive glass among others. Operating profit in Europe was JPY 2.7 billion, down JPY 3 billion due to the weakened shipment in architectural and auto glass by seasonality.

Next, for the 3-year forecast, please turn to Page 29. I'd like to explain the full year forecast for FY 2018. We revised down from the forecast announced in July to net sales JPY 1,520,000,000,000, operating profit JPY 120 billion and profit attributable to owners of the parent to JPY 77 billion.

Operating profit is revised down by JPY 15 billion, but the forecast for the other expenses was revised down from JPY 10 billion to JPY 5 billion. Therefore, the profit attributable to owners of the parent would remain unchanged from the initial forecast at JPY 77 billion. As a result, OP margin will be 7.9% and ROE will be 6.5%.

Let me briefly explain the reason to revised operating profit by JPY 15 billion. First of all, fuel cost increase impact was JPY 4 billion. Natural gas price in Europe surged far above the assumed price in July, as I said before, due to the unseasonable weather and the demand for air conditioning. And Dubai crude oil price also rose farther from the assumed price in July. And in addition to the fuel cost, the logistic cost increased as well.

Deteriorated sales pushed down the profit by JPY 4 billion. Inventory clearance, the part of specialty glass for display applications, and worsened sales mix in auto glass in North America are the major cause for the decline. The demand for pick-up truck increased substantially and sedan demand decreased.

Market-related impact was JPY 3 billion. Margin recovery in chlor-alkali, which was anticipated in the middle of third quarter, was not strong enough as expected. And sales in optoelectronics products in electronics materials did not recover as expected. Development cost increase to explore other new businesses was JPY 2 billion. And cost increased by JPY 2 billion in Japan and Asia in flat glass and automotive glass business due to the labor cost increase and others. These are the major parts of JPY 15 billion.

Crude oil price assumption in the fourth quarter was revised up from $70 to $80 per barrel, reflecting the considerable market price increase. Please turn to Page 30. On the fourth quarter business outlook. Let me start with Glass segment. Shipments are expected to increase in Japan and Asia and Europe due to high season. Selling price in Europe and America will stay high and the price hike in Japan began to be accepted widely. Strong shipment in automotive glass will continue, but expansion of trade risk is a matter of concern. Fuel price are expected to be flat quarter-on-quarter.

In the Electronics segment, LCD glass substrate shipments are expected to be flat and the price decline will be more moderate. On specialty glass for display applications, shipments will increase following the third quarter, but we plan an inventory clearance for some products. On cover glass for car-mounted display, shipments will continue to be firm on Electronics materials. Optoelectronic materials are expected to continue to recover. Please turn to Page 31 for Chemicals segment. Chlor-alkali & urethane, fluorochemicals & specialty will continue to be firm. Life science sales will grow mainly in the expanding biopharmaceutical business. Page 32 is the final one. CapEx sales JPY 220 billion as initially planned. But depreciation is JPY 130 billion, down by JPY 5 billion and R&D will be JPY 47 billion, up JPY 2 billion over the initial forecast. This concludes my presentation. Thank you.