AGC Inc

TSE:5201

Earnings Call Transcript 2020-Q3

[Shinji Miyaji, executive]

This is Shinji Miyaji, the CFO. Please turn to Page 4. The key points of today's announcement on the third quarter results and full year forecast. Net sales for the first 9 months were JPY 1,012.8 billion, down JPY 111 billion year-on-year. Operating profit was JPY 40.6 billion, down JPY 33 billion year-on-year. Impact of COVID-19 pushed down net sales by JPY 144 billion and operating profit by JPY 53.5 billion. The strategic businesses unaffected by COVID-19 showed improved performance steadily. Glass and Chemicals posted lower sales and profit as they felt strong impact of COVID-19. As for full year forecast, net sales are expected to total JPY 1,390 billion, down JPY 128 billion year-on-year. And operating profit is projected at JPY 55 billion, down JPY 46.6 billion. Impact of COVID-19 on sales is projected to be JPY 189 billion, and on operating profit JPY 69 billion. We expect that had not been for COVID-19, we would have achieved the full year forecast announced in February, namely net sales of JPY 1,550 billion and operating profit of JPY 120 billion.

Please turn to Page 6. These are the highlights of financial results for the first 9 months. Net sales and operating profit were already explained earlier. Profit before tax was JPY 26 billion, following the posting of expenses for structural improvement of the Glass business in Europe and elsewhere. Compared to the amount of decline in operating income, the amount of decline in profit before tax was smaller because the expenses for structural improvement were smaller amount than the impairment loss recorded last year in property, plant and equipment, in relation to the automotive glass business in North America. Profit for the period attributable to the owners of the parent was JPY 13.5 billion, down JPY 15.4 billion year-on-year.

Next, year-on-year comparison by business segment. Please turn to Page 7. Glass and Chemicals posted lower sales and profit affected by COVID-19, while Electronics recorded higher sales and profit.

Please turn to Page 8. Here, you can see the quarterly trend since the first quarter of 2019. Having bottomed out in the second quarter, both net sales and operating profit for the third quarter recovered to the similar level as for the first quarter. Impact of COVID-19 and the variance analysis of operating profit by business segment are explained in the following pages.

Please turn to Page 9. For the 3 months in the third quarter, COVID-19 pushed down net sales by JPY 45 billion and operating profit by JPY 17 billion. By business, architectural glass and automotive glass benefited from the resumption of economic activities, resulting in an increase in shipments quarter-on-quarter and an improvement in asset utilization. In the Electronics segment, specialty glass for display applications, which had been affected by COVID-19, saw an increase in shipments quarter-on-quarter following a recovery in the smartphone market. Within the Chemicals segment regarding chlor-alkali and urethane, caustic soda market remained sluggish, but PVC market recovered quarter-on-quarter. As for fluorochemicals and specialty chemicals, while a decline in demand for some fluorochemical products due to COVID-19 was alleviated, demand for transportation-related products declined quarter-on-quarter. Life science performed strongly quarter-on-quarter, owing to new contracts for our COVID-19 vaccine development.

Please turn to Page 10. Variance analysis on operating profit for the first 9 months year-on-year comparison. Operating profit totaled JPY 40.6 billion, down JPY 33 billion year-on-year. Sales volume and product mix, minus JPY 14.1 billion with a decline in shipments of automotive glass and architectural glass. Selling price, minus JPY 24.4 billion with the prices declining for chlor-alkali products in Southeast Asia, architectural glass in Europe and elsewhere and LCD glass substrates. Purchase price of fuels and raw materials, plus JPY 1.8 billion with a decline in price of natural gas in Europe. Cost reduction and others, plus JPY 3.6 billion. While there was an impact of deterioration in manufacturing costs due to operation adjustments of glass making facilities. This was made up for by a decrease in depreciation expenses, owing to last year's recording of impairment loss in North American automotive glass business as well as reduction in SG&A expenses.

Please turn to Page 11. Consolidated statements of financial position comparing to the end of December last year. Total assets were JPY 2,517.9 billion, an increase of JPY 182.5 billion from the end of December. Debt-to-equity ratio temporarily increased to 0.73 as we increased cash and cash equivalents amid COVID-19. If we are to exclude this increase in cash and cash equivalents, debt-to-equity ratio is around 0.55.

Please turn to Page 12. In consolidated statements of cash flow for the 9-month period. Operating cash flow was JPY 155.2 billion. And cash flow used for investing activities was JPY 173.6 billion, resulting in free cash flow of minus JPY 18.4 billion.

Please turn to Page 13. CapEx, depreciation and R&D expenses for the 9 months period. CapEx was JPY 162 billion. Depreciation was JPY 107.2 billion. And R&D expenses were JPY 33.6 billion.

Next is details by business and geographic segments. Please turn to Page 15. First, the glass segment. Net sales for 9 months were JPY 465.9 billion, and operating loss was JPY 21.9 billion. Year-on-year, sales declined by JPY 93.4 billion and profit by JPY 31.6 billion. In architectural glass, shipments decreased significantly in many regions due to COVID-19. Selling prices declined in all regions other than Japan. Net sales decreased by JPY 27.4 billion year-on-year to JPY 234.8 billion. Selling prices in Europe that had continued to decline, posted a quarter-on-quarter increase in the third quarter with an improvement in supply and demand balance. In automotive glass, shipments from the AGC Group declined due to a global decrease in automobile production affected by COVID-19. Net sales decreased by JPY 66.7 billion to JPY 229.3 billion. Operating profit decreased by JPY 31.6 billion for an operating loss of JPY 21.9 billion due to decrease in shipments and selling prices as well as deterioration in manufacturing costs, due to significant capacity adjustments following a decline in demand.

Please turn to Page 16. Electronics segment. Net sales in 3 quarters were JPY 210.1 billion. OP was JPY 27.2 billion, up JPY 9.4 billion and JPY 10.3 billion year-on-year, respectively. In display, LCD glass substrate shipment increased despite the selling price declines. As for specialty glass for display applications, shipment decreased with selling unit declines in smartphones affected by COVID-19. Sales and profit increased in display as a whole due to major impacts by shipment growth in LCD glass substrate. Shipment of LCD glass substrate increased, supported by stay-at-home demand and it increased by the mid-single-digit percentage quarter-on-quarter. Selling price decline was more moderate compared to the previous quarter. As for electronic materials, shipment of optoelectronic materials and semiconductor-related products, including EUVL mask blanks increased substantially. Consolidation printed circuit board business of Taconic, which was consolidated from the third quarter FY '19, contributed also. And the electronic materials sales and profit increased.

Please turn to Page 17. Chemicals segment net sales in 3 quarters were JPY 321.6 billion, and OP was JPY 32.5 billion, and they went down JPY 26.7 billion and JPY 11.4 billion year-on-year, respectively. Sales and profit of chlor-alkali and urethane decreased due to selling price declines in chlor-alkali products in Southeast Asia. PVC selling price in the third quarter increased quarter-on-quarter. Sales and profit of fluorochemicals and specialty chemicals decreased due to the decreased shipment of products of transportation, i.e., automotive and airplane. Sales and profit of life science increased as a number of contracts for synthetic pharmaceuticals and biopharmaceuticals increased. Operating profit breakdown in Chemicals segment was 30% by chlor-alkali and urethane, 40% by rural chemicals and specialty chemicals and 30% by life science.

Please turn to Page 19. Page 19 shows the strategic business results. Sales of strategic business were JPY 141.2 billion. OP was JPY 24.9 billion, up JPY 25.6 billion and JPY 6.6 billion year-on-year, respectively. Shipment in mobility decreased affected by COVID-19, but Electronics and life science have been expanding business steadily.

Please turn to Page 20. Performance by geographic segment is shown here. Let me explain the year-on-year comparison the last 3 quarters in Americas and Europe. Sales and profits for [ Americas decreased ] due to [ increase ] in the shipments fees of architectural glass and automotive glass and fluorochemicals product. In Europe, [indiscernible] synthetic pharmaceuticals and biopharmaceuticals improved. But shipment in architectural glass and automotive glass decreased. And the selling price of architectural glass sale and sales and profit decreased.

Please turn to Page 22. I'll explain the full year outlook. Net sales will be down JPY 128 billion year-on-year to JPY 1.390 trillion. OP will be down JPY 46.6 billion year-on-year to JPY 55 billion. And they are up JPY 40 billion in sales and JPY 15 billion in OP over the forecast announced in July. Major reason for revision is that demand in architectural glass and automotive glass, which were heavily affected by COVID-19, has been recovering faster than expected. Impacts by COVID-19 in this fiscal year are expected at minus JPY 189 billion in sales and minus JPY 69 billion in OP. Profit before tax will be down JPY 41.2 billion year-on-year to JPY 35 billion, and profit attributable to owners of parent will be down JPY 26.4 billion year-on-year to JPY 18 billion. Dividend per share will be kept at JPY 120, considering settling down of COVID-19 impacts from the worst period and the business forecast of the next year and beyond. ForEx full year assumptions are revised to JPY 106.9 to a dollar and JPY 121.9 to euro. Dubai crude oil price assumption was revised to for $42.3 per barrel for the full year.

Please turn to Page 23. Before you have look breakdown by segment. Despite the sales and profit growth in Electronics segment, Glass and the Chemicals segment will be adversely affected by COVID-19 and the sales and profit will decrease substantially year-on-year. But compared to the full year forecast in July and the second quarter announcement, COVID-19 impact will be minor and sales and OP will be above the forecast.

Please turn to Page 24. Fourth quarter outlook by business segment. In Glass segment, as for architectural glass, shipment will fall quarter-on-quarter as the region except Japan enters a low demand season. Automotive glass also enters a low demand season in many regions, and our shipment will be down. And in both architectural and automotive glass, second wave of COVID-19 is a concern in Europe. In Electronics segment, demand of LCD glass substrate in display is firm, and the shipment will be sustained. Specialty glass for display applications will have lower shipment year-on-year, affected by the customer composition. In electronic materials, shipment of semiconductor related and optoelectronics materials will remain strong.

In Chemicals segment, chlor-alkali and urethane will be shored up by economic recovery in Southeast Asia. And the demand for chlor-alkali products, such as caustic soda and PVC will achieved gradual recovery. In fluorine and specialty, while demand for aircraft use, et cetera, will be sluggish due to COVID-19. Demand for automotive and architectural use will recover gradually. In life science, business will remain robust with new contacts for COVID-19 vaccine development.

Please turn to Page 25. Strategic business expanded steadily with limited impacts by COVID-19. Sales are projected as JPY 200 billion and OP will be JPY 32 billion for this year. And the sales will be JPY 10 billion above the announcement in May. And OP will be JPY 2 billion above the forecast.

Please turn to Page 26. This is the last slide. CapEx is JPY 220 billion and depreciation is JPY 150 billion for the full year, and they remain unchanged from the initial forecast. After the thorough examination, R&D expenses will be JPY 48 billion, down by JPY 1 billion compared to the forecast made in July and the second quarter announcement.

That concludes my presentation. Thank you for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]