AGC Inc. (5201) Earnings Call Transcript

Good afternoon. Shinji Miyaji, CFO. Please turn to Page 4. These are the key points of the financial results for FY 2020. Net sales were down JPY 105.7 billion year-on-year at JPY 1,412.3 billion. Operating profit was down JPY 25.8 billion at JPY 75.8 billion. Strategic businesses grew steadily as they were not affected by COVID-19, while Glass and Chemicals showed a decline in net sales and profit due to severe impact of COVID-19, resulting in lower sales and profit overall. Adverse impact of COVID-19 is estimated at JPY 135 billion on sales and JPY 50 billion on operating profit without which, both net sales and profit would have increased year-on-year. As for FY '21 outlook, we expect operating results to pick up gradually and project net sales to increase JPY 117.7 billion to JPY 1,530 billion and operating profit to be up JPY 24.2 billion at JPY 100 billion. We will keep a close eye on the economic impact of a possible resurgence of COVID-19 pandemic. Please turn to Page 6, highlights of the financial results for FY '20. Net sales and operating profit were as explained earlier. Profit before tax was JPY 57.1 billion, with the recording of structural improvement expenses in Glass business in Europe and other expenses. A decline in profit before tax was smaller than a decline in operating profit because the structural improvement expenses in FY '20 was smaller than the impairment loss in noncurrent assets charged in FY '19 in relation to North American automotive glass operation. Profit for the period attributable to owners of the parent was JPY 32.7 billion, up JPY 11.7 billion year-on-year. Next, year-on-year performance comparison by business segment. Please turn to Page 7. Due to the impact of COVID-19, Glass and Chemicals posted lower sales and profit while Electronics posted higher sales and profit. Please turn to Page 8. Quarter-on-quarter performance trend, starting from Q1 FY '19. After bottoming out in Q2, net sales and operating profit made a rapid recovery in Q4 to exceed the previous year's levels. Various analysis on operating profit by segment is shown from the next page. Please turn to Page 9. Various analysis on operating profit FY '20 versus FY '19, down JPY 25.8 billion at JPY 75.8 billion. Sales volume and product mix, minus JPY 9.1 billion. Shipments increased in Electronic Materials, Life Science and LCD glass substrates, and decreased for automotive glass, architectural glass and fluorochemicals. Selling price, minus JPY 24.9 billion. Prices dropped for LCD glass substrates, architectural glass in the U.S. and Europe and caustic soda in Southeast Asia. Purchase price of fuels and raw materials, plus JPY 5.4 billion with lower unit price of electricity in Japan and natural gas. Cost reduction and others, plus JPY 2.7 billion. Manufacturing costs deteriorated due to capacity adjustments at glass manufacturing facilities but were more than made up for by a decrease in depreciation following impairment loss charged in FY '19 in relation to North American automotive glass as well as reduction in SG&A expenses. Please turn to Page 10. Consolidated statement of financial position comparing to the end of December 2019. Total assets were JPY 2,534.5 billion, up JPY 199.1 billion. Impact of foreign exchange totaled minus JPY 36.2 billion. Debt-to-equity ratio temporarily rose to 0.63 due to an increase in interest-bearing debt as we increased cash and cash equivalents to respond to COVID-19 pandemic. Excluding this additional cash and cash equivalents, debt-to-equity ratio would have been around 0.53. Please turn to Page 11. Let me explain FY 2020 cash flow statement. Operating cash flow was JPY 225.4 billion, investing cash flow was JPY 230.2 billion and free cash flow was minus JPY 4.9 billion. Please turn to Page 12. CapEx, depreciation and R&D. In fiscal year 2020, CapEx was JPY 241.3 billion, depreciation was JPY 143.7 billion and R&D expenses were JPY 46.4 billion. Next, I will explain by segment. Please turn to Page 14. Glass segment. Net sales in fiscal year 2020 were JPY 651 billion, operating profit was minus JPY 16.6 billion, down JPY 92 billion and JPY 25.8 billion, respectively. Shipment of architecture glass decreased in many regions due to COVID-19. As selling prices declined in Europe and America, sales decreased JPY 27.8 billion year-on-year to JPY 324.9 billion. Selling price decline in Europe had been continuing but due to improved supply and demand balance, prices have been improving from the third quarter. Group shipment of automotive glass decreased in all regions, except China, with substantial auto production volume decline affected by COVID-19. And net sales decreased JPY 64.7 billion year-on-year to JPY 323.5 billion. Operating profit decreased JPY 25.8 billion to minus JPY 16.6 billion due to aforementioned factors for sales decline. Please turn to Page 15, Electronics segment. Net sales in fiscal year 2020 were JPY 289.4 billion and operating profit was JPY 37.8 billion, up JPY 12.7 billion and up JPY 12.2 billion, respectively. In display, selling price of LCD glass substrate declined, but its shipment volume increased. Shipment of specialty glass for display applications decreased due to decreased unit number of smartphone sales. As for display as a whole, due to large impact of shipment increase in LCD glass substrate, sales and profit increased. Shipment volume of LCD glass substrate was supported by stay-at-home demand, and it increased by low single-digit percentage quarter-on-quarter and the selling price decline was limited as low single-digit percentage quarter-on-quarter. As for electronic materials, shipment of semiconductor-related products, including optoelectronic materials and EUVL mask blanks increased sharply. Consolidation of Taconic print circuit board business since the third quarter fiscal year 2019 also contributed and Electronic Materials sales and profit increased. Page 16, please. Chemicals segment. Net sales in FY 2020 were JPY 451.2 billion, operating profit was JPY 50.5 billion, down JPY 24.6 billion and JPY 12.5 billion, respectively. As for chlor-alkali and urethane, sales and profit decreased due to selling price decline of caustic soda in Southeast Asia. Selling price of PVC continued to improve from the third quarter. Raw chemicals and the specialty chemicals sales and profit decreased due to shipment decrease of products for aircraft and other transportation use. As for Life Science, sales and profit increased due to increased contract for synthetic pharmaceutical and agrochemicals and biopharmaceuticals. Operating profit breakdown in Chemicals segment was: chlor-alkali and resin, 40%; raw chemicals and specialty chemicals, 30%; and life science, 30%. Page 18, please. Let me explain the results of strategic business. Sales in FY 2020 were JPY 202.2 billion, topping JPY 200 billion. Operating profit was JPY 44.4 billion, up JPY 36.8 billion in sales and up JPY 11.3 billion in operating profit year-on-year. Businesses in Electronics and life science have been steadily expanding. Following the expansion of strategic business, the allocation standard for common expenses changed this time from the conventional operating profit ratio to budget sales ratio, and the change affected some numbers slightly. Please turn to Page 19. This slide shows performance by geography FY '20 versus FY '19 in the Americas and Europe. In the Americas, both net sales and operating profit was down due to the decline in the shipment of an architectural automotive glass and for chemical-related products and also cost increase due to asset acquisition of -- in life science. In Europe, net sales and operating profit both went down, despite the increased contracts in synthetic and biopharma due to the reduction in shipment in automotive and architectural glass as well as the lower sales price in the architectural glass. Please turn to Page 21 for the outlook for FY '21. Although the impact of COVID-19 remains uncertain, performance is on the recovery track with net sales JPY 1.53 trillion, up by JPY 117 billion year-on-year and operating profit, JPY 100 billion, up by JPY 24.2 billion year-on-year. Profit before tax is JPY 87 billion, which is up by JPY 29.9 billion. Profit attributable to the owners of the parent will be JPY 56 billion, up by JPY 23.3 billion year-on-year. We plan to sustain the same level of dividends per share, which is JPY 120. And the exchange rate assumption is JPY 105 to the dollar and JPY 125 to the euro. Dubai crude assumption is $50 per barrel for the full year. Please turn to Page 22. This is the FY '21 outlook by segment. Both the net profit and the sales is expected to increase for Glass and Chemicals but Electronics will see increased sales but reduced profit. Please turn to Page 23. This is the outlook by business segment for FY '21 full year. Impact of COVID-19 remains uncertain, but we expect to see slow recovery in demand in many regions for architectural glass in the Glass segment, and our shipments should pick up gradually. In automotive glass, because of the recovery year-on-year in the worldwide vehicle production, we expect our shipment again to pick up slowly. In the Electronics segment, within the display, LCD glass substrates, shipment to China will increase and we will see slower decline in sales price. The total market for LCD glass substrate will be approximately low single-digit, and we expect our shipment to be in line. For display specialty glass, with the recovery of smartphone market, we expect our shipment to increase year-on-year. In Electronic materials, we expect continued strength in semiconductor-related materials and optoelectronics shipment. EUVL mask blanks shipment should increase in line with the expansion of the market and net sales for FY '21 should be approximately 1.5x of the previous year. For LCD glass substrate and the semiconductor-related products, new facility launch will impact and increase the depreciation. Out of the Chemical segments, chlor-alkali, urethane segment should show gradual recovery in demand and in the chlor-alkali products and the caustic soda and PVC products based on the recovery of the Southeast Asian economy. And we expect the PCB spread in Southeast Asia to stay strong. In fluorine and specialty chemicals, we expect the demand for aviation to continue to be weak because of COVID-19, but automotive and semiconductor product demand, we will see slow recovery. Life science will stay strong due to new contracts for COVID-19 vaccine development. Please turn to Page 24. Strategic business will continue to grow steadily for this fiscal year. And for FY '21, we expect net sales of JPY 240 billion and OP of JPY 50 billion. Please turn to Page 25. This is going to be the last page. Full year CapEx is expected at JPY 200 billion; depreciation, JPY 160 billion; R&D expenses, JPY 55 billion; and CapEx will be much lower than the prior year due to reduced investment into Glass business, however, depreciation is expected to increase because of the concentration of the ramp-up of facility of last year in the second half of the year. That concludes my presentation. Thank you very much for your kind attention.

Next, CEO, Yoshinori Hirai.

Good afternoon. Yoshinori Hirai, Representative Director and CEO since the beginning of this year. I would like to explain our new medium-term management plan, AGC plus-2023. In 2016, under the leadership of then CEO, Takuya Shimamura, AGC announced Vision 2025 as the long-term strategy. This year, 2021, marks the halfway point toward 2025. We believe that AGC is at a juncture of moving into the second phase toward realizing Vision 2025. So far, we have pursued ambidextrous management, driven both by core businesses and strategic businesses as 2 wheels. In the second phase, AGC will evolve the ambidextrous management and accelerate the transformation of its business portfolio and move further towards realizing Vision 2030. The AGC group strives to ensure that its unique materials and solutions will continue providing value to its customers and society as a whole. Our brand statement, your dreams, our challenge, reflects our aspiration. To realize the dreams of society and the customers, AGC will continue taking up challenges. In my presentation today, I would like to go over our long-term management strategy, Vision 2030, and then review the former medium-term management plan, AGC plus-2020, before describing our new medium-term management plan, AGC plus-2023. First, long-term management strategy, Vision 2030. AGC group vision, Look Beyond, was defined in 2002. Our mission, our shared values and our spirit will continue to be shared and disseminated throughout the AGC group. Management policy, AGC plus, has been revised partially. AGC plus aspires to add a plus by providing safety, security and comfort to society, creating new value and functions for customers and business partners and building trust with them, enhancing job satisfaction among employees and increasing the group's corporate value for investors. We have added one more line, which reads, building a better future for coming generations. This represents AGC's new policy to contribute to sustainable society. Regarding long-term social issues, AGC's view basically remains unchanged since the launch of Vision 2025, but we are also aware of greater importance being placed on climate change and other sustainable issues as well as rapid digital transformation shift. It is with that understanding that we put together long-term management strategy, Vision 2030, which reads: by providing differentiated materials and solutions, AGC strives to help realize a sustainable society and become an excellent company that grows and evolves continuously. Here, you can see the concept for realizing Vision 2030. While the basic strategy remains the same as the previous long-term strategy, we will place more focus on social value creation. The group-wide strategy is to keep optimizing business portfolio and create economic and social value continuously with both core and strategic businesses as drivers. For that, in terms of core businesses, we will heighten the competitiveness of each business and build robust profit foundations that have long-term stability. And regarding strategic businesses, we will focus on high-growth fields and utilize our strengths to create and expand high-profit businesses that will become our future pillars. And, for that, we will leverage the AGC's group's strength as listed here and provide differentiated materials to growth industries that will underpin future society. These are the financial targets under Vision 2030. Our aspiration is to achieve a record profit and ensure a stable ROE of 10% or higher by 2030. For FY 2025, which is a halfway point, our target is: operating profit, JPY 200 billion; ROE, 9%; and operating profit of strategic businesses, JPY 100 billion meaning, we envision a progress in portfolio shift by 2025, so that strategic businesses will account for a half of the total operating profit. And as financial discipline, we are aiming at debt-to-equity ratio of 0.5 or lower. AGC will, through its business activities, create social value in 5 areas to help solve social issues, as shown in the slide. We will work towards the sustainability goals in all business activities. Now, I would like to review our previous medium-term management plan, AGC plus-2020. In formulating that plan, we were duly aware of a need to reform our business portfolio so as to improve ROE as high percentage of businesses were faced with low asset efficiency or affected by market fluctuations. With that recognition, we set major strategies. First, strengthen high value-added businesses that are resilient to market fluctuations. The results were, while growth was seen in strategic businesses, still not enough for the group as a whole. Second, promote growth strategies of strategic businesses. The outcome on this was that Electronics and life science grew beyond the expectations. Third, concentrate management resources in growing and winnable regions. Here, we saw steady expansion of chlor-alkali business in Southeast Asia, but the Glass business has been left with a number of unresolved challenges. Lastly but not the least, achieve sustainable growth through strategic M&A. Acquisitions in Chemicals, specifically in life science and chlor-alkali business in Southeast Asia, have brought about significant results. PCB materials business, acquired in view of 5G communication, was severely affected by the U.S.-China trade friction in 2020. This is the summary of AGC plus-2020 by segment. Among strategic businesses, Electronics and life science businesses, which escaped major impact of COVID-19, expanded faster than expected while maintaining high asset efficiency. Among core businesses, display, chlor-alkali, urethane and fluorochemicals and specialty saw some parts of businesses severely affected by COVID-19 and market deterioration. But basically, they all progressed more or less in line with the projection made under the medium-term management plan. On the other hand, in architectural glass and automotive glass, asset efficiency continued to be below the cost of capital, partly due to COVID-19. Furthermore, investments hindered cash generation and asset efficiency improvement. This is the summary of financial targets under AGC plus-2020 and actual results. Operating profit was way short of target JPY 160 billion at JPY 75.8 billion. On the right, the case of excluding COVID-19 is shown. Even without COVID-19 impact, operating profit is JPY 125 billion, well short of the target. As a result, ROE remained low. As for strategic business, against the operating profit target of JPY 40 billion, JPY 44.4 billion was achieved. Profit contribution ratio increased to 59%. Excluding COVID-19 impact, the ratio is still over 30%. Strategic business expanded, exceeding the initial expectation in the midterm plan. The ratio deteriorated notably, partly due to increased cash as of FY 2020. Based on this, we worked out a new medium-term management plan, AGC plus-2023. Now I explain the new midterm plan, strategies under AGC plus-2023. AGC will accelerate the following strategies toward Vision 2030. Firstly, we'll pursue ambidextrous management with 2 key businesses of core business and the strategic business. We'll accelerate the growth in the strategic business area and, at the same time, explore new business area. In the core business, we will conduct a structural reform in the architectural glass and automotive glass businesses that needs improvement in profitability and asset efficiency. For other businesses in core business area, we will strengthen their profit foundation and cash generation. Second strategy is promotion of sustainability management. Through materials innovation, AGC will contribute to solve social issues. This time, we set our new target of net zero carbon in 2050. In order to achieve these, we will strengthen human resources and group-wide governance. Third strategy is gaining competitiveness by accelerating digital transformation. Taking a transformation of the business model into consideration, we will leverage digital technologies to improve the process from product development to sales activities. Using digital technologies, we will provide new values to customers and the society and gain competitive advantages. Financial targets in the new midterm management for FY 2023 are shown in the slide. In FY 2023, we will increase operating profit to JPY 160 billion, ROE to 8% and the strategic business operating profit to JPY 70 billion. The ratio will be 0.5 or less. AGC plus-2023 performance by segment. Operating profit is shown on the right. Chemicals segment, including strategic business of life science, will grow steadily. Electronics segment will also grow steadily. As for Glass segment, by 2 measures, namely recovery from COVID-19 impact and implementation of structural reform, operating profit of more than JPY 30 billion is achievable. Now, let me explain the ambidextrous management. Key issues by segment are listed here. As for strategic business, in Electronics, life science and mobility, by implementing major measures shown here, we'd like to accelerate growth further. As for core business, in display, chlor-alkali and urethane and fluorochemicals and specialty, basic strategy set in the previous midterm plan are mostly sustained. We'd like to ensure the continued steady progress. Architectural glass and automotive glass are positioned as the business that requires structural reform. I will elaborate on them later. As for accelerating growth of strategic business, compared to FY 2017, 3 years before the previous midterm plan, sales increased twofold from JPY 100 billion to JPY 200 billion and operating profit increased threefold from JPY 14 billion to JPY 44 billion. And in FY 2020, Electronics achieved sales of JPY 100 billion. Sales in life science will be over JPY 100 billion this year of FY 2021. This is earlier than the initial plan by 4 years. By sustaining this growth trajectory, in FY 2023, we plan to achieve sales of JPY 300 billion, operating profit of JPY 70 billion and in FY 2025, sales of JPY 400 billion and operating profit of JPY 100 billion will be achieved. Structural reform in architectural and automotive glass businesses. As mentioned before, structural reform is required to improve profitability. In architectural glass, we will implement a structural reform that responds to the situation in each region. Manufacturing system will be shifted to correspond to demand. And in France already, one furnace was closed. As for automotive glass, high-efficient facilities will be introduced for intensive manufacturing. We will focus on high value-added products. And in Czech Republic and Belgium, streamlining is already ongoing. In both architectural glass and automotive glass, streamlining in Europe and other regions will be carried out to reduce SG&A expenses. And investments are planned to be kept at 80% of the depreciation cost or less. Through these measures, by 2023, we will reduce JPY 15 billion, mainly in fixed costs by promoting structural improvement measures. In architectural glass segment, AGC will launch a project headed by CFO to swiftly carry out structural reform. Aim of the project is to swiftly implement structural reform headed by top management in a view of industrial realignment as an industry leader. Based on those basic concept, we decided investment resources allocation. Investment ratio of 3 glass businesses is shown on the left. During the previous midterm plan from 2018 to 2020, 52% of total investment was allocated to glass businesses. But during the new midterm plan, from 2021 to '23, it will be reduced to 33%. Investment ratio of strategic businesses is shown on the right. The ratio will increase from 25% in the previous midterm plan to 33% in the new midterm plan. Investment in the new midterm plan JPY 600 billion does not include M&A cost. This slide shows business portfolio reform to-be image after implementing aforementioned measures. Horizontal axis is ROCE and the size of the circle indicates EBITDA. Compared to 2019, ROCE will improve from 5.9% to 7.5% and EBITDA will improve by approximately JPY 100 billion. This is the to-be image that business portfolio reform will achieve in the midterm plan this time. Let me explain changing shareholder return policy. We changed our shareholder return policy to secure investment opportunities in growth businesses while maintaining mid- to long-term financial soundness. Under the current policy, we have been trying to maintain a consolidated total return ratio of 50% or higher, which includes dividend and share buyback. We'll shift to new policy of maintaining stable dividends, with a consolidated dividend payout ratio aiming for 40%, and we'll implement flexible share buybacks. Bottom half of the slide shows the shareholder return so far and also the estimate for FY '20 and '21. This is a cash flow plan for the new midterm plan. We will allocate cash mainly to businesses with high asset efficiency and growth business while securing financial soundness. We reduced co-holdings shares by approximately JPY 110 billion in the past 5 years with JPY 85 billion during the previous medium-term plan. We will continue to achieve further reduction. Bottom half of the slide shows the cash in and cash out for the previous midterm plan versus, to the right, the cash in, cash out for the new midterm plan. Second pillar of the strategy, promotion of sustainability management. I would like to go into this explanation now. AGC Group will propel innovation in materials to help solve social issues. Since its foundation, AGC has been working to solve social issues in response to the demands of the times through long-term R&D and taking on the challenges of commercialization based on relationship of trust with customers. Through our unique materials and solutions, we will continue to fulfill our mission of AGC, an everyday essential part of our world and contribute to the realization of global and social sustainability. We will create wide range of social values through products, technologies and corporate activities. These are the 5 social values that I have just explained, shown on this slide. With regard to the fifth value, contributing to the realization of sustainable global environment, will be explained in greater detail on the next slide. In 2014, we set 2020 CO2 reduction target, which was reducing our CO2 emission sixfold in 2020 through our energy-saving products. Last year, in 2019, we actually achieved 5.6 fold reduction. So we are expected to achieve the original reduction target. Now we are aiming for the next stage, and we have set out a new goal for ourselves, which is a net zero carbon in 2050. And also, at the same time, in order to achieve net zero carbon in 2050, we have set out a milestone of 2030, which is 30% reduction of our GHG emissions and the 50% reduction in GHG emissions per unit of sales, which includes our portfolio reform. This is an example of specific initiatives. We strive for net zero carbon, both in our business activities and also in society. First of all, innovation in manufacturing process. Example is a glass melting process. How we can reduce the energy consumption and turn this process more green. For example, energy-efficient oxygen combustion methods, electric melting boosters and electrification of melting heat sources have been considered and also are being implemented in the manufacturing processes. Secondly, we want to contribute to CO2 reduction of society. And one example is collaboration with Panasonic, development of vacuum-insulated glass with the industry's highest class of insulation performance. And high insulation performance is required in our largest market, Europe. And we believe that this will make a great contribution. We are constructing a facility. Third one is next-generation energy. Fluorine-based polymers for fuel cells have been developed and also mass produced. And for next-generation mobility, we know that FCV is going to have a very high promise. And we have a overwhelming #1 position with high-power generation and durability in this category. Third pillar of the strategy is gaining competitiveness by accelerating digital transformation. Digital transformation at AGC started in 2015 as smart factory, in other words, a DX in the manufacturing shop flow. And then it was extended to R&D, sales and marketing as well as office processes. Going forward, we want to expand and deepen initiatives for each of these individual business processes. And also, at the same time, we want to apply DX of complex business process based on customers and markets and also, standardize and increase efficiency in any place, including back office process. In order to implement and promote DX, we need human resource development. We, of course, consign some of the work outside, but we need people who really understand both the technology and the business of AGC to promote DX, and therefore, we have an internal development system. We want to develop personnel with both business and knowledge materials development, production, sales distribution and also advanced analytics skills, in other words, ambidextrous personnels. At the elementary level, we already have nurtured 1,600 data scientists and also advanced scientists; 40 of them have been developed so far. And by 2015, we want to increase the number of this people to 5,000 and 100, respectively. And we want to transform business models to gain competitiveness and provide new value to customers and society. And this is the summary for today. Today, we have taken a very long-term outlook, in other words, how to deal with the climate change, and I have explained the new goal. In 2050, net zero carbon is going to be targeted. And in order to achieve this, 2030 milestone was also set out: GHG emission, 30% reduction; and GHG emission per sale of unit, 50% reduction. And we also set out the Vision 2030. By 2030, we want to have a record profit and also stabilized ROE at around 10%. In order to achieve this, we have a midterm goal in 2025: JPY 200 billion of OP; ROE of 9%; EBITDA of JPY 450 billion; and the strategic business OP of JPY 100 billion. In other words, by 2025, half of the company's profit should be generated by strategic business. And in order to do this, we will be reforming our portfolio. AGC plus-2023 for the coming 3 years will include strategy of pursuing ambidextrous management, promotion of sustainability management, gaining competitiveness by accelerating digital transformation. And through these efforts, we will transform ourselves into new form. And today, I explained the long-term management strategy as well as our midterm management plan. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]