agc inc....feb 05, 2020 · scale scheduled maintenance at domestic chemical product bases and...

AGC Inc. Financial Results for FY2019

February 5, 2020

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Event Summary

[Company Name] AGC Inc.

[Event Type] Earnings Announcement

[Event Name] Financial Results for FY2019

[Fiscal Period] FY2019 Annual

[Date] February 5, 2020

[Number of Pages] 53

[Time] 17:00 – 18:28

(Total: 88 minutes, Presentation: 51 minutes, Q&A: 37 minutes)

[Venue] Shinmarunouchi Building 9F Room 901

1-5-1 Marunouchi, Chiyoda-ku, Tokyo 100-8405

[Venue Size]

[Participants] 60

[Number of Speakers] 4

Takuya Shimamura Representative Director, President & CEO

Shinji Miyaji Representative Director, Executive Vice

President, CFO

Toshiro Kasuya General Manager of Finance & Control

Division

Kazumi Tamaki General Manager, Corporate

Communications & Investor Relations

[Analyst Names]* Akiko Kuwahara Bank of America Merrill Lynch

Noritsugu Hirakawa Daiwa Securities Co. Ltd.

Yasuhiro Nakada Macquarie Capital Securities (Japan) Limited

Shun Nemoto Mitsubishi UFJ Morgan Stanley Securities

Co., Ltd.

Takaomi Kouno Nomura Securities, Ltd.

Yu Sato SMBC Nikko Securities Inc.

*Analysts that SCRIPTS Asia was able to identify from the audio who spoke during Q&A.



Presentation

Tamaki: Now that we are on time, we will start the briefing on AGC Inc.'s Financial Results for FY2019 and progress in the medium-term management plan.

I would like to introduce the participants from our Company. This is Takuya Shimamura, Representative Director President and CEO. This is Shinji Miyaji, Executive Vice President CFO. This is Toshiro Kasuya, Executive Officer and GM of Finance and Control Division. I am Tamaki from Corporate Communications and Investor Relations Office. Nice to see all of you.

First of all, the full-year financial results and the outlook for 2020 will be presented from CFO Miyaji.

Miyaji: This is CFO Miyaji. I would like to explain the full-year financial results. Please open to page five.

I would like to explain the key points of the financial results for the fiscal year ended December 2019. Net sales decreased JPY4.9 billion from the previous year to JPY1.518 trillion. Although the effect of the new consolidation was JPY22.3 billion, the impact of exchange rates, such as the depreciation of the euro, had a negative impact of JPY30.4 billion, resulting in a decrease in sales.

Operating profit declined JPY18.9 billion YoY to JPY101.6 billion. This was attributable to lower sales prices for display glass and chlor-alkali products in Southeast Asia, as well as temporary deterioration in manufacturing costs, such as in automotive glass in Japan, and through the launch of a new facility for architectural glass in Southeast Asia.



Profit before tax amounted to JPY76.2 billion, a decrease of JPY52.2 billion from the previous fiscal year. This was due to the recording of an impairment loss on fixed assets in the automotive glass business in North America.

Please refer to page six. The consolidated statements of income for the year ended December 31, 2019, are as shown.



Please refer to page seven. Results by segment. In the glass and chemicals businesses, both sales and profits declined, while in the electronics, ceramics, and others business, both sales and profits increased. The factors behind this change will be explained in the analysis of operating profit on the following pages.



Please turn to page eight. I will explain our 2019 operating profit compared to the previous year. Operating profit decreased by JPY18.9 billion from the previous year to JPY101.6 billion. The difference in sales volume product mix was positive at JPY17.9 billion. Although shipments of automotive glass declined, shipments of other products increased.

The selling price difference is negative JPY16.1 billion. Although prices of architectural glass rose in Japan, prices of LCD glass substrates and caustic soda in Southeast Asia declined.

The price differential for raw materials and fuels is positive at JPY1.1 billion. This was due to a decline in the price of natural gas in Europe.

Costs and others are negative JPY21.9 billion. This was mainly due to an increase in depreciation expenses associated with the start-up of new facilities in China for LCD glass substrates, the implementation of equipment repairs for automotive glass in Japan, and sluggish production. In addition, there were deteriorating production costs associated with adjustments to operations of architectural glass in regions other than Japan and Asia and the launch of new facilities in Southeast Asia. In addition, there were large-scale scheduled maintenance at domestic chemical product bases and deteriorating production costs for chemicals.



Please refer to page nine. The operating profit in 4Q of 2019 is compared with the same period of the previous year. Compared with the same period in the previous year, 4Q of 2019 resulted in a decrease of JPY5.5 billion to JPY28 billion.

The difference in sales volume product mix is positive JPY2.8 billion. This was due to an increase in shipments of materials for optoelectronics, electronic materials for semiconductors, and glass for displays.

The selling price difference is negative at JPY5.8 billion. Prices of LCD glass substrates, architectural glass in Europe, and caustic soda in Southeast Asia declined.

The difference in raw material and fuel prices is positive JPY3.6 billion. This was attributable to the decline in natural gas prices in Europe and the recognition of a gain on valuation of oil hedges in the glass segment.

The difference in costs and other factors had a negative impact of JPY6.2 billion. This was mainly due to the increase in depreciation expenses associated with the launch of a new plant in China for LCD glass substrates, the impact of adjustments made to the operations of architectural glass in regions other than Japan and Asia, and the deterioration in the manufacturing costs of chemicals, despite an improvement in the specialty glass for displays and licensing operations.



Please refer to page 10. With regard to the balance sheet, I would like to explain the comparison with the end of December 2018. Total assets were JPY2.3354 trillion, an increase of JPY99.6 billion compared to the end of December 2018.

The effect of the exchange rate was negative JPY17.7 billion. Inventories increased by JPY14.2 billion, of which approximately JPY6 billion was due to new consolidation. Inventories also increased due to additional stock associated with the expansion of production capacity for fluorochemicals-related products.



Please refer to page 11. The cash flow statement for 4Q of 2019. The operating cash flow for 2019 was a positive amount of JPY191.9 billion. Cash flow from investing activities was JPY182.6 billion, and free cash flow was JPY9.3 billion.



Please refer to page 12. I would like to explain capital investment, depreciation, and R&D expenditures in 2019. Capital expenditures totaled JPY207.7 billion in 2019. Major investments include production equipment of glass substrates for LCDs, in-house generation facilities for chemical products in Indonesia, cold repair in Europe, and the construction of new furnaces in Brazil and life science facilities.

Depreciation expenses in 2019 increased JPY21.7 billion from the previous year to JPY143.4 billion due to the launch of glass substrates for LCDs in China, architectural glass facilities in Southeast Asia, and chemical power plants.



We will now move on to the segment-specific explanation. See page 14. First is the glass segment. In 2019, net sales were JPY742.9 billion and operating profit was JPY9.3 billion, a decrease in sales by JPY26.9 billion and a decrease in profit by JPY13.6 billion from 2018.

Sales of architectural glass declined JPY6.2 billion to JPY352.7 billion due to the impact of the weak euro, despite an improvement in sales prices in Japan.

Sales of automotive glass decreased by JPY21.4 billion to JPY388.3 billion due to the weak euro and a decline in demand in regions other than Russia.

Operating profit decreased by JPY13.6 billion to JPY9.3 billion due to the prolonged repair of automotive glass facilities in Japan, the deterioration of production efficiency, the worsening of manufacturing costs associated with the launch of new facilities in Southeast Asia for architectural glass, and the effects of adjustments to operations in regions other than Japan and Asia.

In 4Q of 2019, operating profit was negative JPY400 million, which was a decline of JPY4.9 billion from 4Q of 2018. This was due to the deterioration in production costs due to the adjustment of the operation of architectural glass in regions other than Japan and Asia, the decline in sales prices in Europe, and a decline in shipments of automotive glass in Japan.



Please skip a page and see page 16. In the electronics segment, net sales were JPY276.7 billion in 2019 and operating profit was JPY25.6 billion. Sales were up JPY28.8 billion, and profit was up JPY1.9 billion from 2018.

In the display business, although sales volumes of both glass substrates for LCDs and specialty glass for displays increased, both sales and profits decreased due to a decline in the selling price of glass substrates for LCDs and an increase in depreciation costs associated with the start-up of new facilities in China.

With regard to electronic materials, shipments of opto-electronics materials and semiconductor-related products increased compared with the previous fiscal year. The consolidation of Park Electrochemical and Taconic's printed circuit board materials operations from this fiscal year also contributed to higher sales and profits.

In 4Q of 2019, operating profit was JPY8.7 billion, an increase of JPY900 million from 4Q of 2018. Despite a decline in the selling price of LCD glass substrates and an increase in depreciation costs for new facilities in China, operating profit increased due to an increase in shipments of display glass and electronic materials.

In terms of 4Q trend in the volume and price of glass substrates used for liquid crystals, compared to 3Q of 2019, the volume saw low single-digit growth, and the price remained unchanged.

Please refer to page 18. In the chemicals segment, net sales amounted to JPY475.8 billion and operating profit amounted to JPY63 billion in 2019. Sales decreased by JPY8.6 billion, and profit decreased by JPY8.2 billion from the previous year.

With regard to chlor-alkali and urethane, sales and profits declined due to a fall in selling prices of caustic soda in Southeast Asia, large-scale repair work in Japan, deterioration in manufacturing costs due to typhoons, and an increase in electricity costs.



In fluorine and specialty chemicals, operating profit declined due to lower demand for semiconductor-related products, the impact of large-scale repairs in Japan, and worsening manufacturing costs.

In the area of life sciences, sales and profits increased due to an increase in the number of entrusted biopharmaceutical agents and the new consolidation in March 2019 of Malgrat Pharma Chemicals, a Spanish manufacturer of synthetic pharmaceuticals.

The operating profit for 4Q of 2019 was JPY19.1 billion. This represented a decrease of JPY1.8 billion compared with 4Q of 2018. Although the number of contracts for active pharmaceutical ingredients in biopharmaceuticals increased, the cost of production worsened due to an increase in expenses related to fluorine production facilities.

Skip a page and see page 20, which shows the results by region. I will explain only the performance of the US and Europe, comparing 2019 and 2018.

US sales rose 6.4 billion to 172.6 billion. Although shipments of automotive glass declined, the consolidation of Park Electrochemical's printed circuit board materials business resulted in an increase in sales.

Operating profit declined JPY1.2 billion to JPY5.5 billion, due to a decrease in shipments of automotive glass, despite an increase in the number of contracts for active pharmaceutical ingredients in biopharmaceuticals.

Sales in Europe totaled JPY338.7 billion. Although shipments of automotive glass declined, sales of architectural glass remained steady, and the number of contracts for biopharmaceutical active pharmaceutical ingredients also increased. However, the depreciation of the euro had a negative impact of JPY23 billion, resulting in a decrease of JPY12.2 billion in sales.



Operating profit declined JPY1.1 billion to JPY15.1 billion, due largely to a decline in shipments of automotive glass, despite a decline in natural gas prices and an increase in the number of contracts for active pharmaceutical ingredients in biologics.

I would like to explain the operating profit for 4Q compared with the same period of the previous fiscal year. In the United States, sales and profits decreased due to a decrease in shipments of architectural glass and biopharmaceuticals. Sales in Europe declined, despite an increase in the number of contracts for biopharmaceuticals. Operating profit declined due to lower sales prices for architectural glass and the impact of capacity utilization adjustments.

Please refer to page 21 for a brief explanation of the quarterly comparison of results by region. Looking at the performance by region for 4Q of 2019 and 3Q of 2019, operating profit in the US increased by JPY300 million to JPY1 billion, mainly due to a decrease in depreciation expenses resulting from impairment losses, despite a decrease in shipments of automotive glass in North America. In Europe, operating profit declined JPY2.2 billion due to lower sales prices for architectural glass, capacity utilization adjustments, and a decline in shipments of automotive glass.



Go to page 23, as we move on to the full-year earnings forecast. With regard to the outlook for the full FY2020, we expect net sales to increase JPY32 billion YoY to JPY1.55 trillion due to an increase in shipments of materials for opto-electronics, semiconductor-related products, and life sciences.

Operating profit is expected to increase by JPY18.4 billion YoY to JPY120 billion, partly due to the resolution of the temporary worsening of manufacturing costs that occurred last year.

Profit before taxes is expected to increase JPY30.8 billion YoY to JPY107 billion.

Net income attributable to owners of the parent is expected to increase by JPY24.6 billion YoY to JPY69 billion.

As for factors, we will explain on the next page onwards. This forecast does not factor in the effect of the new coronavirus that is spreading today, as we currently do not foresee any monetary impact. I would like you to understand this assumption of the forecast.



Please refer to page 24. The income statement is as described on the previous page, and the exchange rate is assumed to be JPY110 to the USD and JPY120 to the euro. Dubai crude oil is assumed to be USD60 per barrel. For ethylene, we refer to the assumed CFR price for Southeast Asia in 2020 at USD800 per ton of ethylene.



Please refer to page 25, the forecast of net sales and operating profit by segment. We expect lower sales and higher profits in glass, and higher sales and profits in the electronics and chemicals segments. I will explain the reasons behind this.

Please refer to page 26 for an explanation of our forecasts by segment on the next page.



I would like to briefly explain the outlook for each business. Regarding the glass segment, we are concerned about a decline in sales prices for architectural glass due to a decline in shipments in Europe and a deterioration in the supply-demand balance.

For automotive glass, manufacturing costs are expected to improve due to improvements in production efficiency in Japan and the completion of repairs to raw sheet facilities.

In addition, due to the impairment loss on the automotive glass business in North America recorded in the previous quarter, depreciation and amortization expenses are expected to decrease by about JPY3 billion per year, and we expect to improve our earnings including this factor.

As a result, the glass segment as a whole expects lower sales and higher profits compared to the previous fiscal year.



This is the forecast for the electronic segment on page 27. The shipment of glass substrates for LCDs in 2020 is expected to grow more than the market growth due to increased demand for the 11th generation in China. We expect sales prices to decline in 1Q to mid-single digits on a full- year basis.

Shipments of specialty glass for displays are expected to be on a par with the previous year.

With regard to electronic materials, shipments of both optoelectronics components and semiconductor-related products are expected to increase.

In 1Q of 2020, the quantity and price of liquid crystal glass substrates are expected to decrease from 1Q of 2019. The quantity and price are both expected to have a low single-digit decrease.



Please refer to page 28. Finally, the outlook for the chemicals segment. In the chlor-alkali and urethane business, shipments are expected to increase due to increased demand in Southeast Asia.

In the fluorine and specialty chemicals business, shipments of fluorine-related products for semiconductors are expected to increase.

In the life sciences business, shipments are expected to increase due to the expansion of production capacity in Japan and overseas. We also expect shipments to increase due to the recovery in the agrochemicals market.



On page 29, regarding capital expenditures, depreciation, and research and development expenses, we expect capital expenditures to increase JPY12.3 billion to JPY220 billion in 2020, depreciation expenses to increase JPY6.6 billion to JPY150 billion, and research and development expenses to increase JPY5.5 billion to JPY53 billion.

I’d like to conclude my presentation. Thank you very much.



Tamaki: Here, we will make two revisions. In the explanation on page five, we stated that the new consolidation increased net sales by JPY22.8 billion, but the correct figure is JPY22.3 billion. The impact of the new consolidation is also described on page 35 of this report. Please refer to this section.

In addition, in the section on sales by region, particularly about Europe on page 20, we mentioned that sales increased YoY. However, sales in Europe actually decreased by JPY300 million, so allow us to correct ourselves. We apologize for your inconvenience.

Next, President Shimamura will report on the progress of AGC plus-2020.

Shimamura: This is Shimamura. Nice to meet you. The year 2020 will be the second year for me as CEO and the last year of the mid-term plan. Unfortunately, the results for 2019 have fallen below the previous year. But from 2020, the profit will once again be on an upward trend. I would like to talk about our progress in focusing on our strategic businesses. Put simply, the businesses are growing steadily, thanks to your support.



As you can see, we have core businesses and strategic businesses already in place. The core businesses will be refined by enhancing productivity or deepening them, including by improving asset efficiency. We are currently managing strategic businesses by leveraging our potential technologies to explore them. Our management involves the two styles of deepening and exploring.

Coincidentally, Professor O'Reilly at Stanford University Business School published a book titled Lead and Disrupt: How to Solve the Innovator’s Dilemma. He was very interested in our management style, and AGC Inc. was taken up in a case study of Stanford University's Business School, which you can see on the school's website.

In this sense, we happened to be told that the two movements of deepening and exploration will be crucial as a Company going forward. I feel that what we have been doing has not been mistaken.



As you can see, we handle some commodities that depend on market conditions. Therefore, we need to increase the efficiency of commodities as much as possible and to shift our portfolio to product groups with higher added value as much as possible. At the same time, from the perspective of exploration, we will allocate resources to strategic businesses to become drivers of growth.

Then, in the commodity world, the so-called mass production strategy, which is based on the idea of gaining a broad share of a region or area, is no longer applicable at all. We instead focus on regions and areas where we can make the most of our strengths. We have been conducting our business with the awareness of the need to do so, rather than aiming to expand sales, and we intend to do so in the future.

To date, we have been working to shorten the lead time by actively utilizing M&A, whether it be core businesses or strategic businesses, and then to increase the speed of growth. I would like to discuss some examples of this as well.



These are the management target figures. In 2020, we set the target of JPY160 billion, ROE 8%, contribution of strategic business at 25%, and a D/E ratio of 0.5. In our medium-term plan, AGC plus-2020, we aimed to achieve this while maintaining a sound financial structure. However, I would like to be honest that we may not be able to reach JPY160 billion in this fiscal year 2020.

I will also talk about the future, but the figures shown here show a 29% contribution rate from strategic businesses, followed by figures. By 2020, about JPY35 billion, with operating profit of JPY160 billion, and a contribution rate of 25%, which translates to JPY40 billion. In that sense, the contribution rate rises, and we are in a way coming back on track.

We are continuing our efforts to deepen and explore our vision for 2025 towards JPY230 billion. We will take on a variety of challenges to achieve this goal.



As you can see from the graph, our ROE was 1.4% in 2014, and operating profit had fell to JPY62.1 billion. Thanks to a number of good outcomes from our efforts, operating profit grew steadily year by year until 2018, a good trend. But we faced difficulties this time, which may be that I’m told to cool down a little in 2019. We have also worked to improve the structure of the US automobile by impairment, and we are solidifying our position once again to start the next phase of growth.

The graph may seem vague, but we expect that the results of our investment over the past three years will start showing results in 2021, allowing us to approach JPY160 billion.



Over the past three years, we have invested more than depreciation costs. These investments are investments for growth, and each of our divisions has worked on its own themes. In the glass segment, we have more or less made the major investments planned.

In the growing fields of electronics and chemicals, we will continue to invest in expanding markets and areas where we can further strengthen our position.

As I mentioned earlier, we will continue to invest in growth toward the next milestone 2025. The concrete results will materialize from 2020 and at full scale in 2021.



This is the perspective we would like you to see from the business at this time. We have mentioned that one of our management and financial objectives is ROE, but we are managing our actual business operations with ROCE and EBITDA.

In AGC plus-2020, I have said that we are aiming for ROE 8%. This is about 10% when converted to ROCE, so first of all, ROCE 10% is one benchmark.

As you can see, the glass segment has a very large amount of operating assets in its three glass-related businesses, and it is now clear that the problem is that asset efficiency is low. Going forward, we intend to raise our ROCE to 10% or more by steadily improving earnings and downsizing operating assets.

On the other hand, as shown in the above table, electronic materials, fluorine and specialty chemicals, chlor-alkali and urethane, and life science have already exceeded 10%. We are often told from you that chlor-alkali may be risky because of its high volatility. In 1Q of 2018, the price of caustic soda reached a high point of USD700 in Southeast Asia. Since then, the price has been falling, and the current price has been between USD300 and USD400. Historically, the price of caustic soda has been around USD300 to USD400 for a long time.

So, our view is that USD700 is a kind of momentary spike, and the current state is the calm state. I would like to convey to you that, even if the price falls from USD700 to USD300, we have already secured a ROCE of over 10% for chlor-alkali including in Japan.

Through aggressive mergers and acquisitions, we are now able to raise the share of life sciences to more than 10%. After the first depreciation settles, it is expected to grow further going forward.



Next is shareholder returns. Our current policy is to maintain a consolidated total return ratio of 50% or more, including share buybacks, based on a policy of continuing to pay a dividend per share of at least the current level.

We plan to increase dividends for the fourth consecutive year from 2017. As explained earlier by Miyaji, we plan to pay a dividend of JPY130 per share for this fiscal year. By the way, the payout ratio is 42%.



In addition, we have received a number of comments regarding strategic shareholdings. Over the past several years, we have actively sold off our strategic shareholdings. You can understand that this is continuing, but the funds obtained are used to invest for growth or to return profits to shareholders as shown in the graph on the right.



Let me now discuss our core businesses and strategic businesses. Firstly, I would like to talk about architectural glass. In particular, we have announced that we will integrate our business with Central Glass.

As the graph shows, domestic demand for glass is expected to decline over the long term, and the style and structure of supply must also be adjusted accordingly.

In the past, each company responded to this separately, but in this era, we would rather pursue rationality through a more streamlined, multi-company, integrated approach.

At present, the details of the discussions need to be made only after the Fair Trade Commission's approval. However, on the premise that we can do so, we are discussing specifically with Central what we can do.



Regarding the automotive glass business, we struggled because of the difficulties, incidents, and a decline in the number of vehicles sold. However, there is an increase in demand for high-function products. In this area, we would like to proceed with improving the efficiency of the production process and then responding to the needs of high-function products by focusing on the characteristics of the products required by each region.



Next is the display business. As we have been telling you, a significant portion of the production of panels has been shifting to China. As shown in the graph, about 50% of our production is now in China.

In addition, among these increments, demand for the 11th generation, G11, size is increasing significantly. We will catch up with this growth in demand. On the other hand, instead of increasing the number of kilns, we are currently moving kilns from Korea, Taiwan, and Japan to increase efficiency and improving the process to meet the G11 requirements.

Thanks to these efforts, under an exclusive contract with a major panel manufacturer in China, we have started a system for supplying 11-generation raw glass through long-term contracts.

In addition, since we partly engage in a joint venture with this company, we are not investing in doing everything ourselves. Rather, we are reducing our burden by dividing it into two.



Next is chemicals. In particular, about chlor-alkali in overseas countries, particularly in Southeast Asia. The left is caustic soda, and the right is vinyl chloride. As the graph shows, demand in the market is growing very steadily.

Generally speaking, these basic materials are expected to grow in line with the GDP growth rate. In terms of vinyl chloride resins, they are commonly used in pipes for infrastructure. In this sense, they are growing at a level slightly above the GDP growth rate. In Southeast Asia, demand for caustic soda and vinyl chloride is growing stably on both sides.

The line graph on the side of this report is our capacity. Our capacity is not enough to respond to the increase in total demand, and we are not able to maintain a balance without the inflow from other regions.

In light of these two circumstances, we understand that our increased presence through further enhancement has the greatest potential. Specifically, by around 2022, we are working toward the expansion of capacity in Thailand and are now preparing with environmental assessments.



This is a look at the market conditions for caustic soda and vinyl chloride. The left is the price of caustic soda in Southeast Asia. As you can see, around 1Q of 2018, it struck a high of USD700, but since then has fallen sharply.

The price of caustic soda has fallen, but as I mentioned at the beginning, historically it is between USD300 and USD400, which in a sense is at a reasonable price level. In that sense, the current situation is that we are in a very stable price range.

On the other hand, looking at the right, there is this dark blue line, which is the change in the price of PVC resin in Southeast Asia. Compared to caustic soda, this price volatility is very small. In a sense, it can be understood that the price range is stable.

On the other hand, this light blue coloring is the market for ethylene in Southeast Asia. The balance between supply and demand varied, indicating a very large degree of volatility. At the time of 1Q in 2018, these prices were very high, exceeding USD1,200, but subsequently, as the graph shows, they plummeted.

When shale gas in the United States began full-scale operation, it was expected that ethylene prices in the Southeast Asian region would decline as ethylene derivatives derived from shale gas flowed into Southeast Asia and the greater Asian region. Based on this assumption, we have actually expanded our facilities and made acquisitions in Southeast Asia.

Unfortunately, at the beginning of 2018, it was such a high price, which was a little unexpected, but the graph shows that ethylene prices are falling in a reasonable manner in line with our expectations.



When expressed as a spread between the price of vinyl chloride and the price of ethylene minus the cost of raw materials, it looks like the graph below. The red line shows what remains for us after subtracting ethylene from the price of vinyl chloride.

As you can see, even when the price of ethylene rises, revenue and earnings are very stable. In addition, we can see that the widening of this spread is steadily being observed as ethylene prices have declined.

In this sense, despite the volatility of caustic soda, the extremely strong growth in demand in this region for vinyl chloride is indicative of the possibility of further expansion of the chlor-alkali business as a commodity.

Demand for fluorochemicals has expanded due to factors such as semiconductors and next-generation, specialty high-speed communications. Demand grew slightly faster than we expected. As a result, we created an expansion plan starting from raw materials to spend JPY70 billion, and we are currently in the process of expansion work. We expect to see this contributing to growth in revenues starting in 2021 after the completion of the investment.

The expansion of demand was faster than expected, so in fact, our capacity had been far from sufficient for a while. Honestly, it was fortunate that the demand from semiconductors calmed down a little. We believe that this business can keep growing even further in the future.



Next, I will move on to strategic businesses, the three fields of mobility, electronics, and life sciences. In 2020, we expect approximately JPY20 billion of sales in these three fields and JPY35 billion in operating profit.

The last operating profit for 2020 is forecasted at JPY120 billion, so this is slightly less than 30% of that. However, under the medium-term management plan, AGC plus-2020, the operating profit was set at JPY160 billion in 2020, and the strategic business was expected to generate around JPY40 billion, or 25%.

In the current status, we are unlikely to reach JPY40 billion but coming close to JPY35 billion. If the situation improves, we might be able to generate additional profit. In this sense, I would like you to understand that strategic businesses are steadily increasing their contribution and expanding.

Regarding the strategic businesses, we plotted the product groups that are already on the market for mobility, electronics, and life sciences.

With regard to mobility, we believe that automated driving will develop into a full-scale market in the years between 2025 to 2030. While there are still few products we directly provide to customers, we believe that they will keep growing going forward.

In the electronics business, we believe that EUV mask blanks, as well as optoelectronics components and CCLs, which support high-speed communications, will steadily expand.

In life sciences, we expect growth in synthetic pharmaceuticals and agrochemicals as well as in biopharmaceuticals.



To give an example, this is cover glass for automotive displays. Demand for these products is expected to increase, starting in Europe. At the moment, we have some advantages as early movers, and our cover glass has been used in more than 100 car models. We assume for this part our market share is more than 70%.

This glass is used in luxury cars, and in that sense, it will make a significant contribution to our earnings, unlike more common car models.

As for future trends, demand will grow for curved glass rather than flat. We have just begun to construct a plant in China capable of producing them, and we believe that we will be able to start full-scale production in 2022.



Next, regarding the semiconductor process, the EUV mask blanks business has been somewhat slower than our initial expectation, due in part to a slight delay in the launch by our clients. However, we are confident that by 2025, we can generate JPY40 billion or more in sales and about a 50% share in the market.



Related to 5G, we launched a very unique product in the next-generation high-speed communications business. The capacity of base stations has been running out even with the existing 4G, and we have begun working with NTT DoCoMo to install glass antennas on the interior of existing buildings to increase the number of bases. We are steadily developing and launching glass compatible with 5G telecommunications.

Now we say 5G, but it begins with sub6. However, a crucial point is 28 gigawatts on extremely high-frequency. We are making steady progress in related development and also conducting development including projects with flexibility.



And then, life science. Originally, we were talking about sales of around JPY60 billion by 2020. Based on the current status, sales are likely to exceed JPY65 billion. We have been talking about JPY100 billion by 2025, which we are confident that we can achieve several years ahead that plan.

As I mentioned earlier, for architectural glass, automotive glass, and displays, we are working to improve asset efficiency to deepen the production processes in order to increase profitability. In areas where we can capitalize on our strengths, such as chlor-alkali, we will allocate resources focused on those strengths.

By investing the cash gained from these activities into strategic businesses, we are making steady progress, as I have just mentioned, on specific themes.

With this, I would like to conclude my explanation. Thank you.



Question & Answer

Tamaki: We will now open the question-and-answer session. We would like to hear from as many people as possible, so please ask up to two questions per person. Please give us your name and company at the beginning.

Now, please.

Kuwahara: This is Kuwahara from Merrill Lynch Japan Securities. Thanks for your explanation. I would like to ask two questions.

The first is the results of operations in the fiscal year under review, especially in the glass business. In addition, I would like to ask about the outlook for the current fiscal year. First of all, the operating profit forecast for 2020 is an overall increase of JPY18.4 billion. Of this, I believe that the strategic business accounts for about JPY8.5 billion, so I assume this year the core business will head to an increase in profits for the first time in several years, perhaps three years.

Among them, I imagine that the growth of the glass business is important, but when I look at the recent 4Q, it’s a little shocking that it made a loss. So first, what is the reason for the loss in 4Q? You mentioned briefly, but what was the biggest reason? Has the efficiency worsened again in automobile manufacturing, which been a problem for some time?

How much is the operation adjustment of architectural glass, and how is the operation adjustment and price forecast incorporated into the forecast for the current fiscal year? Could you let us know about these points?

Miyaji: Currently, the most worrying area is the glass business, and the reason for the poor 4Q performance is Europe. The architectural glass business in Europe has worsened quite a lot in 4Q. This means that both shipments and prices have fallen considerably, even more than expected.

Similarly, the European automotive business is still quite bad. We have taken various measures. Basically, we have installed a new facility in Morocco, so we will have an advantage in terms of cost by increasing the operation of the new facility in Morocco. We will stop the old European line and continue to shift to Morocco. But the volume has fallen considerably, so the biggest concern for glass now is Europe, both for architectural and automotive. In this sense, we feel that the most anxious factor in this period is glass in Europe.

On the other hand, there are areas in which we are sure we can increase profits, and it is North America that will be the easiest or surest to do so. As a result of the impairment processing in North America, the annual depreciation will decrease by about JPY4 billion. But we recorded JPY1 billion in advance last 4Q, so this fiscal year, the result will be simply boosted by JPY3 billion.

And the warm repair, or failure of repair, of the furnaces in Japan had a prolonged impact of higher costs, but this part will disappear as well. I believe the amount was around JPY3 billion, so the profit would increase by about JPY6 billion just with the impairment loss in North America and the repairs of the furnace, if everything else were the same.

In addition, Japan's productivity deteriorated in particular last year. When this factor is added, it is natural that, even if the situation for automotives is somewhat unfavorable, we can expect increased profits, especially in Japan and Asia. However, looking at the current situation, we cannot necessarily be so bullish. Our view is that the situation for glass will be covered to a considerable extent by electronics or chemicals in 2020.



Kuwahara: I see. To confirm, do you assume that the operational adjustment currently underway will basically continue in 2020? Operation adjustments, mainly for architectural glass, except for Japan and Asia.

Miyaji: We have stopped some furnaces and are also suspending the resumption of operations following cold repair. In light of the current situation, we are not in a position to resume operations, so I believe that we will stop operations until demand returns to normal.

Kuwahara: Thanks. Second, thank you for explaining the progress of the current medium-term management plan, especially the details of the strategic businesses. You briefly mentioned that operating profit was previously expected to reach JPY40 billion, and it falls short slightly, but if the situation allowed, it may actually reach JPY40 billion.

There was also some talk about EUV mask blanks. Was the result slightly lower than expected due to external factors, or was there a technical factor like the depreciation burden increasing as a result of the acquisition, for example? Talking about circumstances, what will allow the strategic business to be boosted further in 2020, if anything?

Miyaji: First of all, for 2020 we had set JPY28 billion, but we lowered it once to JPY24 billion. However, it turned out to be JPY26.5 billion, which is close to the original base. In terms of the contents, EUV was much weaker than expected. On the other hand, what we call optoelectronics components performed far better than we had anticipated, and this covered the shortfall so we could reach JPY26.5 billion.

Next year, we set the target at 35 billion, but of course there is a possibility that we can reach 40 billion. One factor is naturally the sales trend of smartphones. As cameras are becoming dual and triple, optoelectronics may grow even more depending on how smartphones are sold.

In large products, EUV is also important. Shipments of EUVs depend on the pace of increase in production by customers, but as a matter of course, I think the possibility remains that we can approach the original target of 40 billion.

Kuwahara: Basically, is it all right to understand that there could be fluctuation in the electronics part?

Miyaji: Yes. Electronics has the most possibility to swing.

Kuwahara: Understood. Thank you very much.

Tamaki: Thank you. To the next person, please.

Nakada: This is Nakada from Macquarie Capital Securities. I will ask two questions, although I have many and it’s hard to choose.

I would like to confirm the quarterly movements, especially for the glass business just mentioned and electronics. Comparing on a fiscal-year basis, the profit of glass is expected to increase by JPY7.7 billion. However, considering 4Q in the red to 1Q, I believe that Europe is in a season in which demand and market conditions tend to decline, and you are also reducing production. In other words, are you likely to continue making losses in 1Q, and when will the glass business turn to profitability?

Next, profits for electronics have declined from 3Q to 4Q. Particularly for electronic components, I think 3Q was very good for optoelectronics. How about 4Q, and again, what happens in 1Q? Please explain these two points in quarterly trends.



Miyaji: First of all, regarding glass, we do not think that it will result in a loss. It’s true that architectural glass faces a period of weak demand in Europe, especially in January. But business is also very slow in December, with the Christmas holidays. In that sense, 1Q is not extremely bad compared to 4Q.

On the other hand, the point is automotives in Japan and Asia. Especially in Japan, very large profits are generated every year in March. Profits become very large at the end of the fiscal year, so the most important point is probably automotive glass in Japan. The situation was very bad last year due to problems with substrates and equipment. This one-time event is no longer in the current fiscal year, and there will be the impact of the impairment loss in North America, which we have mentioned earlier. So we’re pretty sure that automotive glass will exceed last year’s results.

The only concern is the effect of the coronavirus. The situation is still unclear, but if its impact spreads around the world, there is a possibility that the automobile supply chain will be significantly affected. While there is uncertainty like this, apart from that, we believe that we can avoid making losses.

Since we do not disclose separate information for each quarter, sorry that my answer is qualitative, but that is the situation.

The electronics performed pretty well in 3Q. The shipment volume of electronic components is largest in 3Q. Semiconductors and also smartphones have the highest operation peak every year toward Christmas and Chinese New Year, so we think it is normal to see higher results in 3Q.

As for 1Q, we believe electrical materials will perform quite solidly. This is because based on the mix of smartphones models of our customers, we expect a substantial number of shipments, so electronic materials will probably exceed last year by a considerable margin.

Compared to the previous year, the G11 started operating last year, and 1Q started with extremely low capacity utilization and depreciation of about JPY7 billion per year. Now, it is almost fully operational. We believe that electronics will make a considerable increase compared to last year's 1Q, rather than comparing it with 4Q.

Nakada: You said the EUV mask blanks continued to grow with each quarter, but they did not reach JPY10 billion last year.

Miyaji: The percentage of revenue growth is rising every year, so I understand, of course, that other companies are saying various things, but this is as we anticipated. Although there seems to be a slight difference in the growth rate depending on the customer mix, it is proceeding according to the forecast. In the end, as mentioned by Shimamura, we feel that it is moving steadily toward the market share of about 50-50. It is growing consistently.

Nakada: You mentioned JPY20 billion in 2020, which you did not reach last year, but think you can get somewhere close to this figure.

Miyaji: Yes, we believe so.

Nakada: My second point is about chlor-alkali. As you explained, about USD300 to USD400 is the usual range, so do you expect the market to remain flat at this level?

And the effect of the coronavirus may be difficult to determine, but if China does not have excess capacity, I wonder if the market in Asia may tighten somewhat.



Additionally, with regard to the spread between the price of caustic soda and vinyl chloride, [at this pearton], how much profit increased or decreased in 2018 and 2019? I guess profit decreased in 2019, but how much impact was there? And how much do you expect profit to increase from 2019 to 2020 [pearton as a set]? Could you give us an explanation?

Miyaji: Given the current situation, we would like the price of caustic soda to rise, but of course, we can’t expect it to be very strong, so it makes sense to assume about USD300 or a little more.

On the other hand, as shown in the graph here, we don’t think the situation of vinyl chloride and ethylene will change so much. Especially in Southeast Asia, where we are doing business, infrastructure investment is quite large, and demand for vinyl chloride is fairly firm. On the other hand, caustic soda has many destinations, so the lack of activity is reflected in prices. But PVC is not affected so much, and we can say it is fairly stable.

And as I mentioned earlier, I believe the cost of ethylene already faces a ceiling, given the structure of shale producing ethylene and derivatives at such a low cost. So, the spread on the right-hand side is quite stable. Therefore, we believe we can secure profits sufficiently if we continue on the current path.

Nakada: In FY2020, you will [pearton] improve margins.

Miyaji: Yes, correct.

Nakada: Thank you.

Tamaki: Thank you. To the attendee in the back of the second row, please.

Kouno: I’m Kouno from Nomura Securities. Nice to meet you.

I’m looking at page 13 of the material on the progress of the medium-term management plan. You are considering the integration of the domestic architectural glass business with Central Glass. If this is achieved, how much is the improvement in profitability expected?

You have provided the situation of the facilities owned by these two companies. I think the consolidation of processing plants, wholesale, and installment bases is a matter of course being carried out, but are you considering to stop the float furnaces or the flat glass furnaces as well, or is it possible? Please give us your thoughts on this point as far as it is currently possible.

Miyaji: I am sorry, but there is almost nothing we can share at present. Exactly how we will do this, this is partly an insider issue, and we have not yet been assessed by the Fair Trade Commission and other authorities. I can hardly mention anything.

From before, amid the decline in market demand, there has been an awareness that it is difficult for a single company to tackle this issue when looking at the structure of the industry. In this sense, article 50 of the Ministry of Economy, Trade, and Industry starts from this point. In line with this, although the form is different, we have to think in the same way in order to change the structure itself.

Of course, simply working together will not be effective, so we are discussing a variety of things. We also know that we cannot make progress without benefits to both parties, so we are currently considering ways in which the benefits can be realized. So, I am sorry, but that’s about all I can say.

Kouno: I see. Second question. You mentioned earlier that your investment over the past three years will start showing effects in 2021 more than in 2020, and you will be able to aim for operating profit of nearly JPY160 billion.



It makes me want to ask, which business is expected to increase its contribution to boost profit in 2021 from JPY30 billion to JPY40 billion?

Shimamura: Although it is very rough, on page eight, there is a diagram that shows how we have invested. I wouldn't explain the details, but each division invested in the expansion of production capacity around 2019, for example in high-performance products in the glass segment.

We believe that the upturn in operation from 2020 to 2021 will have a positive effect on our performance. For electronic or chemical products, profit will be driven by G11 and EUV, as well as increased capacity in bios in the chemical business. We expect them to fully emerge in our score in 2021. We believe that it is possible for us to achieve nearly JPY160 billion.

Kouno: So, rather than a single driver of something specific, a variety of things will contribute. It’s the accumulation of such things.

Shimamura: That's right. We have invested under specific concepts in each division over the past three years, so it’s not just one outstanding growth. We have invested around JPY200 billion over the past three years, against depreciation of roughly JPY140 to JPY150 billion. This is based on the expectation to see results in the future, so I hope you understand that these will materialize at full scale, and we have invested resources in each respective segment to this end.

Kouno: I see. That's all.

Miyaji: Allow me to add some comments. Of course, it's difficult if the tailwind doesn’t blow for everything.

The biggest potential contributing factor is the JPY70 billion we invested in Chiba and Kashima to increase fluorine production. This is the first time in quite a long while that the capacity of a highly profitable business will increase considerably. We expect to see the outcome from 2021.

The other factor is that although electronic components are growing, EUV is expected to increase substantially in 2021 in particular, and we are expanding in preparation for this. This high-end, extremely profitable fluorine, and the significant increase in EUV capacity will be major factors behind the increase in operating profit.

Other markets are certainly favorable, and I’m quite sure that life science will grow. However, this is not enough to push the Company as a whole, so if tailwinds blow for the glass and basic materials markets, it may not be possible for us to reach the target.

Tamaki: Next question, please.

Hirakawa: Thanks for your explanation. This is Hirakawa from Daiwa Securities. I have two questions.

First, I would like to ask about the outlook for the current fiscal year. Regarding glass, as explained earlier, there are some improvements in productivity in the automotive business, so I think it is probably worth an additional JPY6 billion or so.

In that case, it seems that the market assumption in Europe has to be flat for profits to be boosted. So, what is the assumption of Europe around this point, and how negative or flat is it? How much do you factor in? First, please tell us about this point.

Miyaji: Profit in the glass segment is up by JPY7.7 billion, which can mostly be explained by the automotive business I mentioned earlier. We can achieve this as long as the rest goes on the same, but in terms of whether that’s really the case, we are a little worried about Europe.



On the other hand, as I mentioned earlier, we have started up furnaces in Asia and elsewhere in the architectural business. Not in Japan, but in Asia last year, the costs were very high, and it was a difficult time. This is also being resolved and heading for improvement, so I feel that we will be able to cover some of the decline in Europe with Indonesia and Thailand, especially Indonesia.

Hirakawa: As you mentioned earlier, the impact of the coronavirus has not been included. So, should you understand that if there is a small impact here, it will be a little negative factor?

Miyaji: Yes. In particular, we hope automobile manufacturers can start up as usual after the Chinese New Year, but if the suspension is prolonged, there would be a possibility of a supply chain issue, not just in China. That is a risk, although we cannot factor it in.

Hirakawa: Thank you. Next, the second point. In the medium-term management plan materials, I have looked at the uses of cash on page 11.

I think you've been significantly reducing the number of strategic shareholdings, but I think you've changed the policy with Glass Lewis. It is possible that there will be an impact on voting rights and other issues if the Company does not sell its strategic stockholdings at all. In the meantime, there will be cash that has emerged as you sell and reduce strategic stockholdings, while still owning strategic stocks this year.

You have a policy of returning the surplus to investors, with a total return ratio of 50% or more, so I assume that you will return the surplus. What are your thoughts on the balance between strategic shareholdings around this point?

Miyaji: Although we have been reducing them considerably, from the JPY200 billion level, it has generated a total of approximately JPY100 billion in cash, as written here. We still have more than JPY100 billion worth, and in terms of share of equity, I think it is still at a level that exceeds 10%.

Of course, we will continue to keep selling them when possible, but there are customers or stocks with which it is very difficult to resolve the issue, so it may take some time. So far, we have each been working on what we can do, but it is also true that the hurdles are gradually rising. For such stocks, we are also planning to reduce the amount over time.

Hirakawa: Understood, thank you.

Tamaki: To the next person, please.

Sato: Thanks for your explanation. This is Sato from Nikko Securities. I would like to ask two questions simply.

I would like to confirm one point. In the LCD glass business, you invested heavily in 2018 and launched G10.5 in 2019. Looking at the presentation materials on page 29, the plan for capital investment for electronics are increasing slightly in 2020. Is this going to be the start-up of the next line from G10.5?

In that case, I think that the depreciation cost burden was still heavy in 2019, and the operation has started to rise, but if you look at it from a YoY perspective, it was not so significant. In that sense, should we think that in 2020 the Company will turn to an increase in profits, or do you plan to make additional investments? I would like you to sort it out a little.

Miyaji: In the LCD business, it is clear that China is our battleground. Moreover, it is extremely important to capture G11. I mentioned earlier that the price has leveled off in 4Q. This is the first time in a long period since 2010 that we made this comment. There is the G11 effect, of course, so we will basically respond to G11.



In that case, additional G11-related capital expenditures will be required. As you have pointed out, by making additional investments, there will be a wave of increased operation in 2020, followed by a slight increase in depreciation. However, since the depreciation period is fairly short, I feel that, ultimately, we can settle down as a fairly good business.

Sato: I was aware that production for China Star will be in operation by the end of 2020, but does this mean that costs will be borne within this year?

Miyaji: The factory we are currently producing is at almost full capacity, so naturally it is already working, since last year. Next time, it will be another story.

Sato: Is the next one in 2021 or later?

Miyaji: Yes.

Sato: I understand. Let me ask one more question. I am also interested in Mr. Hirakawa's question. You have not conducted share buybacks in recent years, but I had the impression that, while the total return ratio has exceeded 50%, you used to conduct additional share buybacks. I would like to ask if there has been a change in your policy.

Miyaji: We have not changed our return policy, and we would like to flexibly conduct share buybacks depending on investment projects and how profit turns out. And, of course, we will keep the total return ratio of 50%, and we may or may not conduct buybacks depending on the situation.

We happened to buy back shares for several years while looking at the status of the sale of strategic stockholdings and the status of investment. On the other hand, the number of investment projects continues to be large, and there are aspects that the cash will not be earned as much as we initially anticipated. Therefore, we will continue to make decisions while considering the balance.

Sato: Thank you.

Tamaki: Thank you. To the person in the middle, in the front, please.

Nemoto: I’m Nemoto from Mitsubishi UFJ Morgan Stanley Securities. Thanks for your explanation.

First, I would like to ask about EUV mask blanks. In terms of net sales, the plan was JPY10 billion in 2019, but it fell slightly short of the target, so is it JPY8 or JPY9 billion? In terms of remarkable growth, is the idea about JPY15 billion to JPY20 billion in 2020?

In addition, as you have indicated, is it correct to expect JPY20 billion or more, perhaps JPY25 billion, in 2021? What does this figure look like?

Miyaji: As for 2019, the answer is yes, but I think it is a little too bullish to say it will double in 2020. I don't think it will grow that far.

As we do not know yet how our customers will mass produce, it is fully possible that it suddenly increases around 2021. Based on what we see already, we don’t think it will double in 2020. It may be 10 or a bit more. We can’t really say. Results were slightly lower than the forecast last year, and there are both upside and downside possibilities. We don’t expect a downside, but the upside, we can’t tell.

Nemoto: The figure suggests that 2021 is about JPY25 billion, on page 22, about 20 to 30, in the medium-term plan's progress materials.



Miyaji: The image on page 22 has a fairly wide range, with everything in the middle. This is the range we expect.

Nemoto: At least 20 billion.

Miyaji: Yes, that’s what we believe we can aim for.

Nemoto: What are the reasons for the increase in 2021? Will you have more customers, or increase the share within the customers? Or maybe the customer share will not increase, but the customer's mass production will increase.

Miyaji: Mass production by customers will proceed. When mass production is carried out by the customer, the total number of blanks purchased will naturally be responded to. In this sense, these customers' share of the market will increase.

Nemoto: Some manufacturers say that mass production may reduce demand compared to the research and development phase.

Miyaji: Is that so? We do not recognize it that way.

Nemoto: Understood, thank you. Regarding the second point, I’m looking at the forecast by segment on page 25 of the financial results materials.

I may be a bit greedy, but with profits rising by JPY7.7 billion for glass, JPY5.4 billion for electronics, and JPY7 billion for chemicals, I would like to have a better idea of the breakdown, such as architectural and automotive, even an idea of which will earn more.

Miyaji: Roughly speaking, as I mentioned earlier, for the glass business, a large part will be automotive. In light of the current situation, I think the image of architectural is flat or slightly positive just in Asia.

In electronics, we don’t know the extent to which electronic materials will grow, but the surest factor is that operation for G11 started last year, and the situation has completely changed from the long negative period of bearing costs before profit contribution. So, this part is highly probable. As I mentioned earlier, for electronic materials, it’s quite hard to predict the situation.

Regarding chemicals, we feel that chlor-alkali and functional chemicals will not change from this year's level. The effects of the expansion of functional chemicals will materialize in 2021, so there are no major changes in this year's figures for facilities at this time. Loss costs were incurred last year, as we were affected by typhoons, and there were some equipment problems, such as in Indonesia. Although the power plant did not contribute much to profits, this year, an increase is expected, and it seems okay to look at these areas in a positive light.

The life science business is growing steadily, and we can calculate this appropriately, so we expect that the life science business will continue to see an upward trend. That's the idea of the breakdown.

Nemoto: Thank you.

Tamaki: We’d like to take the last question. Does anyone want to ask? May we close the session? Thank you.

We are pleased to conclude our briefing on AGC Inc.'s financial results and the progress of the medium-term management plan. Thank you for participating in the event today.

[END]



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Document Notes

1. Portions of the document where the audio is unclear are marked as follows: [Inaudible]. 2. This document has been translated by SCRIPTS Asia.



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