AGC Inc. (5201) Earnings Call Transcript & Summary

We will now start AGC Corporation's Chemicals Company Performance Chemicals Business Briefing. I'm Ogawa from Corporate Communications, serving as the moderator today. Today's speaker is Tatsuo Momii, Executive Officer, General Manager of Performance Chemicals General Division, Chemicals Company. Well, first half presentation by Momii about the strategy of Performance Chemicals business, and then we'll take questions. We are to end the session at 6:00 p.m. Japan time. If you have any questions, please press the QA button and type in your questions. Momii-san, the floor is yours.

Thank you. My name is Momii. I'm the General Manager of Performance Chemicals' General Division. Thank you very much for your participation today. So let me get started on the Chemicals Company Performance Chemicals Business Briefing. This is what I'll be covering today, positioning of Performance Chemicals business; an overview of our business; and the strength of AGC Group's and future growth strategy. And I'll also talk about the PFAS regulatory trends before I close. First, the positioning of the Performance Chemicals business in the AGC Group. The AGC Group, as you're aware, has core businesses and strategic businesses for our company-wide strategy of ambidexterity. Performance Chemicals belong to the core businesses area, but as will be explained later, Performance Chemicals business entail lots of products and markets. And therefore, in terms of strategy, we are also engaged in electronics and mobility areas as well, which are part of the strategic businesses. And this is the positioning of the Performance Chemicals business. On the right-hand side, we have many businesses within our group. ROCE wise, we are positioned in a very high position, and the carbon efficiency is high as well. So in terms of the business portfolio, it is positioned as one of the businesses where the growth is to be maintained. We belong to the chemicals of JPY 660 billion sales. Performance Chemicals account for about JPY 160 billion. We have 2,000 people within our business. Next, the outline overview of our business. Here, you can see the history of Performance Chemicals business different ages broadly. In the 1960s, the fluorine-related materials research and development started, especially in the area of CFC. And then in the 1970s to early part of the 2000s, water, oil repellent and resin as well as the polymers and the elastomers. In those areas, we have expanded our product areas. And since the beginning of the 2000, as you can see in this history, environment-friendly products as well as next-generation. This develops our products for new markets, especially focusing on environmental technologies. And we have established our own position within the global market. That summarizes the history of our business. And here, you can see the product flow. Chemicals from raw salt electricity, electrolysis, that's where we started. But everything is connected, as you can see, especially the performance of chemicals business in the green area, starting from the effective utilization of chlorine, we are adding value for various applications. As I said, we have many application areas. And by region, as you can see on the pie chart, on the right-hand side, until around 2019, although we were talking about global business, the sales in Japan accounted for close to 50%, and the remaining 50% in the rest of the world, especially the Americas and Europe and China, whereas more recently, as will be explained later, we are seeing more applications, especially in semiconductors. And that has resulted in the growth in Asia and China. So currently, the overseas sales account for close to 60%. And to support that, we have manufacturing sites and sales sites and technical services around the world. The manufacturing sites are in Europe and North America as well in addition to Japan. Main demand sectors very broad. But broadly speaking, electronics, transformation equipment and architecture account for 60% altogether for electronics, semiconductors, especially the semiconductor manufacturing device components and the [ paint ] and tables. Around 30% uses our Performance Chemicals products. In the area, transport equipment, especially the cable, ours -- the high reliability, high heat resistance. These are the requirements. And for those applications, we are providing products for aircraft and automobiles. And for architecture, durability, long life is the required performance, so that frequent replacement would not be necessary. And so these are the main applications accounting for 60% altogether. This is a bit more detail, but for various applications, what are the characteristics are being used? And how specifically the fluorine marks are using applications. I'm not going to go into details. But what categorize this is that, for example, in electronics and in telecommunications and chemical resistance and durability, there are multiple characteristics we got. And the HE -- more characteristic features are what characterizes our products. And with those excellent technologies, we are controlling those characteristics and provide our products to our customers, and that is the source of our business. Here, you can see the positioning of the business in the supply chain. So depending on the market, it differs, but what's common is that we are more focused on the raw materials in the upstream. So in the supply chain, we are at the upper stream. And as a result, the trends in the market, for example, sales volume of vehicles and production volume of semiconductors to those changes in the end use markets. Our raw materials market is affecting this with a timeline, and that is the characteristics of the positioning of the supply chain. Next is about the strengths of our Performance Chemicals business in AGC. There are 3 strengths that we take advantage of to build the foundation of the current business. First of all, global niche strategy. Since last year, we have -- we call ourselves global list of company fluorine business. In the fluoride business, there are some materials that have become commoditized. But what we are working on at Performance Chemicals business is to differentiate ourselves from competitors and develop the high-performance products and then aim for #1 in the global market. That is what we call global niche strategies. And in order to do that, technical service, production, sales and the product development is being conducted globally. And using those functions that are rolled out globally to anticipate the needs in various fields to provide products to customers to respond to the customer needs first, so that we can establish high profitability business foundation that is the strength of our Performance Chemicals business. So for each of those 3 strengths, I'd like to explain more. Amongst the global niche strategies, what are the specific products that command #1 global market shares. And you can see this in photos. ETFE resin, fluoropolymer is represented by ETFE or Teflon. That is what would come to your mind. But what we excel is ETFE resin. And also, the fluoropolymers for on-site coating is where we also have strength. And more recently, the fuel cells, those are spreading gradually. And in fuel cells, what is essential is electrolyte polymers, and we have overwhelming share in this field as well. And in these products, we are commanding #1 global market share. And one of the reasons for that is because in producing those products, the intermediates and raw materials are also internally produced. But manufacturing is quite difficult or handling is quite difficult as are raw materials or intermediates. So that sets -- the entry barrier is quite high. And that's why with the top technologies, we have been able to stay at the top level. And as for global niche strategy, the fluoropolymers amongst general polymers, it is a niche product. Engineering Plastic has several millions of tons in market, but fluoropolymers is only 200,000 to 300,000 tons in volume only. But what is required in fluoride is what is not possible in other materials, and you have to have multiple characteristics and it's quite rare raw material. So as a market, it might be a niche. But in terms of retail chemicals, it is highly evaluated. And as you can see on the left, as in usual ordinary engineering plastic, we can expect higher demand going forward for fluoropolymers. So, we are going to ensure our share for niche products in a niche market. For your reference, let me explain about ETFE resin that I mentioned earlier. About 50 years ago, AGC succeeded in mass production for the first time in the world. So, we have a 50-year history. So, we have consistent efforts and have the overwhelming manufacturing capabilities. So, we have overwhelming share. The processability is very good, and durability and also weather resistance is its characteristics. And so wire coating material and also coating for various materials and outdoor construction materials coating is where our product is used. Now, next is the global expansion. The applications and markets vary. We do have the R&D and manufacturing sites in Japan. But in terms of manufacturing sites, we also have sites in U.K. and the U.S. as well. And as for the marketing sites, in addition to Americas and Europe, in Asia, Singapore, China and India, in those places, we do have the marketing sites and to be closer to our customers, so that our products will be used in the adequate and right way. We do have the technical service sites in different parts of the world as well. So global manufacturing, sales and R&D facilities are there, so as to support the fast-growing semiconductor industry as well as new market to emerge. The hydrogen society, for these applications, we want to capture the technologies that the customers want as quickly as possible and to provide them after R&D in materials in R&D facilities in different parts of the world. So developing new materials to supply into the world is what we are promoting as the third pillar of our strength. Next, about our growth strategy. Performance Chemicals history that I showed you earlier overlaps with this in retrospect, basically environmental issues, social issues. We have been addressing them by launching and supplying new products. That is the history of our business, and that is leading to our growth strategy as well. In 1975, more environment-friendly ion-exchange membrane for salt electrolysis, FORBLUE, FLEMION was launched. And we also developed CFC substitute with a small ODP, and also for future hydrogen society membranes for hydrolysis. These are the examples of the new solutions and products to meet the needs of society. In the growth areas of the 17 SDGs, especially safe and secure society, comfortable society and environmentally-friendly society are where we are focusing on to bring about these societies. We are providing new materials based on our fundamental technologies. Contributing to society through various products are shown here from fluoropolymers to fluoropolymer films to fine silica. These could also be a contributing business for the sustainable society. In terms of the products expected to grow in the future, I'd like to give you 3 examples. One is, as has been mentioned already, the fluorinated electrolyte polymers for fuel cells. You can see the picture on the upper right. We call this [ ipolymer ]. This is a liquid polymer. Fuel cells are used not only for vehicles, but we expect the demand to grow in the future in hydrogen society. Our strength is that it has a very high resistance to heat. We successfully developed such doses. And also the durability is high, where the degradation would not take place in the power generation and also the platinum, which is the major part of the cost can be reduced in amount necessary. And therefore, what is currently available in the world today, we do have the overwhelming #1 position based on our differentiated technologies. So, this is one area we expect a big growth going forward. Next is about, again, electrolyte, but it's about membranes. This is also related to fuel cells. But going forward, renewable energy derived in power will be demanded. And water electrolysis to produce hydrogen is going to be subsidized by various governments in the world. And with that tailwind, we're expecting this demand to grow significantly. And the fluorinated sulfonate ion-exchange membranes that we have, so forth electrolysis [ synthesis ] or molecular design technologies are used and the membrane forming technology is also used. And hydrogen leak is low and safe driving is possible. So in the water electrolysis device, we believe that this will become one of the main sales. And next, you can see Fluon2000 and silica for inorganic filters. And in the semiconductor and electronics fields, we're expecting this to grow going forward. So in the telecommunication, more capacity and high speed is required and the high transmission -- low transmission loss and low dielectric is required, but no adhesiveness is another characteristic of fluorine. It might be difficult to bond this with other materials. But with the fluoropolymers, there's adhesiveness as well. So, this makes it quite unique. So combining the conventional substrate material, we can respond to higher capacity demand for raw materials. And also silica for inorganic filters is a unique silica that AGC tech has. And this has been highly appreciated by the customers. And in high-speed telecommunication era, we believe that this will become more present. So with those products that have high potential and the strength of high performance chemicals, the 3 of them. Based on those, as well as the anticipated provision of solutions and also we have to have a supply capability to ensure trust. And in March, JPY 35 billion investment has been decided. In the second quarter 2025, we're expecting these facilities to start operation. And with the new products introduced and market growth and customers' demand will be forecasted. And by increasing capacity ahead of that, we are expecting JPY 200 billion in revenue by 2025 and JPY 300 billion by 2030. Last but not least, more recently, we are hearing more about PFAS regulatory trends. So I'd like to share this with you. So PFAS, the world PFAS has been the buzzword in the media. So, PFAS position may become more familiar to you. But what I would like you to recognize is that among PFAS items, what is regulated is P-F-O-S, P-F-O-A, or PFOS, PFOA, the substances categorized under these 2 are the ones that are regulated. And as for PFOS, we don't have any history of producing or selling the products. And also PFOA, we used to produce and sell the products. But by 2015, ahead of the regulation, we stopped, discontinued production sales. And as for PFAS-related materials, the wastewater that is generated during the course of production has been minimized for environmental impact. So environmental impact reduction is one of the big priorities for us. So currently, what is the status of regulatory trends in Europe for PFAS. Let me just share with you the current status. Currently, the ECHA or European Chemicals Agency is considering this. And initially, in 2025, there will be a legislation. And without grace period, the regulation will take effect in 2027. That was what was expected. But there are so many objections that were submitted through public consultations. So, we don't know if the things will go as scheduled. So as Performance Chemicals at AGC, we have established industry organization and submitted public comments. And in Europe and other countries, we are engaged in advocacy and lobbying activities so that we can protect our business against the regulatory trends. I have talked a bit long, but that's all. Thank you for your attention.

Thank you, Momii-san. We will now move to the Q&A session. If you wish to ask questions, so please press the Q&A button and type in your questions. We'll first look at the questions that we received in advance. Question number 1 is on the mid- to long-term goals. Net sales of JPY 200 billion in 2025 and JPY 300 billion in 2030, what would be the operating margin?

We do not disclose numerical figures, such as operating margin. But what we can say about profit is that we are assuming that the current level will be maintained. As has been explained in my presentation, we will be launching new products. And with this, we would like to aim for even greater margin.

Next question. There are 4 products that are listed as global share #1. So if you can give us the current sales volume and per share amongst the Performance Chemicals as a whole for all 4 products in total?

Well, as for the sales volume, we cannot disclose the numbers. But in terms of the share weight, the 4 products with global share #1 would represent about 1/3 of the Performance Chemicals as a total.

Next question. As for products expected to grow in the future, 3 were identified. With those 3 put together, how much increment in net sales are you assuming towards 2030?

Increment? Well, those 3 products put together, some have been launched already, but they are to grow in full fledge going forward. So in 2030, we are expecting them to account for 20% of the Performance Chemicals overall.

Next question. On Page 8, you have shown us the sales amount breakdown by region or geography. And the growth for China seems to be bigger. And would it be correct to understand that this is mainly for semiconductors? And the pie chart on Page 8 shows the status in 2022. So in 2023, is the demand for China still growing, Momii-san?

Well, in this year, the sales for China are growing, but it is not just for semiconductors. But the transport, including automotive, resin for those and also solid electrolysis membrane. So non-semiconductor application is also bigger in contribution.

Next question. On Slide 9, you're showing the sales ratio by application. In terms of profit, electronics accounts for how much? Can you comment on that to the extent possible?

Again, we can't give you the quantitative response. But electronics applications, in terms of profit, it will be larger than sales ratio. Here, as you can see, in terms of sales ratio, it's 28%, but for profit, it's going to be greater.

Thank you. Next question. Between Page 23 and 25, you have listed the products that are expected to grow going forward. So at this moment, what will be the sales volume at present for each? And what will be the growth rate that we can expect as far as you can share with us? Please give us the numbers.

Well, we cannot comment on sales. But in 2030, the products that have the growth potential going forward would represent about 20% of the Performance Chemicals as a whole and the growth rate is annual 2-digit percent.

Next question. Price revisions have been implemented recently. Do you think the current price level to be appropriate? Is there room for further price increase?

Currently, we believe that the current level is appropriate. We are selling at the appropriate level. So rather than talking about the room for further price increase, I would say the current level is adequate.

Next question. On Page 26, as you showed, you have to continue massive investments. But what about the tractions for profitability going forward? Do you think you can maintain the high profitability level that you enjoy today? Or is there any room for more improvements, Momii-san?

Well, in terms of profitability of margin, we believe the current level to be continued. But as I explained, we have products that are differentiating ourselves are unique to us. That will be launched. So, we can expect further profitability increase, and we would aim for that.

Next question. Also on Slide 26. As indicated on the right, over the next 5 years, Performance Chemicals business sales are to grow by approximately JPY 100 billion. What will be the breakdown of that JPY 100 billion? Can you give us further details?

Here again, I'm afraid I could only give you a conceptual response. Existing products account for about half of that JPY 100 billion, and the rest to come from the new product areas, so 50-50.

Next question. On Page 27 of the PowerPoint, investment plan and forecast for sales. I'm talking about Page 26, right, rather than 27, so investment plan, revenue forecast. Is it assumed that there will be no impact from PFAS regulation? And would it be really the case that you are not going to be affected at all? And if you are subject to any impact then, which area will be more susceptible? For example, the applications for semiconductors are less susceptible because there's no substitutes for automobiles. Lobbying activities are very strong. So there's less susceptibility. Is there any differences in terms of susceptibility in different fields?

Well, there is still a discussion ongoing for regulations, so we don't know exactly where these would go exactly. But we don't believe that there is no effect at all. There will be some impacts to some extent. And the obligations and products, that could be regulated with more probability. We have put together some scenarios, possible scenarios and the risk assessment has been done and that has been reflected in the business plan that we have shown. And to add more comments, there is a discussion on regulation on consumer applications that are going ahead. So, these could be affected to some extent. But most of the products that we are going to focus on industrial use, including semiconductors are not substituted. So, we believe that we can protect those products.

Next question. Related to PFAS regulation. Regardless of whether there will be regulation or not, the fluorine substituting products seem to be used as marketing tools for companies engaged in the development. So of the products shown on Slides 10 and 22, in terms of the product functionality, which are likely to be substituted, while which are ones that are not likely to be substituted?

As shown on Slide 10, in applications where various performance needs to be met, I believe it will be very difficult to develop something back and substitute fluorine. In many of the industry areas -- industrial areas, I'm afraid it will be very difficult to develop over short term. So, I think it's very unlikely that they will be substituted.

Thank you. Next question is about CCL, copper-clad laminates. It's not about performance of glass cost, but the resins performance is important as well. Conventionally, polyolefin really did or derived resin was a main product. But there is a possibility to use a fluorine-derived resin. So to what extent, do you think polyolefin resin could be replaced by fluorine-derived ones? And what sort of business opportunities do you see in this field, Momii-san?

Well, as I explained, Fluon2000 is the one that we would offer to meet the opportunities to replace the polyolefin. So in the polyolefin, derived ones may not be able to meet the specification needs anymore. So, there is a greater chance for us to replace polyamide where polymers are used in high-performance area. And that is where we can have opportunities. And one of the characteristics of polyolefin is that anti-resistance or chemical resistance, but not all common products will be replaced with fluorine products.

In terms of price and performance, which is the toughest competitor in terms of engineering plastics?

Well, CCL -- well, polyamide and silicon resin, we believe, will be the competitors.

We are still receiving questions. So if you have any questions, please use the Q&A function to type in your question. The next question. In the previous question about PFAS regulation, you said that there is products that could be regulated for consumer applications. But what will be the share in terms of revenue for those products?

Well, we cannot explain in terms of sales numbers, but the probability of products being regulated for consumer use, we assume that there will be products that will be subject to the regulation. And in terms of share in the revenue, it is minimal. That's what we believe. So, I'd like you to understand that way.

So, those are all the questions that we have received so far. But if you have any additional question, please push the Q&A button and type in your questions. Any further questions? Anyone? If you have any questions, please press the Q&A button and type in your questions, please. We received a question in the chat box. When can we expect the fluoropolymers to be used in CCL?

EA-2000 that we have is to be leveraged and to be accepted in the market, and we think it's going to take a bit of more time before that happens. The next-generation high-speed boards, the customers are currently doing the qualification. But it's not likely to be used next year, could be 2 years or 3 years down the road.

Are there any further questions? So next question. The overseas major chemical manufacturers are engaged in fluoropolymer products have signs to withdraw from the market. So is there any chance for AGC to have more business opportunity?

Well, that is true that one of the peers handling fluoropolymer have announced that they are going to withdraw, as you know. But the chemical manufacturers that have the same products as we have, of course, can have the business opportunity, not just us, but they all have the business opportunities. So in that sense, we have more business opportunities.

Next question. In assessing the business growth, what are the indicators that we should be looking at, GDP, PMI or any other indicators?

For Performance Chemicals business, as explained today, many application areas and many markets, not single one that dominates. And therefore, it's very difficult to see what indicators would be a good leading. Of course, GDP is one good reference. But in our business planning, there are no particular economic indicators that we are focusing on.

Next question. We do understand that AGC is quite strong in ETFE, but can you tell me what is the positioning of PFA in AGC?

Well, as for PFA, compared to the peer competitors in terms of production capacity and entry timing was a bit late and lagging behind. But PFA quality and production capacity that we have is commanding high expectation from the market. And every year, the expectation for the market is enhanced. So EA-2000 is one of the PFAs, and that is also one of the main stage. And fluoropolymers in 2025 second quarter, the additional capacity is going to be operational and PFA is one of those products that are produced. And with the capacity increase for PFA, we would like to respond to the expectations for the market for AGC products.

Next question. With the overseas fluorochemical companies withdrawing from the business, are you actually receiving any order inquiries?

I can't say which particular product area, but we are seeing the inquiries as a substitute on a global scale.

Next question. With regard to PFAS, how do you look at the potential risk to be sued going forward in Japan and outside of Japan?

Well, with regard to litigation risk, we are not in a position to talk in detail. But already in the U.S., PFOA, there are many litigations in relation to that filed, but health damage concern is being reported, not just in Japan, but in other countries. So there are risks not just in Japan but in overseas as well. But whether we are faced with litigation or not, we are not in a position to disclose that today.

Next question. There were reports about development of all-solid batteries. But the use of sulfur might be unstable. So it could be difficult for the automotive use. But there are possibilities for factories and others. So the question is, is there a possibility of using all-solid cell for non-automotive applications?

Regarding the all-solid battery, it's not Performance Chemicals, but it's the corporate development theme. So, I'm not in a position to comment on the possible applications of that development.

Thank you very much, Momii-san. With regard to this question, on separate date, IR department will answer that question later. So, we have covered all the questions that we have received so far. If you don't have any further questions, we are a bit early, but we'd like to close this session. But if you have any questions at this moment, please type in your questions now. Then we can pick up those questions. Any questions? Anybody with any further questions? No questions. Hearing none. We believe that there is no more questions. So, we would like to conclude this session. Thank you very much for attending this session despite your busy schedule. So, I would like to close Performance Chemicals Business Briefing. If you close the Zoom screen, then you will be guided to the feedback sheet, questionnaire site. Please help us with your input for further improvement. And if you have any questions, please contact 03-3218-5096 at IR. Thank you very much for your attendance once again. [Statements in English on this transcript were spoken by an interpreter present on the live call.]