It's time, so let us get started. We'll now start day one of AGC IR Day 2024. I'm Chikako Ogawa of Corporate Communications and Investor Relations, serving as the moderator. First, we will have Shinji Miyaji, CFO, talk about the group strategy. Starting at 4:10, Automotive Company President, Yoshio Takegawa, will go over the strategies for the automotive business. At 4:45, Architectural Glass Asia Company President, Shigeki Yoshiba, will go over the strategies for the architectural glass in Asia.
At 5:10, Davide Cappellino, President of the Architectural Glass Europe and the Americas, will go over the strategy for Europe and the Americas. After each business corporation or the business company presentation, we will have a Q&A session. If you have any questions, please click on the Q&A button and type in your questions. First, CFO Shinji Miyaji to go over the group strategy.
Good evening. Let me start my presentation. This is the outline. First, the analysis of the current situation, direction, and key strategies. First, regarding the status quo analysis, the major challenge for AGC Group is ROE. We are struggling improving ROE. We consider this to be a major challenge for us, and as a result, PBR is now below 1, as a result.
So we would like to improve this more than anything else. To accomplish that, there are various initiatives underway. Portfolio shift transformation to be accelerated is one, but more than anything, the profitability of each business has to be improved, or if the profitability is already high, maintain that high level and at the same time, maximize the company business. 8% is the ROE to cover the capital cost.
So, the current capital cost is 8%, so we would like to target ROE of 8% by 2026. These are the key strategies, and I think you will ask... You can ask for further details after each presentation. The evolution of ambidextrous strategy, deepening of sustainability management, DX promotion, and strengthening of management foundation. First, capital cost and capital return analysis.
On the left-hand side, you can see the PBR of AGC, as mentioned earlier. We have been below 1 constantly, separating between ROE and PER. First, on ROE, as you can see on the upper right-hand corner, for the average for 2 medium-term management plan periods, 6 years, is way below the target. Whereas for PER, the average for the past 5 years is 15.9 times in the recent past.
The average for the prime chemical companies are 17.4x. So to improve PBR, what we need to do is to improve on ROE more than anything else. To achieve this, as you can see here, especially regarding the improvement and stabilization of ROE, we are investing heavily on growth businesses, and we need to promote that steadily.
Also, in the core businesses, there are some businesses that still have issues, and therefore, we need to accelerate the structural reform so as to improve and stabilize ROE. To achieve ROE of 8%, we have some key indices. For each business, we have ROCE applied to make assessments. In order to achieve the ROCE for the group-wide basis, we need over 10%, and for that, we can break down into different businesses, as you can see here.
The diameter of each circle shows the size of EBITDA. As you can see, for display and life science, negative, big negative figures right now, so we need to improve this so as to achieve 10%, so that in 2026, in the final year of the current medium-term plan, we can achieve this target. That's a very important challenge for us.
And on the right-hand side, you can see that for the electronics materials and performance chemicals, which are the strategic businesses, currently a very high ROCE is maintained, but we want to enlarge this circle so as to increase the EBITDA. Investments are being made for that purpose. So while improving on our ROCE, we would like to increase EBITDA as well. And this slide shows the very important challenge for us under the current medium-term management plan.
Here you can see our capital allocation policy under the current medium-term plan. On the left-hand side, you can see the previous term capital allocation breakdown. You can see the breakdown and the source of funds. On the right-hand side, you can see the capital allocation policy for the current medium-term plan, which started this year.
Over JPY 1 trillion of operating cash flow is envisioned, assuming things go steadily. As for core businesses, we will be reducing some investments so as to strengthen investment into the strategic businesses. Dividend, excluding the share buyback, size is to be increased over the previous three-year period. With this cash in, what's called the strategic investment budget, would have approximately JPY 200 billion. The businesses...
So, if there are any businesses, any business opportunities, worth investing, we would invest there. And should we find that there are no attractive investees, then that will be used for share buyback as well, as one option. This is my last slide. As you can see here, for 2026, the operating profit and strategic business operating profits are shown here, ROE 8% or higher, EBITDA JPY 440 billion or more, for debt-to-equity ratio of 0.5 or less to maintain the soundness.
For 2030, we have some targets, and, 2026 targets are defined, as the interim point towards achieving the 2030 targets. We will be implementing various initiatives, and I ask for your kind support and understanding. With that, I conclude my presentation, and we do have presentations on automotive glass and architectural glass. We welcome your questions. Thank you.
Miyaji-san, thank you very much. Now, let me invite Yoshio Takegawa to share with you the briefing on the automotive company's strategy. Takegawa-san, the floor is yours.
Thank you. I am Takegawa, President of Automotive Company. Today, I would like to give you an overview of the company's business. Here is my agenda today. First, I will give an overview of the automotive business as a whole, followed by the three measures we are taking to improve profitability in order to realize our mid- to long-term goal of where we want to be in 2030.
I will do a bit of deep dive in high functionality and high value-added products, enablers of our mid- to long-term mobility-related offerings. Finally, I will discuss our mid- to long-term business outlook. Now, automotive business accounts for about 25% of consolidated net sales. Main products include our core business of automotive window glass, as well as other mobility business-related strategic products, which I will come back to talk more about later.
We have a global network in Asia, Europe, and the Americas. Blue dots indicate manufacturing sites for our core automotive window glass, and red dots for a strategic cover glass for automotive displays. We have not only manufacturing sites, but also development sites globally. In addition to Japan, the U.S., and Europe, there is an R&D base in China to capture the fast-growing Chinese market trends. Here is a summary of our strength. First is our customer base.
We have established trusted relationship with many of the global OEMs that are leading the EV and mobility markets and enabling us to access opportunities in new mobility markets. Next is our global production, sales, and development structure. Our global network that enables us to provide high-quality products and services is of great value to our global customers. The third is the AGC Group's comprehensive technological capabilities.
The group possesses a wide range of material technologies, functional design capabilities that meet the needs of mobility society, and production engineering capabilities that ensure the stable production of high-quality products, all of which constitutes value to our customers. The fourth is synergies between automotive and mobility business.
Automotive window business is our core business, and mobility is our strategic business, and we are seeing more and more cases of business creation through synergies, such as collaboration and new mobility products through relationships of automotive glass customers. This is the automotive company's vision, mission, and aspiration for the year 2030. We believe that our business has the potential to create a variety of social value in many fields for the mobility transformation of the society.
We will strive to realize this vision for 2030 by continuing to create and expand a wide range of new businesses through new products, technologies, and services that leverage our strength. Market trend outlook. Changes in the automotive industry, represented by CASE, are steadily progressing. For C, for connectivity, we assume that 5G communications market will be fully launched around 2030. In terms of A, for automated or autonomous driving, level 4-5 autonomous driving is expected to be launched mainly for MaaS vehicles.
In addition, accelerating shift to EVs and environmental responsiveness offer many business opportunities as well. On the other hand, as shown on the lower left, we do not expect the global automotive production volume to increase in the future, and thus, we are shifting our business operations to focus on value enhancement, rather than relying on sales volume growth.
We have introduced the three measures, which I will delineate on the next page, and here, let me discuss the backgrounds that led us to these measures. For a long time, automotive companies' business operations assumed continuous growth of global automotive production. We have achieved business growth by increasing production and expanding capacity in line with our customers' global expansion.
However, in the late 2010s, the earnings environment began to deteriorate rapidly in Europe and in the United States due to slowing automotive sales growth. In North America, an impairment loss was recorded in 2019, and in Europe, earnings environment deteriorated further due to a slump in automotive production caused by the pandemic and the semiconductor shortages, resulting in an impairment at the end of 2021.
Subsequently, sharp rise in European energy prices and sluggish business in Russia forced companies to record another impairment loss at the end of 2022 in Europe. Thus, under such circumstances, we have begun to implement the measures to be described now in response to the inevitable need for rapid improvement in profitability. We are pursuing these measures to improve our profitability. First, automotive window glass based on glass had to be quickly repriced.
In the short to medium term, in addition to structural reforms, mainly Europe, we are continuing to increase productivity by introducing highly efficient equipment. In our core business of automotive window glass, we do not aim to increase sales volume, but rather focus on expanding our high performance, high value-added products and mobility businesses.
We were able to improve our CE to 10% in 2023, partly due to the effects of repricing and other short-term measures. We will continue our efforts to improve asset efficiency. Now, on our pricing policy. To date, we have raised prices mainly in response to rising raw materials and fuel prices and cost increases due to fluctuations in production volume. We will continue to pursue appropriate price levels for sound business operations through price improvements in low profit models and new model sourcing.
Next, I'd like to talk about structural reforms. To date, we have rationalized multiple bases in Belgium, Germany, and the U.S. to reduce costs and production capacity. In addition, we are preparing for higher functionality and productivity by sequentially deploying high efficiency equipment on a global basis while continuing to consolidate and eliminate low productivity lines.
We have also begun to shift our business from automotive window glass manufacturing to manufacturing for mobility. We will continue to realize appropriate production and supply systems in response to market trends in each region. The third measure is to increase functionality and value-added product. With the expansion of EVs, demand for high functionality products, such as sun roofs and sun insulating glass, utilizing heat insulating and light controlling glasses, is expected to grow.
In particular, demand for high, larger area panoramic sun roofs is likely to increase, especially in Europe and China. Towards the realization of CASE society, including EVs, we will further promote high value-added products through mobility products. We have the world's number 1 share of the automotive display cover glass market, and the number of vehicles equipped with this product is expected to increase in the future.
Products related to sensors required for automated driving are moving into the mass production phase and will grow as the second pillar of mobility products. In addition, we will explore and strengthen business opportunities, such as antennas. This page is for your reference, talking about the synergy of our mobility products. Now, I'd like to discuss our mid- to long-term business outlook. As I have mentioned, while we aim to expand the scale of our mobility products by capturing market demand, in our core business of automotive window glass, our policy is to pursue value rather than chasing sales volume.
Under this policy, we aim to increase the ratio of sales of mobility products to the company's total sales to 30% by 2030. In addition, we will achieve a stable profit structure by steadily implementing the improvement measures I have explained today, and improving the product mix, aiming to further improve our CE, which is currently at 10%. With this, I'd like to conclude my presentation. I thank you for your attention.
Takegawa-san, thank you very much. Now, for automotive business, we would like to move on to questions and answer session. If you have questions, use the QR, Q&A function and enter your questions. We would like to respond the questions which we have received it prior. Now, what is your expectation of the effect of the implemented three measures going forward? Thank you very much.
The three pillars that I talked about has three horizons of short term, midterm, and long term. Therefore, it's rather difficult to make a simple comparison, but currently, short-term measures are more effective. Last year, we began to implement such measures, and from this year, we will be adding some structural reform impacts to the effect. Therefore, after 2025, long-term, highly functional, highly performance-based product policies will begin to kick in. Actually, the short-term measures are not temporary measures. They are expected to have continued contribution to profit going forward as well.
Thank you. Next question. Comparing Japan, Asia, and Europe, and the Americas, it seems there is a big gap in terms of profitability. You have shown the structural reform to be implemented in Europe and the Americas. How much effect should we expect from that?
Well, from region to region, the situation is quite different. Competitors, price of the materials, the price level, and there are many other factors that are resulting in low profitability in Europe and the Americas. But thanks to various initiatives implemented, we see a rapid recovery from volume, from volume to value. That is what we are driving. So the profitability is to catch up with the Asia, Japan region.
Now, next question is about improvement in profitability. Operating profitability, 4.3% in 2023, and your expected target is 5% for 2026. It is true, as we look at the trends of the automotive profitability in the past, as well as the midterm plans of your competition, 5% appears to be appropriate.
But as you expect your pricing to work and structural reform to take place, as you mentioned in page 14, you are aiming at expansion of the highly value-added products sales, in addition to automotive glass. So about JPY 4 billion of improvement in operating income, which is about 1%, is this really the appropriate level of improvement that you expect? Thank you very much.
That's a hard question to address. So for billion yen, 1% is very conservative. I think we can do better than that. But as we discussed earlier, currently, we have now seen the results of the short-term measures. And running up to 2026, the midterm structural reform impact is expected. Therefore, essentially, we do not stop improving. After that, we will see greater enhancement of our highly functional product sales.
Therefore, the long-term improvement probably will start to kick in around 2025, and we'll see the impact of that starting around 2030. So in 2025, 2026, we are still in the midway of our improvement journey. Therefore, after that improvement, we will not sit back and relax. We will continue to make further efforts in improving operating profitability, including our CE. Thank you for your question.
Next question, related question: What do you think is the ideal ROCE or the operating profit margin? And in terms of the manufacturing structure, do you think the reductions that you have announced so far would suffice in achieving that state? What happened to my camera? There you go. The ideal level of operating profit margin, well, it will depend on the product mix. When ROS is high, that alone is not that good.
But our current level is not high, we know, and therefore, we want to improve on this. With more mobility products, ROS would improve as well. But more than ROS, ROCE should improve. As explained today, ROCE is to improve from 10% to something even better. That's our target.
Thank you. Let me go on. What is the probability of outsourcing raw glass? Would you please?
Well, basically, raw glass and glass processing and fabrication should be combined within a single company. Because of the strength that we have in raw glass, as well as finalized products, we have to have both of them as our capabilities. But of course, the situations may differ depending on regions and markets. We continue to look at the balance of demand and supply in different regions, and there may be a possibility of outsourcing raw glass, or there may be a possibility of selling raw glass to third parties. Both options are open. We will remain flexible about that.
Thank you. Next question. Currently, the high value-added products, such as sunroof and light control glass, what is the contribution of these products to the profit of automotive business overall?
Sunroof, light control glass, and others comprise the high function, high value-added products. Depending on the product, the level of profit contribution varies. Going forward, depending on how the market grows, again, things may fluctuate. Overall, compared to commodity products, at least several percentage points difference.
High functionality products, in the meantime, entail high value, high functionality materials as well, and therefore, procurement strategy is important. Large scale capital investments will not be made, and therefore, it will contribute to the asset efficiency improvement as well. We want to double the high value-added products and increase the ratio so as to improve the profit contribution.
Thank you very much. Still accepting questions. Use Q&A function at the bottom of your Zoom screen. Let me go on to the next question. Automotive Company held the business briefing last year in November. So what are the major changes from that time? Please summarize the highlights. Takegawa-san, please.
From November? Well, it's been about six months. Well, as per market, we have seen major changes. As you know, in Japan, automotive sales for some OEMs fell short of their targets. On the other hand, the political landscape is changing, with lots of instability being introduced. Under such circumstances, we have to be ready to respond to any changes.
We have to remain flexible in everything we do. From that perspective, what we have done in the past, like attaining appropriate price levels as well as structural reforms, enabling us to have a flexible structure overall, are proving to be quite effective. On the other hand, for CASE, the EVs, which have been leading the movement, are now showing some differences between regions. We no longer expect the rapid growth as we had in the past. That growth has overall slowed down, but then the long-term perspective for EV will remain unchanged, therefore, our commitment to that business will remain the same.
Thank you. Next question. Looking at slide 19, there is a question. Can you show slide 19? The high value-added products shown here, are these the cover glass for car-mounted displays, or does this include the high added value automotive glass as well?
Okay, I think the questioner is talking about this purple portion, the purple portion in the bar charts. The bar charts.
The mobility ratio?
Yes. This is not just the cover glass for car-mounted displays. We are including panoramic sunroof and other high added value glass products as well. So core business and mobility business put together, we're talking about all of the high added value glass products. Thank you very much. Running up to 2025, 30% production capability reduction was announced in Europe.
Running up to 2023, what has been your progress on your plan? Are you done with the capacity reduction? Last year? Well, up until last year, in Belgium and in Germany, we closed and sold assets as per our plan. Therefore, the capacity reduction in Europe is almost complete. But in other areas, we are still in the progress and process of consolidation. So this year or next year, we will be able to complete the plan of 30% reduction in capacity in Europe. Thank you very much.
Thank you. Next question: in order to achieve ROCE of 10%, you need to improve on R and also improvement of CE as well. Which would you be focusing more on, is the question. For automotive business, we are making a very selected investment for the stable improvement of profitability. So the question is R or CE? It's not either/or, both R and CE. We need an improvement with good balance between the two. So profitability and the asset efficiency, both need to be improved in parallel. Okay, thank you. About highly value add products, what are the possibility of them being the highly differentiated products from your competition?
Well, we were always first in introducing highly value add products, using multiple technologies globally for soundproof, thermal insulation, the functions which all leads to higher comfort. Differentiation by a single function will not allow us to improve attractiveness of a car. So depending on the customer's needs, we have to make sure the OEMs are able to choose the most appropriate combination of different technologies, and that's where our differentiation resides.
Next question, about price revisions. Is there room for further price increase?
Well, price revisions. So far, price revisions to reflect the increased cost has been implemented. We have continued to do so. So in that sense, I believe there still is room for further price revision. We have been focusing on the fuel and material costs so far, but, going forward, we will continue to work on these, as well as reflecting the increase in personnel labor cost as well. We will continue our efforts to improve the optimal price range. Thank you.
Now, the next question, 5G glass antenna. What is the progress of the development status?
Oh, 5G glass antenna. Sure. Well, against the early expectations, 5G is a bit delayed because of the development of 5G millimeter-wave infrastructure. But then our development is progressing steadily. We have been developing glass antenna for over fifty years, and we have many patents in the area.
5G antennas leverage such track record of ours, and also for all the directions of the car, glass antennas certainly ensures very stable communications, and which this is a very unique technology that we have. We will maintain this strength, so running up to 2030, we will get ourselves ready for 5G and 6G introductions.
Thank you. In the interest of time, we will now conclude the Q&A session. Takegawa-san, thank you. Thank you for all the questions. We will now take a 5-minute break. We'll come back at 45 minutes past quarter of 5 to go over the strategy for the architectural glass Asia....
We will now resume the program. The next session is on Asia architectural glass business. President of Architectural Glass Asia Pacific Company, Shigeki Yoshiba, will present.
Hello, everyone. I am Shigeki Yoshiba, president of Architectural Glass Asia Pacific Company. I'd like to give you the overview of the company and the strategy. So this is what I'll be covering today. First, the overview. Architectural glass, not just Asia, but including the Europe and the Americas as well, global architectural glass business overall, and then focus more on the Asia Pacific region, then talk about strategy and target in that order.
So first, architectural glass. For global overall, where does it fit in the AGC Group business? In terms of net sales, JPY 476.3 billion, accounting for a quarter of overall net sales of the group. For architectural glass overall, for the past several years, structural reform efforts have been made, which made positive contributions. We are seeing the profit and the asset efficiency improving.
Now, I'd like to focus more on our Asia business. Within the architectural glass, Asia accounts, Asia's net sales totals JPY 158.4 billion, about a third or so. These are the regions where we have business. Overall, Japan versus Asia is how we divide our business. We do have the headquarters for both.
For Asia, in Indonesia and in Thailand, we have the manufacturing facilities for local business, and also the products manufactured there are being exported to the rest of Asia. The regional headquarters is in Singapore. These are the main products, architectural glass, the raw glass, being processed in many ways to become these products with different functionalities, as you can see here. Through our products, we are to contribute to bringing about the more richer lifestyle, thereby contributing to society.
This is the performance in recent years in terms of sales for Japan. With the progress of the industrial reform, we are seeing a structural change contributing to improvement. We have implemented price revisions in response to soaring raw material and fuel prices, and thereby we successfully established a stable revenue structure.
In Asia, we steadily captured market growth and achieved profit stability in line with the plan following the COVID impact. On the right-hand side, you can see the overall size of our sales in Japan versus Asia. Next, strategy. Our mission, glass for quality life. Through glass quality materials, we are to bring about the enriched people's lives and bring about the social value. The strength of AGC's business, twofold.
One is that we have a robust supply chain based on trust established over a long period of time, and we are providing appropriate supply, supply chain in response to the characteristics of each region that we serve. And in terms of technology, we have a leadership position in the product and process development ability in the world. So high functionality glass developments, represented by energy saving glass, we will be driving these necessary technology developments.
In terms of strategy, on the right-hand side, you can see a measure of strategies, stable cash generation. As a core business, we have this mission, explore and launch new businesses and address environmental issues. These are the three major strategies, and starting from the next slide, I'd like to elaborate on what we are doing in all of these three areas.
First, stable cash generation. To achieve this target, as you can see on the lower side of this slide, we have five measures being implemented, especially the first one, increase high value-added products. In Asia and Japan, for both markets, we are developing market-developing products that suit the different needs in two different markets. So we are addressing the needs, translating that into added value. In Japan, the market structure is as follows.
As you can see at the center, the bar charts, for the last several years, with our competitors, mainly, structural reform efforts have been implemented, so we have a better balance between supply and demand. With this as a backdrop, the appropriate price is now possible. In terms of demands, with the birth rate declining in Japan, the new starts are expected to decline.
But with renovation, higher energy efficiency, energy saving requirements are increasing, which is supporting the overall demand. For Asia, basically, the base demand is expected to continue to grow, especially energy saving and energy generating products are expected to grow in terms of demand, and we will capture that growing demand.
As for new businesses, especially in Japan, the market itself is mature, and therefore, we will be focusing on high added value, high functionality products, as you can see here, so as to enhance our business foundation. And on this slide, you can see some specific examples of the product and process development ability. I'd like to highlight that it's not just a glass business, but in electronics and chemicals, we are combining the technologies in those areas as well to bring about the differentiated products. That is the strength that we enjoy.
Next, addressing environmental issues. Twofold. One is the reduction of GHG emissions in the manufacturing processes. As you can see on the left-hand side, various initiatives are underway. And, the second part is promoting the glass recycling. Collect the used glass to recycle that in order to contribute to circular society.
In terms of glass recycling, they can be molten or melted with less energy compared to the fresh, raw material. Here, we're talking about reducing GHG emissions in float glass melting furnaces, what technologies to be deployed when. One highlight is we have global operation, and so we are addressing the reality of each region and developing the technology that will fit to those specific regions.
We will be horizontally deploying these different technologies to the rest of the world, and that will be a source of strength of our structural glass business. Another aspect of environmental issue is to contribute to energy saving and energy generating through our products. These are the representative products that we are supplying to the market, so that energy saving and GHG emissions reductions in society could be reduced.
Finally, but not least, the target of our business. As mentioned earlier, the structure of the business is now becoming more stable, and added value products promotion is being driven so as to further strengthen the foundation of business for the stable cash generation. That concludes my presentation. Thank you for your attention.
Thank you, Yoshiba-san. We will now take questions regarding the architectural glass business in Asia. If you have any questions, please click on the Q&A button and type in your questions. We'll start with the questions that we received in advance. The advanced window renovation subsidy program is a positive factor. Should we be worried about the temporary profit decline when the subsidy program ends?
You are correct, this subsidy program is not going to continue forever. It's going to be terminated sometime in the future. The energy saving renovation is possible with existing houses. That mindset is to be stimulated, and that is the intent of this subsidy program of the government. So the renovation demand, we expect to continue even after the subsidy program ends. We will make our efforts so that that momentum will be continued. In any event, we can expect certain level of demand to be stimulated as a result of this subsidy program, and to leverage that, we have to make sure we have a sound supply chain and other structure in place.
Thank you. The next question: You plan to expand your sales of high-end, high-value products, but your competition also has similar products. What are your strength and differentiation in Japan and in Asia? Yoshiba-san?
Thank you. Could I share my page 12? Well, this is something that I showed you earlier. Our strength is for different regions that we have business in, we have been there for a long time, and therefore, we have been able to build reliable, rigid supply chains. We understand the characteristics of the markets, and we do have high visibility in those different markets. For example, when a new regulation is being planned, we can have a say. We do have a voice, so that's something we can leverage.
Depending on the characteristics of the markets, we can continue developing the most appropriate products which cater to the needs of those markets. That's the prowess that we have, our differentiator against our competition. We will continue to leverage such strength of ours to solidify our position in those markets. Thank you for your question.
Thank you. Next question, slide 15. Slide 15 indicates that demand in Japan is expected to decline further. So how is this going to be addressed in terms of supply? Are you going to be controlling the imports? The float furnaces in Japan is already at a low level, so how should we consider the possibility of further size reduction?
Thank you. The aging society and a decline in birth rates are expected, and therefore, new housing starts is expected to decline. But in non-residential area, we expect the strong demand to continue. And earlier, there was a question about the renovation demand, and renovation demand we expect to be strong as well, and high value added products. Conventionally, when only one glass was used for the sake of energy saving, it could be double or triple glass glazing. That trend is already taking place, and we are promoting those products.
So given all these factors, regarding the demand in Japan overall, we feel that it will continue to be stable. So the demand decline will be a moderate one, is our expectation. Over a short term, currently, there are some imports, so that could be used as a buffer. So when demand or should demand decline, we can use that portion to respond to the changes, and therefore, over a medium to long term, we do not expect a tough demand situation.
Thank you. Next question. In Asia, you expect the demand to increase. What is your plan on your production structure and systems, including your coating lines? Yoshiba-san?
Thank you. In Asia, float glass lines. We also have furnaces for automotive usage. We have 6 furnaces in total, and usually, the raw glass furnaces produce automotive products, and we have different lines of production for architectural glass. But we do have certain flexibility, and we can switch over what to produce depending on the demands.
So such flexibility can be leveraged so that we can choose the place to best produce what is being demanded, and including the production mix, we make sure that we have the highest efficiency in utilizing our equipment. The coating line that you mentioned, well, in Thailand and in Indonesia, we already have those lines, so coating glass products are being offered out of those plants. So those lines will cater to the local demands with different types of products. Just like the floating glass line, we can maximize the utilization of existing equipment with good planning. Thank you for your question.
Thank you. Next question. What is the impact of glass from China in the Thai and Indonesian market? Yoshiba-san, please.
Thank you for the question. Yes, correct. Chinese players are increasing their production capacity. And as you're aware, currently, the architectural or the construction market in China is slowing down, and therefore, there is a huge glut or a surplus in the domestic market. Still, in the Thai and Indonesian markets, are we seeing a major supply from China?
No, we're not seeing that. And one factor is that in China, the production cost is increasing given the higher fuel and raw material prices, and therefore, their cost competitiveness is declining. And, the transportation cost, the freight cost, I think is another factor, that is preventing Chinese players from entering Thai and Indonesian markets. We don't expect this to change dramatically over time.
So in a nutshell, imports from China in Thai and Indonesia is not disturbing the market. Having said that, market situations may change, so we will continue to get all the necessary information, especially the developments on the part of our competitors, so that we can take actions quickly, should that be needed.
Thank you. The next question, about improvement of profitability. Slide 23, please. Well, Can I have the slide? Thank you. The revenues continue to grow, and you expect it to grow the component of highly valued products. But you do not expect much of an improvement in profitability? What is the difference in profitability between value-add products and more generic products?
Thank you. Well, so the difference between high performance and commodity, the difference in profitability is not something I can discuss with concrete numbers. But naturally, value-add products have higher profitability than commodities. And this slide, well, indicates a slight increase in our ROCE, which might have led to this question.
Between 23 and 26, I'm making a comparison. After this year, in 2024 through 2026, our existing equipment will go through a major overhaul, and therefore, the CE portion is expected to grow. Therefore, the profitability improvement is not reflected fully in ROCE improvement. But of course, this is only temporary. In the mid- to long-term, greater sales of value-add products will contribute to higher profitability. So we'll move to the next question.
Regarding the profitability and asset efficiency improvement, are you considering implementing further structural reform in Japan and Asia? Yoshida-san, please.
Thank you for the question. We have implemented various structural reform efforts in Asia and Japan, and that have come to a certain end, and I think that is the reason why this question is being asked. We'll look at the situation, and we will implement structural reform as necessary. Looking at the current situation, though, there are no specific programs that we need to share with you at this current moment.
Thank you. Let me go on. About the current profitability, is it sustainable? Yoshida-san?
Thank you. The shortest answer is yes, it is sustainable. We have this healthy financial situation, and we will continue to fulfill our responsibility as the market leader, and continue to expand the market for highly valued products, and move into new markets as well. Profitability, as well as foundation of our business, will continue to be solidified. Therefore, I'm sure we can keep this profitability sustainable. Of course, the market changes very drastically, but we will be ready to respond to that, taking various necessary measures so that our business itself will remain sustainable.
Thank you. Next question: What is the demand breakdown between new builds and replacement of architectural glass? If you can talk about Japan and Southeast Asia separately, I'd appreciate it, is the question. Yoshiba-san?
Okay, regarding this question, we cannot show specific figures, I'm afraid. But conceptually, in Japan, the renovation demand is increasing, but still, new builds, new construction demand is the majority. That is for Japan. As explained earlier, we expect replacement or renovation demand to grow, and its significance is expected to increase as well.
For Asia, most of the demand is for new builds, new houses and buildings. The sound, healthy demand growth is currently being observed, and that's for existing buildings. Rather than just replacing the window panes, windows, the replacement is mostly done on the whole building, whole structure basis. So that's the situation for Asia.
Thank you. The next question: In different regions, is there any room for industrial restructuring or consolidation?
Well, thank you. We talked about our structural reform, and it is related to that, I guess. Simply put, at this point in time, we do not see any landscape changes that we have to report to you, but certainly, the competitive landscape going forward will have to be watched over, and we never deny the possibility of the industrial restructuring or consolidation going forward.
Thank you. Next question, in relation to addressing the environmental issues, what are the targets and the challenges regarding the glass recycling, is the question. Yoshiba-san?
Thank you for the question. Recycling of glass. This slide that we're showing right now shows what specifically is being done. In terms of challenges, the glass, the market needs to be collected. And there are many foreign materials that are mixed in that, and that could adversely affect the furnace. And therefore, the glass that is being collected, the quality control is one big issue.
And also, currently, what we call the post-consumer, the used glass, would be collected with the dismantling of the buildings. So that supply chain has yet to be established. So we need to build that supply chain. That's the second challenge. And also, as we collect the glass cullet. The pieces of old glass, when we collect that, the economy has to make sense in terms of the cost of collection. That's another important aspect in promoting the glass recycling.
Yoshida-san, thank you very much. Now it is time to close the questions and answers session. Yoshida-san, thank you very much. Now, we would like to take a 5-minute break. We will start the architectural glass business in Europe and in, in Americas, starting from 5:20 P.M. Thank you.
Davide-san, can you hear me?
Yes. Hello. Hello. We're sorry for the inconvenience about the invitation with the Skype, Zoom.
No issue, please. I'm connected.
Thank you very much. So, right now, we can clearly hear your voice, and also, perfect.
Perfect. Excellent.
Okay, thank you very much.
Well, shall I close the camera?
Yeah, so please put off your camera and please wait for the time comes.
Okay. Thank you very much.
Thank you very much.
In the next session, the original sound source will be partly in Japanese and partly in English. If you would like to listen to all of them in Japanese or English, please click the interpretation button and select the language of your choice.
... Now, let me begin. Architectural Glass Europe and Americas, let me invite Mr. Cappellino, the president of the business.
Hello, everyone. Good morning, good afternoon. I am Davide Cappellino, President of AGC Architectural Glass, Europe and Americas, speaking to you from our European headquarters in Brussels, Belgium. I will go through the presentation, and then leaving enough time for question and answers at the end. Just a quick reminder to locate, and so AGC Architectural Glass within the portfolio of the company, so Architectural Glass represent about 25% of the sales of AGC.
The business has been undergoing quite several actions of restructuring and structural reform that have been improving structurally profitability year over year, and so bringing the business now to a return on capital employed well above 10%. Let's now focus on Europe and America.
So as our business is quite regional, so we, we have in our governance, and so two separate companies, and we'll be addressing now Europe and Americas, that account for about 15% of the total sales of AGC globally. A reminder about our footprint. So in AGC Architectural Glass, Europe and Americas, we are a fully integrated player all along the value chain, and so on the left side, you see our footprint in terms of upstream, and so large glass production facilities.
But we also have a very extensive network of almost 100 sites all across Europe that are represented to downstream, where we process and distribute glass to the final consumers. Our market share, the regions where we operate, is pointed out here on the right of this slide, and so as you can see, we are between 20% and 30% in market share in the markets where we operate. Our products and solutions contribute strongly, and so to the three pillars of the social value creation of the AGC: wellbeing, Blue Planet, and innovation.
So a major contribution is given by the extraordinary thermal insulation characteristic of our products that brings comfort and also energy efficiency for buildings. But we are very much active in many other value-added segments, such as energy generation or advanced type of glass for industrial decorative applications, as well as mastering interaction between communication waves and glass windows.
Our business has been going through some changes, structural changes, and so, mostly in the past few years, we've been exiting the North America market. So this exit has been executed in two steps. So in 2021, we've been selling our glass operations in North America, as you can see in the chart. And the following year, in 2022, we have been transferring the soda ash production.
Soda ash is a major raw material of glass, and we have been selling these, as we exit the region. There has been an additional, structural change in the first month of 2024, which was the exit from the Russian market as a consequence of the current, conflict. AGC is a major, well-established and well-respected player in all the markets where we operate.
We are willing, and to leveraging our strong points, by executing our business policy, which is, the ambition of leading the way in our business, building a better world, and so in terms of sustainability and success for our customers. We want to be the best player in our core businesses, having an impact on the markets where we operate.
We want to continue developing our value chain, and so being an integrated upstream, downstream player, and we want to keep on working and leading the way in terms of innovation, sustainability, and business excellence. What kind of market environment are we facing in Europe?
The glass consumption in Europe is quite stable, and so, it is somewhat, impacted, obviously, like, most other segments, by extraordinary events like COVID, like we saw in 2020, or by the, energy crisis we faced in Europe and consequent inflation and high interest rate. But in general, it is a quite stable demand, and that we expect to continue for the years to come, and that is, expected to grow at approximately 2%, so in line with the GDP growth.
One major element, and so, related to demand in Europe, is linked to the big social evolution in terms of sustainability, and by the acceleration in the sustainability-related legislation in Europe. So as you know, Europe is playing a leading role, and so on the global efforts to reduce emissions, and this cannot be done without addressing over 36% of total emissions that are coming from the management of buildings, meaning heating and conditioning buildings.
So the legislation is extremely aggressive, and so new pieces of legislation and directives will be forcing basically all the buildings in Europe to be renovated in the years to come. So it will be compulsory, and so action will be taken. So as a consequence, we are very confident about the long-term demand in Europe that will be driven by renovation. You can see on the right chart that renovation, which is the blue bars, is now more important than the new constructions, and this is expected to continue for the next decade.
Our strategy is based on three pillars. So we want to lead the path in terms of reduction of emissions, we want to improve the resilience to market fluctuations, that will always happen, and we want to capture opportunity growth.
So focusing on the first pillar, so we are very much leading the way in terms of development of new technologies, and so to be able to reduce emissions, AGC is a leader in this field. We are actively working on the circularity, so recovering and reusing as for end-of-life glass, which is certainly one of the long-term trends that we see in our market. And then we have been leading as well the promotion and production of lower carbon glass.
We are today already commercializing the lower carbon glass that contain more than 40% less carbon emissions than usual glass. To push as for the market and the legislators, it's in offering as for the market this type of products. We also want to improve the resistance and resilience of our market to the economic cycles, and this is mainly done through our integration through the glass all the glass value chain.
We observe that the downstream activities, the red line here, are much less volatile than the upstream activities. A good balanced mix of upstream and downstream are optimizing in the performance and resilience in our business. Opportunity to continue improving our penetration in terms of value-added products.
AGC is recognized in all our markets for being leader in terms of product range. We have the widest product range in the industry, and we can offer to our customers any kind of value-added product that the industry of construction might need. And so as you see, we have almost 50% of our sales are related to high value-added products. And finally, opportunities for growth certainly are there in Europe.
Maybe not in terms of additional quantities, but certainly in terms of mix. And so there is a big trend of substituting the double glazing, which is already standard in Europe, with triple glazing, which requires more glass and more coatings and more advanced coatings.
And then we are the only player that is producing and selling in Europe vacuum insulating glass, which is a very performing and very thin insulating glass produced with a totally innovative technology, which is excellent for renovation of historical buildings. South America is another area where we can grow, and so the market has been growing steadily.
AGC arrived about 10 years ago in South America, and we have already been reaching a market share of about 25%. So we are the second largest player in the region, and still we have opportunities for growth. Once again, not just in terms of volume, but also in terms of value because the market is evolving in terms of better products. And finally, our target is to continue delivering stable performance.
In 2024, we will see the results of the transfer of Russian business, so a decrease in our sales as a consequence of this, but we are confident to be able to deliver continuously, and so a solid return on employed above 10%. How are we generating and allocating as so our cash? So architectural glass is a cash generating unit in the portfolio of AGC.
So our mission in the portfolio is to generate cash. That's what we do every year. Cash is allocated partly to keep and grow our business and to execute the measures that are necessary to make our business sustainable and compliant with the new regulations. But about 50% of the cash generated is transferred to AGC Group to fuel the growth of strategic business or to repay the debt. Here I will stop my presentation. Waiting for your question. Thank you.
Thank you very much, Davide-san. Now, for the architectural glass business in Europe and Americas, we'd like to respond to your questions. You can enter your questions after pressing Q and end button. Now, let's begin with the previously received questions. The first one: What is your view of demand trends in Europe, broken down into new construction and renovation for 2024 and 2025 and beyond? Davide-san, please.
Yeah. So I think this is a very important element, and so this is addressed in slide number 14, where you can see indeed, the evolution of new construction-generated demand, and so which are the gray bars, and renovation-related demand, which are the blue bars. And so renovation is a major trend in Europe, not just for the need of the society, but also for the evolution of the legislation.
So we expect that in the long term, as our innovation will be the driver of the demand in for glass in in Europe. As I mentioned, this will be related to regulations, specific rules and laws. And so we expect that this demand for renovation will be stable in the long term, and it will take decades before all the stock of buildings is renovated in Europe.
So I think this is a major asset for our business in Europe. And AGC is extremely well-placed, and so totally, and so harvest the potential of this demand. First of all, because we have a very extensive footprint as well as raising upstream and downstream.
We are present, and so in basically all the countries in Europe, and through our integrated value chain, we can harvest all the value that will be generated from this demand. And secondly, because we have a very wide range of products, many of them have been developed specifically to address the needs of renovation and the needs of the highly insulating glass that will be installed in Europe in the next decade.
Thank you. Moving on to the next question. On the strategy of strengthening the downstream business, is this a new strategy compared to previous ones, or was the strategy originally within AGC but newly explained externally? If there are any changes, please explain what they are.
Thank you. Indeed, AGC in Europe has been integrated in the downstream for quite a long time. In the past, the driver for integration was to capture captive demand. It was a sort of passive initiative, so fact of having a downstream to be able to secure stable output for our upstream. But in the past few years, with the evolution of the market, the increased demand for value-added products and the growth of demand in several regions in Europe, the mission of our downstream is now completely different. Downstream is not just captive demand, but it's a source of cash generation and profit generation.
We've been undergoing profound transformation in our downstream in the past few years, changing the philosophy of the companies, moving from cost center to profit center, doing structural reforms, consolidation, and closing some units, investing in others, with a active strategic approach on the downstream. As a result of this, downstream has been steadily increasing performance, and today is very strongly contributing to the performance of AGC Architectural Glass overall.
The advantage of being in the downstream is that the downstream is capturing from one side, and so all the value from the customer, but also as explained, as shown in this chart, so it's less volatile to the market fluctuations. Why? Because the price dynamic in the downstream is different from the upstream, with less steep changes. Also, the cost structure is different.
And so the upstream is more fixed cost-based business, and so with large investments and big capital, while the downstream is more agile, lower capital employed, and also we're capable of adapting the cost structure and headcount more, in a more agile way to the fluctuation of the market. As a consequence, the combination of the two today is really optimal, and we believe that the downstream is now playing a strategic key role in the deployment of our business in Europe.
Thank you. Now, let us move on to the next question. About the proportion of highly value-add products. In 2021, in our IR day, 45% was mentioned. So it seems that there has not been much increase in the proportion, but is it difficult to foresee higher growth of value-add products? The proportion did not change because there was high demand for a more generic and commodity products. What is your view on that?
Thank you. Indeed. First of all, let me comment on the fact that in Europe, so the market is already quite developed and mature. The current penetration of coatings and high value-added products is already very much advanced compared to other emerging economies, such as South America, for example. We are already at a very high level of penetration because legislation for thermal insulation has been in place for many, many, many years in Europe.
Meaning that the growth year after year is slower than in other emerging regions. The second element is the fact that, as I commented, AGC is a major player in terms of product range, and so we are very much present, and so already in the value-added products. Meaning that we already take an important slice of the market.
So this being said, indeed, and so the market is still evolving. That's why I mentioned the substitution of triple glazing that is now replacing double glazing, and many other additional features that we are proposing to the market, such as vacuum insulated glass. So we are confident on the possibility to keep on increasing this already very high proportion of value-added products, and most of our investments in Europe now are focused on addressing these kind of specific needs.
We're investing on vacuum insulated glass or advanced coatings. We are increasing capacity on laminated safety glass, and we keep on developing our capability to produce and supply to the market triple glazing. And so that's where our investment strategy is heading. And so we will continue being a leader value-added products in our market.
Thank you very much. We'll move on to the next question. The question is regarding the cash allocation, which is a question for architectural glass overall, so maybe we'll ask Miyaji-san to follow up if necessary. For total architectural glass, you have a large capital investment budget of JPY 35 billion for the current fiscal year. What is it used for? Slide 26 shows 50% of cash generators is planned to be allocated to AGEA, AGEA's capital expenditure.
And page 25 shows EBITDA is assumed to have changed little from 2023 to 2026. I would guess that AGEA's EBITDA in 2023 was around JPY 30 billion. So can I assume that the CapEx of AGEA would be around JPY 15 billion yen, and the allocation to growth of AGC group overall would be around JPY 15 billion yen? So that is the question. Davide, could you first try to answer that question?
Absolutely. So I will speak specifically about AGEA. So indeed, so you see on the slide the principle, so that we want to allocate about 50% of our cash generation to our business. Now, this percentage can change year after year, because in our business, so usually glass production furnace requires very low CapEx, as well during the useful life.
But then after several years, maybe 15 or 18 or 20 years, the furnace need to be redone, so there is a spike of CapEx need. So meaning that the need for CapEx is not flat, completely flat year over year. So there might be some fluctuations. So you mentioned some fluctuations next year, we might have coexistence of some projects like this.
Also, we are allocating the resources to the launch of the first pilot hybrid furnace in Europe, which is the world's first innovative facility that will be indeed is under construction now, that we start the production at the beginning of next year. I will leave maybe Miyaji-san, if he wants to comment on the global architectural glass.
Thank you very much, Davide-san. Miyaji-san,
Miyaji-san, anything to add? Architectural glass for Japan, Asia. The upstream was as covered by Davide. The asset efficiency is not very good, the upstream, and therefore there is almost no plan to increase the upstream portion. But for downstream, investment efficiency is good. There are growth opportunities, and will contribute to the profit stability as well. So in Japan, Asia as well, investment CapEx for downstream should be made to improve ROCE.
So in terms of major investment, it's not a big one, but those are some of the investments that we will be making. And as Davide said, from time to time, for maintenance of the furnace, there will be periodic peaks. That will be all for me. Thank you. Thank you. Let me go on to the next question. This is about South America. You seem to expect demand to increase by a CAGR of 2.2% in South America. Do you expect to increase the number of furnaces? Any new installations planned?
So the Brazilian market, South American market in general, has been increasing so quite steeply in the past 15 years. And so we have been increasing capacity, and AGC has been participating to this growth by installing large units with 2 floors, and we are capturing, as I mentioned already, more than 20% of the market in Brazil.
The market keeps on growing, but for the moment, we don't see there is no announcement or no concrete plans, and so to increase the capacity in the market. I think the potential of growth from the South American market is not just coming from additional tons, but from the evolution of the mix, and that's what we want to address now. So Brazil is still an emerging glass market with-...
Compared to Europe, for example, very simple product mix, and is evolving as well with the higher penetration of coatings, with development of decorative products. And so our strategy for the moment is focused on grasping as for this additional value and evolution of product mix.
But we will follow, of course, closely and carefully the evolution of total demand, so to make sure that we can keep our relevant presence in the market. But for the moment, there are no announced plans by us, by our competitors of capacity increase.
Thank you very much. Next question. In GHG emissions reduction, you commented on the development of hybrid furnaces. How should we expect the production manufacturing costs to change as these are deployed? Could you tell us how the cost of raw materials and fuels as a percentage of the overall cost might change together with what the current situation is? Davide?
Yeah. Absolutely. So, if we focus on Europe, but we know that somehow the evolution of legislation of Europe will eventually impact all the other countries and regions. So, this statement might be soon, so also applicable to other regions. But in Europe, since a few years, we have another important cost element, which is the cost of emissions, because taxation of emissions is now starting to be a cost element that we start to see in cost structure. And so the development of hybrid furnaces is addressing exactly this.
And so we want to reduce emissions to fulfill our duty as a social player, but also to optimize our cost structure by reducing, so the cash out due to these taxes. Hybrid furnaces are doing this because they are really dramatically reducing, so the emissions by more than 50%, and so, achieving big savings on the, present and future taxation of, CO2. The other thing that hybrid furnaces are doing is that a hybrid furnace is about switching the energetic dependence from fuel and gas to electricity.
And so, the access to, competitive, renewable electricity is a major element, in the strategy of, hybrid furnaces. And specifically in Europe, we see now more and more abundance, so of very cost competitive, renewable electricity, which is allowing us to keep this kind of, furnaces, competitive. Of course, it's an evolving economy, and so it's an evolving, market and legal environment, so we're closely following this.
We are the first in the industry to launch a full-scale commercial size hybrid furnace. We will be learning many things, and then we will deploy it, this technology, step by step, depending on the evolution of the legislation and also on the evolution of the cost factors, making sure that we are translating this innovation into increased competitiveness in our business, like the regions where we'll be deploying this technology.
Thank you very much. This is going to be the last question. Going forward, in architectural glass in Europe and America, do you plan any further restructuring of your organization, Davide-san?
Yes, our business has been undergoing, as I mentioned, very big and so structural reforms. So we've been exiting the North America market, and then most recently, more recently, we have been exiting the Russian market. And so these changes have been affecting structure, and so the footprint of our business. We don't have any plan of such major change, such as abandoning or changing our presence in a specific region or segment.
And so we don't have any structural plan like this. Certainly, as an industry, we keep on addressing the competitiveness every single day, and so we want to be leaders in efficiency. So with the big footprint that we have, we keep on working on a daily basis on addressing continuous opportunities, and every single day and every year, so we are optimizing our footprint. To message, no major structural reforms, but we are every year, so combining footprints or doing some optimizations that are year after year, making our cost base and our footprint more efficient.
Thank you very much, Davide-san.
Thank you very much.
QA session is over. So, ladies and gentlemen, thank you very much for participating in AGC's IR Day, day one. When you close the Zoom screen, you will be guided into the feedback screen. You can fill it out in about five minutes. Your input is appreciated to improve our investor relations activities. If you have any questions, please call 03-321-85096. 03-321-85096. Thank you for your participation.