Teijin Ltd

TSE:3401

Earnings Call Transcript 2019-Q1

[Kazuhiro Yamamoto, executive]

Good afternoon. This is Kazuhiro Yamamoto, Executive Vice President, Representative Director of the Board and CFO.

Thank you for your continued support. I would like to brief you on the results of fiscal 2018 first quarter and outlook for fiscal 2018 using the slides. Please turn to Page 3. The summary of the operating results for the first quarter. Net sales were JPY 216.4 billion, up 9.1% year-on-year. Sales increased in the materials business field due to firm sales in each business, and that was the largest factor.

Operating income decreased from JPY 19.1 billion to JPY 18.3 billion, down 4.7%. Last year, we recorded consideration for the licensing out to Merck & Co., totaling around JPY 3 billion. Mainly due to the absence of this onetime income in pharmaceuticals, operating income declined year-on-year.

Profit attributable to the owners of the parent was JPY 19.5 billion. There were a net gain on foreign exchange and extraordinary items, which contributed to the significant increase year-on-year.

Moving on to operating results year-on-year comparison. Please turn to Page 4. Net sales increased by JPY 18.1 billion or 9.1%. Operating income was JPY 18.3 billion, down 4.7%.

Nonoperating items. As will be explained later, net gain on foreign exchange totaled about JPY 2 billion, which greatly contributed to the significant increase.

Ordinary income was JPY 21.2 billion, up JPY 1.2 billion or 5.8%. Among the extraordinary items, net positive of JPY 4.9 billion, owing to onetime income, an improvement of JPY 5.4 billion. Profit attributable to owners of the parent was JPY 19.5 billion up JPY 6.5 billion -- or JPY 6.1 billion or 45.4%.

With an increase in profit for the period, ROE improved significantly to 19.5%. As for CapEx, year-on-year, we are aggressively increasing the investment, up JPY 3.1 billion. Depreciation and amortization totaled JPY 11.6 billion, up JPY 0.5 billion, R&D expenses remained unchanged almost year-on-year.

Moving on to nonoperating items and extraordinary items, Page 5. As for nonoperating items, I'd like to draw your attention to the nonoperating income gain on valuation of derivatives, JPY 2.9 billion and among nonoperating expenses, foreign exchange losses totaling JPY 0.9 billion.

As for gain on valuation of derivatives, we hedge U.S. dollar-based borrowings and so this is how it is represented. But on a net basis, we recorded the foreign exchange gain of about JPY 2 billion. Nonoperating items totaled positive JPY 2.9 billion. As for extraordinary items, settlement received totaled JPY 4.5 billion recorded as onetime income in the first quarter. Accordingly, extraordinary items totaled JPY 4.9 billion, an improvement of JPY 5.4 billion.

Next, financial position, Page 6. We are comparing to the end of March 2018. Total assets were JPY 1,028.1 billion, up JPY 46.1 billion. Liabilities totaled JPY 604.7 billion, an increase of JPY 30.9 billion. Interest-bearing debt increased by JPY 41 billion. With an increase in net profit for the period, net assets increased by JPY 15.2 billion to total JPY 423.4 billion.

Changes in total assets are shown at the bottom left. Cash and deposits, plus JPY 28.1 billion, which correspond to the increase in interest-bearing debt.

With enhanced autonomy and independence granted to Teijin Frontier, the intragroup lending has been switched to external financing. Accordingly, for the group overall, both cash and deposit and interest-bearing debt increased as of the end of the first quarter.

Notes and accounts receivables trade increased with an increase in sales. Inventory, up JPY 9.9 billion with some seasonality. Tangible assets and intangible assets increased by JPY 5.9 billion with new acquisitions, resulting in total assets at JPY 1,028.1 billion.

As for cash flows, compared to the first quarter of fiscal 2017, investing cash flow was smaller in fiscal 2018. This is because last year's amount included investments made in relation to the withdrawal from the Home Healthcare business in the U.S., without which it would have been about the same year-on-year.

With an increase in profit, operating cash flow improved and the free cash flow turned positive. With an apparent increase in external financing, as mentioned earlier, financing cash flow was positive JPY 26.8 billion. Net increase or a decrease in cash and cash equivalents increased by JPY 29.2 billion.

Next, changes in EBITDA. Please turn to Page 7. In fiscal 2017 first quarter, EBITDA totaled JPY 30.3 billion coming from operating income, JPY 19.1 billion; depreciation and amortization, JPY 11.2 billion. In fiscal 2018, operating income was JPY 18.2 billion, down JPY 0.9 billion. Depreciation and amortization was up JPY 0.4 billion in the meantime. And therefore, EBITDA decline was kept to around JPY 0.4 billion.

Year-on-year, the absence of upfront payment as consideration for an outlicensing totaling JPY 3 billion was the big profit declining factor year-on-year.

Sales volume. Fabric and pharmaceuticals, Home Healthcare and materials all performed well, resulting in plus JPY 3.5 billion.

Sales price and mix and raw material and fuel cost. Sales price and mix, plus JPY 1.5 billion. This included impact of downward revisions to NHI drug prices and medical fees, which were absorbed to be net positive.

In the meantime, centering on materials. Material and fuel cost is increasing year-on-year. Although our fuel cost is not directly linked, crude oil price rose from $56 last year to $70 this year, resulting in material and fuel cost differential. Sales price and mix for the entire group is at the level that warrants attention. With foreign exchange impact, the result was JPY 29.9 billion.

Changes in EBITDA by segment compared with fiscal 2017 first quarter, Page 8. Materials, JPY 15.8 billion up to JPY 17 billion; and operating income, JPY 8.2 billion up to JPY 9 billion. Sales volume was strong in all fields, particularly resins.

In the meantime, there was a negative impact of maintenance turnaround for aramid fibers but this was absorbed, resulting in increase in profit. Sales price and mix, plus JPY 3 billion, as higher raw material fuel cost were transferred to selling price. This increase was large enough to cancel out negative JPY 2 billion in raw material and fuel cost differential.

In healthcare, JPY 14.5 billion down to JPY 12.9 billion. Operating income was down by about JPY 1.9 billion. Mostly, this was due to the absence of consideration for licensing out in fiscal 2017, totaling JPY 3 billion.

Home Healthcare was affected by NHI drug price and medical fee revisions, minus JPY 1.5 billion. The negatives totaled JPY 4.5 billion, which could not be made up for by higher sales volume and therefore, some negatives remained.

Page 9., operating results by segment compared with fiscal 2017 first quarter. Net sales for materials increased with strong performance in an all fields of material business group, Polyester Fibers & Trading and Retail business group and composites. Healthcare net sales declined due to the absence of the consideration payment in fiscal 2017. As for operating income, materials were up, healthcare was down for a total of JPY 18.3 billion, down JPY 0.9 billion.

Next, results by segment, page 10. In materials, net sales increased due to strong sales in each business. Earnings increased mainly due to an improved sales mix for polycarbonate resin products. In Polyester Fibers & Trading and Retail business group, sales for use in automotive materials were slightly sluggish in Industrial Textiles and Materials, due partly to prolonged new facility start-up and a delay in product qualification.

In composites, sales of lithium-ion battery separators for consumer applications were sluggish in the first quarter despite various actions to promote adoption.

Moving on to healthcare sector, Page 11. Operating income declined, reflecting the NHI price revisions and the absence of the upfront repayment made in fiscal 2017.

Despite sales expansion and larger sales volume for fabric and pharmaceuticals and CPAP in healthcare primarily, negatives could not be made up for.

Page 12. In others, IT business delivered a solid performance. For others, operating income was down year-on-year, due to factors other than IT in relation to demand.

Moving on to outlook for fiscal 2018. Please turn to Page 14. Basically, no change from the outlook announced on May 9. We tried to maintain the assumptions in the previous outlook as much as possible.

More specifically, for the second quarter onward, crude oil price, originally assumed to be $65 per barrel, is now currently $72 per barrel and so there is a risk that the full year, it will reach $70 on average. So the favorable conditions for the first half might be moderated somewhat. So full year operating income forecast has been kept. That's the basis of the new outlook.

ROE and EBITDA forecast are as shown on Page 14. Especially for EBITDA, no change has been made.

Page 15, summary of the outlook for fiscal 2018. Net sales, JPY 880 billion, which is JPY 10 billion higher than the previous outlook. Centering on materials, higher sales are expected in relation to exchange rate and higher material and fuel prices.

Operating income, as was mentioned earlier, JPY 70 billion for full year. In light of increasing raw material and fuel cost in the second half and the possibility of a price transfer not proceeding as expected, we are projecting JPY 70 billion on a full year basis.

As for ordinary income and net profit, first quarter saw a gain on foreign exchange totaling around JPY 2 billion, and we expect some to remain on a full year basis. With that, ordinary income has been raised by JPY 1 billion at JPY 71 billion; profit attributable to owners of the parent, JPY 47 billion, up JPY 1 billion.

With an increase in net profit, ROE is now estimated at 11.4%. Other forecasts basically remain unchanged from the previous outlook.

As for assumptions. Exchange rate, JPY 110 to the U.S. dollar. And average Dubai crude oil price, $70 per barrel. These are the basis of outlook for fiscal 2018 in terms of raw materials and fuel prices. Dividends forecast remain unchanged. Interim dividend of JPY 30 per share and year-end dividend of JPY 40 per share, including a commemorative dividend of JPY 10 for our founding centennial, for an annual dividend of JPY 70 per share.

Later, I will explain the decision we made today on share buyback.

Page 16, changes in EBITDA compared with fiscal 2017. Basically, no change from the previous outlook factor-wise. We assume negatives in raw material and fuel cost to be made up for through improvements in sales volume, sales price and mix and foreign exchange. So no major change from the previous outlook.

Changes in EBITDA by segment, as shown on Page 17, no major change from the previous outlook. Materials, up from JPY 65 billion to JPY 69 billion. Negatives from higher raw material and fuel cost than previous forecast to be absorbed elsewhere to achieve the originally forecasted amount of JPY 69 billion.

In healthcare, similarly, from JPY 47.2 billion to JPY 46 billion, no change from the previous outlook.

Page 18, difference from the previous outlook. Deterioration in raw material and fuel cost of JPY 2 billion is to be absorbed through sales price and mix, foreign exchange and other expenses reduction to achieve the original outlook.

Page 19, key financial indicators. For EBITDA and ROIC, basically no change from the previous outlook.

Page 20, changes in net sales and operating income by segment year-on-year. Net sales are to be higher for materials and little change for healthcare. As for operating income, higher for materials and lower for health care for a total of JPY 70 billion.

Page 21, comparison with the previous outlook. As mentioned earlier, net sales for materials are to be JPY 10 billion higher than the previous outlook. Other than that, no major change.

Outlook for fiscal 2018 by segment. Basically, no change from the outlook announced on May 9. Higher for materials -- higher sales and operating income, that is. And for healthcare, no change in sales and lower operating income.

Page 23, Transformation Strategy: Progress and Outlook, which we report at each briefing. There were some progresses made during the first quarter, as has been announced, respectively. In materials, in composites, we decided to add compounding capabilities in Europe. And in healthcare, in functional food ingredient, to follow up on the enhanced barley product -- barley mix, we entered into exclusive marketing agreement with a Dutch food materials manufacturer.

These were the major developments during the first quarter. As for nonfinancial information, basically, no change.

Page 24. Teijin Group is taking active steps on SDGs so as to make greater contribution to society in a continuous manner while growing the business.

Page 25. In terms of initiatives to achieve the SDGs, as has been announced already, insect-repelling material, SCORON, which has been marketed for quite some time now, was selected as a project for the feasibility survey for SDG's business of JICA.

Page 26. In terms of new developments in ESG external evaluation, Teijin has been selected for inclusion in the competitive IT strategy company program as a company promoting the use of IT. We are committed to making continuous effort for social contribution and business expansion.

Lastly, but not the least, our share buyback initiative announced today, August 1. We disclose this as a timely disclosure. The reason for the repurchase is to implement flexible capital management policies in response to changes in the business environment. The type of stock to be acquired is common stock. The total number of shares to be acquired, up to 11 million shares. And total value of shares to be acquired, up to JPY 20 billion. Acquisition period is from August 2 to November 30. In line with this timely disclosed decision, we will execute the repurchase.

That concludes my presentation. Thank you for your kind attention.