Teijin Ltd

TSE:3401

Earnings Call Transcript 2020-Q1

[Yoshihisa Sonobe, executive]

This is Yoshihisa Sonobe speaking. Good afternoon. I will be using the slides in my presentation. First, the overview of the results for the first quarter of fiscal 2019.

Please turn to Slide 3. So as to help you better understand the changes in the operating income, here, we are showing the results on a quarterly basis. Operating income for the first quarter fiscal 2019 was down 7% compared to the same period of the previous year. But as you can see from this chart, it represented a significant recovery quarter-on-quarter, reflecting a recovery from last year's bottom. By segment, in materials, the material market condition, particularly the polycarbonate market condition deteriorated rapidly beginning in the second quarter of fiscal 2018, causing a decline in the Material segment. In addition, the productivity in CSP, Continental Structural Plastics Holdings, a U.S. subsidiary, deteriorated in the second and the third quarters of fiscal 2018. Due to these combined factors, the performance of materials fell year-on-year. However, the productivity of CSP itself has recovered since the fourth quarter of fiscal 2018 and has stabilized. In health care, sales were consistently strong, driven primarily by CPAP and FEBURIC. In the fourth quarter, healthcare profit tends to be slightly lower than in other quarters due to the accumulation of the end of the fiscal year expenses. In the absence of such special factors, the first quarter posted a significant recovery quarter-on-quarter.

Slide 4 shows performance highlights, a year-on-year comparison. As explained earlier, the operating income for the first quarter was down 7% or JPY 1.3 billion year-on-year. However, the amount of operating income itself accounted for 28% of the full year forecast of JPY 60 billion announced in May, indicating a very steady progress against the full year outlook. In terms of the elements of operating income, the polycarbonate market plunged after soaring up to the first quarter of last year. And accordingly, the operating income decreased compared to the same period of last year. Aramid Fibers, on the other hand, remained extremely robust, thanks to the penetration of price increases from the second half of last fiscal year. The healthcare segment also continued to perform well. Another positive was the recovery of the productivity in CSP. As a result, operating income showed steady progress vis-à-vis the full year outlook. However, profit attributable to owners of parent decreased by (sic) [ to ] JPY 10.8 billion or 44% from JPY 19.5 billion in the same period of the previous fiscal year. One of the factors for this decline was the deterioration of non-operating items due to the foreign exchange effect. Gain on exchange rate was recorded in the previous year, whereas some exchange rate loss was recorded this fiscal year.

Also there was a deterioration of extraordinary items, as will be explained in more detail later. In the previous year, we recorded extraordinary gains, whereas this year, we recorded extraordinary losses. Due to these factors, the profit attributable to owners of parent decreased to JPY 10.8 billion. I will explain in more detail in Slide 5. Net of non-operating items was plus JPY 2.9 billion in the previous fiscal year, whereas it was minus JPY 100 million this year, a deterioration by JPY 3 billion. As for extraordinary items, extraordinary gain of JPY 4.9 billion was recorded in the previous year, whereas this year, an extraordinary loss of JPY 1.8 billion was recorded, a deterioration of JPY 6.7 billion. With the additional effective of tax, profit attributable to owners of parent decreased by JPY 8.7 billion, but ROE was 10.6% for the first quarter as compared with the medium-term goal of maintaining 10%. Also, ROIC based on operating income was 10.3% as compared with the goal of maintaining at least 8% while running the business. EBITDA was JPY 29.4 billion, representing a progress of over 25% against the initial full year outlook of JPY 115 billion. CapEx increased over the same period of the previous year. The main factor was the capital investment in the carbon fiber plant in North America. As for PL exchange rate assumptions for the first quarter, the yen depreciated slightly against the U.S. dollar while appreciating against the euro year-on-year.

Slide 6 describes nonoperating items and extraordinary items. Nonoperating items include many ups and downs as they are shown in accordance with the income statement presentation. Please be reminded that the net of exchange rate gains and losses is the net of gain or loss on valuation of derivatives and foreign exchange gains or losses. In the first quarter of fiscal 2018, a gain of approximately JPY 2 billion was recorded, while in the first quarter of fiscal 2019, a loss of approximately JPY 200 million was recorded. During the first quarter of the last fiscal year, the dollar appreciated slightly, so a gain was recorded. As for extraordinary items, there were almost no extraordinary losses in the previous fiscal year, while there was a gain from settlement received. As a result, the net of extraordinary items was plus JPY 5 billion in the last fiscal year. This year, JPY 3.4 billion was recorded as business structure improvement expenses. This was in relation to the transfer of the film business to Toyobo Company Limited. As the decision of the sale was made during the first quarter, related expenses were recorded as a loss for the first quarter.

As the scheduled closing date is October 1 of this year, the gain on the sale and its impact are to be recorded in the third quarter. Impairment loss was in relation to impairment of idle assets and others. We recorded gain on the sale of investment securities. As per the governance code and our policy declared in the securities report, we have reduced cross shareholdings and sold some securities for which the meaning of cross-holding had been lost.

Next is the financial position, the balance sheet. Please turn to Slide 7. First, the total assets, a comparison between the end of March 2019 and the end of June 2019. Total assets decreased by JPY 18.1 billion. This was due to the appreciation of the yen. As you can see at the lower right, the exchange rate changed from JPY 111 to the dollar to JPY 108 to the dollar. Impact of foreign exchange was JPY 9.1 billion. As shown in the lower-left graph, as trade receivables were recovered and reduced, working capital decreased. The impact was also reflected in cash flow. Operating cash flow in the first quarter of fiscal 2019 increased year-on-year, despite lower profit attributable to owners of parent, due to a reduction in working capital. Free cash flow also increased compared to the previous year.

Slide 8 shows changes in net sales and operating income by segment. Most of the explanation so far has been compared with the same period of the previous fiscal year. But here, we are comparing with the previous quarter, the fourth quarter of fiscal 2018. First is operating income. The right-most column shows quarter-on-quarter differences. For Materials, operating income for Q4 FY '18 was JPY 6.2 billion and was JPY 6.4 billion in Q1 FY '19, an increase of JPY 200 million. Sales of Aramid Fibers was strong, and as the product inventory became thin, we controlled sales slightly, resulting in a decline in sales volume slightly. In the polycarbonate resin related businesses, although market conditions generally deteriorated, by increasing the ratio of compounds in the product mix, we successfully made up for that decrease and secured a slight profit increase. Operating income for healthcare was JPY 42 billion (sic) [ JPY 4.2 billion ] in the fourth quarter and increased to JPY 10.5 billion in the first quarter, up JPY 6.3 billion. This was because various expenses accumulated in the fourth quarter, as is generally the case with healthcare business. Furthermore, FEBURIC performed extremely well in the first quarter. Overall, the profit increased by JPY 6.3 billion quarter-on-quarter.

Starting with Slide 9, we are showing the overview of each business. First is the Material segment. In the Materials business group, while raw material market conditions worsened year-on-year, high-performance materials saw steady performances. As for Aramid Fibers, as was explained during the fiscal 2018 full year earnings briefing, revisions to the selling price and improvement of product mix contributed positively to profit. As for carbon fibers, expenses related to the new plant in the U.S. increased. Regarding polycarbonate resin products, an area where I presume many of you are interested in, commodity products were impacted by a significant drop in sales prices beginning from the second quarter of the last fiscal year, but sales of high value-added polycarbonate products supported earnings. Although market price spreads were worse than in the previous quarter, these factors helped to maintain profit level. In the Polyester Fibers & Trading and Retail business group, sales of apparel products struggled due to domestic market conditions. However, industrial textiles and materials were relatively strong, and sales increased.

In the composites and others, although the U.S. automobile market, in general, did not increase sales, especially for passenger cars, CSP's mainstay segment, pick-up trucks and SUVs remained firm in North America. Helped also by the rollout of Jeep and other models, CSP's sales increased.

Next is the healthcare segment. Mainstay products, particularly FEBURIC, continued to see strong sales. Sales expanded steadily for FEBURIC. In the Home Healthcare business, rental volume for CPAP ventilators increased.

In the Others segment, mainly IT business, the Infocom Corporation has already announced financial results and reported a profit increase. And the electronic comic distribution services performed well as well. As a run-up to the consumption tax hike, the IT service business for hospitals posted stronger results than we had expected. These are the qualitative overview of the businesses.

Let me now turn to EBITDA and go over the variance analysis. Slide 12 might be a bit hard to follow. So please turn to Slide 13, which shows changes in EBITDA by segment, a year-on-year comparison.

First, the Material segment, JPY '17 billion in fiscal 2018, down to JPY 15.2 billion in fiscal 2019, a decrease of JPY 1.8 billion. Main factors were sales price and mix and raw material and fuel cost. Impact of difference in sales price and mix was positive for Aramid Fibers and negative for polycarbonate resin and others, while the impact of difference in raw material and fuel cost was positive for polycarbonate resin and others. However, the net variance between the resin sales price and the resin raw material price was negative, given the significant deterioration of the market conditions compared to the same period of the previous year. But this was canceled out by the higher unit prices, particularly for Aramid Fibers following the price hike, and so the overall effect was net 0. The net impact of difference in volume was slightly negative related to polycarbonate resins and film products. Polycarbonate resins and film products, in particular, felt the impact of automotive and electronic components being affected by the slowdown in China and the overall slowdown in the automotive industry. As a result, sales volume decreased slightly.

Others, the CSP and Aramid Fibers. This difference came mainly from the increase in expenses. Labor expenses were the main cause for the increase in expenses for CSP and Aramid Fibers. Healthcare, as a whole, was slightly positive. Main factors for the variance was the volume differential for FEBURIC, CPAP and others. FEBURIC increased domestic sales and overseas sales as a whole. CPAP also remained steady.

Next, outlook for fiscal 2019. Please turn to Slide 15. First, I would like to go over the key financial indicators. Under the medium-term management plan, for which this is the final year, targets set are ROE of 10% or higher and the ROIC based on operating income of 8% or higher. As discussed earlier, in connection to the first quarter results and the full year outlook, we are confident in achieving these medium-term goals. As for EBITDA, the full year forecast announced in May estimates JPY 115 billion. The first quarter result was JPY 29.4 billion, representing a steady progress against that forecast. While we are keeping our initial forecast, we will continue our efforts to achieve our medium-term target of JPY 120 billion.

Slide 16 shows the outlook for fiscal 2019. Net sales outlook has been revised, while the operating income outlook remains unchanged. The main reason for the net sales outlook revision is the transfer of subsidiaries for film business. We incorporated the effect of the de-consolidation. Another factor is the review of exchange rate assumptions. We expect exchange rates to move towards the yen's appreciation. As shown at the bottom, we expect the yen to appreciate both to the dollar and the euro. Taking into account the negative impact of that exchange rate assumptions and also taking into account some positive factors, we have revised net sales outlook downward by about JPY 10 billion. However, the outlook for the operating income and the profit attributable to owners of the parent remain unchanged. Although there will be some impact from the de-consolidation of the film business subsidiaries, the overall outlook has not been changed in light of the strong sales of Aramid Fibers and FEBURIC and the improvement in CSP.

We have revised upward outlook for the first half, but as there are so many uncertainties for the remainder of the year, we are not changing the full year outlook.

In summary, a slight upward revision for the first half, downward revision for the second half and no change to the full year outlook.

Some topical updates on transformation strategy and new business. Projects are progressing steadily in the mobility area, centering on composites business. One is the adoption of Sereebo, a carbon fiber reinforced thermoplastic, or CFRTP, in General Motors' new models of pick-up trucks, including GMC Sierra Denali. This is the first adoption of CFRTP in mass-produced vehicles.

Another topic in the automotive composites business is the acquisition of Benet Automotive in the Czech Republic. This company's primary business is carbon fiber composites, but we will turn it to be the center of overall composites business as a Tier 1 supplier. The company has a track record of supplying as Tier 1 supplier to main OEMs in Germany. And as we've announced in a press release, CSP Victall, a joint venture in China established between CSP and Victall, will start supplying advanced composites to a Chinese motor company.

In the health care area, as we have already announced in the press release, clinical trials of cardiovascular repair patches have begun based on the expertise of Osaka Medical College and the technologies of Fukui Tateami Company Limited and Teijin's polymers and materials business. This approach represents development efforts in the integrated area of our healthcare and materials segments. In addition, as new business in health care, we entered into consignment agreement with AMED, Japan Agency for Medical Research and Development, to develop drugs for frail, a state of reduced resilience to stress as a result of aging. Teijin will take steps to develop preventive and therapeutic drugs for frail.

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