Teijin Ltd

TSE:3401

Earnings Call Transcript 2022-Q1

[Akihisa Nabeshima, executive]

Good evening. This is Akihisa Nabeshima, the CFO. Thank you for joining us today. I would like to go over the results of fiscal 2021 first quarter and the full year outlook for fiscal 2021.

Please turn to Page 1, where you can see the key points of this earnings report. First, the results for the first quarter. Thanks to the global economic recovery from the impact of the COVID-19 pandemic and the transfer of sales rights of diabetes treatments from Takeda Pharmaceutical Company, EBITDA increased 32% year-on-year at JPY 33.9 billion, representing a 26% progress of the full year forecast of JPY 130 billion. Operating income increased 37% year-on-year at JPY 17.3 billion, as shown in the right graph, representing 29% of the full year forecast of JPY 60 billion. The fiscal year thus made a very smooth start. Both net sales and operating income exceeded the pre-COVID fiscal '29 (sic) [ 2019 ] levels.

As shown in the right graph, the sum of operating income from the Materials segment and the Healthcare segment, more than doubled year-on-year, which came from the increased sales volume in all subsegments in the Materials segment and the sales of diabetes treatments having made a good start, as well as continued firmness in sales in pharmaceuticals, centering on FEBURIC and Home Healthcare equipment rentals, such as HOT oxygen concentrators and CPAP for sleep apnea, continuing from the last fiscal year. These contributed to more than double income or double increase.

Profit attributable to owners of parent increased 72% at JPY 9.8 billion on increased operating income and a lower tax burden rate than in fiscal 2020 first quarter, resulting in an increase of 72% at JPY 9.8 billion. As for the outlook for the full year, while the previous outlook announced in May expected sales and profits to increase year-on-year, we have revised sales outlook upward to about JPY 900 billion, in light of strong results in the first quarter. The annual dividend forecast remains unchanged at JPY 55 per share.

Page 2 shows key assumptions regarding the company's main target markets. As for aramid, automotive felt the impact of a semiconductor shortage, but demand remained strong primarily in relation to tires and rubber materials. We expect this level to be maintained in the second quarter onward. Regarding industrial materials, demand recovered to the 2019 level and remained stably high, primarily in relation to optical fiber applications. We expect demand will remain firm.

As for resin, during the first quarter, due to semiconductor shortage, some customers lowered their operation rates. We expect this concern to continue into the second quarter, but we expect a recovery in the third quarter onward. Still, uncertainties remain. As for carbon fibers, demand for air travel recovered, mainly in domestic routes and supply chains moved to secure the necessary inventory. We expect this trend to continue in the second quarter onward.

As for composites, automotive felt the impact of semiconductor shortage in the first quarter and the production output was below the forecast as well as the fiscal 2019 level. For the second quarter onward, the impact of semiconductor shortage is expected to continue, but will gradually diminish. We, therefore, expect the impact on SUVs and pickup trucks to be limited and we expect the production output to increase to exceed the fiscal 2019 level. Automotive demand remains strong and we expect the production at OEMs to recover gradually in the second half onward.

In the Healthcare segment, in Pharmaceuticals, the market for gout and hyperuricemia treatments grew continuously. There was a shift to strengthen e-promotion due to COVID restrictions on in-person visits to healthcare institutions, continuing from last fiscal year. As we clearly see explosive growth of infections, we expect COVID impact to continue in the second quarter onward.

In Home Healthcare, in home oxygen therapy, HOT market, a decline in the number of hospitalized patients accelerated a shift to Home Healthcare, continuing from last year. The market for CPAP device rentals grew strongly despite a slow increase in the number of patients undergoing examinations due to COVID. In New Healthcare, a certain number of surgeries involving orthopedic implantable devices were postponed due to COVID in the first quarter. We expect this to continue in the second half, but will gradually moderate.

In Fibers & Products Converting, in Fiber Materials and Apparel, sales of apparel at department stores and mass merchandisers remained sluggish due to the state of emergency declaration. But apparel sales related to stay-at-home demand were strong, with working from home becoming a norm. And we expect the same trend for the second quarter onward.

As for Industrial Materials, there was a recovery in automotive applications and the water treatment filter-related market remained firm. We expect a similar trend to continue in the second quarter.

As for medical protective equipment such as gowns, there was a government demand last year. But this subsided in the first quarter, and we do not expect much change in the second quarter onward. However, given the current explosive growth of infections, the situation remains to be seen.

Regarding IT, piracy websites continue to affect e-comics services from the fourth quarter of last fiscal year, but we expect this to come to an end during the first half of the year. Based on past experiences, we expect the impact to diminish in less than 1 year.

We will now look at the details of the first quarter results. And I give the floor to Junji Kitahama, Deputy CFO.

[Junji Kitahama, executive]

Good evening. This is Junji Kitahama, Deputy CFO. First, the results for the first quarter, Page 6, the highlights. Net sales increased significantly year-on-year at JPY 225.9 billion from firm sales in each segment and the revision of selling prices in response to a sharp rise in raw materials prices in the Materials segment and others. Operating income also grew significantly at JPY 17.3 billion, despite a drop in the government demand for medical protective gowns, thanks to sales volume increase in the materials and the contribution of diabetes treatments and others. This exceeded the fiscal 2019 level as well. Profit attributable to owners of parent increased significantly, up 72% at JPY 9.8 billion, mainly due to lower tax burden rates year-on-year, coming from improvements in loss-making subsidiaries and equity in earnings of affiliates.

Page 7, operating summary. Profit and loss were as explained earlier. ROE and ROIC based on operating income were 9.5% and 8.7%, respectively, exceeding the annual targets. EBITDA was JPY 33.9 billion, representing 26% of the annual forecast of JPY 130 billion. CapEx and depreciation are shown on the right. Year-on-year, CapEx increased by JPY 136.9 billion, and depreciation and amortization by JPY 3.6 billion. Main factor being the takeover of the sales rights of diabetes treatments, which increased intangible assets and associated amortization.

Page 8, Materials segment. Net sales were up JPY 41.9 billion at JPY 95.8 billion. Main factors being recovery from the COVID impact and the revision of selling prices in response to rising raw material prices. EBITDA was up JPY 3.1 billion at JPY 9.4 billion, and operating income was up JPY 3.5 billion at JPY 2.1 billion. Details are described on the right. Basically, all businesses saw steady increase in sales, following recovery from COVID.

Some special factors include: for aramid, major maintenance turnaround in Q1, which was slightly extended due partly to COVID, resulting in a production decline; in Composites, while sales recovered steadily, there was an impact of production decline at OEMs due to semiconductor shortage, as well as a sharp rise in material prices due to tight supply and demand balance; in the U.S., retaining workforce continued to be challenging under high unemployment benefits.

EBITDA increased by JPY 3.1 billion. As for variance analysis, manufacture was sales volume, as mentioned earlier. Sales price and mix, and raw material and fuel cost had a combined effect of negative JPY 2.5 billion, with a sharp rise in material prices having slightly greater impact. In Others, cost increased due to recovery of business activities. All in all, EBITDA was up JPY 3.1 billion.

Page 9, Healthcare segment. Net sales were up JPY 9.7 billion at JPY 45.9 billion. This was mainly due to sales from diabetes treatments. EBITDA was up JPY 8.3 billion at JPY 20 billion. Operating income was up JPY 4.5 billion at JPY 13.2 billion. As described on the right, in Pharmaceuticals, sales of type 2 diabetes treatments made a good start. In addition, while there was an impact of NHI drug price revision on existing products, FEBURIC and Somatuline saw a steady sales growth. Also noteworthy in Q1 is license income.

In home therapy, HOT and CPAP businesses made a steady progress. As for HOT, there was a shift to home therapy due to restrained hospitalization. Accordingly, the business grew steadily. As for CPAP, growth in the number of examinations was stomped due partly to COVID, but the market share increased and so did the number of rented units. As a result, EBITDA increased by JPY 8.3 billion, due mainly to volume increase and addition of diabetes treatments as well as an increase coming from existing products. In addition, there was license income recorded, altogether, up JPY 8.3 billion.

Page 10, Fibers & Products Converting segment. Net sales decreased by JPY 6.1 billion at JPY 65.5 billion. In addition to a decline in medical protective gowns, there was an impact of applying a new accounting standard on revenue recognition of about JPY 4 billion. There was the factors or these were the factors for the decline. EBITDA dropped JPY 3 billion at JPY 3.6 billion, and operating income was down JPY 3.1 billion at JPY 2 billion. As described on the right-hand side, while a decrease in government demand for medical protective gowns pushed down profit in Industrial Materials, automotive and water treatment filter applications and others were very strong. Fiber Materials and Apparel business showed recovery from COVID impact. But overall, the tough situation continued.

Our initiatives on the selection and concentration of businesses to improve profitability that started last year had an impact of increasing profit. Overall, while profit declined year-on-year, when excluding medical protective gowns, the segment profit was trending upward.

In the IT segment, net sales and profit were on par with the previous year's level. While the impact of piracy websites on e-comics services and the lingering impact on COVID-19 were still being felt, business progressed firmly to attain the flat growth year-on-year. As for Others, J-TEC, which became a subsidiary in March, recorded steady growth in sales.

Page 11. Nonoperating items recorded a net income of JPY 1.2 billion, an improvement of JPY 1.3 billion year-on-year. As briefly mentioned earlier, equity method affiliates grew business steadily, which made a significant contribution. Extraordinary items recorded a net loss of JPY 1.9 billion in Q1, mainly in relation to the recording of impairment loss of JPY 1.5 billion.

Page 12, financial position. Total assets increased by JPY 143.9 billion from the beginning of the fiscal year, mainly coming from an increase in intangible fixed assets in relation to the succession of sales rights for diabetes treatments, and an associated increase in consumption tax receivable and other assets. Liabilities felt an impact of an increase in interest-bearing debt in relation to the said acquisition of the intangible assets.

Net assets increased by JPY 10.8 billion, owing to increased net income valuation gain on investment securities and an impact of foreign currency translation. Free cash flow was negative JPY 150 billion, mainly coming from the acquisition of intangible fixed assets related to diabetes treatments.

Moving on to the outlook for fiscal 2021, Page 14. As stated earlier, net sales forecast has been revised upward from JPY 870 billion announced in May to JPY 900 billion. This reflects selling price revisions in the Materials segment in response to a sharp rise in raw material prices.

Operating income and net income forecast remain unchanged at JPY 60 billion and JPY 35 billion, respectively, in light of the impact felt in Composites during Q1 of the semiconductor shortage and the sharp rise of material prices, while sales in the resin and plastic processing and carbon fibers remained strong.

Minor revisions to assumptions with slightly weaker yen in exchange rates and crude oil price of $70, up $10, but impact on operating results should be limited. Annual dividend forecast remains unchanged at JPY 55 per share.

Page 15, outlook summary. As mentioned earlier, we've only revised net sales forecast. No change to forecasted profits or KPIs.

Page 16, net sales and operating income forecast by segment. Net sales revised upward by JPY 30 billion, reflecting selling price provisions of High Performance Materials in the Materials segment. In other segments, no change to sales forecast. Operating income, EBITDA and ROIC based on operating income, all remain unchanged.

Page 17, factors for changes in EBITDA forecast compared with fiscal 2020. Almost no change since figures remain unchanged from announcement in May. Just minor changes, reflecting the Q1 results. In Materials, given overall strong sales, volumes slightly revised upward. ForEx also slightly revised upward with weakening of the yen. Spread is revised downward slightly. Considering the impact of material prices, these are some of the ups and downs, but in total, we expect no change. In Healthcare, almost no change from the initial forecast, with slight re-tweaking in sales price and mix and others. Situation of each business is described on the right, but I'll skip it as it basically is the same as the Q1 situation, which I described earlier.

Page 18, factors for change for the entire group for the full year. Despite a drop in government demand for medical protective equipment in Fibers & Products Converting, we expect a significant increase in volume from contributions of the materials and diabetes treatments in Healthcare. On the other hand, we expect negative impact in Others costs, with higher fixed cost and SG&A expenses due to a recovery in economic activities. Total remains unchanged at JPY 130 billion.

Last but not least, main topics. Picking just one, raising of and newly setting of CO2 emissions reduction targets in the Medium-Term Management Plan. Page 20 describes the background, the global development. International community has demonstrated stronger commitments to achieving carbon neutrality and countries, including Japan, have raised respective CO2 emissions reduction targets. In response to these news, Teijin has raised its target so as to accelerate initiatives towards achieving net zero CO2 emissions by 2050.

Specifically, there are 2 targets. One is the company's emissions reduction target, Scope 1, the emissions directly from our operation; and Scope 2, indirect emissions in relation to utility supplied to us, such as electricity and steam. Previously, we set the target of reducing emissions by 20% compared to fiscal 2018 by fiscal 2030. But we have now raised this to 30%. As described in the right graph, we've revised the target for fiscal 2030, so as to keep the temperature increase to below 2 degrees and move from there towards achieving net zero in fiscal 2050.

The other target is Scope 3 reduction, the supply chain CO2 emissions reduction, which covers CO2 emissions from entities outside of the company related to our operation, including suppliers and customers. The target is to reduce emissions from source that account for more than 2/3 of entire Scope 3 emissions by 15% compared to the fiscal 2018 level by fiscal 2030. As stated in the note, sources that account for more than 2/3 of the entire Scope 3 emissions, mean sources of emissions from purchased goods and services, excluding trading businesses. We will reduce these by 15%.

As a result, as shown on Page 21, we have revised the long-term environmental targets set under the Medium-Term Management Plan to include the 2 revisions that I just described. We have revised upward the target for the entire supply chain, which envisions ensuring that the amount of reductions exceed total emissions by fiscal 2030 as well as set specific target for the supply chain and suppliers so as to accelerate our efforts.

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

[Statements in English on this transcript were spoken by an interpreter present on the live call.]