Teijin Ltd

TSE:3401

Earnings Call Transcript 2019-Q2

[Kazuhiro Yamamoto, executive]

Good afternoon. Kazuhiro Yamamoto, Executive Vice President, Representative Director of the Board and CFO. I will go over the results of fiscal 2018 second quarter ended September 30. First, the performance highlights for the first half. We achieved a record high profit attributable to owners of the parent for a first half period. Net sales were JPY 439.4 billion, up 8.6% year-on-year. Operating income was JPY 36.2 billion, a slight decline year-on-year. And profit attributable to owners of the parent was JPY 33.9 billion, up 16.2%. Net sales increased due to firm sales in both materials and healthcare segments. Operating income was pushed down by high raw material and fuel prices and increased onetime expenses at CSP, a U.S. subsidiary in connection with new project orders, which grew more than we had anticipated. Profit attributable to owners of parent increased, partly owing to increases in nonoperating income and extraordinary income.

Turning to operating results. Net sales were JPY 439.4 billion, up 8.6%. Operating income was JPY 36.2 billion, down 3.5%. Net of nonoperating items increased, mainly reflecting an increase in foreign exchange valuation gains, which was already recorded in the first quarter. Ordinary income increased to JPY 39.8 billion. Net of extraordinary items was positive for the second year in a row, owing to settlement received and gain on sales of investment securities. With lower tax due to tax effect, profits attributable to owners of parent was always JPY 33.9 billion, up JPY 4.7 billion year-on-year.

ROE was 16.7%, ROIC was 10.8%, and EBITDA was JPY 59.6 billion. CapEx totaled JPY 25.9 billion, higher than in the previous year with an increase in each business in the materials segment. Depreciation and amortization was higher and R&D expenses little changed. Exchange rates for the first 6 months were more or less in line with the forecast at JPY 110 to the U.S. dollar and JPY 130 to the euro.

Moving on to nonoperating and extraordinary items. As was mentioned earlier, the highlight was an increase in foreign exchange valuation gains of over JPY 2 billion, as a net of gain on valuation of derivatives and foreign exchange loss. Extraordinary items, as stated earlier, included gain on sales of investment securities totaling JPY 3.6 billion and settlement received in the first quarter totaling JPY 4.5 billion on the extraordinary income side. Extraordinary loss included impairment loss of JPY 3.9 billion in relation to changes in the operating rates of some facilities. Net of extraordinary items was positive JPY 3.6 billion. First, financial -- or next financial position. Total assets increased from JPY 982 billion at the end of March to JPY 1,052.8 billion, up JPY 70.8 billion. As the impact of foreign exchange was about JPY 10 billion, the real increase was about JPY 60 billion.

Interest-bearing debt increased by about JPY 40 billion. With a large increase in net profit totaling JPY 33.9 billion, net assets increased by JPY 25.3 billion. Changes in total assets are described in the bottom chart. Compared to the end of March, cash and deposits increased. Notes and accounts receivable trade and inventory also increased, reflecting higher sales and higher selling price, reflecting rise in raw material and fuel cost. Tangible assets increased as a result of acquisitions and others.

Cash flows from operating activities were JPY 33.9 billion, reflecting M&A investments and others. Cash and cash equivalents totaled JPY 11.5 billion.

Changes in EBITDA compared with fiscal '17 first half, JPY 60.1 billion versus JPY 59.6 billion, almost no change year-on-year. Last year, we recorded upfront payment of JPY 3 billion for licensing out of investigational antibody candidate. The absence of its recurrence this year was a big factor. As for sales volume, with steady growth recorded in both materials and healthcare segments, plus JPY 10.5 billion. Sales price and mix plus JPY 5.5 billion, with higher selling prices. As will be explained later, this increase was achieved despite downward revisions to dry -- drug prices in medical fees. And raw material and fuel cost, minus JPY 9 billion. Others, minus JPY 4.5 billion, including onetime expenses and increased project expenses, as mentioned earlier. Overall, the EBITDA remained almost the same year-on-year.

By segment. For materials, JPY 32.4 billion last year and JPY 30.7 billion this year. Big impact coming from lower operating income. Sales volume increased, centering on CSP, Polyester Fibers & Trading and Retail, sales price and mix, plus JPY 8 billion, centering on Aramid Fibers and polycarbonate resins. Raw material and fuel cost, minus JPY 9 billion, as crude oil price soared year-on-year from about $50 per barrel to $37 per barrel during this period.

But, of course, we use various raw materials and feedstock. So crude oil price alone does not govern the cost but we were impacted. Various efforts were made to make up for this increased cost, but with onetime expenses at CSP and other project expenses, resulting in others, minus JPY 5.2 billion. The EBITDA for the period was JPY 30.7 billion. Healthcare, JPY 26.2 billion versus JPY 27.8 billion, up year-on-year. As such negatives as the absence of upfront payment from Merck and the impact of drug price revisions were made up for by the increase in sales volume of existing products such as febuxostat and CPAP ventilators and some expense reductions.

Operating results by segment. I'll not go over each item. Net sales increased in the segments. As for operating income, materials posted a decline of JPY 2.3 billion due to persistently high fuel and raw material and onetime expense at CSP and increase in project expenses. Healthcare posted an increase of JPY 1.2 billion and the total was JPY 36.2 billion, down JPY 1.3 billion or 3.5% year-on-year.

For materials segment, net sales increased due to firm sales. Earnings decreased mainly due to high raw material and fuel prices and onetime expenses at CSP. By business group, sales of Aramid Fibers were firm. Earnings in carbon fibers were pushed down by expenses for launching a new plant and others. Sales mix for polycarbonate resin improved, owing to efforts to avoid the impact of high fuel and material prices. Sales of release films for manufacturing processes were favorable. In Polyester Fibers & Trading and Retail business group, fiber materials and apparel were impacted by rising raw material and fuel prices. Sales for use in bed and bedding applications were favorable while sales for use in civil engineering materials was sluggish in Industrial Textiles and Materials. In composite and others, rising raw material prices and increased onetime expenses at CSP pushed down profit. Sales of lithium battery separators for consumer applications remained sluggish. For healthcare, earnings increased on higher sales due to growth in sales in mainstay products and services. In pharmaceuticals, sales expansion is centering on febuxostat, made up for the absence of the upfront payment. In Home Healthcare, HOT and CPAP, both remained strong.

In new healthcare, implantable medical products performed steadily. For others, the IT business delivered a solid performance, resulting in higher sales and lower profit.

Financial topics. First dividends. We are forecasting JPY 70 per share on a full year basis. JPY 30 for the first half and JPY 40 for the second half, including JPY 10 commitment of dividend to mark the centennial, which should take us closer to the target consolidated dividend payout ratio of 30%. As for the acquisition of own share on August 2, we acquired approximately 5% of the common stock at approximately JPY 20 billion, reflecting our intent to execute flexible capital policies. As for sale of shares, we have sold shares for which the holding purpose has diminished. Major items include KYORIN Holdings, Inc, of which we sold all the shares and we also sold portion of shares in other companies and financial institutions. These sales are made along asset management efforts.

And that concludes my presentation. Thank you for your attention.

[Jun Suzuki, executive]

Thank you, good afternoon. Jun Suzuki, President and CEO. President -- or Representative Director of the Board. I will go over the outlook for fiscal 2018. ROE and ROIC are projected to remain at our medium-term target of 10% or more. EBITDA is progressing steadily towards the target of over JPY 120 billion in fiscal 2019 and over JPY 200 billion in fiscal 2025. As for the forecast for this fiscal year, at the current rate, ROE projected at around 11.7% and the EBITDA slightly lower than last year at around JPY 112 billion.

Changes in EBITDA compared with previous outlook made at the time of the first quarter earnings briefing. Back then, we projected JPY 118 billion, and this has been revised downward by about JPY 6 billion. We strive to mitigate the impact of high raw material and fuel prices and other factors by improving sales prices and the sales mix. But evidently, not enough. And the impact of onetime expenses at CSP in response to increase in new orders for FCA or Fiat Chrysler Automobiles Jeep, which launched during this period.

With rapid increase in production, we see associated cost increase. And with that, we revised EBITDA forecast downward by about JPY 6 billion. Changes in EBITDA compared with fiscal 2017, JPY 115.5 billion versus projected JPY 112 billion. Big factor is the impact of high raw material and fuel prices, JPY 16.5 billion. We attempted to cover this through sales volume and sales price and mix that added with the absence of upfront payment from Merck, totaling JPY 3 billion and CSP related onetime expenses and such, they were not enough.

Details by segment, materials and healthcare, respectively. First, the materials. JPY 65 billion versus JPY 62 billion, down JPY 3 billion. Raw material and fuel cost, minus JPY 16.5 billion and impact was felt in almost all businesses, not just polycarbonate resins, CSP and Aramid Fibers, as listed there. We try to make up for this through sales volume increase and sales price mix, but CSP onetime expenses dealt a blow this period, resulting in a decline.

Healthcare, JPY 47.2 billion versus JPY 46.5 billion, little change. The absence of last year's upfront payment of JPY 3 billion and the impact of downward revisions to drug prices and medical fees were barely made up for by sales volume, resulting in little change year-on-year.

Now outlook for fiscal 2018. Given the firm sales recorded in materials and healthcare, net sales projected to be JPY 900 billion, up 8% year-on-year from JPY 835 billion. Operating income down from JPY 69.8 billion to JPY 65 billion, down JPY 4.8 billion year-on-year. Profit attributable to owners of parent, not changed from the previous outlook at JPY 48 billion. Year-on-year, up 5% from JPY 45.6 billion.

Moving on to outlook by segment. In materials, net sales expected or expect an increase from JPY 624.8 billion to JPY 690 billion, around 10% growth. Whereas, operating income is expected to decline from JPY 33.6 billion to JPY 30 billion. Despite steady sales, including CSP, we expect earnings to decrease mainly based on high raw material and fuel prices and increased onetime expenses at CSP. Healthcare, slight decline in earnings on mostly flat sales. Firm market sales in both Japan and overseas to cover the impact of downward revisions to drug prices and the upfront payment from Merck, given the strong FEBURIC and CPAP business.

On FEBURIC, a decision was made by the Ministry of Health Welfare and Labor, as you know, to grant a 2-year extension of the re-examination period in Japan to be extended until January 2021. So in Japan, generic products are not expected to enter the market until early fiscal 2022.

And in China, approval was obtained in September and the drug price is currently being decided. Looking at developments in transformation strategy. First material segment, sales of CSP to increase steadily and you can see the picture of FCA Jeep on the right-hand side, this was launched this year. And the rapid increase in sales more so than we had anticipated to supply sufficiently, we are seeing onetime expenses increasing, pushing down the profit. During the first half, decision was made for the first time in the world to adopt automotive carbon fiber reinforced thermoplastic or CFRTP components in a mass-produced vehicle namely GMC Sierra Denali, and we are making preparations steadily.

And also a decision was made to install a sheet molding compound line at CSP Europe. Our R&D center of CSP in Pouancé, France to supply glass fiber reinforcement material. Construction has started. And also in Europe, in August, we acquired Inapal Plasticos SA, a Tier 1 automotive composite supplier in Portugal. As a Tier 1 supplier in the automotive industry, we are trying to expand the product variety of multi-material composites. We already have strong presence in the U.S. with a 40% or so share, and we are trying to expand in other regions, Europe and Asia, and this acquisition in Portugal will be a important step in building a foothold in Europe. And this is a transformation strategy, the vision up to '25.

First in materials. In 2017, the new sales amounted to JPY 77.5 billion. For this year, we are projecting JPY 80 billion to JPY 90 billion. But from sales in fiscal 2019, we are projecting sales of over JPY 100 billion. So in around 2025, we are targeting around JPY 200 billion or so as new sales. And with this acquisition in Portugal, we are trying to build a foothold to be the Tier 1 supplier in Europe.

In healthcare area, the new business is still small. Back in fiscal 2016, new sales, JPY 3.4 billion and fiscal 2017, JPY 5.1 billion. For this year, we are projecting JPY 8 billion or so. And for fiscal 2020 -- fiscal 2019, we are targeting JPY 50 billion and not solely on organic growth, but through mergers and acquisitions in mind as well. The target for fiscal 2025 is around JPY 130 billion to JPY 140 billion. And I like to talk about the Recopick, the RFID system based on the two-dimensional wave guided sheet, which is extensively used in the hospital applications. At CEATEC held in Makuhari in October, we had the demonstration at the Lawson booth using this Recopick system. It's not a unmanned operation, but this is for the extensive labor saving and the convenience store showcases management. And eventually, we'd like to lead this to the unmanned cash register operation.

And summary of outlook for fiscal 2018. Net sales JPY 900 billion, up year-on-year. Operating income JPY 65 billion, down year-on-year. Ordinary income, JPY 67 billion, almost flat. Profit attributable to owners of parent, JPY 48 billion, up year-on-year. ROE, 11.7%. ROIC, 10%. EBITDA, JPY 112 billion, slightly down year-on-year. Free cash flow, around JPY 15 billion. CapEx is to increase year-on-year at JPY 75 billion being projected. Depreciation and amortization is slightly increasing accordingly. R&D expenses, slight increase. Exchange rate assumption remains unchanged at JPY 110 to the U.S. dollar and JPY 130 to the euro. And average Dubai crude oil price is expected at $75 per barrel, reflecting the current level.

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