Teijin Ltd

TSE:3401

Earnings Call Transcript 2021-Q2

[Yoshihisa Sonobe, executive]

This is Yoshihisa Sonobe, Senior Executive Officer, Representative Director of the Board. I would like to report on the results of fiscal 2020 second quarter and full year outlook.

Please turn to Page 1. I would like to start with the impact of COVID-19 on Teijin Group results. In a nutshell, recovery in Q2 was greater than expected in the previously announced outlook.

Q2 overview is shown here. After having bottomed out in Q1, our operating results in Q2 achieved a greater-than-expected recovery. The key factor was that the Tier 1 automotive business in North America recovered faster than expected. On the other hand, aircraft demand declined more than expected. Another highlight was that the medical protective equipment, gowns and others, contributed to the business performance above expectations.

As for Q3, given a big recovery in Q2, we expect the rate of recovery to become more gradual. For Q4, we expect recovery to continue, while COVID-19 might be far from over. That is the overall assumption.

Page 2, you can see the summary of trends in main markets. In automotive, for which we have Aramid and Composites as main businesses, Q1 saw a significant decrease in demand in Europe and the U.S., while Q2 saw a rapid recovery of North American SUVs and pickup trucks. Europe also recovered during the period. As for the second half outlook for North America, given a rapid recovery in Q2, we expect the rate of recovery to be flat or a slight increase.

In aircraft, for which we have main businesses in Europe and the U.S., Q1 saw a significant decrease in demand. And in Q2, demand declined further, given overall decline in the build rate. We expect the market to remain weak and the situation to remain tough over a medium term, as prolonged decline in aircraft demand becomes evident.

In health care, mainly regarding business in Japan, Pharmaceuticals and Home Healthcare are expected to maintain firm performance. As for medical protective equipment such as gowns, in the Fibers & Products Converting Business, in Q1, there was an urgent need for large quantity supply to medical front lines facing shortages. Q2 saw continual supply needs, which made significant contribution to our results. As for the second half outlook, we expect supply-demand balance to relax, resulting in a slowdown.

IT business maintained strong performance. Demand for e-comics is expanding due to the growth of the stay-at-home economy.

Page 3 shows the key points. Materials Business was significantly affected by COVID-19, both in terms of the Q2 cumulative first half results and the full year forecast, but the expanded supply of medical protective equipment such as gowns in Fibers & Products Converting Business made a particularly big contribution to the first half results. The Healthcare Business experienced only a slight impact, and results remain solid. IT business posted firm results as well.

For the first half, net sales increased 10% year-on-year to JPY 394.1 billion, but the rate of decline was smaller than for Q1. Operating income decreased 8% to JPY 31.1 billion, again, representing smaller decline than in Q1. Although Materials Business was impacted by COVID-19, it achieved a surplus in Q2. Although for the first half, it was still in the red. Medical protective equipment, gowns and others in Fibers & Product Converting business made significant contributions.

The full year outlook for net sales, operating income and profit attributable to owners of the parent are revised upward based on first half operating results. Outlook for Materials business is a surplus in second half, resulting in a breakeven point for the full term. Outlook for annual dividend is JPY 50 per share with JPY 25 as interim dividend, JPY 10 lower than in fiscal 2019 when interim and year-end dividends were JPY 30 each for the annual dividend of JPY 60 per share.

Page 6, highlights of results for the first half. I've covered most of the items there. I'd like to draw your attention to the third bullet point, a decrease in quarterly profit attributable to owners of the parent by 21%, which was, in part, caused by an increase in the tax burden rate in relation to the declining income at overseas subsidiaries in the Materials business, the same reason as in Q1.

Page 7, operating results summary. I have covered most items here, so I'll just comment on some indicators shown in the lower left. ROE for the first half was 7.9%, an improvement over 5.7% in Q1, but it was lower by 2.2% year-on-year. ROIC based on operating income was slightly down year-on-year at 9.5%. As for exchange rates and crude oil price, overall, the yen appreciation continues. Regarding euro, though, the level remained unchanged from Q1 to Q2, while the overall trend was stronger euro.

Page 8, Materials segment, various analysis of operating results, a year-on-year comparison. Operating income loss declined from JPY 10.2 billion to negative JPY 0.5 billion, down JPY 10.7 billion year-on-year. EBITDA declined by JPY 9.6 billion, the biggest factor being a significant decline in volume due to COVID-19. As I've mentioned earlier, this particularly was evident for Aramid Fibers, Composites and Carbon Fibers.

Sales price and mix and raw material and fuel cost, minus JPY 4.5 billion and plus JPY 3 billion, respectively, resulting in a net impact of minus JPY 1.5 billion. The big factor here was polycarbonate resin, which saw a decline in price spread year-on-year. Carbon Fibers saw a deterioration in sales mix, with higher-priced aircraft applications declining and other industrial applications increasing.

Others, plus JPY 7.9 billion, coming from a decrease of SG&A expenses due to suppression in activities as well as fixed cost reduction efforts being made.

Key points of each business is described on the right-hand side. COVID-19 outbreak significantly impacted businesses. In Aramid, sales volume decreased in overall applications, primarily for automotive applications such as reinforcement materials for tires and friction materials and fiber optic applications.

As for polycarbonate resin, despite special demand for laptop computers, sales volume decreased due to lower demand in office appliance and automotive applications. While sales prices were affected by a decline in market prices, operating results remained solid.

Carbon Fibers saw a significant decrease in sales volume for aircraft applications as well as continued upfront investments, primarily for the development of intermediate materials and the construction of a new plant in the U.S., resulting in heavier upfront cost burden.

In Composites, production and sales of automotive parts largely improved in Q2, in conjunction with a rapid recovery of the North American automotive market, namely SUVs and pickup trucks.

Operating loss was reduced by a decrease of SG&A expenses coming from suppression in activities overall.

Page 9, Healthcare segment. Income statement summary in the upper left. Operating income declined from JPY 19.4 billion to JPY 16.5 billion, down JPY 2.9 billion. EBITDA decreased by JPY 3 billion from JPY 25.4 billion to JPY 22.4 billion, as shown below. A big factor was a volume difference, which had a net effect of minus JPY 1 billion, between minus JPY 2.5 billion overseas due to the launch of generics and plus JPY 1.5 billion in Japan. Sales price and mix, minus JPY 3.5 billion, due partly to drug price revisions. Among others, R&D and SG&A expenses declined due to diminished activities. All in all, EBITDA was down JPY 3 billion.

By subsegment, in Pharmaceuticals, sales mainly for FEBURIC in Japan were impacted by drug price revisions, but sales volume expanded steadily.

In Home Healthcare, CPAP saw signs of recovery in the number of patient examinations from an earlier decline due to the suppression of consultations under the impact of COVID-19. The number of rentals continued to increase. Rental volume for therapeutic oxygen concentrators for home oxygen therapy, HOT, rose associated with increasing adoption of home health care to avoid in-hospital infection.

Page 10, Fibers & Products Converting segment. Operating income increased from JPY 2.8 billion to JPY 12.7 billion, up JPY 9.9 billion. Over 2/3 of this operating income came from early supply in large scale of medical protective equipment such as gowns for health care professionals, which saw a surge in demand, making a significant profit contribution.

Sales remained favorable for polyester staple fiber for water treatment membranes, while textiles, heavy clothing and automotive materials struggled.

SG&A expenses decreased through reduced activities and cost cutting efforts. Overall, large profit growth was achieved.

In the IT segment, operating income increased from JPY 3.6 billion to JPY 4.8 billion, up JPY 1.1 billion. E-comic distribution service continued to increase readership and remain strong.

Page 11, details of nonoperating items which were not explained earlier. With positives and negatives, the net of nonoperating items was negative JPY 0.9 billion, which was JPY 0.2 billion worse than in the previous year.

In terms of gain and losses on foreign exchange and valuation of derivatives, during the first half of fiscal 2019, exchange gain was JPY 1.9 billion, while losses on derivatives valuation was JPY 2.1 billion, resulting in negative JPY 0.2 billion.

For the first half of fiscal 2020, derivatives valuation loss was JPY 1.4 billion, and loss in foreign exchange was JPY 2 billion, totaling JPY 1.6 billion. Year-on-year difference was minus JPY 1.4 billion. This was in relation to the stronger yen and the weaker dollar on resin and Aramid. Aramid was also impacted by stronger euro and the weaker dollar. This resulted in losses on foreign exchange.

Others totaled minus JPY 1.4 billion, but year-on-year deterioration was kept to a small amount with a decrease in interest expenses and a positive change in other nonoperating income and expenses.

As for extraordinary items, in first half fiscal 2019, we recorded a large amount of business structure improvement expenses in relation to the sale of polyester film business to Toyobo, including provision for labor-related expenses as well as a large gain on sale of investment securities in relation to the reduction in cross shareholdings. As a result, net of extraordinary items posted a large negative amount of minus JPY 4.1 billion. There were no such major items this year, resulting in a net amount of minus JPY 2.5 billion, representing a year-on-year improvement of JPY 1.6 billion.

Page 12, financial position. Inventory increased by JPY 6.7 billion from the end of March. The increase was JPY 10 billion or over JPY 10 billion at the end of Q1 as we built up inventory to preserve supply chain in Q1. But towards the end of the fiscal year, we are adjusting production and operation in such areas as Aramid and Carbon Fibers. And therefore, it is expected to be optimized by the end of the fiscal year. The exchange rates are moving in the direction of a stronger yen against the dollar and weaker yen against the euro.

Moving on to the full year outlook. Page 14, the highlights comparing to fiscal 2019. We expect lower revenue and profit due to the impact of COVID-19 on the Materials Business and drug price revisions in Healthcare Business. Compared to the previous outlook, we have made upward revisions to net sales and profit, considering the greater-than-expected supply of medical protective equipment and recovery of the automotive market. Profit attributable to owners of the parent is projected at the level that reflects increases in the tax burden rate due to a decline in income at overseas subsidiaries, the same as in Q1.

Year-on-year, net sales are projected to decline by 6.3%. Operating income projection has been revised upward from JPY 40 billion to JPY 50 billion. Outlook for profit attributable to owners of the parent is raised by 25% from JPY 20 billion to JPY 25 billion. Exchange rate assumptions are similar to the previous outlook with stronger yen against the dollar and weaker yen against the euro.

Page 15, outlook for dividends. Our basic policy is that while targeting a consolidated payout ratio of 30% of profit attributable to owners of parent for the medium term, we consider stable and sustainable dividends and financial soundness as well, as you can see in the middle of the slide.

Based on our basic policy for shareholder returns under the medium-term management plan, after comprehensively taking into account such factors as a decline of profit levels due to the impact of COVID-19, financial circumstances and investment plans aimed at future growth, we are projecting dividend payout ratio for fiscal 2020 to be 38% with annual dividend of JPY 50 per share, which is JPY 10 lower than in the previous year.

Page 16, summary of outlook for fiscal 2020. I've already covered net sales, operating income and ordinary income, so I'd like to focus on ROE and some other indicators. ROE is now projected at 6%, almost the same or very slightly lower year-on-year; compared to the previous outlook, 1 percentage point higher. ROIC based on operating income is projected to be 8%, 2 percentage points higher than the previous outlook.

EBITDA projected at JPY 102 billion, JPY 7 billion higher than the previous outlook and JPY 5.2 billion lower compared to the previous year. CapEx, no change at JPY 70 billion. Depreciation and amortization is projected at JPY 52 billion, JPY 3 billion lower than previous outlook in light of delays in construction and others.

Page 17, outlook for fiscal 2020 net sales and operating income by segment comparing to fiscal 2019 and the previous outlook. Materials expect a decrease in revenue and profit year-on-year due to significant decrease in sales volume, primarily for automotive and aircraft applications through the impact of COVID-19. Operating income is projected to decline from JPY 15.8 billion to JPY 0 billion.

As for Fibers & Products Converting, despite the impact of COVID-19 on both fiber materials and apparel and industrial textiles and materials, the effect of medical productive gowns are expected to increase profit significantly from JPY 5.4 billion to JPY 15 billion. In Healthcare, revenue and profit will decrease significantly due to the impact of drug price revisions. In IT, strong e-comic distribution service is expected to increase profits. Compared to the previous outlook, we raised the overall outlook from JPY 40 billion to JPY 30 billion, up JPY 10 billion.

For Materials, we were previously projecting a loss of JPY 2.5 billion, but now projecting to break even, upward revision by JPY 2.5 billion due to early recovery in automotive applications, although the outlook for aircraft applications is projected to worsen. For Fibers & Products Converting, upward revision by JPY 5.5 billion due to the supply of medical protective equipment such as gowns having exceeded expectations in the first half. For Healthcare, we expect costs to decrease due to delayed recovery of activity level. For IT, upward revision of JPY 0.5 billion based on first half results and future outlook of priority businesses. So the half of the upward revision is attributable to the effects of gowns in Fibers & Products Converting and 1/4 to the Materials.

Page 18, factors of changes in EBITDA, a year-on-year comparison.

I'll skip that page and move to Page 19 to describe by segment. In Materials, EBITDA down from JPY 44.9 billion to JPY 30.5 billion, down JPY 14.4 billion, with a decline in all areas, Aramid, Resin and Plastics Processing; Carbon Fibers and Composites totaling JPY 20 billion, particularly Aramid due to the difference in operating rate. Another factor is a decline in production and sales volume of Carbon Fibers. Sales price and mix differential come from worsening price spread for Resin and Plastic Processing and deterioration in sales mix for Carbon Fibers. Others, positive coming from savings from reduced SG&A.

Healthcare, the chart shows no change in volume differential, but actually, plus JPY 4 billion for Japan coming from increase in FEBURIC and home health care and overseas impact of generics. Sales price and mix declined due to the impact from drug price revisions and increase by price adjustment for overseas sales, resulting in negative JPY 4.5 billion. Others increased by savings in SG&A and R&D expenses due to suppression of activities.

Page 20, operating income outlook. Comparing the first half and the second half by segment, JPY 31.1 billion for the first half and JPY 18.9 billion in the second half. The biggest factor is Fibers & Products Converting, JPY 12.7 billion versus JPY 2.3 billion. Medical protective equipment contributed to first half profit, while second half expects smaller contribution as shipments should decline.

In Materials, minus JPY 0.5 billion for first half versus positive JPY 0.5 billion for the second half. The breakdown is shown in the lower-right chart. Volume of Composites, Aramid Fibers and Polycarbonate Resin is on the recovery trend, totaling plus JPY 5 billion. Increases in costs due to increased activities and upfront investments in Carbon Fiber will have an impact of minus JPY 4.4 billion. In total, operating income of JPY 0.5 billion.

For Healthcare, JPY 16.5 billion versus JPY 13.5 billion, a JPY 3 billion difference. This is due to cost increase in the second half, in line with yearly trends as well as in increased activities. So they show the differences between the first half and the second half.

Page 21, financial KPIs compared to the medium-term management plan. EBITDA will decrease year-on-year as COVID-19 significantly affects Materials, and ROE will remain at low level. ROIC based on operating income will maintain the fiscal 2022 target level. The direction of the medium- to long-term strategies remain unchanged, as we stressed at the Q1 earnings briefing. We will continue to carry out measures to quickly break free from the impact of COVID-19 and to achieve the medium-term financial target. We will pay close attention to the business environment, including COVID-19 for a thorough consideration on investments and others.

That concludes my presentation. Thank you for your attention.

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