Teijin Ltd

TSE:3401

Earnings Call Transcript 2022-Q2

[Akihisa Nabeshima, executive]

Thank you for joining us today. This is Akihisa Nabeshima, CFO. Please refer to the presentation entitled Flash Report Results of FY 2021 Second Quarter and Outlook for FY 2021.

Page 1, key points of this presentation. Owing to increased sales from the economic recovery and the effect of succession of the sales of diabetes treatment drugs from Takeda Pharmaceuticals, sales and profit increased year-on-year in the first half, despite the convergence of special demand for medical gowns, which contributed to profit in FY 2020. Net sales for the first 6 months amounted to JPY 453.4 billion. And operating income was JPY 31.5 billion. EBITDA was up 15% at JPY 65.1 billion.

No change to the previously announced full year forecast, despite uncertainty for the second half in relation to the semiconductor shortages and the rise in material and fuel prices.

In terms of the first half results, the Healthcare Business Field achieved the highest ever operating income of JPY 24 billion, owing to the succession of the diabetes treatment drugs and others. Strong sales in Healthcare Business offset the impact of the convergence of the government demand for medical protective equipment, including gowns. Compared to the full year forecast, EBITDA achieved the progress rate of 50% at JPY 65.1 billion; and operating income, 52% at JPY 31.5 billion, both representing steady progress.

As for the full year outlook for FY 2021, lots of uncertainties in the second half. So we have made no change to the previously announced forecast with expecting -- with expected year-on-year increase in both sales and profit. No change to the previously announced annual dividend forecast either, JPY 55 per share, JPY 5 increase from the previous year. We've decided to pay interim dividend of JPY 27.5.

Page 2, key assumptions regarding the main target markets. For aramid, demand for tires, brakes and hoses increased in the automotive market. We expect strong demand to continue in the second half, primarily for tires and other rubber materials. For industrial materials, demand remained high for optical fiber applications, and we expect this to remain in the second half.

As for resin, office machine was affected by the decreased level of customers' operations due to the impact of lockdowns and semiconductor shortages. We don't expect this to change much in the second half. Same for automotive due to the impact of semiconductor shortages and a possible impact of power restrictions in China. There is a risk of a decline in customers' operations in China. We will keep a close eye on the development.

For carbon fibers, demand for air travel, mainly in domestic routes, recovered in regions with a high vaccination rate. Also, there are signs of a recovery in demand for international flights, which so far remained sluggish. We expect demand for both domestic and international flights to recover in the second half. But in light of the recent research in the infection due to Delta strains in Europe and the U.S., we do see the need to be mindful of a risk of air travel demand declining again.

For composites in the automotive market, OEM production output markedly decreased in the second quarter due to the semiconductor shortage. As for the second half, the impact is expected to remain the same. But we do see a possibility of a gradual improvement beginning in or around the fourth quarter.

Cost assumptions, strong uncertainty lingers over the second half, given that there are many downward factors, for example, impact of semiconductor shortages and rising prices of raw materials. Another is the soaring of natural gas price, which affects our aramid business. Logistics cost is another concern as well as the impact of the recovery in the U.S. labor market. Given these external factors, we need to watch the situation closely.

Page 3, Healthcare. In pharmaceuticals, for FEBURIC for gout and hyperuricemia treatment, the market itself seems to be growing. In home health care, with restrictions on hospitalization, causing a continued shift to home health care, the number of rental units increased more than we expected for home oxygen therapy, HOT, and the continuous positive airway pressure, CPAP. We expect this to continue in the second half.

In Fibers & Products Converting, fiber materials and apparel saw consumption recovering in Europe, North America and China with the resumption of economic activities. The Japanese market remained sluggish, primarily at department stores and GMS. For the second half, we expect domestic demand to pick up due to the increasing rate of vaccination. Still, close attention should be paid to the impact of power restrictions in China.

For industrial materials, sales of automotive applications are on a recovery trend, but were affected by semiconductor shortages. We expect this to continue in the second half. The market for water treatment filters and related products remains firm. As for medical protective gowns and others, we expect governmental demand for supplies to converge this fiscal year.

For IT, piracy websites continue to affect e-comic services from the fourth quarter of the previous fiscal year. We have yet to see the end and consider this continued impact as a risk for the second half.

Now Deputy CFO, Junji Kitahama, will take over to cover the details.

[北浜淳二（きたはま じゅんじ）, executive]

Kitahama, Deputy CFO, speaking. First, results of the second quarter. Page 6, highlights. Net sales amounted to JPY 453.4 billion, up 15%, mainly due to a sales increase in each segment on economic recovery and the revision of selling prices in materials in response to a sharp rise in raw material prices and others.

Operating income was JPY 31.5 billion, up 1.2% despite the convergence of government demand for medical gowns, mainly due to strong sales of diabetes treatments and other health care products and increased sales of products for automotive and aircraft applications and the effect of selling price revisions in materials. Profit attributable to owners of parent increased 35% at JPY 21.6 billion, mainly due to the recording of gain on sales of investment securities.

Page 7, operating results are as shown. ROE was 10.4%. Full year target is 8%. ROIC on operating income was 7.9%, target is 7%. EBITDA was JPY 65.1 billion, 50% of the full year target of JPY 130 billion. CapEx and depreciation increased significantly year-on-year, due mainly to an increase in intangible assets in relation to the takeover of the sales rights for diabetes treatments. Interim dividend has been set at JPY 27.5 per share.

Page 8, segment information. Materials segment. Sales volume increased in all businesses, resulting in higher sales and profit year-on-year, but were below the FY 2019 level due to semiconductor shortages and higher raw material and fuel prices and logistics costs. Net sales were JPY 190.8 billion, up JPY 64.5 billion; EBITDA, JPY 18 billion, up JPY 3.2 billion; operating income, JPY 3.3 billion, up JPY 3.8 billion. Changes in EBITDA are described in the lower left.

Volume increased plus JPY 14 billion, increase in all businesses, including aramid and composites. Sales price and mix and raw material and fuel cost canceled each other out. By business, resin was positive, others were negative. And the net results were almost 0. Cost and others, mainly due to a cost increase caused by the recovery of business activities from COVID, higher logistics costs, had a net effect of minus JPY 10.8 billion, all in all, up JPY 3.2 billion.

For aramid, sales volume grew mainly for automotive applications, but production decreased mainly due to major regular repairs and extension and their period, rise in the natural gas price affected costs. For resin, sales volume increased despite COVID and semiconductor shortages. Selling prices were revised, reflecting sharp rise in material prices. For carbon fibers, sales volume increased for all applications, including aircraft.

For composites, the semiconductor shortage affected the production of SUVs and pickup trucks in the U.S. automotive market as well as continued rise in material prices and continued labor shortages in the U.S. despite the end of extended unemployment benefits in September.

Healthcare segment, Page 9. Higher sales and profit as sales of FEBURIC and home health care equipment remained strong, while sales of diabetes treatments remained robust. Net sales, JPY 90.7 billion, up JPY 17.7 billion; EBITDA, JPY 37.5 billion, up JPY 15.1 billion; operating income, JPY 24 billion, up JPY 7.5 billion. Factor for changes in EBITDA, mostly volume, as you can see, in particular diabetes treatments, in addition to FEBURIC and CPAP devices.

In pharmaceuticals, strong sales of diabetes treatment and FEBURIC and Somatuline had impact. And there was licensing income in Q1. And sales volume of Xeomin increased. Additional indication was approved in June. In home healthcare, increase in the number of rented HOT unit with shift to home health care due to restrictions on hospitalization. CPAP also saw the continued increase in rented devices together with gradual recovery in the number of patients undergoing examinations. New health care, sales of new and other products have consistently increased.

Page 10, Fibers & Products Converting segment. Lower sales and profit with the convergence of government demand for medical gowns. Excluding this factor and the impact of the application of the new standards for revenue recognition, sales and profit actually increased year-on-year.

In industrial materials, sales remained strong for automotive parts, infrastructure reinforcement materials and performance polymer products for electronic parts and short polyester fibers for water treatment filters. But semiconductor shortages began to have an impact later in the period.

In fiber materials and apparel, sales of materials and products for the Europe, North America and China recovered, while sales in Japan were generally sluggish due to low level of consumption. But basic profitability increased through the effect of last year's concentration on certain selected business and lower SG&A expenses due to restricted business activities.

In the IT segment, sales remained strong despite lingering COVID impact. In the Internet business, profit was secured by optimizing advertising costs despite continued impact of piracy websites.

Others in Japan Tissue Engineering, J-TEC, both sales in the regenerative medical product business and the R&D support business increased and remained strong. Ocural, for which J-TEC obtained marketing approval in June has been approved for inclusion in the NHI drug price list effective December, and expansion is expected going forward.

Page 11, nonoperating items. Net result was an increase of JPY 2 billion year-on-year. Main factor being an increase in equity and earnings of affiliates, reflecting recovery from COVID. As for extraordinary items, an improvement of JPY 4 billion year-on-year, mainly coming from gain on sales of investment securities of JPY 4 billion, with reduction in strategic shareholdings being the major factor.

Page 12, financial position. Total assets and liabilities both increased by over JPY 100 billion, mainly in relation to the takeover of the sales rights of diabetes drugs. As for cash flows, operating cash flows remain the same, but reflecting the acquisition of intangible assets in investing cash flow. Net free cash flow was negative JPY 130 billion.

Now outlook for FY 2021, Page 14. No change from the consolidated forecast announced in August, and we are expecting higher sales and profit year-on-year. First half results were generally in line with the forecast as described earlier. There is considerable uncertainty in the second half of the Materials Business, mainly because of global semiconductor shortages and the rise in material and fuel prices. But considering strong sales of Healthcare, there is no change in the consolidated financial outlook. No change to the dividend forecast either. Assumptions shown on the lower left have been revised somewhat, reflecting weakening of the yen and rising crude oil price.

Page 15, summary of the outlook. No change to P&L items, KPIs or free cash flow and others. Page 16 onward, details by segment. First, net sales, no change to the total of JPY 900 billion. IT sales, lower by about JPY 5 billion in light of the impact of piracy websites. Materials revised upward by JPY 5 billion in light of price revisions, reflecting higher material and fuel prices. Total sales, no change.

Operating income, down by JPY 3 billion for Materials, reflecting current situation. Upward revision to Healthcare and Fibers & Products Converting, given strong business. So total, no change. Trends behind the operating income forecast, Fibers & Products Converting expects major impact of the convergence of government demand for medical gown. Materials and Healthcare expects increased sales due to economic recovery from COVID together with strong sales of diabetes treatment drugs. Compared with previous outlook, downward revision for Materials due to sharp rise in material and fuel prices and logistics costs.

Healthcare, revised upward, reflecting strong sales of current main products. Fiber & Products Converting revised upward with improved sales mix and cost reductions.

Page 17, details of Materials segment. Higher sales and profit year-on-year. EBITDA changes are described on the upper right. Same trend as in the first half, increase in volume for aramid, composites and others, but with higher costs, including logistic cost. Net result is JPY 40.5 billion, up JPY 9 billion.

By subsegment, the year-on-year comparison for aramid, while sales volume recovering in light of strong demand for products, mainly for automobile, and given large-scale periodic maintenance and its extension and sharp rise in natural gas, we expect to be flat year-on-year. Resin positive with revision of selling prices despite such negatives as semiconductor shortages and the power shortage in China. Carbon fibers positive with stronger-than-expected sales mainly for aircraft applications. For composites, gradual recovery in the semiconductor shortage is expected in the second half, but impact felt since the second quarter.

Material prices expected to continue to rise, Selling prices will be revised, but we still expect slight negative impact. Labor costs remain high with labor shortage continuing. So overall, we are expecting a decline year-on-year for composites. Compared to the previous forecast for resin and carbon fibers, positive as we expect maintaining sales price level and sales volume increase, including products for aircraft applications.

But for aramid, natural gas price is rising sharply. And for composites, and rises in material prices and labor costs seem to be taking longer than expected. All businesses are affected by high logistic costs and others, so down by about JPY 3 billion overall.

Net sales for the first half versus second half are shown. High-performance materials, a decrease in the second half is expected, mainly due to selling price revisions, reflecting a decrease in resin raw material price. For composites, higher volume and net sales expected coming from selling price revision, easing of impact of semiconductor shortage and start of operation at the Texas plant.

Healthcare segment, Page 18. Year-on-year, higher sales and revenue, owing mainly to diabetes treatment drugs and FEBURIC. Changes in EBITDA to the right, same trend as the first half, mainly volume for diabetes products and other current products. We expect highest ever sales and profit to be achieved by the Healthcare segment this fiscal year.

Trends behind the operating income forecast, compared with FY 2020, increase for both pharmaceuticals and home health care. Compared with the previous outlook, revised upward in light of strong sales of FEBURIC and Xeomin as well as reduction in expenses. Comparison between the first half and the second half, decrease in the second half for operating income and EBITDA in light of the tendency of concentration of costs in the second half. Another factor is the licensing income recorded in the first half.

Page 19, factors of changes in consolidated EBITDA forecast. In addition to factors described for Materials and Healthcare separately, we are taking into consideration the negative impact in relation to the medical gowns. As a main topic, business plan for the regenerative medicine business. Details will be explained in December. So just the overview for now.

Page 21. Following the acquisition of J-TEC equity this year, we have been studying ways to realize synergy between the resources of the 2 entities. We aim to make this business a pillar of profit as a strategic focus of the Teijin Group. We are looking at 2 businesses, as shown here, CDMO services for regenerative medical products and J-TEC for regenerative medical products.

J-TEC has abundant achievements in obtaining marketing approval, manufacturing and supply. By combining those with Teijin's diverse resources, we aim to realize synergy. Especially regarding CDMO services, we aspire participation as a new business, leveraging Teijin's financial strength, experience in manufacturing and selling pharmaceuticals and network within the industry.

Target domain for CDMO business is shown below. Current status of each modality in the Japanese market is shown in the middle. Biopharmaceutical and small molecule drug markets to the right are very large, but entry barrier is relatively low due to characteristics listed. So we will be targeting the area to the left in the introduction stage, namely Japanese market for ex vivo gene therapy and cell and tissue transplantation. The current market is about JPY 26 billion, which is not large, but we expect a market size of about JPY 550 billion in 2030.

In addition, the majority of the market in 2030 will be autologous cell products. As described below, autologous cells are the ultimate tailor-made product, and local production for local consumption is desirable. And it is important to create a manufacturing method that can withstand reproducibility and scale-up. By leveraging J-TEC's advanced cell culture technology and experience in obtaining multiple licenses, we aspire to realize synergy with Teijin's resources. Currently, J-TEC sales are about JPY 2 billion. We are targeting consolidated Teijin-J-TEC sales of around JPY 20 billion in FY 2030.

Thank you for your attention.