Teijin Ltd

TSE:3401

Earnings Call Analysis

Steady Performance With Unchanged Forecasts

The company witnessed a gradual increase in sales and income, with operating income up JPY 1.5 billion from the first quarter, although overall sales and profits declined slightly from the previous year. The forecast for net sales remains at JPY 1.030 billion, with JPY 35 billion for operating income and a constant profit of JPY 13 billion. Key growth areas included the Fibers & Products Converting segment and IT, despite downward revisions in the Materials segment from JPY 11 billion to JPY 7 billion. Dividends remain level, with a CapEx of JPY 85 billion. Recovery from previous setbacks, including a factory fire and sales optimizations in the Healthcare business, advance according to plans.

Subdued Operating Income Amidst Sales Increase

The second quarter results revealed a paradox of a company; while net sales increased, operating income experienced a downturn. Specifically, operating income descended by JPY 4.3 billion to JPY 10 million from the previous year's JPY 14.2 billion. This was largely attributable to the introduction of generic competitors to their blockbuster drug, FEBURIC. However, it wasn't all gloomy, as the Fibers and Product Converting Business reaped the rewards of robust sales coupled with the composite business's revised selling prices improving profitability.

Steadfast Profitability Reforms Maintain Prior Forecasts

Engulfed in a milieu of reform to bolster profitability, the company has found solace in steady progress, enabling it to cling onto its initial full-year predictions. Net sales are anticipated to glide in at JPY 1.030 billion, with a projected operating income standing firm at JPY 35 billion. Profit forecasts, too, stay rooted to the ground at JPY 13 billion, reflective of a resolute stride towards financial rejuvenation.

Consistent Dividend Projections Amid Financial Recalibration

Investor pay-outs appear to be sacrosanct, unsullied by fluctuating fortunes. The company's dividend strategy remains unaltered, poised to distribute annual and interim dividends that mirror previous forecasts, signifying managerial confidence in the face of fiscal uncertainties.

Composite Business Aims for Enhanced Second-Half Performance

The complexities of the Composites business have not deterred the company from pursuing an upswing in profitability. Despite being ensnared by setbacks such as production mishaps and the UAW strike in North America, the business is determined to rally in the latter half. Measures to improve sales, procurement, and production, recovery from past equipment breakdowns, and ambitious profit recovery efforts in North America articulate a company poised to triumph over adversity.

Healthcare Ambition Unfazed, Drives Forward with Strategic Partnerships

In a dynamic response to a stagnant environment, the company's Healthcare business pivots towards the burgeoning domain of rare and intractable diseases. The journey begins with strategic drug licensing maneuvers and is complemented by a realignment of business structure, all without missing a beat on capitalizing on existing product sales. Notable is the joint venture with Axcelead and streamlined marketing, which are testimony to the company's unwavering commitment to revolutionizing its health care offerings.

Earnings Call Transcript 2024-Q2

[Eiji Ogawa, executive]

I am CFO, Ogawa. Thank you. I would like to report the results for the second quarter and the forecast for the full year of fiscal 2023. First, the highlights of the presentation. The second quarter results show an increase in both sales and income compared to the first quarter. Operating income increased JPY 1.5 billion from the first quarter due to increased sales in the Aramid, Fibers and products converting businesses. As you can see in the graph on the right, operating income was on a downward trend from the first quarter of the previous year through the second quarter, third quarter and fourth quarter, but it has continued to increase in the first quarter and second quarter.

In the first half of the fiscal year, sales and profits declined slightly compared to the same period of the previous year, with operating income down JPY 4.3 billion from JPY 14.2 billion in the previous year to JPY 10 million in the current year. The main reason for the decrease in operating income is the full impact of the market entry of generic alternatives to FEBURIC, our mainstay drug since the second quarter of last year. On the other hand, operating income increased mainly due to strong sales in the Fibers and Product Converting Business and appearance of the desired effects of profitability improvement measures, including selling price revisions in the Composites business.

As for the outlook for the full year, we are currently implementing reforms to improve profitability. And since these reforms are generally on track, we are maintaining our previous outlook of JPY 1.030 billion for net sales, and JPY 35 billion for operating income. However, net sales are expected to decrease slightly from the previous forecast by JPY 20 billion. Profit for the year remains unchanged from the previous forecast of JPY 13 billion. In addition, the annual dividend and interim dividend remain unchanged from the previous forecast. This is the situation in our main target markets. In the materials field, the Aramid business saw some softening in demand for optical fiber applications in the first half of the fiscal year, but demand remained firm in other areas such as automobiles and ballistic protective apparel.

In the second half of the fiscal year, we expect demand to remain generally firm. On the other hand, sluggish demand continued for the Resin business, particularly in the electrical and electronic equipment field during the first half of the fiscal year due to the delayed economic recovery in China and the impact of the economic slowdown in Europe. We expect the situation to continue in the second half.

In the Carbon Fibers business, our core aircraft is aircraft and demand for passenger aircraft was strong due to recovery in passenger numbers. Although growth in build rate was stagnated due to restrictions on parts procurement by aircraft manufacturers in the first half. In the second half, demand for passenger aircraft itself is expected to remain strong. In the Composites business, U.S. automotive demand remained firm in the first half, but the UAW strike that began on September 15 caused some production stoppages. In the second half, the impact of this strike continued until the end of October. Although we may be affected by this, we believe that the U.S. automotive demand itself will remain strong.

The Fibers & Products Converting business remained strong during the first half, although the outlook for fiber materials and apparel was slightly weak at the beginning of the year. For the second half, we project that the business may remain slightly weak. However, we expect the domestic demand for fiber materials and apparel will remain strong. The industrial materials sector had inventory adjustment in the automobile-related field, but this is expected to be gradually mitigated in the second half. In the Healthcare business, there has been no major change in the situation, and we expect that HOT will remain flat in the home Healthcare business, and CPAP will recover gradually. In the first half, demand for e-comic was also strong, and we expect this trend to continue in the second half.

These are the actual highlights. Compared with the same period last year, as you can see in the graph below, net sales were generally at about the same level in the first half of the previous year, the second half of the previous year and the first half of the current year, although there were some fluctuations in net sales by business segment. Operating income was JPY 14.2 billion in the previous year and JPY 10 billion in the current year. But as you can see, it was negative JPY 1.4 billion in the second half of the previous year. So we are seeing a significant improvement compared to this result.

As for profit for the year, a large loss was recorded in the second half of the previous year due to an impairment loss on goodwill in the Composites business, resulting in a large deficit. In the first half of the current fiscal year, we recorded losses related to withdrawal from the China Composites business and tax calculation differences, resulting in negative JPY 500 million. We have the performance compared to the first quarter of the previous fiscal year as well as the presentation of the materials and health care sections from the previous graph. The Materials business bottomed out in the third quarter of last year and showed a significant improvement until the first quarter.

But in the second quarter, it slightly grew negatively. The Healthcare business decreased slightly in profit from the previous quarter, due in part to a rebound from drug price revisions in the first quarter. These are operating results in the profit loss format. Operating income was JPY 10 billion. And although it was not mentioned earlier, ordinary income was also JPY 10 billion, while profit for the year was negative JPY 500 million. Non-operating items have deteriorated significantly compared to the previous year and extraordinary items have also been slightly negative. The EBITDA level is just under JPY 50 billion, which is almost the same level as the previous year. CapEx was almost at the same level as in the same period of the previous year. This is a material segment compared to the same period of the previous year.

The Aramid segment declined in sales but growing profits. Selling price revisions and the decreased natural gas price greatly contributed to revenue. On the other hand, sales volume decreased due to the lasting impact of the fire at a raw material plant in December 2022 until the first half of this fiscal year, causing a delay in the procurement of special repair parts for some production equipment. These factors caused a decline in profit, and the overall increase in profit is not that great. In the Resin business, sales volume decreased due to continued low demand due to delays in economic recovery in China and economic slowdown in Europe.

On the other hand, we have managed to maintain the spread, so the decrease in sales and profits is mainly due to the volume decline. The Carbon Fibers business saw a decline in sales and a slight decline in profits. Despite ongoing recovery in aircraft product demand, the sales volume did not increase against the backdrop of restrictions on parts procurement by aircraft manufacturers. On the other hand, the sales volume of products for recreation and other applications decreased mainly due to inventory adjustment. As for the Composites business, both sales and profits increased. The increase in profit was due to improved profitability from the previous fiscal year, supported by sales price revisions and cost reductions.

But the business also show a decline in sales volume due to lower demand for some programs in the Fibers and Products Converting Business. Sales of both fiber materials and apparel and industrial materials were strong in the first half. And while sales were on par with the previous year. Profits increased substantially. In the Healthcare business, the full impact as the market entry of generic alternatives to FEBURIC, our mainstay drug, has resulted in a decline in sales and profits. In the IT segment, the Internet business is performing well with both sales and profits increasing compared to the previous year. In other segments, battery separators are making the largest contribution as the demand is strong.

And together with the strong performance of high-performance membranes, they are generating higher profits. Implant medical products, medical devices and regenerative medicine were also generally strong. Looking at non-operating items. Equity and earnings of joint ventures, mainly overseas deteriorated, resulting in a year-on-year decline in equity in earnings. In addition, due to the difference in the range of yen depreciation during the period, the net amount of gains and losses on valuation of derivatives and foreign exchange losses had a slight negative impact.

And interest expenses also had a negative impact as it increased from higher interest rates in the U.S. and Europe. The total was negative JPY 5.7 billion. On the other hand, as for extraordinary items, while we have been steadily selling across shareholdings and recorded a modest gain on sales of valuation of investment securities in the first half of this fiscal year, we have recognized a provision for the loss related to withdrawal from the China Composites business, which has a net amount of negative JPY 1.3 billion.

As for the financial position, total assets as a whole have increased considerably due to the depreciation of the yen. Of the JPY 78.2 billion increase, JPY 47.9 billion is due to foreign exchange effects. If we look at changes in total assets, inventory assets increased by JPY 31 billion because the Aramid business is currently recovering from the fire and creating inventories. And there are also seasonal factors in the Fibers & Products Converting business. Reflecting the increase in working capital, free cash flow remained at negative JPY 4 billion. These are the outlook highlights for the full year.

For this, we have reduced the sales forecast from JPY 1.050 billion at the beginning of the period to JPY 1.030 billion. Although we have factored in some weakness in the Materials business, operating income is expected to be 2.7x the previous year's level, which I mentioned last time. So we are leaving it unchanged -- in terms of changes by segment, as I will explain later, we are slightly scaling down the Materials segment, while slightly increasing the other segments. Since the previous outlook of JPY 13 billion in profit for the year has been maintained, and the earnings forecast has also been maintained.

We have also kept the dividend at the same level as assumed at the beginning of the term. This is the overall summary. As I mentioned earlier, operating income and profit for the year remain unchanged, and ordinary income also remains unchanged from the previous outlook at JPY 31 billion. CapEx is JPY 85 billion, also unchanged. We expect the D/E ratio to be about the same. As I mentioned, some adjustments have been made by segment. But as you can see, changes in the table on the upper right, the Materials segment has been revised downward by JPY 4 billion from the previous outlook. On the other hand, the Fibers & Products Converting business performed very well in the first half, and the IT segment also showed a slight positive growth, and others also grew, reflecting the upward swing in the first half.

Yet overall, we are maintaining the same level of JPY 35 billion. Here is the Materials segment. The previous outlook of JPY 11 billion has been revised downward to JPY 7 billion. By subsegment, Aramid remained at about the same level, while Resin continued to be in a very difficult situation in the first half. We expect this trend to continue for some time, so we have revised slightly downward. Carbon Fibers will also see some decline in sales due to continued inventory adjustment in recreation applications. The Composite business' profitability will improve as planned, but we affected in unplanned costs at some plants and the impact of the strike.

While in Europe, we expect some positive factors such as increased sales in new programs, overall, we are revising slightly downward. As I mentioned earlier, we have made an up revision to the Fibers and Product Converting segment. The Healthcare segment will be unchanged from the previous outlook. The IT segment has been revised slightly upward in response to the strong performance in the first half of the fiscal year. And the solid Internet business is expected to continue. The other segments have been revised upward as well. I would like to conclude reporting of the results for the first half and the outlook for the full year.

[Akimoto Uchikawa, executive]

I am CEO, Uchikawa. Now I would like to update on the progress of the profitability improvement project. As you can see in the box in February, we said we will improve the profitability of the 3 underperforming businesses and reformed the management structure of corporate offices and headquarters staff. As a result of these efforts, we have promised to increase earnings by JPY 30 billion or more. Today, I would like to update on the progress of profitability improvement efforts of these 3 underperforming businesses. We begin with the Composites business shown on the page.

The measures include the recovery from temporary factors, such as the plant that suffered equipment failure last year and the surrounding plants that had to work excessively to support during the breakdowns. Secondly, we have promised to improve profitability in sales, procurement and production, totaling JPY 19 billion. In order to implement these measures, we promised to first concentrate our resources in North America. To begin with the easiest part to explain, the third item at the bottom, which says selection and concentration. As you already know, we have decided to withdraw from the China business. In addition, we have decided to transfer our Japanese subsidiary and our policy to concentrate resources and investments in North

America is still active. The green dots mean they are overall achieved while the yellow dots suggest they are behind or have not been achieved. The recovery from temporary factors and equipment breakdowns had been partly included in the previous outlook, but some of the 13 plants in North America have not been able to achieve stable operations as planned, and this has been evaluated as a delay. Sales, procurement and production measures will be achieved as planned. I would like to make one point regarding sales. Originally, I have explained that we would make every effort to pass the inflation of raw materials and other incremental costs to prices.

There is no change in that policy. The description says other than the cost of raw materials. I apologize for this. Other incremental costs do include raw material costs. To reiterate, the measures to improve profitability was JPY 13 billion is generally in line with our plan. The profitability improvement is not only applied to North America, but we also have the image of operating income for the entire Composites business to improve its profitability as summarized on this page. Based on the results of the previous fiscal year, we had expected these improvements to be achieved in sales, procurement and production, as I mentioned earlier, as well as recovery from the temporary factors at the plant with equipment breakdowns.

However, at the time of the announcement of this first quarter results, we unfortunately found out that the recovery plan was not progressing as scheduled at some of the plants. So we had to factor in these unachieved targets. The previous outlook is shown in the middle of the page. The first revision is the addition to the outlook of the cost increase in North America, which we have indicated as 3. The details are as follows: productivity has deteriorated greatly and defects were discovered in products shipped last fiscal year, and compensation costs are expected to be incurred. Therefore, this has become a negative factor indicated as 3. Furthermore, as I've already discussed in the second half outlook and the first half results, the UAW strike has been going on in North America, and we have put this into the outlook, assuming that this will last until the end of October.

As I mentioned earlier, we have included other regions in North America in this bridge in order to show the overall picture. As shown in 5, the steady progress of price revisions and productivity improvements in Europe as well as the expected sales increase from the new program. One of our key earnings drivers will partially offset the loss. We have included it in our outlook for fiscal 2023. As you can see, we have unfortunately found it difficult to achieve recovery from equipment breakdowns at some of our plants, but we are committed to making progress to avoid delays in other areas. This status of profitability improvement efforts in the Composites business.

Next, I would like to discuss the Aramid business. It also has 2 main pillars. One is recovery from the fire at the raw materials plant at the end of last year. This cost JPY 7 billion. We also took measures to deal with the unusually high price of natural gas due to the war in Ukraine, ensure stable procurement and improved productivity at our expanded facilities at full capacity. Through the measures, we will increase production and sales to achieve our promise of improving profitability of JPY 7 billion. As I said in the first half performance report, recovery efforts from the fire have already been ahead of schedule from the fourth quarter of last year, and we are on track to achieve this goal. On the other hand, among profitability improvement efforts, we adopted a measure to stably procure natural gas at lower prices for which we expect to achieve more than planned.

As for productivity improvement, as mentioned earlier, we are struggling to procure some special repair parts. We are finding it difficult to increase production volume during the third quarter. This is being offset by the natural gas procurement measures mentioned earlier. Overall, we expect to recover from the temporary factors and improved profitability as planned. As shown in the middle graph below, the production volume has already returned to the level where we started operating the expanded facilities before the fire. And we will further increase this to the planned production volume and raise the sales volume. This is the status of profitability improvement efforts for the Aramid business.

Last is the Healthcare business, one of our business pillars to focus on rare and intractable diseases by making good use of our business base, which we have cultivated through the home Healthcare business. To this end, we announced we will begin with drug licensing as a first step. In line with this, we said we will change our business structure to an appropriate size and to support the change. We have been promoting sales maximization of existing products already on the market. These are the 3 key pillars. As of today, we do not have anything to review on drug licensing, but negotiations with our partners are progressing as planned. As for structural reforms, in June, we announced a joint venture with Axcelead for the horizontal division or drug discovery research functions.

And in October, we reorganized and streamlined the marketing and sales unit. We are making progress as planned to adapt our business to these areas with a focus on treating rare and intractable diseases. Finally, as for maximizing existing products, I would like to introduce one example. We pay attention to the fact that many diabetes patients suffer from sleep apnea. We are conducting a combined promotion. It is progressing very well, and we are proceeding as planned to maximize sales of these drugs in this way. As reported as far, the Composites business has been affected by a strike, and we expect to restart the business in North

America after the strike ends, which should result in a considerable number of orders from OEMs. Although there is some risk caused by confusion on the way to recovery, we are generally making good progress on what we promised in the plan, including other projects. As I mentioned earlier, we will minimize damage and improve profitability in the second half as planned, by having the furloughed workers during the strike, return to work and restart the operations. This is the end of my presentation.