Teijin Ltd

TSE:3401

Earnings Call Transcript 2019-Q3

[Kazuhiro Yamamoto, executive]

Good afternoon. This is Kazuhiro Yamamoto. I will go over the results for the Fiscal 2018 Third Quarter and the Full Year Outlook for Fiscal 2018.

First, Page 3. The overview of the results for the fiscal 2018 third quarter. Net sales were JPY 659.6 billion, up 7.3% year-on-year. Operating income was JPY 48.1 billion, down 14.5% year-on-year. And profit attributable to owners of the parent was JPY 40.8 billion, up 2.6%. As described at the bottom, net sales increased due to firm sales in both materials and healthcare, but operating income was pushed down by increases in raw materials and fuel prices, increased onetime expenses at CSP in connection with new project orders, NHI drug price revision and nonrecurrence of upfront payment received in fiscal 2017 as out-licensing consideration.

Page 4, operating results. As mentioned earlier, net sales were JPY 659.6 billion, up JPY 45 billion or 7.3%, as sales increased in all segments. Operating income was JPY 48.1 billion, down JPY 8.2 billion or 14.5%. As for nonoperating items, as reported at the second quarter earnings briefing, impact of foreign exchange reversed year-on-year to total JPY 3.2 billion, an increase of JPY 2.7 billion this year.

Ordinary income was JPY 51.3 billion, down JPY 5.5 billion or 9.7%. Profit attributable to owners of parent was JPY 40.8 billion, up JPY 1 billion or 2.6% year-on-year.

ROE was 13.5%, down slightly year-on-year. ROIC was 9.9%, down year-on-year. And EBITDA was JPY 83.6 billion, also down year-on-year.

CapEx totaled JPY 40.7 billion, reflecting some major projects being decided on, significant increase year-on-year. Due to these factors and mergers and acquisitions, depreciation and amortization totaled JPY 35.5 billion, up JPY 1.4 billion or 4%. R&D expenses, little changed.

Page 5, nonoperating items and extraordinary items. Nonoperating items, as mentioned earlier, felt the impact of foreign exchange. Net gain on valuation of derivatives and foreign exchange losses was over JPY 2 billion, which served to increase the nonoperating items. Among extraordinary items, items all but decided during the second quarter were reflected in the figures for the 9-month period, namely, gain on sale of investment securities, JPY 3.6 billion; and settlement received, JPY 4.5 billion. Extraordinary items totaled JPY 8.6 billion, up JPY 2.3 billion year-on-year. As for extraordinary loss, impairment loss in relation to separators was recorded. Extraordinary items totaled JPY 3 billion, little change year-on-year.

Page 6, financial position. As of December 31, 2018, total assets were JPY 1,015.7 billion, JPY 33.8 billion more than as of March 31. Liabilities totaled JPY 586 billion, up JPY 12.3 billion. With an increase in net profit, net assets totaled JPY 429.7 billion, up JPY 21.5 billion. Changes in total assets, shown at the bottom, up from JPY 982 billion at the end of March to JPY 1,015.7 billion at the end of December, an increase of JPY 33.8 billion.

Cash and deposits, et cetera, increased by JPY 28.2 billion. Inventory increased by JPY 18.8 billion, reflecting higher sales and slightly higher inventory level than projected.

Tangible assets, up JPY 26.3 billion, primarily due to the mergers and acquisitions executed during this period.

Investment securities, down JPY 29.8 billion as a result of selling. The total was JPY 1,015.7 billion at the end of December.

Moving on to cash flows. Cash flows generated from operating activities were JPY 59.2 billion, an increase year-on-year. Net cash flow from investing activities were negative, mainly in relation to the mergers and acquisitions mentioned earlier. Free cash flow totaled JPY 38.9 billion. After financing cash flows, net increase or decrease in cash and cash equivalents totaled JPY 29.3 billion.

Page 7, changes in EBITDA compared with fiscal 2017 9-months period. EBITDA decreased mainly due to the impact of increase in raw materials and fuel prices, and onetime expenses at CSP in connection with new orders, despite growth in sales value due to solid sales. EBITDA decreased from JPY 90.4 billion to JPY 83.6 billion, down JPY 6.8 billion year-on-year.

Main factor was a decrease in operating income from JPY 56.3 billion to JPY 48.1 billion, down JPY 8.2 billion. This was because the impact of a nonrecurrence of upfront payment from Merck in healthcare, higher raw material and fuel cost, and an increase in onetime expenses could not be fully made up for by increase in sales volume and sales price and mix.

Page 8, changes in EBITDA by segment. In materials, down from JPY 47.7 billion to JPY 41.8 billion, down JPY 5.9 billion. Major reasons were higher raw material and fuel costs, and others, onetime expenses at CSP in connection with new project orders and increases in other project expenses in relation to carbon fiber operation in the U.S. Those negatives could not be made up for by sales price and mix.

In healthcare, down from JPY 40.5 billion to JPY 40.1 billion, down JPY 400 million, or little change year-on-year. As was mentioned earlier in the overview, such negatives as upfront payment from Merck, down JPY 3 billion; and downward revisions to drug prices and medical fees, down JPY 3.5 billion; which together had a negative impact of JPY 6.5 billion, were largely canceled out by sales expansion of febuxostat and CPAP ventilators.

Page 9, operating results by segment, year-on-year comparison. Net sales increased for Material business group, Polyester Fibers & Trading and Retail business group, and Composites and others, all posting an increase of JPY 10 billion -- or over JPY 10 billion. For materials total, sales were up JPY 41.7 billion or 9.1%. Healthcare was flat, and in others, IT was strong. So sales totaled JPY 659.6 billion, up 7.3%, representing a steady increase. Operating income was affected by raw material and fuel cost and other factors. In materials, operating income was JPY 17.3 billion, down JPY 6.9 billion. Healthcare, JPY 31.3 billion, little change, and others, also little changed. Operating income totaled JPY 48.1 billion, down JPY 8.2 billion year-on-year.

Page 10, a review of each segment. In materials, net sales increased due to firm sales in each business. But earnings decreased mainly due to increases in raw material and fuel prices, and onetime expenses at CSP in relation to new projects. More specifically, in Material business group, sales of aramid fibers were firm, primarily for optical fiber applications. Earnings in carbon fibers were pushed down by such factors as expenses for launching a new plant in North America, as was mentioned earlier. Impact from deterioration in market conditions for certain polycarbonate resin products was partially absorbed by a shift in the portfolio to high-value added products. In Polyester Fibers & Trading and Retail business group, results reflected the impact of increases in raw material and fuel prices, despite firm sales of functional apparel fiber in the fiber materials and disaster mitigation and bedding-related products in industrial materials. In Composites and others, impact of rising raw material prices and increased onetime expenses at CSP in connection with new project orders was felt, despite steady increases in sales of mass-produced automotive components of CSP. Lithium-ion battery separators were affected by a global slump in smartphone demand, which became conspicuous particularly since the year-end.

Page 11, healthcare. Sales of core products and services were firm, represented by firm sales of FEBURIC in pharmaceuticals and CPAP ventilators in Home Healthcare. Discounting the impact of consideration for the licensing out of an investigational antibody candidate recorded in fiscal 2017, which totaled JPY 3 billion, earnings were almost flat year-on-year.

In pharmaceuticals, sales expansion of FEBURIC covered the impact of downward revisions to NHI drug prices.

In Home Healthcare, home oxygen therapy, HOT, and CPAP ventilators were firm. New Healthcare exhibited steady performance.

Page 12, others, in which the IT business accounts for a large portion, mainly content service business. E-comics distribution service expanded steadily. And we established a new partnership system in the IT service category for growth. Overall, net sales increased.

Moving on to the outlook for fiscal 2018 full year, Page 14. This is the second year in the medium term management plan. Fiscal 2019 would be the final year. So we are a little past the halfway point.

Looking at the key financial indicators. EBITDA is progressing steadily toward the target for fiscal 2019 of over JPY 120 billion. ROE, against a target of over 10%, fiscal 2018 outlook is 11.3%. As for EBITDA, fiscal 2018 outlook is JPY 107 billion, slightly lower due to lower operating income. So we feel actions are needed to achieve the target for fiscal 2019.

Page 15, changes in EBITDA compared with the previous outlook. JPY 112 billion previously, now down to JPY 107 billion, a decrease of about JPY 5 billion. Operating income, JPY 65 billion previously. Current outlook is JPY 60 billion. We now expect operating income to be about JPY 5 billion lower. Main factors are described there on the slide. We expect sales volume of the Polyester Fibers & Trading and Retail to see lower sales in apparel-related area in Japan, due partly to warm winter. We're also taking into consideration signs of slowing down of the Chinese economy. As for LIB separator, as you know, smartphone market itself is shrinking. And in relation to the uncertainty in the Chinese economy, we do not believe strong growth in new orders, although we are winning some new orders. These are the main factors we are taking into consideration in projecting lower results. Raw material and fuel cost is coming down, which is a positive, but this is projected to be canceled out by sales price and mix. So overall, we are projecting a greater negative impact from Polyester Fibers & Trading and Retail and LIB separator.

Page 16, changes in EBITDA compared with fiscal 2017. JPY 115.5 billion last year and this year, projected to be JPY 107 billion, down JPY 8.5 billion, mainly coming from decrease in operating income of JPY 69.8 billion, down to JPY 60 billion, a decrease of JPY 9.8 billion, despite some increase in depreciation and amortization. Similar story to the third quarter results compared to the previous year mainly due to the impact of upfront payment from Merck, down JPY 3 billion, and increases in raw material and fuel prices.

Looking at representative price. Dubai crude oil was approximately $56 per barrel last year versus projected at over $70 this year. The total impact being JPY 14 billion. In addition, their impact from project investments and onetime expenses for new project orders at CSP. While sales volume is expected to increase by JPY 10 billion and sales price and mix by JPY 4.5 billion, they're not likely to cover the negatives, thus, a projected decline of JPY 8.5 billion.

Page 17, changes in EBITDA by segment compared with fiscal 2017 results. Materials, JPY 65 billion, down to JPY 55.5 billion, down JPY 9.5 billion. Operating income, JPY 33.6 billion down to JPY 23.5 billion, down JPY 10.1 billion. Despite some increases in depreciation and amortization, a decline in operating income is to have a greater impact. Sales volume is to be positive for both CSP and Polyester Fibers & Trading and Retail. But raw material and fuel cost, minus JPY 14 billion, cannot be made up for by increase in sales price and mix. Added with negatives associated with onetime expenses at CSP, we expect a decline of JPY 9.5 billion.

Healthcare, JPY 47.2 billion versus JPY 48 billion, up JPY 800 million. Despite impact of nonrecurrence of upfront payment from Merck and downward revisions to drug prices and medical fees, we expect increase in sales volumes of main products and services to make up for the difference. Operating income is projected to increase from JPY 35.9 billion to JPY 36.5 billion, up JPY 600 million.

Page 18, outlook for fiscal 2018, including some previous figures. Net sales down JPY 10 billion from the previous outlook as sales volume in materials of the Polyester Fibers & Trading and Retail and LIB separators is now projected to be lower than the previous forecast. Still, compared to fiscal 2017 results of JPY 835 billion, we expect an increase to JPY 890 billion. As for operating income, as there are many uncertainties, we are now projecting JPY 60 billion. Profit attributable to owners of parent is projected to be JPY 46 billion, reflecting lower operating income, but this still represents a slight increase over JPY 45.6 billion in fiscal 2017.

Page 19, outlook for fiscal 2018 by segment. Materials, higher sales, but lower profit. Sales are expected to increase mainly due to steady sales at CSP and Polyester Fibers & Trading and Retail, as mentioned earlier, and penetration of price increases for aramid fibers, despite the impact of maintenance turnaround. But earnings are expected to decrease mainly due to the impact of increases in raw material and fuel prices and onetime expenses for new project orders at CSP.

For healthcare, slight increase in earnings on flat sales. Firm market sales and services to continue. These should cover the impact of downward revisions to drug prices and medical fees.

Page 20, transformation strategy, progress and outlook. Looking at the third quarter alone, some major items. CSP's China joint venture decided to construct a second plant for further penetration in the Chinese market as part of the efforts to globally deploy lightweight materials, centering on glass fiber sheet molding compounds.

And in healthcare, we launched a second functional food material to follow on enhanced barley, which is already well accepted in the market. We started the sale of Inulia, the company's in-house product made from inulin.

Page 21, summary of outlook for fiscal 2018. Net sales, JPY 890 billion, JPY 10 billion lower than in the previous outlook. Operating income projected at JPY 60 billion in light of onetime expenses and project investments, down JPY 9.8 billion year-on-year. Ordinary income, similarly, down JPY 5.8 billion at JPY 62 billion. Profit attributable to owners of parent, slight increase year-on-year at JPY 46 billion.

ROE, ROIC and EBITDA are projected to be slightly lower year-on-year, but we believe, the target under the medium-term management plan will be achieved.

CapEx, slightly lower than the previous outlook in light of some time lag. Depreciation and amortization, slightly higher. Assumptions for this outlook are exchange rates, JPY 110 to the U.S. dollar and JPY 125 to the euro. An average Dubai crude oil price is estimated to be $60 per barrel. We are expecting some decline in the raw material and fuel costs for the fourth quarter.

Dividend forecasts for fiscal 2018, no changes from the previous outlook. Interim dividend of JPY 30 per share, year-end, JPY 40 per share for an annual dividend of JPY 70 per share.

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