Teijin Ltd

TSE:3401

Earnings Call Transcript 2022-Q3

[Akihisa Nabeshima, executive]

This is Akihisa Nabeshima, CFO. Thank you for joining us despite your busy schedule. I would like to go over the results for Q3 fiscal year 2021 as well as the full year outlook. Please turn to Page 1. Key points of this briefing. First, the financial results for Q3 year-to-date, the first 9 months, net sales increased by 13% at JPY 687 billion, while operating income declined 16% at JPY 38.2 billion, due to such factors as the worsening impact of semiconductor shortage, sharp rise in raw material and fuel prices and logistics costs as well as the virtual end of government demand for medical gowns.

Full year outlook, as described at the bottom is net sales, JPY 930 billion; EBITDA, JPY 120 billion; operating income, JPY 50 billion; and profit attributable to owners of parent, JPY 32 billion. The forecast for operating income has been revised downward from the previous outlook, but we expect a major improvement in Q4 over Q3 with a significant profit improvement projected for the Materials Business Field.

In terms of the results for Q3 year-to-date, strong sales in the Healthcare Business Field almost offset the impact of the virtual end of government demand for medical gowns. Healthcare expects the highest ever net sales and operating income on a full year basis. Alternatively, the Materials Business Field posted an operating loss, mainly due to the sharp rise in raw materials and fuel prices in the composites and the Aramid businesses as well as the production shutdown caused by plant power outage in the Aramid business.

As for full year outlook, sales forecast is revised upward from the previous outlook in light of strong demand. But given the operating loss in the Materials Business Field recorded for Q3 and others, operating income forecast is revised downward. Year-on-year, we are expecting higher sales and lower profit. Annual dividend forecast remains unchanged.

Please turn to Page 2. Key assumptions for main target markets. We assume that demand will remain firm generally speaking. On this page, you can see the results for the first 9 months and outlook for Q4. For Aramid, demand for tires, brakes and hoses increased significantly. For Industrial Materials, sales of products for optical fiber and other applications recovered to the 2019 level and demand remained high. We expect this to continue in Q4.

As for Resin business, in the office machine market, the office machine manufacturers operations decreased due to semiconductor shortage and the pandemic. Same for Automotive market where customers' operations declined. We expect customers' operations to remain subdued in Q4.

As for Carbon Fibers, demand for air travel, especially for domestic flights recovered mainly in Europe and North America. Supply chains are shifting to secure the necessary inventories. Demand for our freight transportation remained strong. We expect demand recovery to continue in Q4. As for Composites, impact of semiconductor shortage proved stronger than expected and OEM production was constrained. As demand remains firm, OEM production is expected to recover gradually in Q4 onward.

In terms of cost assumptions, impact of higher raw material and fuel prices and logistics costs became more prominent and costs are seemed to remain high in Q4, and the situation needs to be watched closely. Tight labor market in the U.S. is expected to moderate somewhat from Q4.

Please turn to Page 3. In Healthcare and Pharmaceuticals, markets for gout and hyperuricemia treatments continue to grow. As restrictions on hospital visits continued, e-promotion continue to be enhanced, including those by major pharmaceuticals. In Home Healthcare, the home oxygen therapy, HOT market saw a continued shift to Home Healthcare. In the market for continuous positive airway pressure, CPAP, the number of examinations recovered gradually. This trend is expected to continue in Q4.

In Fibers & Products Converting, for fiber materials and apparel consumption recovered in Europe, North America and China, but the Japanese market remains snob. Given the expansion of Omicron infection situation needs to be watched closely overall in Q4.

In Industrial Materials, impact of semiconductor shortage was felt, and this is expected to continue in Q4. In medical gowns, government demand for supplies virtually ended. For IT, piracy websites continued to affect e-comic services from Q4 of FY '20. The impact of this is expected to continue in Q4, while the situation remains uncertain.

Details of Q3 results and full year outlook will be explained by Junji Kitahama, Deputy CFO.

[北浜淳二（きたはま じゅんじ）, executive]

Page 6, highlights of the Q3 results. Net sales increased significantly by 12.7%, reflecting economic recovery as well as selling price revisions in the Materials Business Field to respond to sharp rise in raw materials prices. Operating income decreased by 15.6% despite strong sales of the diabetes treatments and other products in healthcare due to the end of governmental demand for medical gowns, semiconductor shortage, the sharp rise in raw material and fuel prices and logistics cost and production shutdown in the Aramid business. The detailed word but decline in profit attributable to owners of parent was kept at 3.7%, thanks to equity in earnings of affiliates and sale of investment securities.

Page 7, the summary of operating results. The profit and loss items have already been covered. Operating income was down 15.6%, but the decline in ordinary income was kept at 3.6%. Among KPIs, ROE was 8.2%, exceeding the original target of 8%. ROIC based on operating income was 6.4%, which was below the annual target of 7%. EBITDA increased by JPY 5.4 billion at JPY 89.3 billion. CapEx and depreciation and amortization increased significantly, mostly in relation to the increase in intangible assets due to the takeover over of the sales rights for diabetes treatments.

Page 8, Materials segment year-on-year comparison. Net sales increased significantly, but EBITDA and operating income declined. In fact, we posted an operating loss of JPY 4.8 billion. Lower left chart shows changes in EBITDA. Volume was positive for each business, but raw material and fuel cost had a large negative impact of JPY 37.5 billion, which was only partially offset by sales price and mix at JPY 34 billion, not the full amount.

By business, Resin achieved price revisions to more than make up for the material and fuel prices, but the revisions in Composites, Aramid and Carbon Fibers were not enough to cover the entire amount. Among others, higher expenses were recorded due to recovery in business activities, higher logistics costs, wage increase and new factory launches in each business. Overall, EBITDA decreased by JPY 4.8 billion year-on-year.

Details of each business is described on the right. Profit increased for Resin, Carbon Fibers and Battery Materials, while profit decreased for Aramid and Composites. In Aramid business, demand was very strong, including automotive applications, but production declined due to the impact of large-scale periodic maintenance in Q1 and its extension and power outage at raw material plants in Q3. The power outage took place at our raw material plants in the Netherlands. It was due to the problem with the power supply facilities owned and operated by the industrial park. The park supply itself was restored relatively early, but as the polymer in the material process solidified, it took us a certain period of time to remove and clean it up, resulting in reduction in production volume.

In addition, sharp rise in natural gas prices in Europe affected our mainstay operations in the Netherlands. Resin business felt the impact of the pandemic, semiconductor shortage and power restrictions in China, but its sales volume remained at the same level. Profit increased as selling prices were revised to respond to sharp rise in Material prices.

In Composites, semiconductor shortage affected the production of SUVs and pickup trucks are mainstay applications. Raw material prices continue to rise and labor shortage in the U.S. continued pushing up overall costs.

As for Battery Materials, sales volume of separators for lithium-ion battery increased, thanks to the customer acquisition for smartphone market and the use of the separators in new smartphone models. Also, we started receiving license consideration in relation to the EV battery application, thus, firm profit increase year-on-year.

Page 9, Healthcare. Significant increase in net sales and profit. As shown in changes in EBITDA at the lower left, main factors or the main factor was volume with strong sales of diabetes treatments, FEBURIC and CPAP devices. While NHI drug price revision had negative impact, the positives included licensing income.

Details by business is shown on the right. In Pharmaceuticals, sales of diabetes treatments and current main products were firm. There was licensing income from Merck with the start of clinical trials related to Alzheimer's disease in December. In Home Healthcare, HOT continued to see an increase in the number of rented units with continued restrictions on hospitalization and shift to Home Healthcare. CPAP also saw continued increase in rented devices.

Page 10, Fibers & Products Converting posted significant decrease in sales and profit, mainly due to the virtual intergovernment demand for medical accounts, without which the trend of sales and profit increase remained unchanged. By business, in Industrial Textiles and Materials, sales of automotive parts and fibers for water treatment were good, but semiconductor shortage had an impact late in Q3, thus slightly lower results than expected.

In Fiber Materials and Apparel despite a recovery in sales of Materials and products in Europe, North America and China and heavy clothing in Japan, environment was difficult with overseas plant shutdowns, which pushed up costs associated with substitution and the sharp rise in raw material and fuel prices and logistics costs. Still, basic profitability increased through concentration on certain selected businesses, which started last fiscal year, together with a decrease in SG&A expenses.

In the IT segment, sales were down, but profit level remained the same despite the continued impact of piracy websites on e-comic services through optimization of advertising costs. Among others, Japan Tissue Engineering posted firm results in both the regenerative medicine and the R&D support businesses. Positives included the listing of new product in healthcare or health insurance coverage and the start of clinical trials.

Page 11, nonoperating items and extraordinary items. Nonoperating items posted a net improvement of JPY 5.5 billion. Main factors are improvements in equity and earnings of affiliates coming from the strong performance of an Aramid paper joint venture and gain on valuation of derivatives, primarily on weaker yen and weaker euro.

As for extraordinary items, net gain of JPY 1.4 billion year-on-year, mainly coming from gain on sale of investment securities of JPY 5.3 billion as we continue to reduce strategic shareholdings as planned.

Page 12, financial position and cash flows. Total assets and liabilities increased mainly as an impact of the takeover of the sales rights of diabetes treatments, which was also the main reason for the year-on-year changes in cash flows.

Moving on to the full year outlook. Please turn to Page 14. First, comparing to the previous year. We forecast a significant increase in net sales due to recovery from pandemic and the effects of diabetes treatment sales rights. But we expect operating income to decrease mainly due to cost increases and semiconductor shortage in materials and the virtual end of government demand for medical gowns.

Comparing to the previous outlook, net sales are revised upward by about JPY 30 billion with the price revisions reflecting higher materials and fuel prices. Operating income is revised downward by JPY 10 billion despite strong sales in healthcare in light of impact on Materials of semiconductor shortages sharp rise in Materials and fuel prices and Aramid production shutdown due to power outage.

Profit attributable to owners of parent is revised downward by JPY 3 billion versus JPY 10 billion for operating income, in light of improvements in equity, in earnings of affiliates and gain on sale of investment securities. No change to the annual dividend forecast of JPY 55 per share.

Starting from Page 15, changes from the previous outlook. Summary on Page 15. As mentioned earlier, net sales are revised upward by about JPY 30 billion.

Operating income is revised downward by JPY 10 billion. Ordinary income is revised downward by JPY 7 billion in light of improvements in equity and earnings of affiliates. Profit attributable to owners of parent is revised downward by JPY 3 billion in light of sale of investment securities. ROE remains unchanged at 8%. ROIC based on operating income is 6%, down 1 percentage point. EBITDA has been reduced by JPY 10 billion at JPY 120 billion following the decrease in operating income. Free cash flow is expected to improve by JPY 10 billion despite lower profit in light of reduction in invested capital.

Page 16, net sales and operating income by segment. First, net sales on the left, upward revision of approximately JPY 30 billion coming from JPY 15 billion each for Materials and Fibers & Products Converting. Main reason being price revisions, reflecting higher fuel and material prices, Healthcare is revised upward by about JPY 5 billion in light of strong sales and milestone income. IT is revised downward by JPY 5 billion in light of impact of piracy websites.

Operating income on the right compared to the previous outlook revised downward by JPY 10 billion in total. Healthcare is revised upward by JPY 2.5 billion, but Materials, Fibers & Products Converting and IT are revised downward by JPY 10 billion, JPY 2 billion and JPY 0.5 billion, respectively.

In terms of trends behind the operating income forecast in comparison to the previous outlook for Materials, greater-than-expected impacts of sharp rise in fuel and material prices, semiconductor shortage and Aramid production shutdown. For Healthcare, increase in sales of current main products and licensing income.

In Fibers & Products Converting, stronger-than-expected impact of delay in recovery in the apparel market, power restrictions in China, sharp rise in raw material and fuel prices and logistics costs for IT impact of piracy websites.

Page 17, factors for JPY 10 billion downward revision for Materials. As shown in the lower half, no change to Carbon Fibers in light of demand remaining strong. All other subsegments have been revised downward. Particularly large impact was felt by Aramid business, which was strongly affected by higher natural gas prices in Europe as well as production shutdown due to power outage, resulting in tight inventories, affecting both production cost and sales volume.

As for Resin, impact of semiconductor shortage and customer operations expanded more than expected. In Composites, semiconductor shortage having a more widespread impact than expected and the rise in raw material prices having a slightly more widespread impact than expected.

Page 18. In Q3, Materials posted a huge operating loss of JPY 8.1 billion. But we are expecting a recovery in Q4. Factors are explained in this page. The lower chart shows the trend from Q2 to Q3 and Q3 to Q4, respectively. In all subsegments, profit declined from Q2 to Q3, while they are expected to increase from Q3 to Q4. Decline in Q3 had been expected somewhat, including the impact of the gap in carryover stock at the beginning of the fiscal year in Resin as well as the launch cost and depreciation expenses for the North American new factory in Carbon Fibers, but there were some additional adverse factors that materialized in Q3.

By subsegments, Aramid was affected by higher natural gas prices and power outage in Q3. The impact of power outage will be mitigated in Q4. We expect fuel and material prices to rise further, but we should see the effect of selling price increase in Q4. Resin felt the impact of gap and carryover stock at the beginning of the fiscal year. This was in relation to the sharp rise in the raw material BPA price that began at the end of the previous fiscal year, which then fell sharply towards the second half of this fiscal year.

While the selling price is revised in accordance with the sharp rise in raw material prices, there is a time lag in raw material from the sourcing to production to inventory. So what happened is, in Q3, there was a write-down on high-priced inventory from the first half, while the selling price was revised downward in accordance with the sharp fall in the raw material price. This dealt a serious blow to the profit in Q3 as it coincided with the semiconductor shortage and power restrictions in China.

For Q4, as raw material prices continue to trend downward, we expect the selling price to be lower. But as we are to maintain the price spread, the impact of the gap in carryover stock at the beginning of the fiscal year should be mitigated, and we expect improvement.

As for Carbon Fibers, start-up new factory in North America in Q3 entailed the launch cost and depreciation expenses. But we expect improvement given the start of commercial production in Q4 against the backdrop of strong demand for Carbon Fibers.

As for Composites, the impact of semiconductor shortage, high raw material prices and tight labor market was greater than expected. But in Q4, we expect the impact of semiconductor shortage to moderate gradually. We expect high raw material prices to continue, but expect effect of price hikes that we successfully negotiated in Q3. We also expect effect of profit improvement measures, which I will talk about in the next page.

Page 19. Let me talk about the profit improvement measures at Teijin Automotive Technologies U.S., which we consider to be important matter to be addressed. Adverse external factors, as you can see, included sharp rise in material prices, semiconductor shortage and tight labor market. They are having great impact.

As for forecast going forward, we expect raw material prices to remain high until at least the first half of FY '22. As for semiconductor shortage, we expect the situation to improve gradually from Q4 and that demand for products of the main programs will return to normal in FY '22.

Regarding labor shortage, we see gradual improvement, and therefore, we expect necessary plant labor force to be secured in the first half of FY '22. The measures we are taking are shown in the lower half. One is price increases. Negotiations for price increases were conducted smoothly in Q3, and we expect to see the effects starting in Q4. But the level of price increase is not sufficient to cover the entire cost of higher material prices. And therefore, we plan to continue negotiations for selling price increases in next fiscal year.

Regarding the establishment of new, more profitable programs, a new program has been established at the new Texas plant, which starts full-scale operation in Q4. This should benefit the profit, and we plan more programs for FY '22, which should make further contribution. The automation of pressing machines and shift to in-house coating processes have started after some delay due to COVID pandemic and recruitment issues. Same measures are planned for other plants as well, and that should make a difference going forward.

Page 20, Healthcare segment. Sales and income forecasts are revised upward over the previous outlook. As shown in the lower half, factors for upward revision include strong sales of FEBURIC and XEOMIN as well as recording of license income in Q3. Page 21 describes factors for changes in EBITDA forecast compared to the previous year, but I will skip this page.

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.]