Teijin Ltd

TSE:3401

Earnings Call Transcript 2023-Q3

[Akihisa Nabeshima, executive]

I am Akihisa Nabeshima. I will go over the financial results for the third quarter of FY '22 as well as the full year outlook. First, the key points. The top half describes results for the first 9 months compared to the same period of the previous year. The bottom half is the full year forecast compared to the forecast announced last November.

First, the results for 9 months. Year-on-year, net sales increased 11.4% to JPY 765.1 billion. Against the backdrop of sales volume increase due to strong demand, price revisions made in response to rises in material prices and the impact of the weaker yen.

Operating income was JPY 14.8 billion, down 61.1%. Overall, sales increased and profit decreased. In materials, profit decreased despite such positives as sales volume increased mainly for automotive and aircraft applications and the impact of the weaker yen. This was because of a decline in productivity in the U.S. due to equipment failure at a plant, a decrease in productivity and production in Europe caused by labor shortages and the plant fire in December, lockdowns and sequent economic slowdown in China and rises in material and fuel prices and logistics costs.

In Healthcare, profit decreased year-on-year due to the market entry of generic alternatives to FEBURIC and drug price revisions. We recorded a net loss attributable to owners of parent of JPY 7.1 billion as a result of impairment losses of goodwill in composites and the increase in the tax burden rate triggered by the increased deficits at overseas subsidiaries.

As for the full year forecast, we project net sales of JPY 1,030 billion, about JPY 20 billion lower than the previous forecast, and operating income of JPY 10 billion, down JPY 15 billion from the previous forecast of JPY 25 billion.

Materials expects a significant drop in profit due mainly to the fire at the plant in Europe and the delay in the start-up after the equipment failure at the U.S. plant.

We have revised net income to a loss of JPY 18 billion, as mentioned earlier, due to the recording of impairment losses on goodwill. The dividend forecast remains unchanged at JPY 40 per share. Key assumptions for main target markets have not changed much since the previous announcement, so I will skip those pages.

We closed the third quarter, as mentioned earlier, with higher sales and lower profit year-on-year and a net loss attributable to owners of parent.

Next is the income statement. As operating income dropped by JPY 23 billion, other profit items also declined year-on-year. Accordingly, the key management indicators, ROE and ROIC, declined as well. CapEx, depreciation and amortization and R&D expenses were as shown on the slide.

Looking at the results in Materials by segment. In Aramid, sales volume decreased due to a decline in productivity caused mainly by the labor shortage and the limited supply of key consumables from suppliers and decreased production volume caused primarily by the suspension of operations of production lines after a fire at the raw material plant.

Meanwhile, revision of selling prices to respond to impact of the increased natural gas price on costs and the effect of the weaker yen contributed to earnings, resulting in an increase in net sales and profit. Resin was affected by lockdowns and subsequent economic slowdown in China as well as slowdown due to COVID, resulting in decreased sales volume and thus a decline in sales and profit.

Carbon fibers saw a very strong demand for all applications, in particular products for aircraft applications posted increased sales volume. With successful price revision to counter a shop price increase of a main raw material, net sales and profit increased.

In composites, sales volume increased mainly due to a gradual reduction in the impacts of the suspension of OEM production caused primarily by the shortage of parts and materials, including semiconductors and ramping up sales for a new large-scale program. Helped also by successful price revisions to counter soaring raw material prices, net sales increased. But profit declined due to continued low productivity due to labor shortage coming from tight labor supply as well as a decline in productivity and additional expenses due to equipment failure. Battery materials posted higher sales and profit on strong sales of separators.

Healthcare felt the impact of a significant decline in sales volume of FEBURIC due to the market entry of generic alternatives in June. Diabetes treatments, Somatuline and Xeomin, remained firm. In January 2023, we launched OSTABALO, a treatment for osteoporosis. Home healthcare are strong and steady.

In the Fibers & Products Converting segment, industrial materials and fiber materials and apparel both remain strong. Selling prices for fiber materials and textiles were successfully raised to counter sharp rise in raw material and fuel prices and logistics and purchase costs, resulting in increased sales and profit.

In the IT segment, advertising and promotion expenses were enhanced to strengthen marketing in the e-comics service, resulting in very strong sales.

The orthopedic implantable devices business posted strong results with increased sales. The regenerative medicine business of Japan Tissue Engineering, J-TEC, was affected by a decline in sales of the autologous cultured epidermis JACE, resulting in a decrease in sales and profit.

Turning to nonoperating items. Foreign exchange gains and losses were positive, partly due to the impact of the weaker yen, while interest expenses increased due to rising interest rates and others. Net of nonoperating items remain almost unchanged from the previous year.

Extraordinary items include sale of noncurrent assets and the sale of strategic shareholdings who's level was about the same as in the previous year. Given the impairment losses, net of extraordinary items was a loss of JPY 8.3 billion.

Moving on to financial position. Total assets increased overall. A major factor was the impact of exchange rates. In addition, inventories increased due to higher raw material prices and there also was an impact of impairment losses on noncurrent assets. Overall, total assets increased.

The debt-to-equity ratio increased slightly. In terms of cash flows, free cash flow was positive JPY 3.8 billion as cash flow from investing activities was within the range of cash flow from operating activities.

Next, the full year earnings forecast for fiscal 2022. Year-on-year, sales are projected to increase from JPY 926.1 billion to JPY 1.03 trillion, up 11.2%. This is mainly due to the enhancement of production capacity in materials as well as the increase in sales volume following the operation of the new plant, selling price revisions, favorable exchange rates and other factors.

Operating income is forecast to decrease by 77.4% due to such factors in the Materials business field as a decline in productivity in the U.S. caused by an equipment breakdown, impact of a plant fire and a rise in the natural gas price as well as the impact of generic alternatives to FEBURIC in the health care business. We forecast a loss attributable to owners of parent to be JPY 18 billion. I will explain the previous outlook later, and no change in the dividend forecast.

Regarding profit and loss, sales and operating income forecasts are as shown here. We expect the management indicators, ROE and ROIC, to be slightly lower than in the previous year and also slightly lower than the previous forecast. Although profits are projected to decline, free cash flow is forecast to be almost the same as the previous forecast, partly due to the impact of a slight decrease in capital investment.

Let me elaborate on the outlook by segment, mainly comparing to the previous forecast. Net sales forecast is JPY 1.03 trillion compared to the previous forecast of JPY 1.05 trillion, down JPY 20 billion. In particular, down JPY 20 billion in materials given the impact of the fire on Aramid. Operating profit is projected at JPY 10 billion compared to JPY 25 billion in the previous forecast, again, due to a decline in materials.

Some details about the segments. Aramid production has decreased due to the suspension of the production line following a plant fire. While natural gas prices remain below the previous assumption, the effect of profitability improvement has been extremely limited due to the reduced operation resulting from the fire. Resin was affected by the economic slowdown in China after lockdowns.

In carbon fibers, raw material and fuel prices remained below assumption. In composites, improvement of productivity was delayed due to the delay in starting up after recovering from the equipment failure. In addition, sales volume in some programs has decreased due to a supply shortage of OEM parts. For healthcare, no change from the previous forecast.

EBITDA is projected at JPY 85 billion, down JPY 28 billion year-on-year. Details are as I just explained.

Financial soundness has deteriorated slightly due to increased liabilities following the takeover of the sales rights for diabetes treatments from Takeda Pharmaceutical in FY '21 as well as deterioration in business performance this fiscal year.

As for the annual dividend, the forecast remains unchanged at JPY 40 per share. While we project a net loss for FY '22, this is deemed a temporary loss as the Aramid fire, deterioration in productivity in deposits, equipment failure and impairment of goodwill are all temporary one-off factors. And the earnings structure has not changed significantly from the previous outlook. Also in light of our policy of paying stable and continuous dividends, we have made a comprehensive judgment to keep the annual dividend forecast unchanged at JPY 40.

This concludes my presentation. Thank you for your attention.