Toray Industries Inc

TSE:3402

Earnings Call Transcript 2021-Q1

[Masahiko Okamoto, executive]

Thank you very much for joining the teleconference today despite your busy schedule. On behalf of Toray Group, I would like to take this opportunity to extend my gratitude towards your continued understanding and your interest in our management and business activities.

Now I would like to report Toray's business results for the first quarter ended June 30, 2020, and the business forecast for the fiscal year ending March 2021. Please be reminded that we have applied International Financial Reporting Standards, or IFRS, from this fiscal year, and the figures on the following pages are in accordance with IFRS.

Now I would like to follow the table of content shown on Page 1. I would like to begin with a brief summary of business results for the first quarter ended June 30, 2020.

Please turn to Page 3. Consolidated revenue for the first quarter declined 22.5% compared with the same period a year earlier to JPY 397.6 billion. Core operating income decreased 63.7% to JPY 12.5 billion while profit declined by 63% to JPY 9.5 billion.

Page 4 is about special items. Special items for the first quarter worsened by JPY 2.1 billion to minus JPY 3.0 billion compared with the same period of the previous fiscal year.

Moving on to Page 5. Here shows the summary of the balance sheet and free cash flow. As of end of June, total assets stood at JPY 2,724.3 billion, a decrease of JPY 9.3 billion from the end of the previous fiscal year, mainly due to declines in trade receivables. Total liabilities decreased by JPY 12.1 billion to JPY 1.520.5 billion compared with the end of the previous fiscal year, owing mainly to declines in trade payables. Total equity increased by JPY 2.9 billion compared with the end of the previous fiscal year to JPY 1,203.7 billion. Owners' equity was JPY 1,120.6 billion. Interest-bearing liabilities was JPY 1,025.8 billion, and D/E ratio was 0.92 points. Free cash flow was positive at JPY 25.2 billion.

Page 6 explains about capital expenditures, depreciation and amortization and R&D expenditures. Capital expenditures for the first quarter increased by JPY 2.4 billion to JPY 29.2 billion on a year-to-year comparison. Meanwhile, depreciation and amortization decreased by JPY 0.1 billion to JPY 29.3 billion. And R&D expenditures decreased by JPY 1.3 billion to JPY 15.0 billion compared with the same period of the previous fiscal year. The forecast for capital expenditures for the current fiscal year has been revised from the initial forecast of JPY 163.0 billion to JPY 143.0 billion, reflecting changes in the business environment, including decrease in demand due to the spread of COVID-19 and other factors as well as delays in the progress of construction works. Forecast for depreciation and amortization has also been revised from the initial forecast of JPY 120.0 billion to JPY 117.0 billion. Meanwhile, there are no changes to the initial forecast for R&D expenditures.

Next, this graph on Page 7 describes the factor analysis of JPY 22.0 billion decrease in core operating income for the current first quarter on a year-to-year comparison. The difference in quantity was a minus JPY 34.4 billion due to decrease in sales and production with the impact of COVID-19. The net change in price was a plus JPY 4.9 billion. This was due to the decline in raw materials prices compared with the previous fiscal year. Cost variance, et cetera, was plus JPY 8.3 billion as a result of efforts to reduce operating expenses and other costs.

The chart on Page 8 shows the revenue and core operating income results by segment. Using Page 9 and after, I would like to explain the results of each segment.

First, Fibers & Textiles. Revenue of the overall segment declined 25.9% to JPY 145.0 billion compared with the same period of the previous fiscal year, and core operating income fell 50.3% to JPY 7.2 billion. The net change in price was positive, reflecting the decline in raw materials prices. However, difference in quantity was significantly negative due to the impact of the stagnation of production activities and the consumption behavior caused by the COVID-19 both in Japan and overseas.

In the apparel applications, demand declined due to lockdown and closure of retail stores in various countries. While in the industrial applications, sales volume for the mainstay automotive applications decreased as automobile manufacturers suspended operations and decreased production volume. Demand for nonwoven fabrics increased for the applications of medical gowns and masks that fell short, thus offsetting the decline in overall sales volume in the segment.

Page 10 is the Performance Chemicals segment. Revenue declined 21.2% to JPY 155.6 billion compared with the same period of the previous fiscal year, and core operating income fell 51.9% to JPY 8.1 billion. The net change in price significantly turned negative, being affected by the stagnation of production activities caused by the COVID-19. Among Japanese subsidiaries, a trading subsidiary recorded an allowance for doubtful accounts, which has been reflected in the company's results.

I would like to explain the conditions of each business on the next page. First, in the resins business, demand from the automotive and industrial applications declined in Japan and overseas. The chemicals business was affected by the decline in the basic chemicals market. In the films business, while sales of packaging materials were strong, reflecting the growing demand for home meal, demand for battery separator films for lithium-ion secondary batteries and polyester films remained low. The electronic and information materials business was affected by a decline in the production of OLED-related materials.

Page 12 is the Carbon Fiber Composite Materials segment. Revenue declined 26.2% to JPY 45.4 billion compared with the same period of the previous fiscal year, and core operating income fell 73.4% to JPY 1.7 billion. The entire group worked toward cost reduction. And applications including wind, turbine blades and casings remained strong, while aircraft applications were affected by the decline in the production rate of large-sized passenger aircraft.

I would like to explain the status of each application on the next page. Aerospace applications were affected by the decline in the production rate of aircraft at major customers due to the impact of COVID-19 as well as shutdown of plants. Sports applications were impacted by lower operating rates at production basis in Asia, particularly in China due to the spread of COVID-19.

In terms of regulatory products among the industrial applications, demand environment and energy-related fields led by compressed natural gas plant applications and the automotive applications for luxury cars in Europe were weak due to the impact of COVID-19. As for large tow products, shipment of wind turbine blade applications remained strong. As the composite business, materials for PC chassis remained strong and shipments of materials of medical devices for the diagnosis of COVID-19 pneumonia increased. Meanwhile, sales at an overseas composites-related subsidiary decreased due to lower demand with the impact of COVID-19.

Page 14, in the Environment & Engineering segment, revenue declined 11.2% to JPY 37.2 billion compared with the same period of the previous fiscal year, and core operating income declined 40% to JPY 0.8 billion. In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole, while shipment to some regions were affected by the COVID-19. Among domestic subsidiaries in the segment, a construction subsidiary was negatively affected by the suspension of works to prevent the spread of the COVID-19. And an engineering subsidiary experienced decreases in the shipment of some electronics-related equipment.

Page 15 is the Life Science segment. Revenue declined 7.5% to JPY 11.6 billion compared with the same period of the previous fiscal year, and core operating income fell 87.5% to JPY 0.1 billion. In the pharmaceutical business, sales of pruritus treatment REMITCH were influenced by the introduction of its generic versions as well as by a major NHI drug price revision in April this year. In the medical devices business, shipment of dialyzers grew strongly in Japan and overseas. So there was an impact of medical institutions postponing nonurgent operations due to the spread of the COVID-19.

Page 16 shows the business results of major subsidiaries and regions. At Toray International, sales of fibers and textiles, resins, films and chemicals and carbon fiber composite materials remained weak. At Toray Engineering, shipment of electronics-related equipment decreased. As for our subsidiaries in Southeast Asia, in the Fibers & Textiles business, sales for both apparel and industrial applications remained sluggish due to the impact of COVID-19. The Performance Chemicals business was also impacted by sluggish demand for resins and films due to the spread of COVID-19. As for subsidiaries in China, the Fibers & Textiles business were also impacted by COVID-19, and sales for both apparel and industrial applications remained sluggish. As regards to subsidiaries in the Republic of Korea, the Fibers & Textiles business were affected by worsening market conditions. However, sales for nonwoven fabric applications remained strong on the back of increased demand for masks due to the impact of COVID-19. The spread improved with the decline in raw material prices. In the Performance Chemicals business, demand for battery separator films for lithium-ion secondary batteries remained weak.

Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2021. Please turn to Page 18. Forecast for the fiscal year ending March 2021 are based on the assumptions that the world would pass the peak of COVID-19 pandemic in the second quarter and economy in Japan and abroad would be on a gradual recovery track from the third quarter through the end of the fiscal year. Toray revised its consolidated revenue forecast announced on the 28th of May this year to JPY 1,840 billion, taking into consideration its business performance of the first quarter and changes in the business environment. The company has kept its consolidated forecast of core operating income and profit unchanged at JPY 70 billion and JPY 40 billion, respectively. These forecasts from July onwards is based on an assumed foreign currency exchange rate of JPY 105 to the U.S. dollar.

Page 19 indicates the consolidated business forecast for the fiscal year ending March 2021 by segment. Page 20 shows the comparison of core operating income between the initial forecast and the new forecast with breakdowns into segments. Despite the impact of the spread of COVID-19, we will expand sales in markets where demand is growing and promote thorough cost reductions.

This concludes my presentation. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]