Toray Industries Inc

TSE:3402

Earnings Call Transcript 2019-Q2

[Akihiro Nikkaku, executive]

Thank you very much for coming here 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 our business results for the 6 months period of fiscal March 2019 and the business forecast for the fiscal year ending March 2019.

Please look at Page 1. These are the topics that I will cover today. I would like to begin with a brief summary of the business results for the 6 months ended September 30, 2018.

Now please look at the table on the right side of Page 3. Net sales for the 6 months ended September 30, 2018, increased 13.6% to JPY 1,191.2 billion compared with the same period of the previous fiscal year, and operating income fell 0.5% to JPY 77.7 billion.

Ordinary income increased 0.8% to JPY 77.4 billion and net income rose 2.1% to JPY 48.5 billion.

As for the business results for the 6 months period, net sales and operating income reached the company's record highs, respectively.

Please look at the table on the right side of Page 4. Nonoperating income increased by JPY 1.7 billion, due mainly to increase in interest and dividend income and equity in earnings of affiliates. Meanwhile, nonoperating expenses increased by JPY 700 million, primarily due to increase in interest expenses and costs related to films-related idle facilities. Nonoperating income expenses net of the 6 months period improved by JPY 1.0 billion to minus JPY 300 million compared with the same period of the previous fiscal year.

Page 5 is about special credits and charges. Special credits for the 6 months period was JPY 700 million, which was almost the same level as the previous fiscal year. Special charges improved by JPY 5 million (sic) [ JPY 500 million ] to JPY 4.1 billion, mainly due to decrease in environmental expenses. As a result, special credits and charges net improved by JPY 500 million to a minus JPY 3.4 billion compared with the same period of the previous fiscal year.

Page 6 is about assets, liabilities and net assets. As of end of September, total assets stood at JPY 2,834.7 billion, up JPY 258.8 billion from the end of the previous fiscal year, primarily due to increase in intangible assets from recording goodwill related to the acquisition of TenCate as well as increases in current assets, including notes and accounts receivable.

Please note that JPY 116.1 billion derived by subtracting net assets from the amount paid for the acquisition of TenCate is tentatively recorded as goodwill, since the purchase price allocation has not yet been completed at present. Total liabilities increased by JPY 189.2 billion to JPY 1,595.9 billion, owing mainly to a higher level of interest-bearing debts due to the issuance of the straight corporate funds this July.

Total net assets rose to JPY 69.6 billion to JPY 1,238.8 billion, reflecting an increase in retained earnings due to recognition of net income.

Owner's equity was JPY 1,156.7 billion.

Interest-bearing debts was JPY 996.3 billion, and D/E ratio was 0.86 points.

Regarding cash flows during the 6 months period, net cash provided by operating activities increased, while net cash used for investment activities also increased, mainly due to the acquisition of TenCate. As a result, free cash flows was a minus JPY 128.4 billion.

Page 7 explains about capital expenditures, depreciation and R&D expenses. Capital expenditures decreased by JPY 3.6 billion to JPY 66.3 billion on a year-to-year comparison. Please find details of major capital expenditure projects on this slide.

Depreciation increased by JPY 3.4 billion to JPY 50.1 billion.

R&D expenses increased by JPY 2.0 billion to JPY 33.2 billion.

This graph on Page 8 describes the factor analysis of JPY 400 million decrease in consolidated operating income for the 6 months period on a year-to-year comparison. The difference in quantity was a plus JPY 19.5 billion, due to increases in production quantity and sales volume related to sales expansion. The net change in price was a minus JPY 11.5 billion, due to the continued rising trend in raw material prices, despite the efforts to pass on rise in raw material prices to the sales price.

Cost variance, et cetera, was minus JPY 8.7 billion due mainly to increase in costs related to sales expansion and R&D expenses.

Page 9 presents net sales and operating income results by segment. Using Page 10 and after, I would like to explain the 6 months results of each segment. First, Fibers & Textiles. Overall sales of this segment increased 19.0% to JPY 503.1 billion compared with the same period a year earlier, and operating income rose 17.5% to JPY 41.8 billion.

Although this segment as a whole was affected by the rise in raw material prices, Toray Group covered the negative impact through sales expansion and cost reduction. In apparel applications, the group worked to expand the business format that integrates fibers to textiles to finer products. Shipment of garments and textiles increased due to the clearance of distribution stock of autumn/winter garments, reflecting the last season's cold-weather.

As for industrial applications, automotive applications, including textiles for automobile airbags remains strong in general.

Page 11 is the Performance Chemicals segment. Overall sales increased 11.1% (sic) [ 11.3% ] to JPY 435.0 billion compared with the same period a year earlier, and operating income rose 0.3% to JPY 35.8 billion. Although the segment as a whole was affected by the rise in raw material prices and saw an increase in sales expenses, Toray Group covered the negative impact through sales expansion of resins and chemicals and films products.

I would like to explain each business condition described on the next slide. In the Resins business, we expanded sales of ABS and PPS resins, while passing on rise in raw material prices to the sales price. The Chemicals business saw an improvement in the basic chemicals market and sales of fine chemical products also increased.

In the Films business, battery separator films for lithium-ion secondary batteries and MLCC release films remained strong.

The Electronic and Information Materials business was affected by the slowing demand for OLED-related materials, while electric circuit materials at our Korean subsidiary performed strongly.

Page 13 is the Carbon Fiber Composite Materials segment. Overall sales increased 13.7% to JPY 96.5 billion compared with the same period a year earlier, while operating income fell 43.0% to JPY 6.0 billion.

Sales volume increased mainly in the aircraft and industrial applications. However, the segment was affected by rising raw material prices and intensifying competition. Also, the cost of starting a new project at a composite subsidiary overseas increased. Major reasons for the decrease in the adjustments of operating income include: costs associated with the purchase of shares in TenCate; and the increase of unrealized profit from transactions between the group companies, in line with sales expansion plan of aircraft applications for the second half of the fiscal year.

Business conditions by application are described on the following slide. Demand for the aircraft application was mostly strong, given the completion of the inventory adjustment in the supply chain. In Sports, demand for materials for bicycles, golf shafts, records and hockey sticks showed signs of recovery and proceeded with sales expansion of high value-added products.

In the industrial applications, demand showed a recovery trend, primarily in the environment and energy-related field, led by compressed natural gas tank applications and wind turbine blade applications. Moreover, shipment of composites for PC chassis and electrode substrates for fuel cell vehicles continued to be favorable.

Page 15, in the Environment & Engineering segment, overall sales increased 5.4% to JPY 121.4 billion compared with the same period a year earlier, and operating income declined 16.4% to JPY 5.7 billion.

In the Water Treatment business, demand for reverse osmosis membranes and other products, in general, grew strongly in Japan and abroad.

In terms of Japanese subsidiaries in the segment, though there was an increase in the trading volume of a trading subsidiary, an engineering subsidiary experienced a decreases in plant constructions and shipments of electronics-related equipment.

Page 16 is the Life Science segment. Overall sales increased 0.2% to JPY 26.3 billion compared with the same period a year earlier, while operating income declined 51.1% to JPY 700 million.

In the Pharmaceutical business, sales volume of DORNER increased for overseas markets. However, sales was affected by its generic versions and the revision of National Health Insurance drug price standards. Sales of REMITCH was influenced by the market entry of its generic versions. In the medical devices business, while being affected by the reduction of the insurance reimbursement prices in Japan and the increase in raw material prices, shipment of dialyzers grew strongly in Japan and overseas. Sales volume of the dialysis machines also expanded. The main course of the decline in the adjustments of operating income was the decrease of unrealized profit from transactions between the group companies.

Page 17 shows the business results of major subsidiaries and regions. At Toray International, Fibers & Textiles business performed strongly. Toray Engineering experienced the decreases in plant constructions, which was robust in the same period a year earlier, and the shipment of LCD color filter manufacturing equipments.

Overall performance at overseas subsidiaries were affected by the height in the material prices.

In terms of subsidiaries in Southeast Asia, in the Fibers & Textiles business, PP spunbond for hygiene products performed strongly, despite some subsidiaries reporting sluggish performance. In the Performance Chemicals business, ABS resins and resin compounds for automotive applications performed strongly.

As for subsidiaries in China, Fibers & Textiles business reported strong performance as a whole with sales expansion of textiles, garments and adding value at the same time. In the Performance Chemicals business, sales of Resin Compounding business expanded and the group proceeded with passing on rise in raw material prices to the sales price.

In other businesses, sales expanded in the Water Treatment Membrane business.

Regarding subsidiaries in Korea, despite the effect of the sluggish domestic market and intensifying competition, in Fibers & Textiles business, sales expanded in export business and efforts were made to pass on rise in raw material prices to sales price as well as cost reduction. In the Performance Chemicals business, sales of electric circuit materials expanded.

On Page 18, here shows the comparison of operating income between the first quarter and the second quarter. Consolidated operating income increased JPY 9.9 billion from the JPY 33.9 billion in the first quarter to JPY 43.8 billion in the second quarter. The variance factors of the plus JPY 9.9 billion are explained on the right side of the slide, with breakdowns into segments.

Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2019. Please turn to Page 20.

As for the forecast for the fiscal year ending March 31, 2019, Toray revised its full year consolidated forecast announced on the 6th of August this year, reflecting the business performance of the 6 months period and changes in business environment. Forecasts for net sales are kept unchanged, while the company now expects consolidated operating income of JPY 160 billion and ordinary income of JPY 155 billion. Toray has also kept its forecast for net income unchanged since it expects recording of special credits in the latter half of the fiscal year. These forecasts from October onwards is based on an assumed foreign currency exchange rate of JPY 110 to the U.S. dollar.

Page 21 indicates the consolidated business forecast for the fiscal year ending March 2019 by segment.

The upper table represents net sales and the lower table shows operating income with the difference from the previous forecast located on the far right of the slide.

Please look at Page 22. The revision in operating income forecast for the Carbon Fiber Composite Materials segment is mainly due to the expected increase in manufacturing-related costs at an overseas composite subsidiary, where extra time is required to stabilize operations of the new project.

This concludes my presentation. Thank you very much.