Toray Industries Inc
TSE:3402
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Toray Industries Inc
Earnings Call Analysis
Q2-2024 Analysis
Toray Industries Inc
In a thoughtful gesture, Masahiko Okamoto of Toray Group thanks stakeholders for their continued interest and moves to deliver the business results for Q2 ended September 2023, followed by projections for the fiscal year ending March 2024. Despite the complexities of the market and the company's vast line of activities, Okamoto addresses the financial outcomes with clarity.
A concerning downtrend is observed as the consolidated revenue for Q2 diminished by 4.9% to JPY 1,199.4 billion, compared to the previous year. This decline aligns with a 10.6% dip in core operating income to JPY 48.7 billion and a steeper fall in profit by 51.2% to JPY 28.9 billion, hinting at challenges that could rattle investors.
The balance sheet paints a mixed picture. While total assets grew to JPY 3,416.3 billion thanks to increased receivables and inventories, liabilities too nudged up to JPY 1,617.9 billion, primarily due to borrowings. The hike in assets and owner's equity portrays financial resilience, yet the uptick in interest-bearing liabilities, standing at JPY 986 billion, raises prudence flags. Additionally, a negative JPY 4.2 billion in special items compared to last year further sours the financial standpoint.
Toray shows a commitment to the future with capital expenditures rising by JPY 12.8 billion to JPY 55.1 billion, reflecting a long-term strategic stance. Although R&D expenditures saw a marginal decrease, the sustained high investments demonstrate a forward-thinking approach, essential for innovation-led growth.
The Fibers & Textiles segment wrestled with a revenue drop, affected by global market conditions, yet managed a 13.9% growth in operating income. In contrast, the Performance Chemicals segment suffered an 8.5% revenue slump and a significant core operating income decrease of 42.2%, revealing stark differences within business units.
Positively, the Carbon Fiber Composite Materials enjoyed a 0.8% revenue uptick and a 35.9% core operating income surge, supported by aerospace applications. The Environment & Engineering segment too shined with a 5.2% revenue increase and a 23.3% boost to core operating income, propelled by water treatment solutions and robust construction sales.
The Life Science segment didn't escape the overall negative trend, experiencing a 4.3% revenue decrease and posting a core operating loss. This downturn is attributed to competitive pressures, such as generic drug introductions and inventory adjustments overseas.
Regionally, Toray International and subsidiaries in Southeast Asia and China echoed similar narratives, grappling with dwindling sales across fiber, chemicals, and resins due to adverse market conditions. However, the Korea subsidiaries bucked the trend, enlarging sales in key segments.
Looking ahead, the forecast for the fiscal year ending March 2024 treads cautiously, with an expected revenue of JPY 2,540 billion and a profit of JPY 71 billion, operating income projections stand firm. However, global economic headwinds like inflation, high interest rates, and geopolitical tensions inject uncertainty, compelling Toray to hedge expectations with a conservative exchange rate assumption of JPY 140 to the U.S. dollar.
Concluding this report, Okamoto has unraveled the fiscal intricacies of Toray's operations. Even though investors may feel uneasy with the mixed financial signals, Toray's strategic capital deployments and resilient segments could be the silver linings in this ambiguous economic canvas.
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Thank you very much for joining us today despite your busy schedule. On behalf of Toray Group, I would like to take this opportunity to extend my gratitude toward your continued understanding and your interest in our management and business activities.
Now I would like to report Toray's business results for the second quarter ended September 30, 2023, and the business results for the fiscal year ending March 2024. 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 second quarter ending September 30, 2023. We start on Page 3. Consolidated revenue for the second quarter decreased 4.9% compared with the same period a year earlier to JPY 1,199.4 billion. Core operating income decreased 10.6% to JPY 48.7 billion, and profit decreased 51.2% to JPY 28.9 billion.
Page 4 is about special items. Special items for the second quarter worsened by JPY 23.6 billion to negative JPY 4.2 billion compared with the same period of the previous fiscal year.
Page 5 is about assets, liabilities, equity and free cash flow. As for financial condition at the end of September 2023, most assets on the liabilities were affected by the increase in translated yen amount of overseas subsidiaries because of the depreciation of the yen. Total assets stood at JPY 3,416.3 billion, up JPY 222.3 billion from the end of the previous fiscal year due primarily to an increase in trade and other receivables, inventories, and tangible fixed assets. Total liabilities increased JPY 59.7 billion from the end of the previous fiscal year to JPY 1,617.9 billion, owing mainly to increases in borrowings.
Total equity rose by JPY 162.6 billion compared with the end of the previous fiscal year to JPY 1,798.4 billion. Owner's equity was JPY 1,693.3 billion. Interest-bearing liabilities was JPY 986 billion, and the D/E ratio was 0.58. Free cash flow was positive at JPY 8.3 billion.
Page 6 explains about capital expenditures, depreciation and amortization and R&D expenditures. Capital expenditures for 6 months increased by JPY 12.8 billion to JPY 55.1 billion on a year-to-year comparison. Meanwhile, depreciation and amortization increased by JPY 0.1 billion to JPY 65 billion. R&D expenditures decreased by JPY 0.1 billion to JPY 32.8 billion compared with the same period of the previous fiscal year.
The table on Page 7 describes revenue and core operating income by segment. In addition, the growth on this page shows the factor analysis of JPY 5.8 billion decrease in core operating income for the 6 months on a year-to-year comparison. The difference in quantity was minus JPY 10.1 billion due to decrease in production and sales volume, mainly in Performance Chemicals segment. The net change in price was a plus JPY 11.7 billion due to the falling raw material prices compared with the same period of the previous fiscal year. Cost variance, et cetera, was minus JPY 7.8 billion, mainly due to increase in fixed costs.
Using Page 8 and after, I would like to explain the results of each segment. First, Fibers & Textiles. Revenue of the overall segment decreased 5.5% to JPY 481.2 billion compared with the same period a year earlier, and core operating income increased 13.9% to JPY 27.2 billion. Apparel applications were impacted by the worsening market conditions in the U.S. and Europe, but the trading subsidiaries in Japan performed strongly.
Hygiene material applications were sluggish due to the worsening supply-demand balance. Industrial applications witnessed a continued demand recovery trend in automotive applications and there was improvement in the spread from the price decline of natural gas, et cetera, in Europe.
Page 9 is the Performance Chemicals segment. Revenue decreased 8.5% to JPY 433.1 billion compared with the same period a year earlier, and core operating income decreased 42.2% to JPY 14.5 billion.
I would like to explain the conditions of each business on the next page. In the resins and chemicals businesses, the resins business was weak given the impacts of demand declines in the Chinese market and other factors. In the films business, demand declined due to inventory adjustment in supply chains for electronic parts. In the electronic, information materials business, demand for OLED-related materials and circuit materials saw some recovery.
Page 11 is the Carbon Fiber Composite Materials segment. Revenue increased 0.8% to JPY 141.1 billion compared with the same period a year earlier, and the segment posted a core operating income of JPY 7.6 billion, 35.9% increase from the same period a year earlier. I would like to explain the status of each application on the next page.
In the aerospace applications, the production rate of commercial aircraft at the major customers showed a recovery trend. The sports applications was slow due to the full-fledged inventory adjustments, mainly in general purpose products for outdoor leisure. In the industrial applications, in regular tow, demand for pressure vessels expanded with the rise of environmental awareness, while in large tow wind turbine blade application has entered into an adjustment phase.
Page 13 in the Environment & Engineering segment, revenue increased 5.2% to JPY 111.5 billion compared with the same period a year earlier, and the core operating income increased 23.3% to JPY 10.2 billion. In the water treatment business, shipment to the U.S. and China, the 2 major markets for reverse osmosis membranes was strong. Further, sales of our construction subsidiary in Japan was also strong.
Page 14 is the Life Science segment. Revenue decreased 4.3% to JPY 24.8 billion compared with the same period a year earlier, and the core operating income decreased by JPY 0.9 billion to negative JPY 0.5 billion. In the pharmaceutical business, sales of oral antipruritic drug REMITCH were affected by the introduction of its generic versions and the NHI drug price revision and sales of orally active prostacyclin derivative DORNER were affected by inventory adjustment overseas. In the medical devices business, sales of dialyzers were affected by the soaring prices of raw materials and fuels.
Page 15 shows the business results of major subsidiaries and regions. At Toray International, sales of fibers and textiles, resins, chemicals and films decreased. At our subsidiaries in Southeast Asia, in the Fibers & Textiles business, apparel applications were affected by the worsening market conditions in the U.S. and Europe. In the Performance Chemicals business, sales of ABS resins and polyester films decreased.
At our subsidiaries in China, in the Fibers & Textiles business, apparel applications were affected by the sluggish market conditions in the U.S. and Europe. The Performance Chemicals business was affected by the demand decrease in resin products.
As for our subsidiaries in the Republic of Korea, in the Fibers & Textiles, supply and the demand balance of nonwoven fabric worsened. Meanwhile, in the Performance Chemicals business, sales of polyester films, battery separator films and circuit materials expanded.
Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2024. Please turn to Page 17. The pace of recovery in the global economy is expected to remain slow due to factors such as the inflation and high interest rates in the U.S. and Europe dampening consumer spending and capital investment, the slow recovery in the Chinese economy and the situation in the Middle East. The Japanese economy is also expected to show a gradual recovery. However, the deepening real estate recession in China, unstable prices of primary commodities, including food and energy, and continued monetary tightening in U.S. and Europe to tackle the sustained inflation are among downward risks for the economy in Japan and abroad.
For the fiscal year ending March 31, 2024, Toray revised its full year consolidated forecast announced on August 7, 2023, taking into consideration its business performance for the 6 months of the fiscal year and the changes of business environment. It now expects revenue of JPY 2,540 billion and profit of JPY 71 billion. Operating income of JPY 120 billion remain unchanged. These forecasts from October onwards is based on an assumed foreign currency exchange rate of JPY 140 to the U.S. dollar.
Page 18 shows the consolidated business forecast for the fiscal year ending March 2024 by segment.
Page 19 shows the comparison of core operating income between the forecast announced on August 7 and the new forecast with breakdowns into segments. The factors behind the differences are shown on the right side of the table.
This concludes my presentation. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]