Toray Industries Inc

TSE:3402

Earnings Call Transcript 2018-Q3

[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 third quarter of fiscal March 2018 and the business forecast for the fiscal year ending March 2018.

Please look at Page 1. These are the topics that I will cover today. I would like to begin with a brief summary of business results for the third quarter of fiscal year ending March 2018.

Please turn to Page 3. I will focus on actual figures of the third quarter of fiscal March 2018 in the thick frame on the left table and the year-on-year variance on its right. Net sales of the third quarter increased 12.2% year-on-year to JPY 600.6 billion, and operating income rose 19.4% to JPY 45.3 billion. Ordinary income increased 13.7% to JPY 44.8 billion, and net income increased 28.3% to JPY 30.1 billion. The company achieved record highs of its third quarter as well as its 9 months business results in terms of net sales, operating income, ordinary income and quarterly net income.

Page 4 is about nonoperating income and expenses. Nonoperating income and expenses net for the third quarter under review decreased by JPY 2 billion to minus JPY 500 million, compared with the same period of the previous fiscal year due mainly to decrease in equity in earnings of affiliates as well as increase in costs related to startup of new facilities, including Carbon Fiber Composite Materials-related facilities.

As indicated on the right table, nonoperating income and expenses net of the 9 months period decreased by JPY 3.1 billion to minus JPY 1.8 billion compared with the same period of the previous fiscal year.

Page 5 is about special credits and charges. Special credits for the third quarter under review increased by JPY 2.4 billion year-on-year to JPY 2.7 billion, mainly due to gain on sales of investment securities reflecting the gain on sale of stocks, which became less meaningful to hold. Special charges worsened by JPY 5.4 billion year-on-year to JPY 8.4 billion, owing mainly to loss on liquidation and devaluation of overseas subsidiaries and affiliated companies as well as recording of impairment loss on Carbon Fiber Composite Materials business, et cetera. As a result, special credits and charges net was minus JPY 5.7 billion. Special credits and charges net of the 9 months period decreased by JPY 5.7 billion to minus JPY 9.6 billion compared with the same period of the previous fiscal year.

Page 6 is about assets, liabilities and net assets. As of end of December 2017, total assets stood at JPY 2,658.4 billion, up JPY 261.6 billion from the end of March 2017, primarily due to increases in notes and accounts receivable as a result of higher sales as well as increase in investment securities reflecting such factors as investment to Pacific Textiles Holdings Ltd. Total liabilities increased by JPY 154.4 billion to JPY 1,451.0 billion, owing mainly to a higher level of interest-bearing debt due to the issuance of straight corporate bonds. Total net assets rose JPY 107.2 billion to JPY 1,207.4 billion, reflecting an increase in retained earnings due to net income. Of these, owner's equity came to JPY 1,123.6 billion. Interest-bearing debt was JPY 847.5 billion, whereas, D/E ratio stood at 0.75 points.

Page 7 explains about capital expenditures, depreciation and R&D expenses. Capital expenditures for the 9 months period under review increased by JPY 9.0 billion year-on-year to JPY 107.6 billion for investments to major capital expenditure projects as listed in the table below. Depreciation increased JPY 4.9 billion to JPY 71.4 billion. R&D expenses increased by JPY 4.0 billion to JPY 46.7 billion.

On Page 8, the upper table indicates net sales and operating income results by segment for the third quarter net of the 3 months period, whereas the lower table describes the results of the 9 months period. To compare the 3 months period on a year-to-year comparison, net sales and operating income increased in all segments as a result of aggressive sales expansion as well as promotion of high value creation and power cost reduction.

Using Page 9 and after, I would like to explain the results of each segment. Please refer to the figures in the box on the left side of the upper table and the column below where third quarter October to December is indicated.

First, Fibers & Textiles. Overall sales increased 11.8% year-on-year to JPY 274.8 billion, and operating income rose 18% to JPY 23.0 billion. In Japan, demand for some industrial applications such as automobiles was strong. In apparel applications, demand from materials for the autumn/winter garments remained strong due to the cold winter. Toray Group not only continued to strive to expand sales in both apparel applications and industrial applications, but also worked to expand the business format that integrates fibers to textiles to final products while focusing on strengthening cost competitiveness.

Overseas, while shipment for apparel applications was slow at some subsidiaries in Southeast Asia and Republic of Korea, business as a whole was generally strong led by automotive applications, including airbag fabrics and auto microfiber, nonwoven fabric with suede texture for car seats and PP spunbond for hygiene products, reflecting demand growth in Asia.

Page 10. In the Performance Chemicals segment, overall sales increased 15.2% year-on-year to JPY 209.0 billion, and operating income rose 19.2% to JPY 20.0 billion.

I would like to explain each business condition described on the next slide. As for resin and chemical business, shipment of engineering plastics for automotive applications was strong in general, mainly in Japan. Besides automotive applications, Toray Group also promoted sales expansion of ABS and PPS resins. In the film business, shipment of battery separator films for lithium-ion secondary batteries increased, reflecting demand growth. While films for electronic parts, which are used for applications such as smartphones, continued to be favorable. In the electronic and information materials business, shipment of OLED-related materials expanded due to the increase in demand for OLED mid-panels. Shipment of high-functional electric circuit materials remained strong. Trading companies increased their sales.

Page 12. In the Carbon Fiber Composite Materials segment, overall sales increased 14.7% year-on-year to JPY 43.4 billion, and operating income rose 1.1% to JPY 4.6 billion.

Business conditions by application are described on the following slide. In the aerospace applications, while the build rate of large-scale aircraft decreased, final demand for small- and medium-sized aircraft remained strong, and shipment showed signs of recovery as the inventory adjustment in the supply chain was completed. In sports, end-user demand for the main applications, including bicycles, golf shafts and fishing rods remained sluggish. However, the company proactively pursued sales expansion in each application.

In the industrial applications, demand showed a recovery trend in environment and energy-related field led by regulatory products for compressed natural gas tank applications in the U.S. However, demand remained sluggish in Europe with impact from the strong euro. While the demand for wind turbine blade applications and large tow products remained strong, it did not achieve full recovery due to the impact such as intensifying competition. Meanwhile, sales of composites for PC chassis and electric substrates of fuel sales tax remained strong.

Page 14. In Environment & Engineering segment, overall sales increased 4.9% year-on-year to JPY 55.7 billion, and operating income rose 13% to JPY 2.5 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 domestic subsidiaries in the segment, although sales decreased at trading companies, our construction subsidiary performed strongly.

Page 15. In the Life Science segment, overall sales increased 5.1% year-on-year to JPY 13.6 billion, and operating income increased by JPY 800 million to JPY 600 million. In the pharmaceutical business, shipment of pruritus treatment REMITCH expanded due to the impact of the introduction of a new dosage form and approval of new indications. On the other hand, shipment of FERON and DORNER remained sluggish due to the impact of alternative medicines and generic drugs. In the medical devices business, shipment of dialyzers grew strongly, mainly in Japan.

This graph on Page 16 describes the factor analysis of JPY 9.2 billion increase in consolidated operating income for the 9 months period on a year-to-year comparison. First of all, there was a positive impact of a plus JPY 27.0 billion from difference in quantity with the contribution from the Performance Chemicals, Fibers & Textiles and the Environment & Engineering segments. The net of rising selling prices of petrochemical-based products and rising raw materials cost and fuel prices was a minus JPY 14.8 billion due to the negative impact from the Fibers & Textiles, Performance Chemicals and the Carbon Fiber Composite Materials segments. Another negative factor was a minus JPY 10.5 billion from variance in operating cost, reflecting increase in costs related to sales expansion and R&D expenses in those segments.

Page 17 shows the business results of major subsidiaries and regions. At Toray International, Fibers & Textiles and Performance Chemicals businesses performed strongly. Toray Engineering reported strong performance of its industrial machinery and electronics-related equipment.

In terms of subsidiaries in Southeast Asia, Fibers & Textiles business performed strongly led by materials for automotive applications and hygiene products. In the Performance Chemicals business, ABS resins and films for electronic parts performed strongly.

As for subsidiaries in China, Fibers & Textiles business reported strong performance as a whole. In the Performance Chemicals business, sales of resin compounding business expanded. However, there was an impact from the rise in raw materials prices.

In regard to subsidiaries in Korea. Fibers & Textiles business were affected by the sluggish domestic market, intensifying competition and the rise in raw materials cost and fuel prices. The Performance Chemicals business reported increase in sales and income mainly due to the merger of the battery separator film business to Toray in April 2017. This merger led to the reporting of the Korean subsidiaries as one of Toray's overseas subsidiary from this fiscal year. Their business performance was previously included in the consolidated results of Toray's Japanese subsidiary.

Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2018. Please turn to Page 19. The forecast for the company of the fiscal year ending March 2018 remains unchanged from the previous forecast announced on the 10th of November last year. However, we have slightly revised the business forecast by segment, reflecting the business performance of the 9 months period and the current business environment. These forecasts from January onwards is based on an assumed foreign currency exchange rate of JPY 110 to the U.S. dollar.

Page 20 indicates the consolidated business forecast for the fiscal year ending March 2018 by segment. I would like to explain the difference between the previous forecast and the new forecast on a full year basis. In the Fibers & Textiles segment, the company expects sales to decrease at trading companies compared with the previous forecast. In the Performance Chemicals segment, we will pursue sales expansion in businesses such as resins, chemicals, films, electronic and information materials and trading. In the Carbon Fiber Composite Materials segment, the company expects impact from the rise in raw materials prices as well as the increase in operating cost, including R&D expenses. In the Environment & Engineering segment, the engineering subsidiary and trading subsidiaries are expected to perform strongly.

This concludes my presentation. Thank you very much.