Toray Industries Inc

TSE:3402

Earnings Call Transcript 2020-Q3

[Toru Fukasawa, executive]

I am Fukasawa, Senior Vice President of the company. Thank you very much for joining us today despite your busy schedule. Now I would like to report Toray Industries' business results for the third quarter and fiscal year ending March 2020 and the business forecast for the fiscal year ending March 2020.

Now please look at Page 3. On the right side of this table here shows the figures of the 9 months period under review. Net sales for the 9 months under review declined 7.0% to JPY 1,681.4 billion compared with the same period of the previous fiscal year. Operating income declined 7.0% to JPY 104.5 billion. Ordinary income fell 9.4% to JPY 101.0 billion and net income decreased 18.6% to JPY 66.2 billion.

Please look at Page 4. This is about nonoperating income and expenses. Nonoperating income decreased by JPY 3.1 billion due mainly to decrease in equity in earnings of affiliates. Nonoperating expenses decreased by JPY 600 million. As a result, nonoperating income and expenses net worsened by JPY 2.5 billion to minus JPY 3.4 billion compared with the same period of the previous fiscal year.

Please look at Page 5. Here shows the special credits and charges. Special credits for the 9 months period worsened by JPY 12.5 billion to JPY 4.7 billion mainly due to a decrease in gain on sales of property, plant and equipment. Special charges improved by JPY 900 million to JPY 6 billion. As a result, special credits and charges net worsened by JPY 11.6 billion to a minus JPY 1.4 billion compared with the same period of the previous fiscal year.

Page 6 is about assets, liabilities and net assets. As of end of December 2019, total assets stood at JPY 2,786.4 billion, down JPY 1.9 billion from the end of the previous fiscal year, primarily due to decreases in notes and accounts receivable. Total liabilities declined by JPY 32.4 billion to JPY 1,542.0 billion, owing mainly to decreases in notes and accounts payable. Total net assets increased by JPY 30.5 billion to JPY 1,244.4 billion. Owner's equity came to JPY 1,158.7 billion. Interest-bearing debt was JPY 976.7 billion and D/E ratio was 0.84 points.

Page 7 explains about capital expenditures, depreciation and R&D expenses. Capital expenditures decreased by JPY 9.1 billion to JPY 99.6 billion on a year-to-year comparison. Major capital expenditure projects are described here on this slide. Meanwhile, depreciation increased by JPY 4.7 billion to JPY 81.7 billion. R&D expenses decreased by JPY 800 million to JPY 49.1 billion.

This graph on Page 8 describes the factor analysis of JPY 7.9 billion decrease in consolidated operating income on a year-to-year comparison. The difference in quantity was a minus JPY 9.1 billion due to decrease in sales and production in the Fibers & Textiles and Performance Chemicals segment. The net change in price was a plus JPY 24.6 billion. This was due to the decline in raw material prices compared with the previous fiscal year. Cost variance, et cetera, was minus JPY 19.6 billion due mainly to the increase in production fixed costs related to business expansion.

Page 9 presents net sales and operating income results by segment.

Using Page 10 and after, I would like to report the 9 months results of each segment. Page 10 is Fibers & Textiles. Overall sales of this segment declined 10.4% to JPY 682.2 billion compared with the same period a year earlier, and operating income fell 20.5% to JPY 47.9 billion. In apparel applications, Toray Group pursued sales expansion of materials for uniforms in Japan and for sports applications in the U.S. and Europe. However, shipments remained weak in general. Overseas, demand for garments and textiles remained sluggish.

In industrial applications, shipments remained weak in general both in Japan and overseas, especially overseas, reflecting the prolonged trade frictions between the U.S. and China and slowdown in the Chinese economy. Demand for automotive applications in Europe and China and hygiene products in China remained sluggish.

Page 11 is the Performance Chemicals segment. Overall sales declined 10.0% to JPY 589.1 billion compared with the same period a year earlier, and operating income fell 7.7% to JPY 48.0 billion. Although the net change in price remained positive, reflecting the decline in raw materials prices, operating income decreased due to lower sales volume caused by the slowdown in the Chinese economy.

I would like to explain the conditions of each business on the next page. In the resins business, sales in Japan were strong in general, while sales of both automotive and home appliance applications were slow overseas primarily due to the impact of the slowdown in the Chinese economy. The chemicals business was affected by the decline in the basic chemicals market.

In the films business, shipment of battery separator films for lithium-ion batteries increased, reflecting demand growth, while polyester films were affected by the inventory adjustment for optical as well as electronic parts-related applications. The electronic and information materials business saw strong performance of OLED-related materials and electric circuit materials.

Page 13 is the Carbon Fiber Composite Materials segment. Overall sales increased 16.8% to JPY 180.2 billion compared with the same period a year earlier, and operating income rose 98.5% to JPY 16.6 billion. Business remained strong as a whole. There was an expansion of demand for the aircraft application, strong performance in industrial applications in the environment and energy-related fields such as compressed natural gas tanks and wind turbine blades and recovery in the demand for sports applications.

The net change in price remained positive with steady progress in price increases of general purpose products on the back of improvement in the supply-demand balance. From a cost perspective, there was an increase in production fixed costs and sales expenses accompanying business expansion.

I would like to explain the status of each application on the next page. In the aerospace applications, demand for aircraft expanded, and the company had positive effects from the consolidation of Toray Advanced Composites, which is formerly TenCate.

In sports, each application saw an increase in its high value-added products. In terms of regulatory products among the industrial applications, demand for environment and energy-related fields led by compressed natural gas tank applications and the automotive applications for luxury cars in Europe remained strong. As for large tow products, shipment of wind turbine blade applications continued to expand.

Regarding composite business, materials for PC chassis and electrode substrates for fuel cell vehicles and stationary fuel cells remained strong.

Page 15 is the Environment & Engineering segment. Overall sales decreased 4.2% to JPY 176.8 billion compared with the same period a year earlier, and operating income declined 28.2% to JPY 5.7 billion. In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole in Japan and overseas. Among domestic subsidiaries in this segment, a construction subsidiary was negatively affected by the decline of high-profit project orders, and an engineering subsidiary experienced decreases in the shipment of some electronics-related equipment.

Page 16 is the Life Science segment. Overall sales declined 0.5% to JPY 40.0 billion compared with the same period a year earlier, while operating income rose 51.2% to JPY 1.9 billion. In the pharmaceutical business, sales of DORNER were affected by the introduction of its generic versions. While sales of REMITCH were also influenced by the introduction of its generic versions, its shipment was strong partly due to the growth in the entire market.

In the medical devices business, shipment of dialyzers grew strongly in Japan and overseas. In addition, the company pursued cost reduction, including sales expenses.

Page 17 shows the business results of major subsidiaries and regions. At Toray International, sales of Fibers & Textiles, resins, films and chemicals remained weak. At Toray Engineering, shipment of electronics-related equipment decreased. Toray Construction experienced negative effects from the decline of high-profit project orders.

As for our subsidiaries in Southeast Asia, in the Fibers & Textiles business, some subsidiaries reported weak performance, reflecting the impact of deteriorating market conditions and the effects from the decline in sales volume. In the Performance Chemicals business, ABS resins were affected by the decrease in sales volume and price decline.

As for subsidiaries in China, in the Fibers & Textiles business, garments and textiles for apparel applications were affected by deteriorating domestic market conditions and saw a decrease in shipment when compared with its strong performance during the same period of the previous fiscal year. Industrial applications were also impacted by the deteriorating market conditions. In other business, sales of dialyzers remained strong.

In terms of subsidiaries in Korea, in the Performance Chemicals business, the spread for the polyester films improved, and shipment of battery separator films for lithium-ion secondary batteries and electric circuit materials increased. In other business, sales of RO membranes remained strong.

On Page 18, here shows the comparison of operating income between the second quarter and the third quarter. Consolidated operating income decreased JPY 4.3 billion from JPY 37.1 billion in the second quarter to JPY 32.8 billion in the third quarter. The various factors of the minus JPY 4.3 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 2020. Please turn to Page 20. As for the forecast for the fiscal year ending March 31, 2020, Toray revised its full year consolidated forecast announced on the 7th of November 2019, reflecting the business performance of the 9-months period and changes in the business environment. The company now expects net sales of JPY 2,250 billion, consolidated operating income of JPY 130 billion, ordinary income of JPY 121 billion and net income of JPY 72 billion.

The negative impact from factors such as the slowdown in the Chinese economy ensuing from the trade friction between U.S. and China and the decline in demand for automobiles and smartphones were greater than our previous expectations. The company was partially impacted by these factors in the third quarter. We have downwardly revised our forecast this time because we expect such sluggishness in the market to continue throughout the fourth quarter. This forecast from January onwards is based on an assumed foreign currency exchange rate of JPY 105 to the U.S. dollar.

Page 21 indicates the consolidated business forecast for the fiscal year ending March 2020 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.

On Page 22, here shows the comparison of operating income forecast between the previous forecast and the new forecast, with the variance factors explained on the right side of the slide with breakdowns into segments.

This concludes my presentation. Thank you very much.

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