Toray Industries Inc

TSE:3402

Earnings Call Transcript 2021-Q3

[Masahiko Okamoto, executive]

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 towards your continued understanding and your interest in our management and business activities.

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 third quarter ended December 31, 2020.

Please turn to Page 3. Consolidated revenue for the 9-month period declined 14% compared with the same period a year earlier to JPY 1,364.2 billion. Core operating income fell 35.7% to JPY 67 billion, and profit declined by 62.8% to JPY 27.9 billion. Meanwhile, core operating income for the 3 months of the third quarter increased slightly from the same period of the previous fiscal year.

Page 4 is about special items. Special items for the 9-month period worsened by JPY 25.9 billion to minus JPY 30.8 billion compared with the same period of the previous fiscal year, mainly due to our U.S. carbon fiber-related subsidiary recording impairment losses.

Page 5 is about assets, liabilities, equity and free cash flow. As of end of December 2020, total assets stood at JPY 2,773.1 billion, up JPY 39.6 billion from the end of the previous fiscal year mainly due to increases in cash and deposits. Owner's equity was JPY 1,150.7 billion. Interest-bearing liabilities was JPY 1,015.7 billion, and D/E ratio was 0.88. Free cash flow was JPY 52.5 billion.

Page 6 explains about capital expenditures, depreciation and amortization and R&D expenditures. Capital expenditures for the 9-month period was JPY 93.8 billion. Depreciation and amortization was JPY 88.7 billion. And R&D expenditures was JPY 44.9 billion.

This graph on Page 7 describes the factor analysis of JPY 37.2 billion decrease in core operating income for the 9-month period on a year-to-year comparison. The difference in quantity was a minus JPY 73.9 billion due to decrease in sales and production with the impact of COVID-19. The net change in price was a plus JPY 7.4 billion. This was due to the decline in raw material prices compared with the same period of the previous fiscal year. Cost variance, et cetera, was plus JPY 30.3 billion as a result of efforts to reduce operating expenses, production fixed costs and other expenses.

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 16.4% to JPY 536.3 billion compared with the same period of the previous fiscal year. And core operating income fell 41.7% to JPY 28 billion.

The net change in price was positive, reflecting the decline in raw materials prices, and the company has been working on cost reduction. However, difference in quantity was significantly negative due to the impact of the stagnation of production activities and consumption behavior caused by the COVID-19 in Japan and overseas.

In apparel applications, demand declined due to lockdown and excessive channel inventory in various countries. While in industrial applications, general purpose materials remained weak, and sales volume declined. Demand for nonwoven fabrics increased for the applications of medical gowns and masks. And there were signs of recovery in the automotive applications, but these factors fell short of offsetting the decline in the overall sales volume in the segment.

Page 10 is the Performance Chemicals segment. Revenue declined 10.7% to JPY 519.9 billion compared with the same period of the previous fiscal year. And core operating income increased 1.4% to JPY 47.6 billion. Difference in quantity was negative due to the impact of the stagnation of production activities caused by the COVID-19.

Meanwhile, cost variance, et cetera, was positive because of the cost reduction efforts. And the net change in price also turned positive reflecting the decline in raw materials prices.

I would like to explain the conditions of each business on the next page, 11. The resins business was affected by the stagnation in production activities caused by the COVID-19, but demand was strong in the third quarter with automobile manufacturers operating and the recovery of the Chinese economy.

The chemicals business was affected by the deteriorating market conditions in the first half of the fiscal year, but saw a recovery trend in the basic chemicals market in the third quarter.

In the films business, battery separator films for lithium-ion secondary batteries were affected by lower market prices, while polyester films for optical applications and electronic components performed strongly.

In the electronic and information materials business, electronic circuit materials were weak, but OLED-related demand increased in the third quarter.

Page 12 is the Carbon Fiber Composite Materials segment. Revenue declined 24.8% to JPY 134.9 billion compared with the same period of the previous fiscal year. And posted core operating loss of JPY 3.7 billion, a decline of JPY 21.8 billion from a year earlier.

Toray Group worked toward drastic cost reductions. And sales of wind turbine blades in the industrial applications remained strong, while aerospace applications were affected by the decline in the production rate of commercial aircraft.

I would like to explain the status of each application on the next page, 13. Aerospace applications were affected by the decline in the production rate at major customers due to the impact of COVID-19 as well as shutdown of plants. Although sports applications were affected by COVID-19, demand for bicycles, fishing rods and golf shaft applications for outdoor leisure showed a recovery trend in the third quarter.

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 were weak due to the impact of COVID-19. As for large-tow products, shipment of wind turbine blade applications remained strong.

As for composite business, shipments of materials of medical devices for the diagnosis of COVID-19 pneumonia expanded. Meanwhile, sales at an overseas composites-related subsidiary decreased due to the lower demand for automotive applications with the impact of COVID-19.

Page 14 in the Environment & Engineering segment, revenue declined 4.4% to JPY 124.6 billion compared with the same period of the previous fiscal year, while core operating income rose 44.9% to JPY 8 billion. In the water treatment business, demand for reverse osmosis membranes and other products remained strong on the whole despite shipment to some regions being affected by the COVID-19.

Among domestic subsidiaries in the segment, an engineering subsidiary experienced decreases in the shipment of some electronics-related equipment. Meanwhile, a construction subsidiary posted profits from progress in a large-scale construction project and completion of a real estate project.

Page 15 is the Life Science segment. Revenue declined 4.8% to JPY 38.4 billion compared with the same period of the previous fiscal year, while core operating income rose 9.3% to JPY 1.8 billion.

In the pharmaceutical business, sales of pruritus treatment REMITCH were influenced by the introduction of its generic versions. And there was an impact of a major NHI drug price revision in April last year.

In the medical devices business, shipment of dialyzers grew strongly in Japan and overseas, despite the impact of medical institutions postponing nonurgent operations due to the spread of the COVID-19. The company implemented cost reductions including operating expenses.

Page 16 shows the business results of major subsidiaries and regions. At our subsidiaries in Southeast Asia, the Fibers & Textiles business remained sluggish in both apparel and industrial applications due to the impact of COVID-19. In the Performance Chemicals business, sales of ABS resins were strong due to a recovery in demand in the Chinese market, mainly for use in home appliances as well as the improved spread.

As for subsidiaries in China, sales for nonwoven fabrics in the Fibers & Textiles business remained strong on the back of increased demand for masks due to the impact of COVID-19. However, sales for apparel 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, polyester films performed strongly, but demand for battery separator films for lithium-ion secondary batteries were affected by the decline in market prices.

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 spread of COVID-19 will repeat the cycle of slowing down and respreading but eventually subside, and the economy in Japan and overseas would follow a gradual recovery trend.

Toray revised its consolidated business forecast announced on the 6th of November last year, taking into consideration its business performance of the 9-month period of the fiscal year and the changes and the business environment.

The company now expects revenue at JPY 1,870 billion, core operating income at JPY 90 billion and profit at JPY 39 billion. This forecast from January 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.

Next, Page 20 shows the comparison of core operating income between the previous forecast and the new forecast 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.]