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Earnings Call Transcript 2024-Q1

[Hideki Somemiya, executive]

Good evening, everyone. I'm Hideki Somemiya, CFO of Resonac Holdings Corporation. Thank you very much for your consistent support and understanding of our company. I'll explain the overview of the financial results of the first quarter FY 2024 ending in December.

Please see Slide 2 for key takeaways. There are 2 points. First point is about the financial results of January to March quarter. Sales and income increased year-on-year and compared to the initial forecast, indicating continued moderate recovery in demand, including semiconductor materials, and that our company was able to capture the recovery trend.

Second point is about 2024 full year forecast. Prior to the results announcement today, we already made a timely disclosure of the upward revision on April 16. And the announced figure is based on the revision of the first half from January to June alone. So the review of the full year, including the second half, will be announced as the first half figures unfold.

Now I'd like to move to the first quarter results in FY 2024. Please turn to Page 4. This slide shows consolidated results of the first quarter FY 2024 in a year-on-year comparison. Please see the table on the left. Net sales in the first quarter was JPY 321.4 billion, up JPY 22.5 billion or 7.5% year-on-year. Operating income was in black, JPY 8.9 billion, up JPY 18.2 billion from the loss in the previous year. Ordinary income was also in black, JPY 11 billion, up JPY 21.9 billion year-on-year. Net income attributable to owners of the parent was in black, JPY 27.1 billion, up JPY 39.3 billion year-on-year. EBITDA was JPY 36.3 billion, up JPY 18.4 billion year-on-year. And EBITDA margin to sales was 11.3%, up 5.3 points.

Table on the right shows the results of the ongoing businesses in year-on-year comparison. Remember, this year excludes results of the diagnostic medicine business that was divested in the previous year. Please refer to this at your convenience.

Please turn to the next slide, Page 5. This chart shows a breakdown of operating income changes from operating loss of JPY 9.2 billion in January to March in the previous year to operating profit of JPY 8.9 billion in the corresponding period of this year. The breakdown of profit increase of JPY 18.2 billion year-on-year includes JPY 9.4 billion of sales volume. Major contributor is JPY 10.9 billion in Semiconductor and Electronic Materials business, which was supported by sales volume recovery in Semiconductor Materials and Hard Disk Media.

On the other hand, Chemical segment profit worsened by JPY 2.1 billion as the sales volume decreased with sluggish market in Graphite Electrode and lower utilization due to the shutdown maintenance of petrochemical derivatives. Sales price pushed up profit by JPY 3.8 billion, mainly in Semiconductor and Electronic Materials segment. Besides the benefits by depreciation of yen, successful price hike negotiations to pass on the material cost increase to price in many businesses delivered results.

Next, variable and fixed cost pushed up profit by JPY 2.7 billion due to the substantial fixed cost reduction impact in Hard Disk Media business through structural reform implemented in the previous year despite the cost increase factors including continued material cost increase and the depreciation of new facilities. Others increased profit by JPY 2.3 billion. It is mainly due to the product mix improvement.

From this year, on the following Page 6 and 7, breakdown of operating income changes by segment are shown. Please refer to them later.

Page 8 shows results by segment with sales, operating income and EBITDA by segment in the year-on-year comparison. Prior to the explanation, let me give you a heads-up. As mentioned in the previous results meeting, from this fiscal year, Aluminum Specialty Components business moved from Innovation Enabling Materials to Mobility segment. In this presentation materials, the segment change retroactively applied. So please take note that the numbers shown here are not same as the one shown in the previous year.

Semiconductor and Electronic Materials segment marked significant sales and profit increase year-on-year, as shown at the top. On the contrary, Chemicals segment on the fourth line marked sales and profit decrease.

From Page 9 to 12, segment summary is shown. I explain only the outlines, but performance overview on the right shows the detailed conditions of subsegment. So please refer to them later.

Semiconductor and Electronic Materials segment is shown on Page 9. Let me cover only the key points. Sales were JPY 97.5 billion, up 40% year-on-year. Operating income was in black, JPY 6.3 billion, up JPY 16.6 billion year-on-year. In January to March last year, back-end Semiconductor Materials and Hard Disk Media for data center were at the bottom of demand, but gradual demand recovery progressed since April to June quarter last year. And sales and profit increased with sales volume growth. Front-end semiconductor materials showed a slight sales growth. And this is because the front-end materials production adjustment have just started in the previous January to March quarter, and sales have not hit the bottom yet.

Page 10 shows Mobility. Sales increased to JPY 52.6 billion, up 1% year-on-year. And operating income increased to JPY 1.7 billion, up JPY 1.4 billion year-on-year. Sales of Aluminum Specialty Components are included in automotive products. Automotive product sales increased as automobile production recovered with continued regional variance and the products for new model vehicles have been launched. Lithium-ion battery material sales increased due to sales volume increase for EVs despite the lingering impact of sluggish consumer demand.

Page 11 shows Innovation Enabling Materials. Sales increased 8% year-on-year to JPY 22.3 billion. Operating income increased JPY 1.2 billion year-on-year to JPY 2.4 billion. Sales and profit increased due to material cost pass-through to product selling prices, sales volume increase and weaker profit due to the time lag from the material cost increase to selling price pass-through in January to March last year.

Page 12. The final page of segment summary shows Chemicals. Sales decreased 8% year-on-year to JPY 116.8 billion. And operating income decreased JPY 3.2 billion to JPY 0.7 billion. In olefins and derivatives, both sales and profit decreased as sales volume and utilization were down due to the shutdown maintenance of derivatives despite selling price increase with naphtha price increases. In basic chemicals, sales decreased due to selling price decrease in some products with lower feedstock cost despite the price pass-through in many products. Operating income increased benefited by the tailwind of moderated feedstock cost surge. Finally, in Graphite Electrodes, both sales and profit decreased due to weak volume and prices hit by the market environmental deterioration. These are the segment summaries.

Page 13 shows nonoperating income and expenses and extraordinary profit and loss in year-on-year comparison. Nonoperating income and expenses on the left improved JPY 3.8 billion year-on-year. The biggest factor was the expansion of foreign exchange gains year-on-year due to the progress in depreciation of yen, which led to JPY 3.7 billion improvement.

In extraordinary profit and loss on the right, net extraordinary profit was JPY 18.7 billion in this first quarter. And of this, JPY 19.7 billion was gain on sales of noncurrent assets. As shown in the press release in November 2023, this is due to the sales of land and building of former head office in Daimon. But in the previous first quarter, impairment loss of JPY 2.9 billion was posted along with the structure reform mainly in Hard Disk Media business. So we posted an improvement of JPY 22.5 billion year-on-year.

Page 14 shows consolidated balance sheet. On the asset side on the left, total assets at the end of this quarter are JPY 2,043.5 billion, and it increased JPY 11.5 billion from the end of last fiscal year, mainly due to the increase in cash and deposit by revenue from the business activities. Total liabilities were JPY 1,432.8 billion. It decreased by JPY 20.5 billion from the end of last fiscal year, mainly due to the repayment of interest-bearing debt. Total net assets were JPY 610.7 billion, up JPY 32 billion from the end of last year, even after paying the dividend of the last fiscal year. This is due to the quarterly net profit of JPY 27.1 billion and increase in foreign currency translation adjustment caused by further depreciation of yen. Positive revaluation reserve for land and total accumulated other comprehensive income is offset by reversal of retained earnings, so it does not affect the balance of total net assets.

Turning to major indicators shown below. Net D/E ratio improved from 1.00x at the end of last year to 0.90x due to a decrease in interest-bearing debt, increase in cash and deposit and increase in shareholders' equity. Equity ratio also improved by 1.4 points compared to the end of last year to 28.6%. And as usual and as described in the footnote of this slide, for calculation of net D/E ratio, we evaluate 50% of subordinated loan as equity capital based on the credit rating given by Japan Credit Rating Agency.

Next, I will explain the 2024 performance forecast. Please see the 2024 consolidated forecast on Page 16. Prior to the financial results announcement today, we announced the revision of the forecast on April 16. So we do not revise the forecast for this fiscal year today.

The column in the middle shown as C is the forecast announced on April 16. We revised the initial forecast announced on February 14 for the first half. To be specific, foreign exchange rate was assumed initially as JPY 135 to a dollar, but it was revised to JPY 150 on average for the first half with further depreciation of yen. And demand recovery trend, mainly in Semiconductor and Electronics Materials segment, is reflected in the forecast. Based on these, compared to the initial forecast, net sales will be up by JPY 30 billion, operating income will be up by JPY 19 billion, and net income attributable to owners of the parent will be up by JPY 15 billion. As a result, net income in the first half will be 0.

Page 17 shows 2024 forecast announced on April 16 by segment. In the second quarter, from April to June, we expect the continued moderate demand recovery. Sales will be higher than the first quarter in many segments. But as we expect the fixed cost increase which was curtailed in the first quarter, operating income will be flat or edged down in each segment. And let me reiterate that the second half forecast is not revised from the one that was announced on February 14. As for the forecast for the second half, we will let you know after confirming the development in the first half.

Page 18 and onward are appendix. But let me add one point. Please turn to Page 24 for topics. As shown at the bottom of Page 24, though it is an event after reporting period of the first quarter, we issued 0 coupon convertible bond with stock acquisition rights as a financing measure to curve financial expenses. Raised funds of JPY 100 billion will be allocated for growth investment and repayment of long-term debt to strengthen financial position. These convertible bonds are designed to control the dilution of EPS by attaching the conversion restriction close in addition to setting the conversion price above the market price for the consideration for existing shareholders. For further details, please refer to the press release.

This concludes my presentation. Thank you very much for your attention.

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