Showa Denko KK

TSE:4004

Earnings Call Transcript 2022-Q2

[Hideki Somemiya, executive]

Good evening. This is Hideki Somemiya, CFO of Showa Denko. Thank you very much for your continued interest in our business performance. I'd like to present the financial results of the second quarter FY 2022.

Please turn to the presentation material entitled as a consolidated financial results second quarter 2022. Page 2 shows 3 key points of this presentation. In the first half of the year, in addition to the positive impact of the yen's depreciation, strong sales in the Semiconductor and the Electronic Materials segment continued and increased raw material costs was shifted to product prices to some extent.

But due partly to the sluggish automobile production and sales decline caused by the effect of transfer of the businesses implemented in 2021, sales decreased JPY 37.3 billion year-on-year and profit decreased year-on-year due to the absence of gain in graphite electrode business this year, which was caused by an application of the lower of cost or market accounting method in 2020. But within the ongoing businesses, which excludes the results of transferred businesses, sales increased and the profit decreased.

Second point is about the full year forecast. We announced a revision of the full year forecast yesterday under the assumption of the continued depreciation of yen, which is more than the initial forecast, reflecting the delay in the recovery of automobile production and the steep rise in raw material prices. We revised aftersales from the initial forecast, but kept operating income forecast unchanged at JPY 84 billion.

Third point. With the plan of the integration of the corporative statuses January 2023, for the smooth reorganization, we repurchased the preferred stock by financing through a subordinated loan in June earlier than schedule, which was originally planned in the next year.

Please turn to summary of the consolidated results on Page 3. Summary of the consolidated results are shown with a year-on-year comparison. As the table on the left shows in the first half 2022, consolidated net sales were JPY 656 billion, down JPY 37.3 billion or 5.4% year-on-year. Operating income was JPY 37.1 billion, down JPY 10.5 billion or 22% year-on-year. Ordinary income was JPY 46.8 billion, down JPY 3.4 billion or 6.7% year-on-year and net income attributable to owners of the parent was JPY 31.7 billion, up JPY 45.1 billion year-on-year.

The table on the right shows the comparison based on the ongoing businesses. Net sales were up JPY 65.7 billion, 11.1%. Operating income was down JPY 2.4 billion, 6.1%. And EBITDA was down JPY 1.8 billion, 1.9%. And EBITDA margin was 13.9%, down by 1.8 points.

Please turn to Page 4, operating income breakdown by factor. This chart shows the difference from operating income in January to June period in the previous year by factor. Operating income in the first half 2021 was JPY 47.6 billion. And excluding the profit of the business transferred later, it was JPY 39.5 billion.

In the comparison based on the ongoing businesses, volume impact is plus JPY 2.5 billion and changes in raw material prices include a selling price hike, net impact of the raw material cost increase minus selling price hike was plus JPY 4 billion.

Last year, gain was positive due to the application of the lower of the cost or market method in the graphite electrode business. But due to its absence this year, the effect was negative JPY 14.5 billion. Others, JPY 5.6 billion includes the expanded feedstock adjustment in graphite electrode business, shutdown maintenance cost in [ OITA ] and energy cost increase. Operating income decreased JPY 2.4 billion year-on-year on ongoing businesses in total.

Please turn to Page 5, summary of consolidated sales and operating income by segment. In Semiconductor and Electronic Materials segment, sales and profit increased with continued strong demand in semiconductor-related industries. In Mobility segment, sales decreased and the business tend to be loss-making affected by the automobile production decrease caused by the semiconductor supply shortage.

In innovation enabling materials and the Chemicals segment, sales increased and the profit decreased due to the time lag between raw material price surge and passing of cost increase to selling prices. These are the disclosure segment. But as explained in the first quarter, Others in the previous year includes the energy storage device and system, aluminum can, aluminum rolled products businesses, which was transferred in the previous fiscal year and SHOKO Co. Ltd., which was deconsolidated with reduced stakes.

Page 6 to 8 show the sales and operating income by segment. For details, please refer to the performance over the column later. Let me walk you through the highlights of the overview here. Page 6, semiconductor and electronic materials, sales increase of 12%, profit increase of 27% backed by the strong demand.

Mobility on Page 7 shows sales increase due to the demand of a part of automotive parts customers amid the sluggish automobile production, but sales decreased 3% due to the sales decrease in lithium-ion battery materials and the segment turned to operating loss.

In innovation enabling materials on Page 8 shows sales increase of 7% due to rising material prices, but profit decreased 35% due to insufficient cost pass on to the price. Chemicals segment had a shutdown maintenance in petrochemicals. Sales increased due to product price rise caused by naphtha price increase, but profit decreased in the first half year-on-year due to the volume decline caused by the shutdown maintenance.

In April to June alone, profit temporarily increased due to the one-off feed stock adjustment related to low-cost naphtha, which was procured before shutdown maintenance. Sales and profit increase in graphite electrode business year-on-year were not able to offset the negative factor in profit. And as a segment, total sales increased 17%, but profit decreased 32%.

We take profit and loss conditions of segments, except semiconductor and electronic materials seriously, and we will strive harder to pass the cost increase to price and group-wide cost reduction.

Please turn to Page 9, nonoperating income and expenses and extraordinary profit and loss year-on-year. Nonoperating income and expenses improved JPY 7.1 billion, mainly due to the foreign exchange gains of the depreciation of yen. Extraordinary loss net decreased JPY 47.6 billion year-on-year. It improved substantially year-on-year as large expenses of JPY 9 billion of environmental cost and JPY 32.8 billion of business structural reform costs were posted in the previous year.

Please turn to Page 10, 2022 forecast for the full year. Yesterday, we released the full year forecast. In this fiscal year, net sales are revised up from the initial forecast due to the continued depreciation of yen and price hike, but operating income is kept unchanged from the initial forecast due to the impact of raw material price increase and increasing energy costs and logistic costs, which may not be fully passed on to selling prices in the second half.

Order income is revised up from the initial forecast due to the variation gain in foreign currency-denominated assets and the improvement in interest dividend income less interest expenses and net income attributable to owners of the parent is revised up from the initial forecast.

Considering that one of the improvement factors in the first half is a shift of a part of the structural reform costs to the second half, the full year upside is expected as shown here.

Please turn to Page 11. Sales, operating income and EBITDA forecast by segment. This is a full year forecast by segment. Assuming the continued depreciation of yen, sales will increase with a raw material cost surge and by pass-through of cost, a certain level of profit will be secured. But we take the mobility business turning to loss and overall margin decrease very seriously, and we will accelerate further actions going forward.

Please turn to Page 12, consolidated balance sheet. As of the end of this quarter, cash and deposit goodwill and other intangible fixed assets decreased, but partly due to the impact of raw material cost surge, inventories increased and tangible fixed assets increased due to CapEx. As a result, total assets increased JPY 79.6 billion from the end of the previous fiscal year to JPY 2,222 billion.

In June this year, we conducted the subordinated loan finance to purchase preferred stock RE and that led to the increase in interest-bearing debt. Total liabilities increased JPY 302.4 billion from the end of the previous fiscal year to JPY 1,626.4 billion. Despite the increase in foreign currency translation adjustment, noncontrolling interest decreased substantially by the purchase of preferred stock and the total net assets decreased JPY 222.8 billion from the end of the previous fiscal year to JPY 595.6 billion.

As for the main indicators, net D/E ratio improved to 0.05 points to 1.10x and the equity ratio improved 1.7 points to 25.7%. As described in the footnote, the assumption of 50% of the total value of preferred stocks and the subordinated loan as equity capital is based on the credit rating by Japan Credit Rating Agency. Our net D/E ratio is calculated based on this concept.

Finally, please turn to Page 13, balanced trend of interest-bearing debt and the preferred stock. This slide shows the total of interest-bearing debt and preferred stock. LBO loan in yellow part was fully repaid before due date in March, and it was replaced by a straight bond, among others.

Preferred stock in orange was repurchased earlier than the schedule by the financing through the subordinated loan, which was also recognized as 50% equity capital. Interest-bearing debt increased in line with this, but it works positively in cash outflow of dividend and interest payment. Net D/E ratio is as shown in the previous page.

Page 14 and onward are reference. Page 22 shows the quarterly sales and operating income change in FY 2021 by new segment. And Page 23 shows the quarterly profit change in this fiscal year. Please refer to them and other pages at your convenience.

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.]