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Earnings Call Analysis

Substantial Profit Increase and Optimistic Full-Year Forecast

Resonac Holdings Corporation experienced significant improvement in the first half of 2024 with net sales reaching JPY 668.5 billion, a rise of 8.5% year-on-year. Operating income climbed to JPY 28 billion from a prior loss, and net income surged by JPY 58.3 billion to JPY 38.4 billion. Notably, the Semiconductor & Electronic Materials segment grew by 37%. For the full year, the company forecasts an upward revision with net sales expected to increase by JPY 103.1 billion, operating income by JPY 64.8 billion, and a net income boost of JPY 53.5 billion, driven by enhanced EBITDA margin and improved equity ratios.

Introduction

Resonac Holdings Corporation's first half of 2024 demonstrated robust financial health and performance improvements. CFO Hideki Somemiya revealed key metrics indicating increased sales and profits which led to an upward revision of the full-year forecast.

Financial Highlights

In the first half of 2024, Resonac recorded net sales of JPY 668.5 billion—up by JPY 52.4 billion or 8.5% year-on-year. Operating income surged to JPY 28 billion from the previous year's loss of JPY 13.2 billion, representing an impressive turnaround. Ordinary income reached JPY 30.5 billion, and net income attributable to owners of the parent was JPY 38.4 billion, showcasing a significant recovery and growth.

Segment Performance

Several segments under Resonac saw varying performance levels. The Semiconductor and Electronic Materials segment soared with a 37% increase in sales to JPY 209.6 billion and an operating income surge of JPY 34.7 billion, resulting in a profit of JPY 21.6 billion. This segment benefitted immensely from strong AI-related demand and a recovery in data center requirements. Notably, EBITDA margins for this segment improved substantially from 8.6% to 23.2%. Meanwhile, the Chemicals segment experienced a 4% reduction in sales, down to JPY 245.4 billion, and a decrease of JPY 2.7 billion in operating income, now at JPY 2 billion.

Operational Insights

A breakdown of operating income changes highlights the importance of several factors. Most notably, sales volume contributed JPY 19.7 billion to the profit increase, driven significantly by the Semiconductor & Electronic Materials sector. Sales price hikes accounted for an additional JPY 12.8 billion in profit, supported by a depreciating yen and successful negotiations on several fronts. In terms of cost management, efforts to pass raw material cost increases onto customers yielded positive results, offsetting naphtha price escalations.

Balance Sheet and Financial Health

The company's total assets grew by JPY 82.8 billion to JPY 2,114.8 billion, mainly due to increased cash and deposits. Liabilities saw a slight increase to JPY 1,469.3 billion despite debt repayments. Consequently, net assets rose to JPY 645.4 billion. The net debt-to-equity ratio improved to 0.86x from 1.00x last fiscal year. Furthermore, the equity ratio climbed from 27.2% to 29.3%, signifying enhanced financial stability.

Future Outlook

For the full year of 2024, Resonac revised its forecast upward, anticipating a JPY 103.1 billion increase in net sales year-on-year, with operating income expected to hit JPY 64.8 billion. The net income attributable to owners is projected to rise by JPY 53.5 billion. EBITDA margins are expected to improve from 8.2% to 12.3%, while the net D/E ratio is forecast to enhance further to 0.9x. A 24.1% EBITDA margin is anticipated in the Semiconductor & Electronic Materials segment by the year-end. Conversely, the Mobility segment faces challenges due to market conditions in Thailand, affecting sales and profits.

Earnings Call Transcript 2024-Q2

[Hideki Somemiya, executive]

Good evening, everyone. I'm Hideki Somemiya, CFO of Resonac Holdings Corporation. Thank you for your consistent understanding and the support for our company.

Today, I will explain the consolidated financial results for the first half 2024. Please turn to Page 2 for key takeaways. I'll explain the financial results from here.

Sales and income in the first half 2024 increased year-on-year. And the full year forecast for 2024 is revised upward from the previous guidance with the expectation of increased sales and income year-on-year. These are the two key takeaways.

Without further ado, let me explain the consolidated financial statement for the first half 2024. Please turn to Page 4. This slide shows the consolidated results for the first half 2024 with the year-on-year comparison.

Please see the table on the left. Net sales in the first half 2024 were JPY 668.5 billion, up by JPY 52.4 billion or 8.5% year-on-year. Operating income was JPY 28 billion, a profit up by JPY 41.1 billion from the loss in the previous year.

Ordinary income was JPY 30.5 billion in profit, up JPY 41.8 billion year-on-year. Net income attributable to owners of the parent was JPY 38.4 billion in profit, up by JPY 58.3 billion year-on-year. EBITDA was JPY 83.8 billion, up by JPY 42.7 billion year-on-year and EBITDA margin was 12.5%, up by 5.9 points.

Please turn to Page 5. This chart shows the breakdown of operating income changes from operating loss of JPY 13.2 billion in the first half 2023 to operating income of JPY 28 billion in the first half 2024. Out of the year-on-year profit increase of JPY 41.1 billion, the greatest contributor was JPY 19.7 billion of sales volume. The impact of Semiconductor & Electronic Materials was the largest with JPY 21.1 billion and the recovery in sales volume of Semiconductor Materials and Hard Disk Media was a major contributing factor.

Sales price increased profit by JPY 12.8 billion. This is backed by the benefit of depreciation yen in addition to the result of raw material cost pass-through and the successful price hike negotiations in many businesses. Sales price and variable and fixed cost includes the impact of naphtha price increase in Olefins & Derivatives business in Chemicals segment, both sales price and cost increased, and they almost offset each other.

Following Page 6 and 7 show the breakdown of segment operating income changes. Please refer to them later.

Page 8 shows the business performance by segment. Sales, operating income and EBITDA by segment with a year-on-year comparison as shown here. Sales and profit in Semiconductor and Electronic Materials segment shown at the top, increased substantially year-on-year. And in Chemicals segment, the fourth line from the top saw a decrease in sales and profit.

From Page 9 to 12 summarize of business performance by segment are shown. On Page 9, in Semiconductor and Electronic Materials, sales increased 37% year-on-year to JPY 209.6 billion, and operating income increased JPY 34.7 billion year-on-year and marked the profit of JPY 21.6 billion. This is due to the continued moderate demand recovery after bottoming out in the first half 2023. With this, the volume grew in Hard Disk Media with demand recovery for data center and the back-end Semiconductor Materials as the demand for AI related materials, including those for AI Cyber was robust. EBITDA margin of this segment improved from 8.6% in the first half 2023 to 23.2%.

A Page 10 shows mobility. Sales increased 4% year-on-year to JPY 108 billion, and operating income increased JPY 1.8 billion year-on-year to JPY 2.4 billion. In Automotive Products, automobile production recovered with some regional differences and sales volume related to new model vehicles grew.

On the other hand, market deterioration caused by the interest rate hike in Thailand and the stricter loan screening affected and sales were almost flat year-on-year. In Lithium-ion Battery Materials, weaker consumer demand continued, but sales volume for EV contributed to sales growth.

Next, Page 11 shows Innovation Enabling Materials. Sales increased 8% year-on-year to JPY 47 billion, and operating income increased JPY 2.6 billion year-on-year to JPY 5.5 billion. Successful pass-through of raw material cost increase to sales price and the increase in sales volume led to increase in sales and profit.

The last page for segment summary, Page 12 shows Chemicals. Sales decreased 4% year-on-year to JPY 245.4 billion, and operating income decreased JPY 2.7 billion to JPY 2 billion. In Olefins & Derivatives, sales volume decreased due to the lower utilization caused by the shutdown maintenance of petrochemical derivatives. But due to high naphtha price and improved feedstock adjustment, both sales and profit increased.

In Basic Chemicals, sales were almost flat year-on-year, and operating income decreased due to the increased raw material costs for some products. Finally, in Graphite Electrodes, both sales volume and price declined due to the weak market condition and sales and profit decreased. That's all for the segment summary.

Page 13 shows non-operating income and expenses and extraordinary profit and loss with a year-on-year comparison. Non-operating income and expenses shown on the left improved by JPY 0.7 billion year-on-year. Extraordinary profit and loss shown on the right improved JPY 21.3 billion year-on-year. In this first half, out of the net extraordinary profit of JPY 17.6 billion, gaining on sales of non-current assets were JPY 20.2 billion. This is due to the sales of land and building of the former head office in Diamond as press released in November last year.

Page 14 shows the consolidated balance sheet. In assets, on the left, total assets at the end of the first half were JPY 2,114.8 billion, up by JPY 82.8 billion, and the majority of this was the increase in cash and deposit, JPY 48.1 billion compared to the end of the last fiscal year, and it was mainly from the operational revenues.

Total liabilities were JPY 1,469.3 billion. We issued zero coupon convertible bond with stock acquisition-wise of JPY 100 billion, but promoted a debt repayment. And they resulted in the increase of just JPY 16 billion from the end of the last fiscal year.

Net assets were JPY 645.4 billion, up by JPY 66.8 billion compared to the end of the last fiscal year. Net profit for the first half was JPY 38.4 billion, and foreign currency and translation adjustment increased substantially due to the further depreciation yen. So even after deducting the dividend payment for the last fiscal year, total net asset increased. Revaluation reserve for land, which is a major cause for the increase in total accumulated other comprehensive income is offset by the same amount of the reverse of fund that retained earnings. So it does not affect the balance of net assets.

Adjusted net D/E ratio in major indicators shown below, improved from 1.00x at the end of the last fiscal year to 0.86x due to the increase in shareholders' equity boosted by the increased net profit and foreign currency and translation adjustment. Equity ratio improved from 27.2% at the end of the last fiscal year to 29.3%. And as usual, as shown in the footnote at the bottom, let me add that in calculating net D/E ratio 50% of subordinated loans is deemed as equity capital based on the credit rating given by Japan Credit Rating Agency.

2024 performance forecast. Please turn to Page 16 for 2024 consolidated forecast. Column in the middle, shown as the focus C is the revised full year forecast announced on August 8. We revised our full year forecast upward at this time as we review the forecast for the second half as well as the first half results, which exceeded the area forecast.

Assumed foreign exchange rate for the second half is JPY 150 to $1. As a result, compared to the last fiscal year, when operating loss was incurred, we revised our forecast upward with net sales increase of JPY 103.1 billion year-on-year, operating income of JPY 64.8 billion and net income attributable owners of the parent increase of JPY 53.5 billion.

We expect that EBITDA margin will improve from 8.2% to 12.3%, and net D/E ratio will improve from 1.00x to 0.9x. They are the upward revision in sales and profit even compared to the area forecast shown in the Q1 results meeting.

Page 17 shows 2024 sales and the operating income forecast announced today by segment. In Semiconductor & Electronic Materials segment, sales will increase by JPY 94.9 billion year-on-year, and operating income increased by JPY 59.4 billion year-on-year with significant increase in sales and profit. EBITDA margin improved to 23.2% in this first half from 13% last year. And for the full year, it will grow further to 24.1%.

In Mobility segment, assuming the impact of weakening market conditions in Thailand, sustains, we expect a decline in sales and profit year-on-year. In Innovation Enabling Materials segment, we expect sales and profit will increase year-on-year due to sales volume increase and price increases. Finally, in Chemicals segment, we expect sales and profit will increase year-on-year. Sales are expected to increase due to sales volume increase and the sales price increase in olefins and the derivatives and basic chemicals.

We posted operating loss last year due to the lower of cost-of-market method application in graphite electrode business, but we assume that we didn't recur in this fiscal year and expect the profit increase.

Page 19 onward are appendix. So please refer to them at your convenience. This concludes my presentation. Thank you very much for your attention.