Showa Denko KK

TSE:4004

Earnings Call Transcript 2022-Q3

[Hideki Somemiya, executive]

Good evening, everyone. 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 third quarter FY 2022. Please turn to Page 2 for summary. There are 2 main points: first, the summary of the third quarter business results; and second, the downward revision of the full year forecast.

As for the summary of the third quarter results. Quarterly operating income from July to September decreased JPY 7.9 billion, down 32%. And it was mainly due to Chemicals segment profit decrease of JPY 5.4 billion. The total sales from January decreased JPY 17.5 billion, down 2% year-on-year, and operating income decreased JPY 18.4 billion, down 26% year-on-year. Excluding the impact of transferred business on the previous year's results, based on the ongoing businesses, net sales from January to September increased JPY 123.8 billion, up 14% year-on-year. But operating income decreased by JPY 6.6 billion, down 11%.

As for the downward revision of the full year forecast, considering changes in external business environment including a demand slowdown in Semiconductor and Electronic Materials segment, oil price decline and the deteriorated spread in Chemicals segment and time lag in cost pass-through for raw material costs, we revised downward the full year performance forecast this time.

Net sales will be JPY 1.41 trillion and operating income will be JPY 56 billion for the full year after revision. And compared to the forecast announced in August, sales went down JPY 90 billion, down 6%, and operating income went down JPY 28 billion, down 33%, showing the substantial downward revision.

This downward revision of the full year forecast is backed by the rapid change in business environment from July to September. In July to September, environment deteriorated more than our expectation, including production adjustment of the semiconductor back-end customers, inventory adjustment in HD media for data center and oil price decline. In our semiconductor materials business, due to the inventory adjustment of the semiconductor customers, achieving the initial plan has become difficult and we had to revise downward the full year forecast.

As a management, I take this fact extremely seriously. We assume there would not be major changes in mid- to long-term strategy to compete globally and in the industry trend as a basis for the strategy. However, in order to gain trust from investors, we will move the necessary action forward with increased sense of crisis. To be more specific, we will bring forward the structural reform in automotive parts business in Mobility segment, and we will accelerate the review of sweeping structural reform with no sacred cows in the entire company.

Please turn to Page 3 for the consolidated results summary. Consolidated results from January to September are shown in year-on-year comparison.

Please turn to the table on the left. In January to September period, net sales were JPY 1,034.2 billion, down JPY 17.5 billion or 2% year-on-year. Operating income was JPY 53.5 billion, down JPY 18.4 billion or 26% year-on-year. Ordinary income was JPY 64.1 billion, down JPY 9.2 billion or 13% year-on-year. And with the decrease in extraordinary loss, net income attributable to owners of the parent was JPY 39.7 billion, up JPY 50 billion year-on-year.

Table on the right shows the year-on-year comparison based on the ongoing businesses. Net sales increased JPY 123.8 billion, up 14% year-on-year, and operating income decreased JPY 6.6 billion, down 11%. EBITDA decreased JPY 6.7 billion, down 4.7%, and EBITDA margin to sales worsened 2.5 points.

Please turn to Page 4 for operating income breakdown by factor. This chart shows the analysis of operating income variance of JPY 18.4 billion between JPY 53.5 billion of this year from January to September and JPY 71.9 billion for the same period of 2021. Operating income of ongoing business is JPY 60.2 billion, excluding the impact of business transfer JPY 11.7 billion from JPY 71.9 billion of operating income from January to September in the previous year. Volume impact was minus JPY 4 billion.

Change in raw material prices were plus JPY 11.5 billion. This combines the cost increase with raw material cost increase, selling price hike and foreign exchange impact by depreciation of yen. Graphite electrode reversal gain impact from the lower of cost or market method application in the previous year was minus JPY 18.3 billion as a reversal gain of JPY 18.3 billion was posted in the previous year, and with its absence this year profit decreased. Others, plus JPY 4.1 billion, includes feedstock adjustment of graphite electrode, among others.

Please turn to Page 5 for sales and operating income by segment. Sales and operating income by segment are shown on a year-on-year basis. Semiconductor and Electronic Materials segment sales and profit increased. But in 3 segments of Mobility, Innovation Enabling Materials and Chemicals, sales increased but profit decreased. Others and adjustments in the previous year include the sales and profit of energy storage device and system, aluminum can, aluminum rolled products, which were transferred during the previous fiscal year, and SHOKO CO., LTD. which was deconsolidated with reduced stakes.

From Page 6 to 8, sales and operating income by segment are shown more in detail. In performance overview column on the right, details are described so please refer to them later.

Let me comment on the summary here. As for the Semiconductor and Electronic Materials segment on Page 6. As mentioned at the beginning, with production adjustment in the back-end semiconductor process and further inventory adjustment in hard disk media in July to September, sales and profit decreased slightly quarter-on-quarter. And when you look at the January to September total, backed by the robust demand from the beginning of the year, sales increased 7% and profit increased 15% year-on-year. We have a green prospect for the fourth quarter. And as I will elaborate later, segment operating income forecast is revised downward by JPY 15 billion from the announcement on August 4.

As for the Mobility segment on Page 7. With the automobile production recovery from the third quarter, sales increased 3% year-on-year, but operating loss was incurred due to amortization of goodwill with consolidation of Showa Denko Materials in addition to the material cost surge.

As for Innovation Enabling Materials segment on Page 8. Sales increased 1% year-on-year due to selling price increase with raw material cost surge, but cost pass-through was not sufficient and profit decreased 36%. Also in Chemicals segment, sales increased 24% year-on-year and profit decreased 37%. Chemical sales were boosted by naphtha price hike and graphite electrode price increase, and profit decreased due to tighter spread due to eased supply-demand balance.

Please turn to Page 9 for nonoperating income and expenses and extraordinary profit and loss on a year-on-year basis. Nonoperating income and expenses improved JPY 9.2 billion year-on-year, and it is mainly due to foreign exchange gain by depreciation of yen. Extraordinary profit and loss improved JPY 47.5 billion year-on-year in net, and it is mainly due to the decrease in loss. In the previous year, business restructuring expenses of JPY 32.8 billion in energy storage devices business was material, followed by the decrease in loss on sales of businesses, JPY 6.9 billion. Another major topic was gain on sales of investment securities in strategic shareholding, plus JPY 2.7 billion.

Please turn to the full year forecast for 2022. We disclosed a revision of the full year forecast for FY 2022 today. As mentioned at the beginning, compared to the forecasted second quarter results, we revised downward the sales and profit forecast. After revision, sales forecast is JPY 1.410 billion, down JPY 90 billion or 6% from the previous forecast. Operating income full year forecast is JPY 56 billion, down JPY 28 billion or 33% from the previous forecast, reflecting the business environment deterioration in Semiconductor and Electronic Materials and the Chemicals segment in the second half.

In the column below operating income, improvement in nonoperating income was foreign exchange gain and improvement in extraordinary profit and loss due to decrease in extraordinary loss compared to the previous forecast are reflected. Due to this, net income attributable to owners of the parent for the full year forecast is JPY 22 billion, down JPY 10 billion or 31% from the previous forecast.

Please turn to Page 11 for sales and operating forecast for the full year by segment. As for sales, we had to make substantial downward revision in Semiconductor and Electronic Materials and Chemicals segment. Out of the total JPY 90 billion sales decrease forecast, Semiconductor and Electric Materials decrease is JPY 30 billion; and Chemicals, JPY 45 billion.

In operating income as well, revision in Semiconductor and Electronic Materials and Chemicals account for major parts. Out of the total JPY 28 billion profit decrease, Semiconductor and Electric Materials decrease is JPY 15 billion; and Chemicals, JPY 12 billion.

Please turn to Page 12 for consolidated balance sheet. As for assets, as of this quarter end, cash and deposits intangible fixed assets including goodwill decreased. But inventories increased partly due to raw material cost surge, and tangible fixed assets also increased due to CapEx. Total assets increased JPY 55.2 billion from the end of the previous fiscal year to JPY 2,197.6 billion. We are trying hard to cut back the inventories towards the end of the fiscal year.

As for liabilities, interest-bearing debt increased as we finance through the subordinated loan for the early purchase of preferred stock in the first half, and the total liabilities increased JPY 259.7 billion from the end of the previous fiscal year to JPY 1,583.6 billion. As for net assets, shareholders' equity increased JPY 16.5 billion and the total accumulated other comprehensive income increased JPY 58.2 billion, while noncontrolling interest of preferred stock decreased substantially, corresponding to the interest-bearing debt increase as mentioned.

On the other hand, foreign currency translation adjustment increased due to the depreciation of yen, and the total net assets decreased JPY 204.5 billion to JPY 614 billion. Net D/E ratio, one of our KPIs, improved 0.08 points to 1.07x, and the equity ratio improved 2.8 points to 26.8%. This improvement is backed by the increase in total net assets due to the increase in foreign currency translation adjustment.

Please take note that these equity-related indicators are affected by the fluctuation in the foreign exchange market. And let me add one more point. As described in the footnote, 50% of the preferred stocks and subordinated loan are considered as equity capital in net D/E ratio calculation, and it is based on the credit rating given by Japan Credit Rating Agency.

Skipping a few pages. Please turn to Page 20 for topics. As shown in the second column from the top, JCR announced their upgrading our credit rating on Showa Denko on October 4 from A- to A. We think that the improvement in financial structure and realization of consolidated management effect with Showa Denko Materials were positively assessed.

In Semiconductor and Electronic Materials, sample shipment of 200 milli SiC epi-wafer started, and we are investing for capacity expansion in semiconductor materials business from the mid- to long-term perspective. In Mobility business where a structural reform is ongoing in the internal combustion engine components, we completed the transfer of ISOLITE, a European thermal insulation manufacturer.

Please come back to the top line. At the Extraordinary General Meeting of Shareholders on September 29, resolutions were passed to transform itself to holding company structure, change trade names and partially amend Articles of Incorporation. Newly integrated company, Resonac, will start on January 1, 2023. After the transformation into Resonac, we sincerely wish to have your continued support.

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