JSR Corp

TSE:4185

Earnings Call Analysis

Q1 Revenue and Profit Decline, Future Recovery Expected

In Q1 FY '23, the company saw both revenue and profit fall year-on-year, hit by a downturn in the Life Sciences business due to one-time factors and a semiconductor demand cycle affecting the Semiconductor Materials segment. Additionally, major repairs at their Colorado facility led to lost production. Despite this, they maintain the original projection of turning a profit in Q2 as the Digital Solutions and Plastics businesses saw quarter-on-quarter recovery. Moreover, a strategic partnership with JICC is anticipated to facilitate going private, aiming to bolster long-term growth and competitiveness. The company expects sales improvements from the second quarter, banking on a forecasted upturn in semiconductor materials demand and the sales of IVD test kits targeted for the second half of the year.

Facing the Trials of Transition

Recently, the company's financial performance has been a tale of overcoming challenges and navigating change. Notably, there was a year-on-year decrease in revenue and core operating profit in FY '23 Q1, impacted by one-off factors in the Life Science segment and the cyclical downturn in semiconductor demand. Despite these headwinds, a silver lining appears as the company did not revise its FY '23 earnings projection, staying on course for a return to profitability in Q2.

A Future Paved with Strategic Growth

The company isn't resting on its laurels; it's aggressively expanding its market share in cutting-edge EUV technology, a shining point of growth with a notable 25% year-on-year increase in Q1 despite overall semiconductor demand challenges. Preparing for the future, it has forged a strategic partnership with JICC, paving the way for privatization and increased international competitivity.

Sector-by-Sector Resilience and Recovery

In the face of adversity, the Life Sciences division encountered a one-time loss due to factors such as major repairs at its Colorado facility. However, steady recovery is anticipated from Q2 onwards. The Plastics business shows a year-on-year recovery trend in demand, with improved margins expected as volume picks up. Meanwhile, the Digital Solutions segment reveals an increase in revenue and profit, signaling a positive trajectory amidst market challenges.

Realigning for Robust Returns

The company's agile cost management and strategic business reviews helped counterbalance slower demand. Investments in future growth, like EUV and MOR technologies, are unwavering, demonstrating commitment to long-term success. With JSR's semiconductor materials demand aligned with the market, they are preparing for a robust rebound in FY '24, with a forecasted 14% growth.

Earnings Call Transcript 2024-Q1

[Eric R. Johnson, executive]

I will just give some explanation. First, please take a look at Page 3. There's an overall summary or key takeaways. FY '23 Q1 results showed a decrease in both the revenue and profit year-on-year and the loss in core operating profit. It is due to LS, Life Science, onetime special factors. SEMI, semiconductor materials. The business was impacted by the semiconductor cycle with the decline in semiconductor demand. The rest was in line with our plan. We ended up incurring core operating losses, but we originally expected it was incorporating profit in Q1 based on our plan, and we expect to generate a profit in Q2 and we did not change our projection.

Please take a look of the second column. The FY '23 earnings projection will not be revised this time. With no special factors in Q2, as is the case in Q1, we forecast to return a profitable and a steady recovery in earnings in each business. Demand for semiconductor materials is expected to recover from Q2 and a full-scale recovery from the next year.

Our company's market share expanded steadily in the leading-edge EUV technology, such as Logic 3 nanometers and below and DRAM. The development status of MOR, metal-oxide resistor, and next-generation EUV is also good. Even with the declining semiconductor demand, EUV saw a growth of 25% year-on-year in Q1.

DISP, display material, experienced a sharp demand correction in the second half of FY 2022. But recently, we are seeing a recovery trend, which is continuing. Life science, there were onetime factors in Q1, but we should not expect them in Q2. Growth of our CDMO operations are expected to continue to expand. Concerning CDMO, we are working on profitability improvement projects and we are expecting to see special results from such projects.

Next, the third point, strategic partnership with JICC, Japan Investment Corporation, JIC Group announced plans to commence a tender offer for our shares of our company aiming to commence a TOB tender offer from around December 2023.

Through a strategic partnership with the JICC in which the two companies share the same strategic direction, we will accelerate the promotion of our strategy by going private, while flexibly promoting the industry restructuring or industry consolidation of semiconductor materials. We aim to strengthen international competitiveness and medium- to long-term growth potential of all our businesses.

At present, we are working on procedures based on relevant regulations, including competition laws in Japan and overseas. We are making progress without any problems. We expect the partnership is the best strategic option to all stakeholders of JSR, including shareholders, global customers, employees and partners.

Please turn to the next page, the main points or summary of the Q1 FY '23 results. In the top left corner, there is the year-on-year waterfall chart, year-on-year decline in revenue and profits. Digital Solutions business, profit decreased by JPY 5 billion. Demand difference from previous year affected performance, so that was the main reason. Particularly last year, although there was some uncertainty in semiconductor demand, overall performance remains strong. This time, the semiconductor environment has deteriorated significantly.

As a result, there was -- this impacted significantly the revenue and profit. Life Science business, there are onetime factors as written here, mainly CDMO posted a loss of about JPY 4.5 billion.

This was in line with the plan, but there were major repairs to Colorado facility in Q1, and we had to stop production during the major repairs. And there is also a provision of inventory write-down. So it's an accounting matter and a onetime factor.

PLA, stands for Plastics business. Demand is in the midst of recovering and demand recovered year-on-year. And Q-on-Q core operating profit -- revenue and profit decreased Q-on-Q. Concerning Digital Solutions, there was an increase in revenue and profit. But Semiconductor materials and Display materials, there was an increase in revenue and profit.

Demand environment for semiconductor materials continue to be sluggish in Q1, but sales improved Q-on-Q. EUV with this is also making steady progress. Concerning Life Science business, excluding onetime factors of about JPY 4.5 billion, about JPY 4.1 billion negative was from the timing mostly of IVD test kit sales. It is not a regular business. It's an intermittent business. And in the previous quarter, there was a large amount of sales generated. But in Q1, there was 0 sales. So it's purely because of a sales timing issue.

The sales of test kits this year are expected in the second half of this year. Excluding these factors, CDMO, because of progress of KBI's plants startup there is an increase in profit.

The Plastics business, demand was on a recovery trend, but profit declined temporarily due to an accounting matter, inventory effect. Profits decreased significantly from the previous year across the company, but the recovery change was seen Q-on-Q, except for some factors, and we expect a steady recovery from Q2 onwards as well.

In the waterfall chart, I showed to you the national results overview, and this page shows a table of numbers, and the content is the same as what I explained before. On a Q-on-Q basis, on a company-wide basis, because of Life Science business, there was a significant decline in profit, but the Digital Solutions, revenue and profit is increasing recovery trends.

And Life Sciences, there are special factors. But in Q1, there was the sales timing issue of IVD test kit sales. But besides that, performance was almost flat.

Next, segment data, Digital Solutions business, I would like to explain about Digital Solutions business in a bit more detail. Year-on-year revenue and profit decreased. Semiconductor materials sales decreased by 14%, significant decline. On the other hand, our company's semiconductor material demand is very much based on silicon wafer inputs and this fell by more than 15% year-on-year, which means that JSR is trending in line with the market.

Display Material and Edge computing businesses fell due to demand factors. As for cost, we are suppressing costs relative to plan amid weak demand. On the other hand, in the bottom left corner, there's the variance analysis of this shows fixed costs as well as investments. As you can see in the graph, that was the future. We have been expanding upfront investments for future growth amidst the current environment.

Next, Digital Solutions business, revenue of main products. As I just mentioned, EUV resist at 25% sales growth year-on-year. On a Q-on-Q basis, there was a decline of 35%. But license revenue and other revenue in Q4 of FY 2022 impacted the Q-on-Q performance. Excluding these factors in terms of actual volume, there's improvement in EUV as well on a Q-on-Q basis.

Moving on to Life Sciences business shows the situation on the subsegment in this business division. Year-on-year decrease in revenue and profit, there were special factors as mentioned before. And CDMO because of the major repairs in our main factory, our Colorado facility, the sales had to stop during the repairs. So we -- there was a loss of opportunities.

On the other hand, the booking itself had no issues. And the production has already restarted from July. So from Q2, we are expecting the sales to recover.

CRO, Contract Research Organization, business is negative 5% against the previous year, a little weaker than expected. This was impacted by the demand environment. But on the other hand, BPM, Bioprocess Material, there was a timing difference in terms of sales. And from Q2, we are expecting recovery. And for IVD this was impacted by timing differences for IVD test kits. For Q-o-Q, which is shown on the right-hand side, again, decrease in revenue and profit. This was due to major repairs and the timing differences in sales for IVD kit. So those were the special factors.

Now moving on to Plastics business, year-on-year decrease in revenue and a small increase in profit. The automobile industry which is a major customer industry is recovering in demand. However, for Materials business, it is still on recovery. There has been a small improvement, however, weaker or slower than expected. So we are working to improve the prices, so the margin has improved and the profitability is expected to improve with further volume recovery.

If we can go back to the slide, now Q-on-Q decrease in revenue and profit. Sales volume is on the recovery trend. The prices of naphtha and other raw materials are on the decline. So therefore, the margin shrunk due to the effect of the price formula, which affects the margin with the time difference according to the raw material price with customers. There were also short-term effects due to other accounting factors.

This shows the actual versus FY '23 projection, which is shown on the slide. For the full year guidance, there will be no change. So we will -- we have listed up the initiatives to achieve full year targets on the right-hand side.

And furthermore, we will strengthen our efforts to achieve sustainable growth in the next fiscal year. Digital Solutions. If you can take a look at the left side of the slide, sales progress was 22% which was impacted by the delay in semiconductor demand recovery which was slower than expected. And also, our plan is originally weighted on the second half of FY '23. So we are expecting to see a recovery from the second quarter.

We cannot control the demand for semiconductor itself, but the market shares in the advanced fields such as EUV are expanding, and the growth will outperform the market growth. The market shares of our core products are progressing well. And while the demand is fluctuating, we are working to control our costs, and we are also strengthening our structure by reviewing businesses. We will make sure to promote investments for the future, such as EUV, MOR and strengthen sales in technical services in the Asian region.

And moving on to Life Science business, except for the onetime factors, overall progress is in line with our plan. CDMO business, KBI, is operating smoothly, and demand is also strong. Our new facility in North Carolina is also operating well and is ramping up.

In terms of CRO business, our customers' development ventures saw a slowdown in demand partially, which was lower than planned. But on the other hand, the current order situation is improving, and it is expected to recover from Q2.

The profitability improvement project of KBI is now in progress, and it is expected to achieve the top line improvement and profit margin improvement simultaneously by expanding the operation of the new plant. CRO demand is a little weak, as I mentioned earlier, but CDMO demand is strong.

In the Life Sciences business as a whole, we are implementing various structure reforms such as cost control and review of business. And we would like to make sure that we build a solid foundation for our future growth.

Plastics business. Demand is clearly in the direction for recovery, and efforts to revise prices in response to rising fuel costs are also being enhanced and expecting to see its effect in Q2 in terms of revenue and margin.

Next page shows exactly the same slide that we showed in the previous briefing. This is a summary of FY '23 projection. In this fiscal year, against the core operating profit of JPY 34 billion in the previous year, we are expecting a significant improvement. On the other hand, for Digital Solutions business, a negative of 8 it says. In this fiscal year, the semiconductor demand adjustment is ongoing, and we are expecting a V-shaped recovery in FY '24. We believe that this fiscal year is to prepare for that recovery. And this is the market environment assumptions for our outlook. So we have updated the results for the first quarter.

The benchmark for semiconductor demand, which is silicon wafer input, is expected to be negative 5% this quarter, but Q1 saw a sharp decline of over -- negative 15%. So we -- while we expect Q1 to be the bottom and recovery in Q2 and beyond, but the overall situation would remain weak for the time being or in the short term. We will closely monitor the situation. We expect a strong growth of 14% in FY '24.

We are expecting a strong growth in FY '24 after the adjustments in FY '23. FPD panel manufacturers, or DSPs, display business' main customers, their utilization rate bottomed out in the second half of FY '22, and we are seeing a stronger than expected recovery. And it is expected to perform well in Q2 as well.

And for the automotive production, after the semiconductor shortage was eliminated, it is on its recovery trend, and it is expected to spread to our Plastics business demand in JSR.

For biopharmaceutical market, which is the base market for our Life Sciences business, as I mentioned before, development ventures finding difficulties in funding.

So therefore, it seems as though there is a stagnation in the market. But overall, the market is strong. And lastly, very important point for our business plan for this fiscal year, production schedule of KBI's new facility is shown on the slide.

On the left-hand side, we have a bar chart. The numbers are not mentioned here. It shows the number of production batches in this new facility for each quarter. And the line represents the theoretical production capacity.

Last fiscal year, there has been delay in starting up the production. But starting from the third quarter, the commercial production started, and we have been able to steadily ramp up the production. And for the first quarter, the operation or utilization was good. And compared to the Q4, the number of batches has decreased, but that was due to starting up of the production of a new product called Product 2.

And the production of Product 2 had faced no issues. It was smooth. And in the second quarter, we will further expand its operations, and we do believe that the revenue -- or the sales is going to increase. And towards the second half of FY '23, we are expecting full operation.

PRO, which is mentioned here, is the budget or the plan. So for the full year, we'll be able to achieve capacity utilization, which is higher than we had expected. We have, on the right-hand side, the revenue increase as well as the profit. From mid- to long term, we are expecting a strong growth from KBI. And the top line will be -- KBI's top line will be supported by this facility. And we are pushing the profitability improvement project to push up the profit.

And CDMO is a contract development and manufacturing organization of biopharmaceuticals, and human capital is very important for the business. And at the same time, a large number of headcount is required, leading directly to profitability in terms of costs. We aim to improve profitability by efficiently expanding operations while securing the necessary human capital.

With this, I would like to conclude my presentation on the results for the first quarter.

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