JSR Corp

TSE:4185

Earnings Call Analysis

Company Faces Down Cycles and Strategic Changes

In FY '23, the company experienced significant declines in sales and profits due to a downturn in the semiconductor cycle and other one-time issues. Despite 25% growth in the CDMO business, profits in life sciences fell primarily due to operational shutdowns and excess inventory write-downs. However, an anticipated recovery in semiconductor materials and a strategic partnership aim to boost future growth. With a return to full-fledged growth expected by 2025 and strategic moves towards relisting, the company plans to tackle industry restructuring and sustainability while not disclosing exact FY '24 forecasts.

Overview of Financial Results

The company experienced a challenging FY '23 with significant declines in both sales and profits. Revenues amounted to JPY 404.6 billion, while core operating profit stood at JPY 8.3 billion. The decline was strongly linked to cyclical downturns in major business segments and various one-time expenses. The semiconductor materials business saw a notable year-over-year sales decrease of 6%, which was a double-digit decline until the third quarter but improved by the fourth quarter due to market recovery. This indicates a potential turnaround on the horizon.

Semiconductor Materials Business

The semiconductor business was heavily impacted by the broader industry down cycle, leading to a significant reduction in sales. However, recovery signs emerged in Q4 FY '23 with a 25% year-on-year increase in sales compared to Q4 FY '22. The company continues to invest in strategic areas such as EUV (extreme ultraviolet) lithography and metal oxide resist technologies, which could drive future growth. A full-fledged return to growth is expected in 2025.

Life Sciences Segment Challenges

The life sciences segment had a tough year despite achieving a 25% growth in the contract development and manufacturing organization (CDMO) business. Profitability was significantly impacted by several one-time factors, including a lengthy operational shutdown for repairs at the KBI Colorado plant, write-downs due to pandemic-induced inventory procurement risks, and provisions for doubtful accounts amid the biotech downturn. Inventory issues have been primarily resolved, and operational improvements are in place for FY '23. The company anticipates a better profit outlook for this segment in the next fiscal year.

Plastics Business Performance

The plastics business faced mixed results. Demand for automobiles, a major customer industry, showed signs of recovery. However, sales to other sectors like home appliances, office automation equipment, and building materials were weak, leading to overall sales declines. The company is cautiously optimistic about the automotive sector's continued recovery, which should help stabilize this segment.

Strategic Shift and Future Outlook

Plans are underway to delist the company, which completed a tender offer in April 2024, facilitating flexibility in strategic investments, structural reforms, and industry restructuring. The semiconductor materials segment is expected to significantly contribute to revenue growth, particularly from cutting-edge EUV and next-generation photoresist technologies. The life sciences segment aims to sustain double-digit growth focusing on operational enhancements and global expansion. The company expects to relist in the future, aiming to enhance management governance while creating value for all stakeholders.

CEO's Remarks

CEO Eric R. Johnson acknowledged the disappointing results for 2023 but emphasized that the company has been working on improving its competitiveness to position itself favorably for the anticipated upturns in various business areas. The strategic focus remains on ensuring the organization is competitive, with an eye towards capturing growth opportunities in the coming years.

Earnings Call Transcript 2024-Q4

[Unknown Executive]

[Interpreted] Thank you very much for waiting. We now would like to cover the financial report briefing for FY '23 and the fourth quarter FY '23, which was announced at 2:00 at TSE. Now from the public relations, my name is Takeda of JSR. It is a great pleasure to meet you.

As we have informed beforehand, this company is expecting a delisting of the company, so we will have a short presentation for the results ending in March 2024. Now we are providing simultaneous translation, and please switch the language of your choice at the screen. And this session is recorded for the purpose of the record taking.

Now today, we first would like to have our CFO, Emoto, to give you the overall view about the financial results. After that, we will take a Q&A. At the Q&A, the Representative Director and CEO, Eric Johnson will also join. Today, including Q&A, we will finish at 3:30. And when you listen to the presentation, please use the presentation material posted on our IR page on the web page. And we will be only displaying the Japanese version on the screen. Emoto-san, please.

[江本 賢一, executive]

[Interpreted] Thank you very much for your support all the time. And thank you for joining this financial results briefing for FY '23. We will use a separate set of materials for the results announcement, and we will use the first 2 pages to give you the overview. And after that, there will be short remarks by CEO, Eric Johnson, and we will have some Q&A session.

Now if you could open the supplemental material for the results announcement on Page 3, I will give the overall summary. With regard to the establishment of a strategic partnership with JICC, that was announced last June, the TOB was launched on March 19 this year and completed on April 16, 2024. Taking advantage of the benefits of becoming a delisted company, we aim to accelerate flexible strategic investments, structural reforms and industry restructuring. Our vision remains unchanged as JSR. As a world-leading technology company, we will strive for sustainable value creation.

Now let me announce the FY '23 results. Sales and profits decreased for FY '23 in a significant way. SEMI, semiconductor materials business sales decreased minus 6% year-over-year due to the semiconductor down cycle. The decline magnitude was more than double digits until the third quarter FY '23, but eased due to the market recovery trend.

In addition, we continue to make strategic investments to strengthen competitiveness in EUV, metal oxide resist, MOR and Asian markets, which will lead to future business growth. For life sciences, onetime expenses, including structural reform were announced in the first quarter and the fourth quarter of FY '23, resulting in a significant decline in earnings. JPY 8.3 billion for core operating -- core profit and the net income was negative.

For the future outlook, semiconductor materials business sales is -- was bottomed out in the fourth quarter FY '22, and the revenue was recovered upward, resulting in approximately plus 25% year-on-year in the fourth quarter FY '23. We are observing the continuing recovery, but a return to a full-fledged growth path is expected only in 2025.

Our market share in the cutting-edge logic and memory fields with EUV, advanced photoresist is expanding as we speak. We expect it to contribute significantly to our revenue growth in the future semiconductor growth period. We are also making progress at the business development of the next-generation photoresist metal oxide resist, MOR, at the top level in the industry. It is expected to be widely used in the latter half of the 2020s.

For life science, given the medium- to long-term high-growth prospects of the biopharmaceutical sector, we gained a unique market position with unique technology. In the current weak, biotech-related environment, CDMO plans to continue a double-digit growth for -- growth following last year. As the launch of new operations has been delayed amid the rapid business expansion and global production expansion, we have been carrying out our structural reforms, such as business restructuring and operational strengthening in parallel. We expect to see these results to be shown in FY '24 and beyond.

With the strategic partnership with JICC, in regards to the completion of the TOB, we will go through a squeeze-out process, and our company will make a new start as a private entity. We will accelerate the strategic actions of each business line through the strategic partnership with JICC.

We will also aim to reorganize the semiconductor materials industry and contribute to the strengthening the international competitiveness of our domestic industry. In the semiconductor industry, which will become increasingly important to society as investment competition accelerates, we will establish the foundation to continue to provide superior quality services using advanced technologies to customers in the global semiconductor fields.

We plan to relist in the future. Our policy of fulfilling responsibilities such as creating value for all stakeholders and continuing to a sustainable society remains unchanged. We will also improve management governance.

Now we expect a recovery in FY '24. And due to absence of special factors, we are expecting performance improvement. But based on the fact that we are going to delist the company, we're not disclosing our forecasts.

Next page, please. Key points for the financial results for FY '23. FY '23 resulted in revenue of JPY 404.6 billion and core operating profit of JPY 8.3 billion, This was a significant year-on-year decline in profit and also against the guidance.

In -- for digital solutions business, or DS, it was mainly due to a decrease in sales caused by a decrease in demand because of semiconductor cycle and due to an increase in fixed costs for strategic investment. Revenue has been on a recovery trend since the bottom in Q4 of FY '22. Sales of display materials increased due to a recovery in panel maker utilization. Panel market was also on an improving trend, indicating a stronger market recovery than expected.

For life sciences, despite the 25% growth in CDMO business, profit significantly decreased mainly due to the impact of special factors. The special factors include the impact of the operation shutdown of about 3 months due to the large-scale repair at KBI Colorado plant; write-down of excess investment in inventory during periods of heightened material procurement risk in the COVID-19 pandemic; and also a provision for doubtful accounts of customers due to the downturn in biotech industry. In FY '23, we've strictly recognized losses, including those involving future risks.

Inventory in question were purchased in FY '20 through FY '22. No issues were identified for materials purchased in FY '23 onwards, and we expect improvement in operation. And we were able to expand our production in FY '23. Because of the absence of the special factors, the increase in top line, life science business is going to show improvement in profit in the next fiscal year.

For PLA or plastics business, demand for automobiles, the major customer industries is on a recovery trend. On the other hand, demand for home appliances, office automation equipment and building materials slowed and sales declined.

So that was a very brief explanation of the financial results. From Page 5 onwards, details of the figures are given. We will not be disclosing the FY '24 earnings forecast, as was mentioned earlier. However, the market outlook is described on Page 10.

It is expected to be the last quarterly earnings briefing held in this style. We are planning to separately disclose our management and business performance through our website and through management briefings. I would like to ask the investors and media people to provide us with continued support.

Now I would like to hand over to our CEO, Eric Johnson, to say a few words.

[Eric R. Johnson, executive]

Thank you, Emoto-san. So as was described, 2023 was disappointing results for us. We saw a convergence of down cycles across all of our businesses, which had a significant impact. And then also, as noted, we had some significant onetime costs issues, particularly at KBI.

Having said that, we have spent a lot of our resources focused on improving our competitiveness and ensuring that we're well positioned going forward. And we feel very good about the organization as we look forward to the upturns in the various businesses that we're participating in.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]