Sekisui Chemical Co Ltd

TSE:4204

Earnings Call Transcript 2020-Q1

[Keita Kato, executive]

My name is Keita Kato, Senior Managing Executive Officer and Head of Business Strategy Department. Let me go over the first quarter results for fiscal '19.

On the first slide, you will find the currency rate used for the first quarter and the assumption for the second quarter. Next slide illustrates the first quarter results, for which we enjoyed growth both in sales and profit. The operating income reached JPY 10.8 billion, which is on track with the first half guidance.

On the other hand, ordinary income was almost flat from last year as the yen appreciated in excess of the company assumption causing foreign exchange losses. The net income declined due to valuation loss booked in compliance with the accounting rules. The loss was triggered by the fall in the stock price of a Vietnamese company that we have invested in.

The results breakdown by divisional companies is shown on Slide 3. Operating income was down by JPY 2.5 billion for HPP or High Performance Plastics Company due to a prolonged weakness in the smartphone and the auto markets.

Operating income for the Housing Company overachieved original plan, reaching JPY 4 billion year-on-year growth, owing to an increase in the number of houses sold and progress made to smooth out the sales fluctuation between the first and the second quarter.

In UIEP or Urban Infrastructure and Environmental Products Company, the operating income growth of JPY 0.3 billion was driven by steady sales growth of prioritized products in Japan and volume growth and improved product mix in the overseas market. The profit achieved was in line with the plan. On a consolidated basis, the result was pretty much on par with the projection, and we enjoyed growth both in sales and profit. For the first half, we expect a sales growth of JPY 9.1 billion with each profit line expected to be in line with the guidance.

Next, let me dive into the first half earnings guidance for divisional companies. For HPP, although we do not expect a huge improvement in the global market in the second quarter, we aim to recover the operating income to last year's level by growing sales in the growth fields and fixed cost reduction. However, the profit decline in Q1 cannot be fully offset. And hence, we revised down the first half forecast by JPY 2.5 billion from the original guidance to JPY 20.5 billion.

In Housing, we made good progress in leveling out the quarterly sales fluctuation. The profit in Q2 is expected to drop, but we intend to grasp the last minute demand spike right before the consumption tax hike in order to grow the sales of subdivided land and ready-built housing and home renovation. With that, we revised up the first half guidance from the initial plan by JPY 0.5 billion, now projecting for an operating income of JPY 19 billion. We'll continue to strengthen the manufacturing and construction capabilities in order to deliver their homes by the end of the first half.

For UIEP, we plan to definitely take up the brisk construction demand in Japan and revised up the first half operating income projection by JPY 1 billion to JPY 6 billion, which will be a record high for UIEP as a first half profit.

As the Medical business continues to enjoy brisk momentum with the Diagnostics business, we revised up the forecast by JPY 0.4 billion to JPY 4.4 billion, which will be comparable to the operating income achieved last fiscal year. On a consolidated basis, we will endeavor to curve the fixed cost spending.

The first half operating income for the whole group is expected to grow from last year, and the guidance remains unchanged at JPY 4.3 billion.

We will make an all-out effort to offset the decline in the HPP business by the performance of other divisional companies and initiatives taken at the head office.

This slide is the analysis of the results. As indicated at the top right corner, HPP fell short of the plan in sales quantity and composition as the business was impacted by the slowdown in the global economy. However, we covered that by lowering the fixed cost so that we can still project for revenue and profit growth for the first half as planned. To be poised for protracted global economic weakness, we are taking measures beyond cost reduction and improving production efficiency and have embarked on cost innovation, looking at the overall supply chain, including procurement and logistics.

Let me also talk about the big topic for the first half that I have not had the chance to explain yet, the recent announcement on the acquisition of AIM Aerospace Group. The intention behind the acquisition is illustrated on Slide 7. We are now formulating our long-term vision for 2030. And in order to realize a new phase of growth, this transaction will serve as a very important stepping stone.

The overview of AIM is shown at the bottom left. The acquisition price was $510 million or approximately JPY 56 billion, and this is the biggest M&A transaction ever for us. We expect to complete the process in the second half of fiscal '19. AIM's main business is a CFRP and other composite material molding products for aircraft and drones, and big chunk of their business is for Boeing Company.

This slide visualizes the potential synergy and expected impact from this deal. For the fire-retardant foam currently under development, we expect to strike synergy by replacing the third-party foam currently used in AIM's stacks with their own. Furthermore, we will aim to strengthen our brand positioning in the future in the aircraft market, which will partly be achieved through collaboration with their current aircraft sheet business in the U.S. As we think about growing the business and realizing synergies, the deal was a very important means to pursue a sales target of JPY 50 billion by 2025 for the aircraft-related business.

Next, let me walk you through the first half business outlook by each divisional company. Starting with HPP, sales is projected to go down by JPY 6.3 billion to JPY 165 billion. The line graph at bottom left illustrate the market trend. We are observing protracted weakness in the smartphone and auto market and the situation got worse than our expectation in April.

For the smartphone market, we could not see the impact of Huawei at that point in April, but now the repercussion has become bigger than anticipated. We expect small Q-on-Q recovery in the second quarter. But under the current circumstances, we have to admit the possibility of some downside risk.

In automobiles and transportation, the shortfall in the product mix target could not be offset by lower fixed costs. So the first half guidance is revised down by JPY 2.5 billion. However, we will strive to recover the Q2 profit, the level comparable to last year.

Now let's look at the 3 strategic fields. For Electronics, the demand for smartphone-related product is far below our expectation due to various factors, including the Huawei situation. Having said that, the portfolio reform initiative to expand the non-LCD-related application is making steady progress. And in Q2, the plan is to raise exposure to non-LCD application to 50%.

I'd like to draw your attention to one of the bar graph at the bottom right that focused on the non-liquid field. First, we are not overly optimistic about the LCD business. We are projecting some sales decline. But to the non-liquid business, the sales is up nicely, thanks to the initiatives taken to date. If we fully execute the initiatives, we believe the non-liquid sales can reach 50%.

Next is the automobile and transportation. For the high-performance interlayer film, we have a very high market share, especially for the one with soundproof function. Until recently, our business was growing irrespective of what was happening in the market, thanks to measures including our effort to increase the contents per vehicle. Having said that, the most recent market decline caused by the slow recovery in Europe, weakness in China and further deterioration of the U.S. market was so significant that our business was also impacted. However, the demand for the head-up display interlayer film is growing for sure, and the growth in Q1 was 120% year-on-year. We expect to enjoy accelerated growth in Q2 as the interlayer film will be adopted to more models.

The middle bar graph at bottom right indicates a 9% year-on-year decline for the high-performance interlayer film in Q1. This was due to an extremely strong Q4 last year when we gained market share in excess of the volumes stipulated in the contract. Another one-off factor that I should note is the inventory and production adjustment in Q1 carried out by the glass makers. However in Q2, we expect those one-off factors to subside as well as gradual market improvement, and we believe it's possible to achieve a 3% year-on-year growth in Q2.

For building and infrastructure, although the tough global market environment is expected to last for a while for CPVC, we continue to enjoy opportunity in sales growth of fire-resistant materials as well as good momentum for thermal insulation and noncombustible materials, stemming from firm domestic demand. So the progress is in line with the plan. The bar graph at bottom right shows the growth in thermal insulation and noncombustible materials. The absolute yen amount is still very small, but the growth is substantial, expanding at close to 130% year-on-year.

Next is the Housing Company, for which we expect the net sales to grow by JPY 10.1 billion to JPY 257 billion. For new housing, the number of homes sold in the first half is projected to go up by 200 units. Smoothing the quarterly fluctuation is also making good progress, and the Q1 sales grew by 20% year-on-year. We intend to augment the production and construction capability leading to the end of the first half.

For home renovation last fiscal year, we streamlined the structure to be profitable by measures including fixed cost reduction. This fiscal year, we are back on the growth trajectory with higher sales. Q1 sales grew 8% year-on-year and in Q2, we will focus on capturing the last minute spike in demand before the tax hike. The strategy is to grow profit mainly by the new housing and home renovation business, and we aim to achieve JPY 19 billion in operating income in the first half for the Housing Company, which will be JPY 500 million higher than the original plan.

Let me also talk about the order trend for new houses. In Q1, the fall in demand for rebuilding homes in the urban area was more than what we had anticipated, and we fell short of the original plan and the order intake declined by 1% year-on-year. On the other hand, demand from the first-time buyers were extremely solid and we expect the trend to continue in Q2 as well.

By augmenting the sales force, product strategy and land procurement strategy, in Q2, we will aim for 2% order increase in terms of units. The internal initiatives, such as nationwide rollout of immersive showrooms, new product launches of steel frame-based homes for the first-time buyers, growing ready-built home sales and securing land bank are all progressing steadily. We would like to further realize the effectiveness of these measures, so that we can continue to secure good orders in the second quarter, mainly targeting the first-time buyers.

In UIEP, we expect sales to grow by JPY 3 billion to JPY 114 billion. In Q1 for the domestic market, the sales of prioritized products grew nicely, mainly for non-residential and public market. The commodity business was also solid, and we expect spread improvement in the first half. In Q2, we plan to grow by improving the sales quantity and composition, mainly boosted by the prioritized product.

Overseas, the production ramp-up for the aircraft sheet business and FFU used for railway sleepers is bearing fruits and business is making steady growth. We'll continue with the fixed cost reduction initiative and project the first half operating income to grow by JPY 1.7 billion, an upward revision of JPY 1 billion from the original plan to aim for record high first half profit of JPY 6 billion for UIEP.

Here on Slide 14 are the 3 strategic fields. We expect significant sales growth for Advanced Materials, but flat growth for Building and Living Environment. For Piping and Infrastructure, while we enjoy robust trend of piping materials for buildings in the Japanese market, backed by the government policy for building national resilience, the piping material for fabs in the IT industry is struggling due to the protracted trend of IT companies curving their CapEx. In Building and Living Environment, the demand for collective housing is weak but overall trend is in line with the plan.

In Advanced Materials, the U.S. aircraft sheet business is recovering and with the production ramp-up, we project another phase of growth. The FFU business is expanding for civil engineering application in Japan and with increased number of railway companies adopting our FFU as railway sleepers overseas, particularly in Europe. In Japan, the sales of the prioritized products are growing very rapidly, and overseas, we are also enjoying steady business growth.

Last but not least, I'd like to have a few words on the Medical business that was carved out from the HPP Company from this fiscal year. Net sales is expected to grow by JPY 0.8 billion to JPY 35 billion. The Diagnostics business is trending slightly above the plan, so we revised up the first half operating income forecast by JPY 0.4 billion.

The Pharmaceutical Science business is trending pretty much in line with the plan for the first half. And in aggregate, we aim to secure the operating income similar to last year's level. For the Diagnostics business, the mainstay diagnostic reagents are achieving steady growth mainly in Europe, U.S. and China, and we expect a significant revenue growth in Q2 as well.

In the Pharmaceutical Sciences business, revenue was down due to reasons that resided with the clients. But in Q2, we expect to see some recovery. We are moving ahead for the launch of new drug substances, making sure that we are planting the seeds for business opportunities in the second half and beyond.

This is where we stand for the respective divisional companies as well as the medical business, including the main measures that we are taking. In Q2, we intend to really execute the initiatives on sales expansion and fixed cost reduction so as to achieve the first half operating income target of JPY 43 billion.

The remaining slides are more detailed disclosure on the results. So please check them at your convenient time. Thank you very much for your attention.

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