Sekisui Chemical Co Ltd

TSE:4204

Earnings Call Transcript 2023-Q1

[Futoshi Kamiwaki, executive]

This is Futoshi Kamiwaki, Representative Director and Head of Business Strategy Department. I'd like to go over the financial results for the first quarter of fiscal 2022.

Page 1 shows the currency assumption. Initially, the currency assumption against the dollar was JPY 115 in the business plan. The actual in Q1 was JPY 130. And for Q2, we are assuming JPY 133 against the dollar. The first half guidance is expected to positively benefit from the currency.

Page 2 illustrates the results of the first quarter. Net sales grew to JPY 282.3 billion, with the operating income reaching JPY 13.8 billion, ordinary income JPY 21.4 billion and net income JPY 14.6 billion. All the profit lines were up, and ordinary income, in particular, increased significantly due to the impact of foreign exchange gains.

Page 3 is net sales and operating income by respective companies for the first quarter. Both sales and profit increased for all the segments. The High Performance Plastics Company, or HPP, was affected by stagnant automobile production and high raw material and fuel prices, but these were offset by improved selling prices and fixed cost reduction. In addition, foreign exchange gains helped the segment to achieve the target as planned.

For the housing company, new housing orders remained strong. Despite the ongoing impact of soaring component prices, progress was slightly above the plan, thanks to the increase in the number of houses sold and progress in leveling up sales fluctuation.

In Urban Infrastructure & Environmental Products Company, or UIEP, the market is showing a certain level of recovery. Although the business has been impacted by higher raw material cost, we took thorough steps such as improving the selling prices for securing spread. And the performance was pretty much on par with the plan and recorded the highest profit ever for the first quarter.

The Medical business was impacted by lockdowns in China, but thanks to the steady progress for domestic Diagnostics business and Pharmaceutical Sciences business, the overall Medical Business is generally performing in line with the plan.

Page 4 indicates the market assumptions. First, the global automobile production struggled slightly in the first quarter, with the production volume at 96% year-on-year, deviating from the forecast. We expect recovery in Q2 mainly driven by China, with the overall market at 121% year-on-year, partially due to the low base effect last year.

Smartphone shipments was slightly below the expectation of 102% year-on-year in the first quarter. For the second quarter, we are assuming 98% year-on-year partially due to the lockdowns in China and some inventory adjustment by the manufacturers.

For the Housing business, we were able to secure visitors at a level comparable to last year, and the housing starts is starting to show gradual recovery. Domestic naphtha price, which is indicated for the level of raw material prices, is much higher at JPY 84,000 per 1 kiloliter versus assumption of JPY 70,000, which suggests that the business is likely to be severely impacted by the soaring raw material prices.

Page 5 is the outlook for the first half, and we expect all the segments to achieve growth in both net sales and profit. The guidance for operating income is JPY 39 billion, and progress is in line with the plan, with each segments expected to book the operating income as anticipated.

Looking closely by segment. HPP is likely to be impacted by the rising raw material prices and slowdown of global demand, but we plan to offset that by improving the selling prices, cost reduction or CR activities and currency gains so that we can achieve the operating income target.

Housing is also expected to be affected by soaring prices of steel, lumber and other materials, but we expect to achieve the plan by increasing the number of new houses sold. In UIEP, raw material prices will continue to rise, but we will focus on securing spreads and achieve the plan by capturing a certain level of market recovery.

In the Medical business, there's been a delay in getting the approval for COVID-19 testing kits. The domestic Diagnostic Reagents business and Pharmaceutical Sciences business are performing well, and we believe we will be able to achieve the targets.

Page 6 breaks down the first half into Q1 and Q2. For the Housing business, profit in Q2 is expected to decline year-on-year because we were able to bring forward a large amount of the sales to Q1 as part of our effort to level the quarterly sales fluctuation. For the Other segment, we expect both sales and profit to continue to grow in the second quarter.

Page 7 analyzes the changes behind the consolidated operating profit for the first half. Net sales is projected to grow by JPY 65.4 billion. The waterfall chart on the right illustrates that the raw material prices rose significantly more than our April assumption. On the other hand, selling price has been improving considerably compared to the April plan. Although the sales volume and product mix factor is trending slightly short of the April plan due to the market conditions, we still have JPY 10.5 billion gain vis-a-vis the previous year.

With these efforts as well as some fixed-cost savings and currency benefit, we expect to achieve the operating profit growth of JPY 3.5 billion as planned.

Next, I would like to show the profit outlook for the first half on Page 8. Revenue guidance for the first half is revised up by JPY 19.1 billion versus the original plan to JPY 613.3 billion, while the operating profit forecast is kept unchanged. Ordinary profit was revised up by JPY 5 billion from the April forecast to JPY 46 billion. Net profit is also revised up by JPY 3.5 billion.

Next on Page 9 is the forecast for the full year of fiscal '22. The second half guidance remains unchanged from the April forecast. So the revised guidance for the full year simply reflects the upward revisions made to net sales, ordinary income and net income for the first half.

I will now explain the business by segment, starting with HPP on Page 10. First half sales are projected to increase by JPY 36.2 billion. As shown by the analysis of operating profit on the right, OP is affected by a sharp rise in raw material prices, significantly more severe than the April projection. However, we have been able to improve the selling price almost at the same pace. At the same time, as indicated by the cost reduction bar, we have also been impacted by the steep rise in LNG prices, mainly in Europe by more than JPY 2 billion. This impact has been minimized through CR activities.

And although the sales volume and product mix are affected by deteriorating market conditions, we were able to secure an increase of JPY 700 million, driven mainly by high-performance interlayer film. Considering the foreign exchange gains on top of all the factors just explained, we project a JPY 2.2 billion gain on OP as stipulated in the business plan.

Next, let me offer some details on the 3 strategic fields using Page 11. In the electronics field, we expect a decline in demand for LCDs in the second quarter with inventory adjustments expected to take place in the quarter. In the non-LCD field, we anticipate the demand to remain firm, especially in the semiconductor field. The mobility business on the right is being affected by the automobile production cutbacks stemming from the impact of the lockdowns in China and the shortage of components due to the situation in Ukraine.

However, more models are adopting the interlayer film for head-up displays and the sales have been firm, and we expect 15% growth in sales for the first half. SEKISUI Aerospace business is on track to return back to profitability. The Building & Infrastructure business is shown on the bottom left. The demand for chlorinated PVC is very strong, mainly in India. An improvement on the selling price has been achieved as planned.

In addition, fire resistant and noncombustible materials are also performing well, backed by the recovery of the domestic housing market, and we expect a significant increase in sales.

In the Housing business on Page 12, we are forecasting a JPY 13.2 billion increase in net sales for the first half. Orders were firm with orders for new housing and renovation in the first quarter at 100% and 104%, respectively, and the orders for the first half projected at 100% and 108%.

The waterfall chart on the right illustrates that the number of houses sold increased by 190 units from the previous year. And the business was also strongly affected by the sharp rise in component prices, especially for steel and lumber. As a result, the OP for the Housing business is expected to go down by JPY 400 million.

On the other hand, the renovation business remained strong, with the OP going up by JPY 500 million year-on-year. For the other businesses, the OP is projected to grow by JPY 100 million, thanks to the firm trend for Town and Community Development business and purchase and resale business. Overall, we expect to achieve a target of JPY 200 million growth in OP in line with the business plan.

Page 13 presents our measures for the new housing orders. The table in the middle shows the number of orders by type of construction. And you can see that subdivision housing and ready-built houses, which we are strategically focusing, are driving the orders.

On the other hand, for rebuilding and apartment housing, we have been able to win orders at a level comparable to the previous year by expanding the zero-energy homes, which is one of our strength. The bottom half of the slide outlines our strategies for winning orders, which is a combination of attracting customers, product strategies and land strategies.

As mentioned on the right-hand side on the product strategy, the ratio of zero-energy homes is nearly 90%, and the adoption rate of storage batteries is 80%. We will continue to capture orders leveraging our strength in smart and resilient housing. We plan to expand the same concept to wood-based houses in the second quarter.

Next is UIEP on Page 14, for which we project a revenue growth of JPY 11.6 billion in the first half. The analysis of operating profit illustrates that the impact of raw material prices have been more severe than what we expected in April. But at the same time, improvement in the selling prices has been greater than our April assumption, and we have been able to offset the impact of higher raw material prices.

For sales volume and product mix, we've been able to capture the demand recovery from Q1, and this factor would also have some positive impact. In sum, we are on track to achieve JPY 1.8 billion OP growth target in the first half as planned. We also marked a record high profit in the first quarter.

Page 15 shows the details of the 3 strategic fields for which a significant sales growth is projected for the first half due to the following reasons. Strong demand in the piping and infrastructure field, thanks to the demand for detached houses; firm industrial piping materials demand from the semiconductor sector and improvement on the selling prices.

In Building and Living environment, demand for new housing, apartment building and renovation was particularly strong, leading to an increase in sales. In the Advanced Materials field shown at top right, the sheet business, which was severely impacted by the pandemic, is on a recovery trend with the increasing demand for aircraft refurbishment used for domestic flights.

In addition, demand for FFU railway sleepers for North America is showing signs of recovery, and we project an increase in sales here as well. We also expect sales of our prioritized products and overseas sales, which are important KPIs to grow steadily.

Lastly, the Medical business on Page 16. Sales is expected to increase by JPY 3.1 billion for the first half. As shown by the OP waterfall chart on the right, the Diagnostics business overseas is under a little bit of a pressure due to some delay in the approval schedule for the COVID-19 testing kits in the U.S. and the impact of the lockdowns in China.

In contrast, domestic Diagnostics Reagents business and Pharmaceutical Sciences business is performing above the plan. In sum, we expect to achieve an OP growth of JPY 1.2 billion.

Page 17 is the overview by business. In the domestic Diagnostics business, the performance of COVID-19 testing kits and general testing reagents have been very strong. Overseas Diagnostics business is struggling slightly due to the factors I mentioned earlier. But sales of diagnostic reagents other than for COVID-19 is on the recovery trend, especially in Europe and the U.S.

In the Pharmaceutical Sciences business at bottom left, orders for new active pharmaceutical ingredients are progressing as planned, and sales is increasing steadily. As for the new product in the U.S., there's been some delay in the authorization process for our proprietary COVID-19 testing kits, and we are aiming to resubmit part of the application in the second half to complete the application process.

This will be the end of my presentation. Thank you very much for your attention.

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