Sekisui Chemical Co Ltd

TSE:4204

Earnings Call Analysis

Strong Growth and Profitability Improvements Across Segments

In Q1, the nonresidential market showed a recovery, driving growth in the pipe systems and CPVC business, with strong post-election demand expected in India. UIEP reported record first-half sales of JPY 114.3 billion, while the Medical division saw sales rise by JPY 5.6 billion to JPY 49.3 billion. Despite a JPY 9.7 billion decline in Housing sales to JPY 255.1 billion, operating profit increased by JPY 500 million to JPY 13.5 billion. The company plans to enhance profitability by JPY 10 billion by 2025 and is on track for this goal. Overall, they forecast a JPY 22.7 billion increase in sales to JPY 223 billion.

Strong Start to the Fiscal Year

The company announced impressive results for the first quarter of fiscal year 2024 with net sales reaching JPY 298.8 billion and operating profit at JPY 20.2 billion. Although the profit attributable to owners of the parent saw a minor decline to JPY 23.7 billion due to the absence of gains from sales of cross-shareholdings, the operating profit exceeded their plan .

Segment Performance Highlights

High Performance Plastics saw substantial growth in net sales and profits, driven by a recovery in electronics and industrial demands as well as favorable foreign exchange rates. The Medical segment benefitted from strong domestic demand for diagnostic reagents and increased sales in the U.S. and Europe . On the other hand, the Housing segment experienced a decline in net sales, yet profitability measures led to an increase in profits .

Market Conditions and Assumptions

The assumptions for market conditions revealed mixed trends. Automobile manufacturing was slightly below expectations for the first quarter but is expected to align with projections in the second quarter. Smartphone shipments surpassed expectations for the first quarter but are anticipated to dip in the second. For the entire first half, a year-over-year increase is expected. As for new housing starts, a gradual improvement is predicted with an overall increase in visitor numbers above last year's levels .

Positive First Half Outlook

The forecast for the first half of the fiscal year 2024 looks promising with expected operating profits of JPY 44.8 billion, up by JPY 3.6 billion year-over-year. The forecast was revised upwards by JPY 2 billion compared to April, thanks to foreign exchange gains and fixed-cost reductions. All segments except Housing are projected to experience increases in both net sales and profitability .

Second Quarter Projections

For the second quarter, a moderate recovery in demand is anticipated despite the rush in demand seen in the first quarter due to improved sales prices. The impact of rising raw material costs has been considered, leading to an expected slight decline in operating profit compared to both the plan and the previous year .

Full Year Expectations

The full-year forecast remains unchanged from April's projections, taking into account potential foreign exchange fluctuations. An update is expected in October when the first half results are announced. Meanwhile, a planned increase in interim dividends per share by JPY 2 to reach JPY 37 was confirmed .

Strategic Field Developments

The company highlighted advancements in three strategic fields: electronics, mobility, and industrials. A recovery in smartphone and semiconductor demand is expected to drive growth in electronics, while mobility investments are being made to increase production capacity. Industrial fields are experiencing a recovery in construction and consumer goods demand in North America and Japan .

Challenges in the Housing Segment

The Housing segment faced a JPY 9.7 billion drop in sales to JPY 255.1 billion, though operating profit was forecasted to increase by JPY 500 million to JPY 13.5 billion. A decline in the number of houses sold was offset by improvements in fixed costs and profitability measures. New housing orders have stabilized, and the company sees growth in the high-priced urban rebuilding market .

UIEP and Medical Segment Growth

UIEP saw a rise in net sales by JPY 4.7 billion to JPY 114.3 billion, with a record high operating profit forecasted at JPY 8.3 billion for the first half. The Medical segment reported a sales increase of JPY 5.6 billion to JPY 49.3 billion, with operating profit expected to rise by JPY 300 million to JPY 5.4 billion, driven by steady trends in domestic and overseas diagnostics .

Earnings Call Transcript 2025-Q1

[Futoshi Kamiwaki, executive]

So I would like to explain about the results for the first quarter. Next page, please. So the in-house assumptions as well as the results for ForEx rates as well as the sensitivities are available on this slide.

Turning to Page 2. Here, we show the results for the first quarter of fiscal year 2024. Net sales was JPY 298.8 billion; operating profit, JPY 20.2 billion; ordinary profit, JPY 26.5 billion; and profit attributable to owners of the parent was JPY 23.7 billion. Stars were record highs.

So we increased in net sales, and operating profits increased substantially and ordinary profits increases as well. So for profit attributable to owners of the parent, it went down slightly due to the absence of gain on sales of cross-shareholdings. Sales was broadly in line with plan, and operating profit exceeded the plan.

Please turn to Page 3. This is Q1 results by segment. For High Performance Plastics, we saw a significant rise in net sales and profits. For UIEP and Medical, we saw an increase in net sales and profits. Housing declined in net sales. However, the measures to improve profitability steadily progressed, and we were able to see an increase in profits. All segments saw operating profits increase, and the operating profit plan was exceeded. For HPP, all 3 fields increased in net sales as well as in profits, especially the contribution was made from the demand recovery in electronics and industrials. And we also saw an FX gain as well.

Regarding Housing, the sales volume of housings went down, but we saw an improvement in product mix as well as we engaged in fixed-cost reduction. And we saw more orders for the renovation business. And these types of efforts led to an increase in profit.

For UIEP, the nonresidential area is showing a recovery trend. And because of the improvement in prices, we saw a rush in demand, which has contributed. Regarding Medical, we saw firm domestic demand for diagnostics reagents and growth in drug development solutions and an increase in testing reagent sales in Europe and the U.S. that led to higher net sales and profits. And perovskite, LB and biorefinery in the Others segment were areas where we made advanced investments in line with plan.

Turning to Page 4. Here are the assumptions for market conditions. For automobile manufacturing, the assumptions were a little bit lower for the first quarter, but we expect we'll be in line with assumptions for the second quarter. For smartphone shipments, we were trending above our assumptions for the first quarter. We are expecting to go below for the second quarter. But for the first half, we expect to be higher year-over-year.

Regarding Housing visitors, overall visitors were down. However, overall, we are expecting to go above last year levels. And also for new housing starts, the bottom should be the second half of the fiscal '23, and we are seeing a slight improvement. However, still, trends are sluggish. Also, for domestic naphtha prices, prices have been exceeding our assumptions. So this is a risk that we view.

Next is Page 5, which is the first half forecast by segment. Looking at the total first, operating profits are expected to be JPY 44.8 billion, which is up by JPY 3.6 billion year-over-year. Compared to the plan in April, we are expecting an upward revision of JPY 2 billion. Especially, we are expecting a certain recovery in the market. So for the 3 segments, excluding Housing, we are expecting higher net sales as well as higher profits for all segments.

So from FX gains as well as reducing fixed cost, we have revised up our expectations by JPY 2 billion. So for High Performance Plastics, we are expecting contribution of demand recovery for semiconductors as well as construction and consumable goods. And also, we are struggling for residential. However, we will -- are expecting a upper revision due to profitability reinforcement measures.

For UIEP, the nonresidential market recovery is expected to continue. And also in Q2, due to sales price increases that is likely to penetrate the market, we expect to secure spreads. And that is why we have -- are expecting upward revision. For Medical, domestic diagnostic reagent demand is relatively trending in a brisk manner.

Please turn to Page 6. This is by first and second quarters. Especially when you look at the second quarter, for the second quarter, we are expecting a certain degree of demand recovery. However, partially, there has been a rush in demand in Q1 due to sales price improvements. And also, we have been seeing an impact from surging raw material prices, so we have accounted for that. So for the second quarter, operating profit compared to plan and compared to the previous year, we are expecting it to slightly decline.

Next, turning to Page 7. This is the first half forecast, and we do an analysis of net sales and operating profit. Regarding net sales, we are expecting an increase of JPY 24.4 billion to reach JPY 635.7 billion. And for operating profit, we expect it to go up by JPY 3.6 billion, reaching JPY 44.8 billion. And when you look at the analysis for sales volume and product mix, we are expecting plus JPY 9.5 billion contribution, especially around HPP. We expect a substantial improvement. Also for selling price, raw materials and cost reduction, et cetera, and securing spreads, we are expecting it to be broadly in line with the plan or slightly higher.

And for fixed costs, we expect to save compared to plan slightly, and the weak yen is expected to contribute by JPY 4.5 billion. And due to these reasons, we expect it to be up by JPY 3.6 billion year-over-year, which is going to be a upward revision of JPY 2 billion compared to our plan from April.

Turning to Page 8. So this is the overview of first half fiscal '24 forecast. So we're expecting an increase in net sales and profits as well as for sales, operating profits, ordinary profits and profit attributable to owners of the parent. We have been revising up our expectations. And we expect to increase the interim dividends per share as planned by JPY 2, reaching JPY 37.

So regarding the full year forecast, which is on Page 9. For the full year, compared to the April forecast, we have decided to keep it as it is. For the second half of the year, we have accounted for FX fluctuation risk. And that's the reason we have kept it as it is. But regarding the forecast for the second half, when we announce our second -- first half results in October, we would like to give you an update.

Next, please turn to Page 10. We will now explain the current situation by segment. First, I would like to present the first half forecast for the High Performance Plastics Company. Sales are forecast to increase by JPY 22.7 billion to JPY 223 billion. OP is expected to increase by JPY 4.2 billion to JPY 27.2 billion. As you look at the factor analysis section, the sales and volume product mix was increased by JPY 8 billion. Electronics and mobility was very strong in this area. Also, in terms of the selling price and raw materials and cost reduction, we expect to secure the spread almost as planned. Likewise, with the fixed cost, it is in line with our expectation. Also, FX. It was a weaker yen, opposing a positive impact, so we have a JPY 900 million upward revision in comparison to the plan as of April. So JPY 27.2 billion of OP, and this is a record high for the first half.

Next, we would like to talk about the status of the 3 strategic fields on Page 11. So on the left, in the electronics, as we see recovery in demand for smartphones and semiconductors and especially for the non-LCD field, we do expect a steady growth. Also, in terms of the SELFA, which is a processing materials for semiconductors, we have decided to increase the capacity. So in light of the strong semiconductor demand, we have made a decision to invest in the production capacity.

Moving on to mobility. The market conditions in China are deteriorating, especially for N-HPP sales, centered on the head-up display. It is below our plan. However, it is still growing in comparison to the previous year. In a mid- to long-term basis, in HPP, we do expect the demand to grow. So in the group's Thai factory, we have decided on making an investment for production capacity increase. Also, for the heat release materials, in comparison to lithium-ion batteries, we have a strong demand for electrical equipment application. Now for the aerospace field, the demand for some aircrafts continues to be sluggish, and we have been impacted.

Moving on to the industrial field on the right. So the demand for construction and consumer goods in North America and Japan is on a recovery trend. So for Q1 and Q2 for this year, we have seen increase in both sales and profits in comparison to the previous year.

Next is Page 12, the Housing Company. Sales fell by JPY 9.7 billion to JPY 255.1 billion. Operating profit is forecast to increase by JPY 500 million to JPY 13.5 billion. By segment, Housing is plus JPY 500 million. Renovation is plus JPY 700 million. Others, minus JPY 700 million. And the total is JPY 500 million plus. Particularly in the Housing business, as we look at the factor analysis, the sales impact was minus JPY 3.9 billion. The number of houses sold was a significant decline from the previous year. So in terms of the marginal profit, both in terms of composition and cost reduction, we have seen improvement, especially for the fixed cost. Because of the measures to strengthen the profitability, we've seen a positive impact by JPY 1.8 billion. So we have been able to offset the decline in the sales with the increase in the earnings.

Please move on to Page 13. On the top left, this is the order situation for the new housing. So in terms of number of orders, trended 100%. But the value, because of the rise in the unit price, resulted in 106%, so indicating that the decline in orders received came to a halt in Q1. Q2 onwards, the number of orders, expected to be 102%. And also, Q2 onwards, 101% in the first half.

In terms of number of orders by type of construction, rebuilding has been fairly strong, especially in urban areas at high price range. There has been a strong demand for rebuilding and has been driving the overall growth.

All the smart house-related indicators are showing steady growth. Also on the bottom left, for the renovation orders, sales are quite steady. Especially, we are shifting personnel away from new housing to renovation. We are seeing a steady impact of this initiative.

Now for the initiatives for profitability improvement, we plan to improve by JPY 10 billion over the 3-year period from 2023 to 2025. We are making good progress in 2023 and 2024, slightly ahead of schedule, leading to the impact that I've just mentioned.

Moving on to Page 14 for UIEP. So net sales increased by JPY 4.7 billion to JPY 141.3 billion (sic) [ JPY 114.3 billion ]. Operating profit is expected to be JPY 8.3 billion. And this JPY 8.3 billion, it will be a record high number for the first half of the year. In terms of the analysis of factors, the sales volumes and product mix are negative, but this includes the rise in the logistics cost. If you were to exclude this, especially from the recovery in the demand for non-housing sector, we are seeing a positive impact in terms of sales and volumes and product mix. In terms of the selling price and raw materials and in terms of the spread, we've been able to secure somewhat of a larger spread than initially expected. And the fixed cost, it is pretty much in line with our expectation. Because of that, in the first half, we are expecting JPY 200 million of an increase. That is an upward revision from the April plan.

Moving on to Page 15, the status of the 3 strategic fields. First, for pipe systems, the nonresidential market is on a recovery trend, especially in Q1. We were able to capture the rush in demand in Q1 prior to improvements in selling prices. That was one of the factors. Also, for CPVC business, because of the impact of the election of the Prime Minister in India, there was a suspension in terms of the movement of the products. But after the election is over, we expect to see a recovery from Q2 onwards. In terms of building and infrastructure composite materials, we have been impacted by the sluggish trend in the housing market. Therefore, it was somewhat weak in Q1. However, in terms of nonflammable materials and FFU, these priority products, we have seen a strong result. So Q2, we shall see a strong growth in these products.

Now for infrastructure renovation, on the bottom left here, the pipeline renewal has been fairly strong, both in Japan and overseas. As a result of these, in the bottom right, prioritized products sales for Japan and overseas sales by region also increased steadily compared to the previous year.

Finally, Page 16, for the Medical business. Sales increased by JPY 5.6 billion to JPY 49.3 billion. Operating profit is forecast to increase by JPY 300 million to JPY 5.4 billion. In terms of factor analysis, diagnostics Japan, diagnostic overseas and pharmaceutical science and other were pretty much in line with the plan as of April. So it's an increase by JPY 100 million in terms of the earnings, so there has been a revision by JPY 100 million.

Moving on to Page 17, the overview by business. For diagnostic Japan, the market has trended steadily. So Q2 onwards, we will focus on capturing new orders. Also for diagnostic overseas, Q1, especially for the infectious disease test kits, maybe if you look back last year in the second half, there were some special factors leading to some sluggish trend. However, the impact of the special factors have been resolved. So we are back to more of a steady trend.

Q2 onwards, we have in the U.S. new products as well as the blood coagulation products in China, which will contribute to positive result. Also for the pharmaceutical science, the drug development solution business was quite solid in Q1. In Q2, we would focus on capturing new orders. Also on the bottom right, this is for U.S. and domestic together, the net sales of infectious disease test kits are shown here. So because it's an infectious disease, it tends to be skewed towards the second half of the year. But the first half, we are trending somewhat better than our initial expectation.

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

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