Sekisui Chemical Co Ltd

TSE:4204

Earnings Call Analysis

Company Expects Increased Sales and Profits

In a recent earnings call, the company reported Q3 results with record high net sales of JPY 312.6 billion and a promising operating profit of JPY 24.7 billion that exceeded plans. A weaker yen impacted foreign exchange rates, while the High Performance Plastics segment saw sales and profits soar, aiding the overall company profits. Despite a weak housing market and slower market recovery negatively affecting sales and operating profits, forecasts indicate growth in sales and profits across most segments, except housing where there is a projected decline. Full year operating profit was revised down by JPY 5 billion. Nevertheless, expected increases in volume, product mix, maintained spreads, and controlled fixed costs contribute to a bright forecast, with net profits anticipated to hit a record high of JPY 75 billion and year-end dividends forecasted at JPY 71 per share, reflecting a JPY 12 increase.

Third Quarter Performance Exceeds Expectations Amidst Currency Dynamics

The company faced a weaker-than-expected yen during the third quarter, impacting results by creating foreign exchange sensitivity. Despite this, it achieved a significant increase in net sales reaching JPY 312.6 billion and posting increases across all profit metrics. This included an operating profit of JPY 24.7 billion, ordinary profit of JPY 21.3 billion, and a net profit of JPY 14 billion, with the latter marking a record high. The progress of operating profit also slightly surpassed the October plan.

Segment Breakdown Shows Mixed Results

In terms of segments, the High Performance Plastics Company stood out with a substantial uptick in sales and profit, driven by the mobility field, slightly exceeding plans and contributing crucially to the overall performance. Contrastingly, the Housing Company's sales were slightly better than anticipated, balancing out with operating profits on par with the previous year. The Urban Infrastructure & Environmental Products Company met expectations, despite facing market headwinds, due to successful cost controls and spread maintenance. The Medical business, however, saw an uptick in sales but profits declined, mainly due to sluggish sales in Japan and delayed product expansion in the U.S.

Market Outlook and Segment Forecasts Indicate Varied Dynamics

The forecast for the market shows that global automobile production and smartphone shipments are trending above October forecasts, but exhibition visitor recovery and new housing starts are lagging. Effects from these market conditions extend to segment performance where sales and profits in all segments, except for Housing, are expected to rise in line with or above plans. Specifically, High Performance Plastics is anticipated to robustly compensate for housing demand declines, maintaining a stable operating profit year-on-year.

Operational Profit Analysis Highlights Challenges and Strategy Adjustments

The expected increase in sales volume and product mix for the second half of the fiscal year is JPY 6 billion year-on-year but falls short of forecasts due to a slower market recovery. Positive aspects include sustained spreads between selling prices and materials and successful fixed cost controls. Yet, foreign exchange gains are predicted to contribute less to the increase than planned, reflecting October's optimistic forecast.

Full Fiscal Year Projections Show Sector Strength Amid Housing Softness

Looking ahead, the company forecasts an increase in both sales and profits across most segments other than housing for the full fiscal year. Both High Performance Plastics and the Urban Infrastructure & Environmental Products segment are on track for record profits. The Medical segment is also expected to hit a peak in profits, despite adjustments from prior forecasts. Overall, the company anticipates upward revisions with a net profit expected to reach a record JPY 75 billion.

Dividends and Key Financial Metrics Signal Shareholder Confidence

Reflecting a solid financial stance, the company projects year-end dividends to rise to JPY 36 per share, culminating in JPY 71 per share for the full year—an uptick of JPY 12. New record highs are expected for both EBITDA, forecasted at JPY 148 billion, and key ratios such as ROIC and ROE, predicted to hit 7.6% and 10% respectively, signaling efficient utilization of capital and solid returns on equity.

Segment Strategy Focuses on Innovation and Market Recovery

In strategic focus areas, the electronics field is primed for a Q4 recovery, specifically in the non-LCD market. Noteworthy gains in the Mobility field stem from exceeding sales targets in interlayer films for head-up displays. Conversely, Aerospace demands are battling headwinds due to external quality issues. Recovery is anticipated in the Industrial segment, supported by a demand projection for labor-saving and eco-friendly products.

Housing Business Seeks Turnaround Through Strategic Cost Management

The Housing Company segment anticipates a profit drop of JPY 4.3 billion due to weak sales, with orders for new houses falling 650 units year-over-year. The response strategy focuses on enhancing the sales mix and pricing adjustments, coupled with an aim to achieve a JPY 10 billion profit improvement over three years, starting with accelerating fixed costs improvements in FY2023. Renovation and other businesses are expected to maintain performance levels.

Tactical Adjustments Aim for Steady Growth in Challenging Segments

While some segments are performing below initial expectations, the company is making calculated adjustments to maintain growth. This includes leveraging firm domestic demand in areas like plant piping materials and expanding overseas sales of key pipeline and infrastructure products. Similarly, in Medical, focused efforts are underway to ramp up sales in diagnostics both in Japan and internationally, with new development initiatives in the pipeline.

Earnings Call Transcript 2024-Q3

[Futoshi Kamiwaki, executive]

[Interpreted] My name is Futoshi Kamiwaki, Senior Managing Executive Officer. Thank you for joining. Please turn to Page 1. First, regarding FX rates, Q3 results were impacted by the weaker-than-expected yen compared to the assumptions shown here. FX sensitivities can also be confirmed on this page.

Turning to Page 2. Here is the overview of Q3 results. Net sales were JPY 312.6 billion. Operating profit was JPY 24.7 billion. Ordinary profit, JPY 21.3 billion and net profit was JPY 14 billion. Revenue increased in Q3 and all profit levels increased. Moreover, operating profit progress slightly exceeded the October plan.

Regarding cumulative Q3 results on the right-hand side, sales, operating and net profit increased. The asterisks indicate record highs.

Turning to Page 3. Here are Q3 results by segment. First, in the HPP, The High Performance Plastics Company, although the recovery in market conditions was slower than expected, the robust mobility field made up for the drop, resulting in a significant increase in sales and profit, slightly exceeding plan and driving company-wide profit.

In the Housing Company, sales in the third quarter were ahead of schedule, due to leveling out sales that exceeded expectations, resulting in both sales and operating profit slightly exceeding plan and operating profits achieving similar levels as the previous year.

In the UIEP, Urban Infrastructure & Environmental Products Company, despite sluggish market conditions and delays in non-residential properties, et cetera, net sales and profits increased as planned, due to the maintenance of spreads and thorough control of fixed costs.

In the Medical business, sales increased, but below plan and profits decreased due to the sluggish sales of blood coagulation reagents in Japan and the delay in sales expansion of new products in the United States. Here, once again, the asterisks indicate record highs.

Turning to Page 4. This page shows the outlook for the market. Global automobile production is expected to exceed the October forecast in both Q3 and Q4. Also, smartphone shipments are trending slightly above the October forecast. On the other hand, the top right graph shows the number of visitors. Recovery has been slow for mainly exhibition visitors and is considerably below the October forecast.

In addition, new housing starts also continue to be sluggish, trending below plan substantially. Moreover, domestic naphtha prices have surged and is higher than October assumptions, which is impacting our performance.

Page 5 shows the forecast for the second half by segment. Both sales and profits are expected to increase in all segments except Housing. Total company sales and profits are expected to increase as well. In the Housing Company, sales in the second half are expected to decline due to challenging orders in Q3. As a result, both sales and profit are expected to decrease. The October forecast for net sales and operating profit has been revised down with an operating profit downward revision by JPY 5 billion.

Page 6 shows the forecast by segment broken down into Q3 and Q4. Q4 will continue to be affected by the decline in housing demand but company total sales are expected to increase with each segment making up for the decline, mainly driven by the High Performance Plastics business. Operating profit is expected to be broadly flat year-on-year.

Please turn to Page 7. I will explain the analysis of the operating profit forecast for the second half of the fiscal year. Please refer to the analysis on the right. First, sales volume and product mix are expected to increase by JPY 6 billion year-on-year, but the growth is considerably lower than the October forecast. Market recovery has been delayed, and the sluggish market, especially in the Housing sector is having a significant impact.

On the other hand, the spread between selling prices and raw materials has been maintained, which is better than planned. Fixed costs are also kept lower than plan as well. The foreign exchange gains are also expected to contribute to the increase of JPY 2.5 billion year-on-year. However, this is expected to fall short of the October forecast that planned for a JPY 7.5 billion increase year-on-year.

Next, turning to Page 8. This page shows the full fiscal year forecast by segment. We expect both sales and profit to increase in all segments except housing. Total company sales and profits are also expected to increase. In the HPP and UIEP segment, we expect record high profits for the fiscal year, in line with October plan.

We also expect Medical to record its highest profit for the fiscal year, although it has been revised downward from the October plan. Sales and operating profit have been revised downward as mentioned earlier. Operating profit has been revised downward by JPY 5 billion.

Please turn to Page 9. Here is an overview of fiscal year 2023 forecast. I already talked about the forecast for net sales and operating profit, but for Ordinary Profit, we are expecting JPY 103 billion, which is in line with the October forecast. Net profit is also expected to be JPY 75 billion, also in line with the October plan. JPY 75 billion will be a record high. Year-end dividends are expected to be JPY 36 per share at the end of the fiscal year as planned in October and JPY 71 per share for the year, an increase of JPY 12.

Please turn to Page 10. Here is a slide on consolidated performance, especially EBITDA at the top is expected to reach JPY 148 billion in fiscal '23, which will be a new record high. ROIC and ROE are also expected to reach 7.6% and 10% respectively.

From Page 11, we break it down by segment. First is the HPP Company and the forecast for the second half of the fiscal year. Please refer to the analysis of operating profit on the right side. Sales volume & product mix are broadly in line with the plan, expected to increase by JPY 8.5 billion. Although the recovery in market conditions in the electronics field, Europe, the U.S. and Japan are below expectations, the robust mobility field is expected to make up for the drop off.

Meanwhile, the spread between selling prices and raw materials is almost in line with October plan, and with fixed costs expected to be curved, an JPY 8.9 billion increase from the previous year is expected, which is in line with October plan. Operating profit for the second half of the year will be a record high.

Please turn to Page 12. Here is a page regarding the three strategic fields: First, in the electronics field, smartphones recovered in Q3, but sales of large-sized LCD panels were sluggish. The semiconductor market recovery was also delayed, trending below the October plan. We expect a gradual recovery in the non-LCD market in Q4. We will continue to expand sales aiming for adoptions in areas where we have strength, such as MLCC binder resins and bio tapes.

Regarding the Mobility field, sales of interlayer films for head-up displays exceeded the October plan. Q3 sales were 139% year-on-year, and we expect the sales expansion to continue in Q4. Regarding Aerospace, demand declined due to the impact of the quality issues of the 737 MAX, it's expected to trend slightly lower than plan.

As for Industrial, on the right, sales decreased due to sluggish demand for construction materials in Europe, the U.S. and Japan in Q3. For Q4, we expect a certain degree of recovery in market conditions, especially for labor saving and environmentally friendly products.

Please turn to Page 13. This page is about the Housing Company. Please refer to the analysis of operating profit on the right. Looking at the second half by segment, the housing subsegment operating profit is expected to decrease by JPY 4.3 billion.

On the other hand, we expect that the Renovation and other recurring type businesses will remain broadly unchanged from the previous year. Looking at the outlook for just the Housing business, the sales factor has a negative impact of minus JPY 7.5 billion. As orders were sluggish, the number of houses sold is expected to be 200 units less than the October plan, or down by 650 units year-over-year, leading to a substantial impact. We will strive to make up for this by improving the sales mix or raising prices.

In addition, fixed cost reduction is expected to contribute positively by JPY 600 million due to the, favorable progress of measures to strengthen profitability. However, this will be not enough to cover the decrease in sales volume, resulting in a decrease of JPY 4.3 billion in profit. On the other hand, we expect the Renovation and other businesses to perform well.

Please turn to Page 14. The top left shows new housing orders. Q3 was 93% of the previous year's number of units, and Q4 is expected to recover slightly but at 95% compared to the previous year. The second half, as a result, is expected to be 94%. The October plan was expecting 101%. So our current view is that it is likely to go below plan quite substantially. Please refer to the table for the breakdown by type of construction.

Regarding Smart House-related Indicators, the ZEH ratio is close to 95% as planned. So we are making steady progress in this area. As for the Renovation business, orders received during the second half of the fiscal year is expected to reach JPY 52.6 billion, which is 107% compared to the previous year, and orders are increasing steadily.

The measures implemented to address the challenge of strengthening profitability of the Housing business is expected to improve profitability by JPY 10 billion over 3 years from 2023 to 2025 by reducing fixed cost and improving marginal profit. The impact is expected to be materialized in fiscal year 2023 are now progressing at a pace that will enable the effects to be realized ahead of schedule, mainly around fixed cost improvements. As mentioned here, we will optimize the production structure and shift indirect personnel from new housing to the recurring stock business. In addition, we will develop product strategies that fit the purchasing power of each area. We are currently accelerating our efforts ahead of schedule in these areas.

Please turn to Page 15. This is the second half forecast for the UIEP business. Please refer to the analysis of operating profit. Sales volume and product mix is expected to increase by JPY 1.9 billion, but will be lower than the October plan. This is mainly due to the sluggish Japanese domestic housing market and delays to non-residential properties.

On the other hand, the spread between selling prices and raw materials is expected to be greater than planned. We also expect to curve fixed costs slightly more than planned resulting in an operating profit increase of JPY 1.4 billion as planned in October. We expect to reach record high profits here as well.

Please turn to Page 16. This page shows the status of the three strategic fields. First, pipe systems have been affected by the sluggish Housing market and delays in the construction of non-housing properties. But piping materials for plants has remained relatively firm by steadily capturing domestic demand for capital investment. In addition, ShinEtsu Polymer's piping materials business that we succeeded is gradually starting to contribute.

In the Building and Infrastructures Composite Materials business on the right side, a plant for FFU synthetic lumber has started operations in Europe. We now have a structure that will enable us to expand overseas adoption. In addition, new fire-resistant and non-combustible materials products are growing steadily.

In the Infrastructure Renovation business on the bottom left, our main product is Pipeline renewal. This product continues to perform well, both in Japan and overseas. In addition, our prioritized products, mainly polyethylene pipes for water supply, fire extinguishing and industrial plants have also been performing well. Overseas, CPVC has been slightly affected by a decline in demand in India, but we plan to expand overseas sales of plants, pipeline rehabilitation and functional materials.

Lastly, on Page 17, I would like to talk about the Medical business. Once again, please refer to the analysis of operating profit. Diagnostics in Japan is expected to increase by JPY 0.3 billion, which is slightly less than the October plan, especially due to blood coagulation reagents struggling. Diagnostics overseas is expected to increase by JPY 0.1 billion, which is significantly lower than plan.

In particular, the delay in sales expansion of new products in the U.S. had a significant impact. In the Pharmaceutical Science and other business, performance is expected to be in line with plan. In the second half, we will work on curving fixed costs, resulting in an operating profit increase of JPY 0.4 billion year-on-year. However, this will be JPY 900 million lower than the October plan.

Please turn to Page 18. This page shows the overview by Business and Field. Regarding Diagnostics in Japan, despite slight difficulties in blood coagulation reagents, demand for infectious disease testing for influenza and COVID, et cetera, remain brisk. In Q4, we are focusing on expanding sales of blood coagulation test, as for Diagnostics overseas, despite sales delays for new products in the U.S., blood coagulation reagents remained strong in China. In Q4, we will focus on expanding sales of the new products that were delayed in the U.S.

In Pharmaceutical Sciences, both new pharmaceutical ingredients and drug development solutions are expected to trend firmly. In the area of new product development, we are preparing a combo kit that enables simultaneous testing for COVID and the flu for the U.S. And in China, we are working on the development of a local production system for diagnostic devices. This concludes my explanation. Thank you very much.

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