Adeka Corp

TSE:4401

Earnings Call Transcript 2022-Q3

[城詰 秀尊, executive]

Good morning, everyone. I'm Hidetaka Shirozume, President and Chief Executive Officer of the Adeka Corporation. Thank you for taking the time off your busy schedules to participate in today's results briefing.

I would now like to start by reporting on the consolidated financial results for the third quarter of the fiscal year 2021. Allow me to start with an overview of consolidated results through to the end of the third quarter.

First, net sales increased by JPY 47.1 billion Y-o-Y to JPY 261 billion. Operating profit increased by JPY 9.8 billion Y-o-Y to JPY 25.5 billion. Current profit increased by JPY 11.2 billion Y-o-Y to JPY 26.4 billion. Profit attributable to owners of parent increased by JPY 8.7 billion Y-o-Y to JPY 19.1 billion. Lastly, net profit per share increased to JPY 185.3 per share.

Shown here is an analysis of operating profit. Rising raw material and fuel prices persist, and this translated into a negative impact of approximately JPY 2.5 billion from net pricing. However, we revised the sales volume significantly higher, and this had a positive impact of JPY 9.4 billion. Additionally, exchange rates favored us, and we were able to reduce manufacturing costs. We carried out efforts on these fronts, allowing us to grow operating profit by JPY 9.8 billion Y-o-Y.

Shown here is the consolidated results trend over the past 5 fiscal years. The rightmost bars on each graph show the fiscal year 2021 forecast. In terms of net sales, the progress rate versus the forecast stood at 73% and at 80% for operating profit. These are, therefore, strong results, in line with the forecast.

Next, I would like to discuss the consolidated financial results by segment through to the end of the third quarter. In terms of defining topics, we registered a strong upward trend in sales across most segments. This was particularly pronounced for Polymer Additives and for electronics and IT materials, which both registered high growth rates.

On the other hand, operating profit for Polymer Additives stood at approximately double the last fiscal year's results. Furthermore, operating profit growth for electronics and IT materials and Functional chemicals also increased Y-o-Y. Unfortunately, we registered a Y-o-Y decrease in cumulative operating profit through to the end of the third quarter for the Food Products business.

I would now like to discuss each segment individually, starting with Polymer Additives in the Chemicals business. Sales grew by 39.3% Y-o-Y. The main factors behind this increase are as follows: First, in the field of automobile related, we registered very strong growth in sales of nucleating agents and light stabilizers. We also saw growth in the sale of flame retardants for EV-related products. Additionally, sales were strong for PVC stabilizers and heavy metal-free stabilizers for use in building materials and infrastructure. Sales of antioxidants for use in all plastic products were strong and we registered steady sales of clarifying agents for use in food packaging and for medical use.

Operating profit more or less doubled Y-o-Y, growing by 98.1%. The main factors for the operating profit increase was a positive contribution of JPY 3.8 billion resulting from higher sales volume and JPY 400 million from favorable exchange rates. On the other hand, net pricing had a negative impact of JPY 500 million.

Next is electronics and IT materials in the Chemicals business. Sales grew by 30.9% Y-o-Y. We registered an expansion of sales of High-k materials for cutting-edge DRAM against the background of the acceleration in the adoption of 5G communications and IoT. Additionally, while extra demand for appliances like TVs, resulting from people staying at home has run its course, panels continued maintaining high production levels through to the end of the third quarter, with strong sales of all display-related materials.

Operating profit grew by 61% Y-o-Y primarily on account of sales volume increase, which contributed to an increase of JPY 2.5 billion, from an improvement in manufacturing costs of JPY 400 million and from JPY 200 million in favorable exchange rates.

Next is Functional chemicals in the Chemicals business. Sales grew by 13.8% to Y-o-Y. While this business was significantly impacted by reduced automobile production, sales of automobile-related products exceeded the results for the same period in the previous fiscal year. Additionally, we succeeded in the expansion of sales of eco-friendly reactive emulsifiers for overseas architectural coatings.

Looking at each market individually, we registered strong sales of lubricant additives for engine oil, special-type epoxy resins and epoxy resin adhesives for the automobile market. Additionally, sales were also strong for reactive emulsifiers for water-based adhesive resins for use in architectural coatings and food packaging labels.

In terms of chemicals for general industrial use, sales of polypropylene glycol were strong. On the other hand, we continue seeing weak sales of surfactants for use in cosmetics.

Operating profit grew by 54% Y-o-Y. The main factors behind this were an increase in sales volume, which made a positive contribution of JPY 1.8 billion and a positive contribution of JPY 600 million from improvement in manufacturing cost. On the other hand, net pricing had a negative impact of JPY 800 million.

Next is the Food Products business. Sales grew by 8% Y-o-Y. We struggled in terms of overseas sales due to restrictions on the flow of people being put in place in countries across Asia and electric power issues in China. On the other hand, we registered steady sales of margarine and shortening against the backdrop of a recovery in domestic demand for pastries.

Additionally, sales expansion of the Marvelous series, which contributes to reducing food waste, continued to proceed at a healthy pace. We saw strong results for all products for use in bread and confectioneries and in Western confectioneries and desserts.

On the other hand, operating profit decreased by close to 60% Y-o-Y. We were unable to fully hedge a record surge in the price of raw materials and this translated into a negative impact of JPY 1.8 billion from net pricing. On the other hand, we continued to carry out efforts in terms of production as it pertains to manufacturing costs, et cetera. and this translated into a positive contribution to operating profit of JPY 1.2 billion. Additionally, an increase in sales volume had a positive impact of JPY 200 million. Despite these, we still registered a significant Y-o-Y decrease.

Next is the Life Science business, which corresponds almost entirely to the results for Nihon Nohyaku. Sales grew by 22.8% Y-o-Y. This was on account of strong sales of agrochemicals abroad that made up for sluggish sales of agrochemicals and pharmaceuticals in Japan. Another factor was an expansion of demand for acaricides due to increases in pests in North America.

The results in each market were as shown here. Operating profit increased by 108.5% Y-o-Y. The main factors behind this increase were positive contributions of JPY 1.2 billion from an increase in sales volume, JPY 700 million from a favorable exchange rate and JPY 400 million from net pricing. On the other hand, fixed costs, primarily in the form of an increase in R&D and investment expenses, had a negative impact of JPY 1.2 billion.

I would now like to discuss the consolidated financial results forecasts for fiscal year 2021 and the dividend forecast. Regarding the trends in each of the markets shown here, these correspond to a forecast of how the situation will evolve going from the third quarter of fiscal year 2021 into the fourth quarter. As it stands, we do not foresee any market delivering further significant growth in the fourth quarter from a third quarter baseline.

In terms of electronic devices, the sale of panels is on a slightly downward trend. And in addition to this, we are starting to see a little bit of plateauing sales. Another market we see weakness in is cosmetics and within Food Products in the tourism and restaurant industries.

With that being said, we expect results to remain mostly in line with third quarter results.

Next, I would like to discuss the business risk factors in the fourth quarter. These risks are increased materials and logistics costs and adjustment of production in supply chains. These risks, therefore, could potentially have a negative impact on the company's results.

Particularly exposed to the risk of increased materials and logistics costs are the businesses of Food Products, Functional chemicals and Polymer Additives.

Regarding the risk of adjustment of production in supply chains, we believe there is a possibility that the businesses of Polymer Additives and Functional chemicals could be significantly affected by this.

We have raised consolidated financial results guidance for fiscal year 2021. Adding the results for the fourth quarter, we expect to deliver full year sales of JPY 358 billion. This represents a Y-o-Y increase of JPY 30.9 billion. In terms of operating profit, we expect to deliver a full year performance of JPY 32 billion, for an increase of JPY 3 billion.

Regarding current profit, we expect to deliver a full year performance of JPY 33 billion for an increase of JPY 3.7 billion. For profit attributable to owners of parent, we expect to deliver a full year performance of JPY 21 billion for an increase of JPY 4.5 billion. We are, therefore, forecasting a net profit of JPY 203.9 per share.

Next are the consolidated forecasts by segment. Compared to the growth rate seen through to the end of the third quarter. We are currently forecasting a slight downward trend in the fourth quarter. In light of the myriad of interconnected factors that play here, perhaps some stakeholders might view these forecasts as being slightly conservative, but we have revised the forecast for fiscal year 2021 based on numbers we are confident that the company will be able to achieve.

In light of the factors I just mentioned, we have also raised the dividend guidance. The previous forecast was for the payment of JPY 28 per share in second quarter-end and year-end dividends, respectively, for a total dividend of JPY 56 per share. While the payment of the second quarter-end dividend came to this number of JPY 28 per share, we have raised the year-end dividend forecast to JPY 34 per share for a total dividend of JPY 62 per share as we continue to adhere to a dividend payout ratio policy of around 30%.

For reference purposes, allow me to give you an update on the progress of the midterm management plan, ADX 2023. The operating profit target for fiscal year 2023, the final year of ADX 2023, is JPY 35 billion, and this represents a basic outline of our MTMP. As it stands, we forecast an operating profit performance of JPY 32 billion in fiscal year 2021.

We have an ROE target of 9% for fiscal year 2023 and we already expect to be able to achieve 8.9% in fiscal year 2021. We are targeting JPY 50 billion in capital investment over a 3-year period. And we expect to finish fiscal year 2021 with JPY 14.5 billion in investments carried out. In terms of the dividend payout ratio, we intended to maintain at the current level of 30% or greater.

I would now like to discuss a number of topics, starting with capital investment. As previously announced, we executed JPY 2.5 billion in investment in Adeka Fine Chemical Taiwan Corp., AFTW for short, for the new installation of manufacturing equipment for the production of materials for use in cutting-edge logic IC for the process of EUV exposure. The start of construction is slated for August of the current year, with the commencement of commercial operations expected for April of 2024.

Beginning in 2005, we started manufacturing and selling resist materials for use in displays, black matrix and AFTW and we have now decided to expand the plant and we'll be establishing production lines for semiconductor materials. Our plan is for AFTW to become a key element in allowing us to address demand across different generations of semiconductors. We are, therefore, carrying out investment with the objective of reinforcing AFTW to serve as our overseas production site for semiconductor materials following Adeka Korea Corp.

Next is the topic of business operation in the semiconductor field. Up until now, the key products in this field were film formation materials, primarily High-k materials for memory products like DRAM and NAND flash memory. However, we believe logic IC is undergoing a shift from traditional materials to new ones. Against this backdrop, we are dedicating our efforts to different geographical areas and also slowly expanding the areas we focus on in terms of semiconductor processes. Through this, we will aim to expand the scope of the Adeka group's electronic materials business and consequently grow the scale of our operations by leaps and bounds.

We are also carrying out R&D in new battery materials. SPAN is an electrode active material for next-generation rechargeable batteries and this material has the potential to contribute to creating a decarbonized society. While we believe we are still some time away from actual commercialization of this product and from receiving actual orders, we believe the advent of this material will make possible further improvements in battery capacity and battery life span.

Toward market introduction of this product, we are currently manufacturing and using our original test cells to evaluate discharge and charge. By repeating these tests, we seek to ascertain whether this material is effective in actual-use scenarios. We believe SPAN holds the potential for further improvements in its capabilities so we have very high hopes for this material.

Earlier, I mentioned how it will take some time for the commercialization of this product, but we would like to carry out efforts to deliver results and get this product to market as soon as possible.

Next is the trend in overseas sales. Over time, we have carried out efforts so that the ratio of overseas sales exceeds 50% of total sales. As of the end of the third quarter, this ratio stood at 53.3%. And we also expect the ratio for the full fiscal year to be firmly above the 50% mark.

This concludes today's financial results briefing. Next, I would like to discuss the Adeka Group's initiatives for climate change issues.

First, I would like to discuss the Adeka Group's CSR management promotion initiatives. Our objective is to integrate management and CSR, and we have formulated the Adeka Group's fundamental CSR policy which reads: The Adeka Group contributes to the creation of a sustainable future by meeting stakeholders' expectations with technologies and reliability through fair and transparent corporate activities.

We formulated our fundamental CSR policy and CSR priority issues while simultaneously imagining the external business environment of society in the year 2030. These 2 concepts were integrated into Adeka Vision 2030, which positions us as an innovative company contributing to a sustainable future and affluent lifestyles. This forms our fundamental philosophy.

And on top of this, we will work to achieve the targets outlined in the current MTMP of ADX 2023, which consists of the integration of management and CSR. As such, we see social issues as business opportunities and promote the integration of management and CSR.

Next, I would like to discuss the value pursued by Adeka shown here in the form of a diagram. On the left-hand side, you will find the letters E for environmental, S for social and G for governance. The Adeka Group has, therefore, identified priority issues within CSR for each of these ESG elements.

Against this backdrop, within the business of Chemicals, Food Products and Life Science, we seek to create product lines capable of making a significant contribution to solving these priority issues. Through this, we will seek to maximize both social and economic value as shown on the right-hand side of the page to contribute to a sustainable future and affluent lifestyles and thus improve corporate value. This philosophy forms the core of our efforts to promote CSR management.

I would now like to discuss past initiatives with a focus on recent initiatives. In April of 2019, we established a CSR Committee and CSR Promotion Subcommittee. That same year, in August, we identified CSR priority issues, which we have incorporated into ADX 2023, which is the new and current MTMP and which went into effect starting in April 2021. We set up KPIs associated with CSR priority issues and simultaneously incorporated these into ADX 2023.

In May of the same year, the Adeka Group advanced ways to address the issue of climate change, primarily through the Carbon Neutrality Preparation Committee. Lastly, in March of 2022, we will be reviewing KPIs within our CSR priority issues and within the scope of conserving the global environment.

Next, I would like to discuss our operating environment and related notes. We believe that we have a responsibility as a business enterprise to tackle the issue of climate change. With that being said, we believe there is plenty of potential for us to find a variety of business opportunities within the scope of executing new initiatives. There are several elements in this area, the first being the Adeka Group's business characteristics as an intermediate material manufacturer. Going forward, we believe it will be even more important to build relationships with both upstream and downstream companies. Additionally, we believe the continuation of business operations is dependent on achieving carbon neutrality.

Another element is how the world is moving toward carbon neutrality, and I believe things are rapidly changing every day on this front. The Japanese government pledged to achieve carbon neutrality by 2050. And in light of this, we realized the need to take a more stoic approach than we had originally planned toward achieving carbon neutrality. This made us realize even more strongly that there is a need to achieve these goals even at the cost of making sacrifices as a business. More and more companies are raising their emission reduction targets and we at the Adeka Group are also carrying out measures towards doing the same.

Lastly, we consider these developments to be a business opportunity as we will be leveraging this by keeping on top of changing trends. The trend is toward a decarbonized society and speedy efforts are needed in order to achieve this vision. As such, we will be advancing efforts to raise the GHG emissions reduction target and promote carbon neutrality. Such is our fundamental philosophy.

The diagram on Page 7 shows the purpose of the Adeka Group's efforts to tackle climate change. This topic relates to something I will be discussing later on in this presentation. And as I have mentioned multiple times already, the focal point here is pursuing and maximizing both social and economic value.

First, there is a need to understand the risks and opportunities that may result from climate change. To this end, the Adeka Group has expressed support for TCFD recommendations. The next step is working to reduce risks and increase opportunities, and these are measures we would like to execute.

First, on the topic of risks, in order to minimize these, we will be working to reduce GHG emissions from our business activities. Additionally, we would like to seize business opportunities by tackling climate change. This involves, for example, the creation of new businesses and products as well as transformation and optimization of business. Through these initiatives, we seek to grow business opportunities.

Furthermore, we intended to continue creating eco-friendly products and expand sales of these. Through these, and as I mentioned earlier, we would like to pursue both social and economic value while simultaneously improving our corporate value toward achieving a sustainable society and affluent lifestyles. We would, therefore, like to become a company making contributions in these areas.

I would now like to discuss our efforts to achieve carbon neutrality. We have raised the GHG emissions reduction target and increased efforts to achieve carbon neutrality by 2050. First, we formulated a carbon neutrality road map and raised our targets for 2030. Additionally, we also expressed support for the TCFD. I will be discussing these topics in greater detail over the next few pages.

First is the road map toward carbon neutrality, namely the reduction of GHG emissions from our business activities. We have raised our Scope 1 + 2 2030 emissions reduction target to 46% compared to fiscal year 2013 levels.

First, on the topic of energy, we will be shifting toward energy conservation and LNG. Additionally, we will be gradually introducing renewable energy equipment and procure renewable energy. Through this, we will seek to gradually reduce GHG emissions.

Furthermore, we will be executing business transformation by developing and utilizing technologies to contribute to the reduction of GHG emissions. Additionally, we will be restructuring our business portfolio. We will be carrying out these initiatives and transform our operations into a structure allowing us to make a contribution to reducing GHG emissions. Through this, we seek to achieve our target for 2030 of reducing emissions by 46% and ultimately reach carbon neutrality by 2050 for the whole of the Adeka Group, reducing emissions down to 0.

This page discusses the topic I mentioned just now. We will be gathering ideas for achieving carbon neutrality by 2050 from all Adeka. The target for 2030 is a reduction of 46% of Scope 1 + 2 CO2 emissions compared to fiscal year 2013 levels. We will, therefore, be executing a 2-pronged approach consisting of the reduction of GHG emissions from our business activities and contributing to the reduction of GHG emissions through the creation of technologies and products.

I would now like to discuss the creation of technologies and products to contribute to the reduction of GHG emissions. Within this context, we currently certify a number of our product lines as being eco-friendly.

The 2030 KPI for CSR priority issues is to grow net sales of our eco-friendly product lines triple the level compared to fiscal year 2019 levels. We define as eco-friendly products that contribute to reducing the environmental load throughout their life cycles, from the resource collection to disposal.

As you can see on Page 11, we have defined 13 product lines as being eco-friendly. For example, these products include nucleating agents for automobile components; intumescent-type flame retardants for use in battery cases for automobiles, especially EVs; products for the reduction of food waste; et cetera. Currently, 13 of our product lines fall into this category of eco-friendly products. Going forward, we will be developing new eco-friendly products, not just to reach our goal of tripling sales compared to fiscal year 2019, but to grow our results even further beyond that.

Next, I would like to announce the Adeka Group's support for TCFD recommendations. We seek to identify new needs of society and pursue both social value and economic value. In light of this, in February 2022, Adeka and its consolidated subsidiary of Nihon Nohyaku have expressed support for the TCFD.

In 2022, we will conduct a scenario analysis in the businesses of Functional chemicals and Life Science within the Adeka Group, the latter business corresponding primarily to Nihon Nohyaku. The scope of the TCFD scenario analysis will be Functional chemicals and Life Science and the reason we chose these businesses is as follows: As shown here, these 2 were chosen because we believe they account for a large percentage of our GHG emissions. The share isn't all that high for the business of Life Science, but we view this business as being important given the fact that Nihon Nohyaku is a publicly listed subsidiary. As such, we have used this opportunity to carry out a scenario analysis for this business as well.

Other criteria were a significant contribution to net sales and operating income in the future, the impact on climate change throughout the product life cycle and the impact of raw fuel and energy on product manufacturing. In light of these, we have decided to carry out scenario analysis starting with these 2 businesses.

Next is an example of a trial calculation of financial impact based on scenario analysis. Shown here is the outlook for the Adeka Sakura-Lube series of engine oil lubricants within Functional chemicals. This also shows our vision for our new business.

The Adeka Sakura-Lube series consists of engine oil lubricants for automobiles, more specifically for gasoline-powered vehicles running on internal combustion engines. The number of vehicles owned on internal combustion engines will be decreasing over time as we believe sales will continue to shift toward EVs. We, therefore, expect sales of our engine oil lubricants to gradually decrease over time and we believe there is a possibility the actual decline that might be steeper than the ones shown on the graph.

On the other hand, we expect to release more and more EV-related products as EVs rise in market share. We would like to study opportunities and timing in this area and develop one after another products that make a contribution to this as we believe doing this to be an important necessity.

Next are our future action plans. We will be carrying out TCFD action and rather than carrying out scenario analysis only once, we will be enhancing the level of sophistication for this type of analysis. Scenario analysis was only carried out in the businesses of Functional chemicals and Life Science, but going forward, we believe there is a need to expand this to other businesses like Polymer Additives, Food Products and Electronic Materials. Going forward, considering the CO2 emissions, the size of their financial impact and other factors, other business segments will be gradually analyzed.

Last is the conclusion. The Adeka Group will identify changes and use the power of our Excellent Value, that is our products, technologies and services, to contribute to the creation of a sustainable society. We believe the products and materials we offer are necessary in the promotion of carbon neutrality, the efficient use of resources in reducing food waste and in achieving a circular economy. We will quickly identify trends in the external environment and provide our products, technologies and services with higher added value through our technologies, services and human resources in addition to providing materials.

Here are the KPIs for the Adeka Group's CSR priority issues, which I believe I have discussed on previous occasions already. We have established priority domains for CSR priority issues and formulated goals to be achieved by 2030, involving environmental, social and governance elements as well. The section with the red border shows the reduction target for 2030 of CO2 emissions compared to fiscal year 2013 levels. We have raised this KPI from the previous target of 12% to 46%, and this represents the change to the table shown here.

This concludes today's presentation. Thank you for your time.

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