Sumitomo Osaka Cement Co Ltd

TSE:5232

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[諸橋 央典, executive]

This is Morohashi. Thank you for joining our financial results briefing in person or online despite your busy schedules. This is a new venue, and I am a little bit nervous.

First, fiscal '22 results. We have been working to raise the selling price of cement since the year before last, but the price hike could not keep pace with cost increases coming from soaring coal prices and rapid yen depreciation. We regret to report that all 3 categories of profit, namely operating, ordinary and net income came in negative. However, based on our policy of paying continuous stable dividends, we maintained the annual dividend of JPY 120 per share, including the interim dividend of JPY 60 using proceeds from selling cross shareholdings.

As for FY 2023 through the additional price hike in cement, all of operating income, ordinary income and net income will recover to the profitability. As for dividend, from the perspective of sustaining the stable dividend, dividend per share will remain unchanged at JPY 120 per share. The new medium-term management plan that will be presented later incorporates the mid-to-long perspective, targeting 2035.

In this year, we will strive to turn to profitability and strengthen the business foundation to achieve the mid- to long-term target. All the management members and employees will be united in our efforts, so we'd like to have your continued support.

We will now explain the financial results. Sekimoto-san, please start.

[Masaki Sekimoto, executive]

I will now explain the financial results explanatory materials. First, Page 4 shows the domestic cement demand and our cement sales volume. Domestic demand for cement in fiscal '22 was 37.28 million tonnes, down 1.6% from the previous year, with private sector demand increasing, mainly from redevelopment projects in urban areas, but public sector demand falling mainly from cuts in public works budgets and labor shortages.

In fiscal '23, we expect a moderate recovery in both public and private sector demand, and we foresee a 2% increase to 38 million tonnes. Our domestic sales volume in fiscal '22 was 8.15 million tonnes, down 2.4% from the previous year. For fiscal '23, we are forecasting 8.27 million tonnes.

On the next page is our fiscal '22 financial summary. Net sales increased in both the cement-related and high-performance products. Although we worked to raise cement prices, the impact of soaring coal and oil prices and yen depreciation was larger and operating loss for the Cement business deteriorated by JPY 17.16 billion, resulting in an overall operating loss of JPY 8.56 billion, a significant decrease of JPY 15.43 billion from the previous year.

Nonoperating profit and loss deteriorated by JPY 2.3 billion due mainly to dividend income decline and foreign exchange losses. Extraordinary profit and loss improved by JPY 2.6 billion, due mainly to the sale of cross holding shares. Net income was negative JPY 5.72 billion. The annual dividend remains unchanged at JPY 120 per share from the viewpoint of maintaining stable dividends.

On the next page, I'll explain the cement operating income increase and decrease breakdown. Cement operating income for fiscal '22 was a loss of JPY 19.5 billion, a deterioration of JPY 17.2 billion from the previous year's loss of JPY 2.4 billion. Despite an JPY 8.8 billion improvement from sales price hikes, coal and oil prices caused deterioration by JPY 16.2 billion, of which coal price is rising by about $130 causing JPY 15.3 billion and oil price is increasing by about $20 causing JPY 0.9 billion negative impact. Electricity and raw material prices cost JPY 3.8 billion and an approximately [ JPY 20 ] depreciation cost JPY 5.8 billion negative impact.

Sales and profit and loss by segment. In the cement-related business except cement, sales and profit of mineral resources increased due to the increase in sales of limestone for overseas and domestic steel business. In cement-related products, sales increased due to the increased foundation improvement works, but profit decreased due to the sales volume decrease in concrete secondary products and raw material cost increase. In high performance products business, sales in optoelectronics decreased due to sales volume decrease in LN modulator and operating loss of JPY 130 million was incurred. In advanced materials, sales volume of semiconductor production equipment components increased and sales and profit increased.

FY 2023 earnings forecast. Sales are expected to increase by JPY 25.3 billion due to cement sales price hike and the sales increase in advanced materials. Operating income here increased by JPY 14.66 billion year-on-year due to the cement sales price hike to achieve the profit of JPY 6.1 billion. Net income will be JPY 6 billion, up JPY 11.72 billion year-on-year. As for dividend, we will continue to be based on the stable dividend policy and the annual dividend will be sustained at JPY 120 per share.

Cement operating profit change breakdown. In FY 2023, cement operating profit improved by JPY 19 billion due to sales price hike and the coal price will also push up the profit. But energy and raw material price and fixed cost increase will push down the profit by JPY 4.1 billion. Therefore, profit will improve by JPY 14.9 billion year-on-year, but loss of JPY 4.7 billion will remain. Coal price is expected to decrease by almost $20. Oil price will be down by around $5 and the yen will strengthen by JPY 5 per dollar and the respective sensitivity is as shown here.

Sales and profit forecast by segment. In the cement-related business except cement, sales and profit of mineral resources were increased due to the sales increase and the price hike of limestone. In cement-related products, sales and profit will increase due to the price hike to respond to the cost increase. In high performance products, sales in optoelectronics and advanced materials will increase, but profit will decrease slightly. This concludes the presentation on the financial results.

Next, we'd like to explain our medium-term management plan. Present, Morohashi, please?

[諸橋 央典, executive]

I will now explain our medium-term management plan for fiscal years 2023 through 2025. First, a review of our medium-term management plan for fiscal years 2020 to 2022. With unstable international situation causing unforeseen external environment changes, coal prices rose sharply, resulting in our mainstay cement business significantly underachieving the plan. As a result, we were unable to achieve the targets we had set for each of the profit items and ROE in fiscal '22.

In businesses other than cement, the Advanced Materials business performed solidly due to strong semiconductor manufacturing equipment market and the total operating income of all noncement business achieved the plan.

Next is the cash flow for the 3-year period. We worked to revise cement prices in response to cost increases caused by the yen's depreciation and a sharp rise in coal prices, but progress was [ delayed ] and our coal inventories increased resulting in a deterioration in operating cash flow.

On the other hand, the necessary capital investment was done almost at the planned level. Free cash flow was negative JPY 19.8 billion. Shortage of funds, including working capital, was met with interest-bearing debt.

For shareholder returns, we implemented a share buyback and a stable dividend of JPY 120 per share using operating income and cash obtained from the sale of cross-held shares as a source of funds.

Next, I will explain our medium- to long-term vision. We have had a corporate philosophy. But this time, we are newly presenting our medium- to long-term management vision of what we would like to be in 2035. This is the SOC Vision2035. In 2035, we assume the external environment surrounding cement business to have changed and decarbonization of society to have progressed. Under such circumstances, business structure transformation and initiatives for carbon neutrality will be key. And we decided to consider what measures we should take.

This is our vision for 2035. We have decided that our aim is to be a company with a strong presence where each of our businesses can exhibit superiority through differentiation and unique style. And we become an environmental solution company that can offer solutions to the various environmental issues that changes with the times. And we become a company that continuously takes on the challenge of coal withdrawal. Through these efforts, we will contribute to the society and further enhance our presence in society.

As target figures, we aim to become a company that achieves sales of JPY 400 billion, operating income of JPY 40 billion or more, ROE of 10% or more and ROIC of 6.5% or more by 2035. To achieve this goal, we will work to transform our business portfolio so that the sales of noncement business will account for 50% of our total sales.

This is a vision for each business. We indicate the environmental solutions that each business provides for various environmental issues and the points where we will promote uniqueness. We would like to create a sense of unity as a company by linking each business with a common keyword of environmental solutions.

Next, I explain our business portfolio transformation. We believe that sales of JPY 400 billion in 2035 will be difficult to achieve with the business portfolio that relies on the cement business. We will expand the Advanced Materials business, which is a growth area and create new businesses such as the carbon business in stages to create new business pillars that can stand alongside the cement business.

In fiscal '22, noncement sales account for about 30% of our total sales, but we aim to raise that to 35% by fiscal '25 and 50% by fiscal '35.

This is the positioning of each business. Going forward, we cannot expect significant growth in the domestic cement business, but it should be returned to stable profitability early so that we can sustainably invest in carbon neutrality and coal withdrawal. The Advanced Materials business is an area with potential for both market growth and profitability. We will concentrate our resources into this business to make it a large business that can stand on its own. New business have not started up in concrete terms yet, but we believe they have potential and we intend to develop them into businesses that can also be profitable. We will work to ensure stable growth in mineral resources, cement-related products and optoelectronics businesses as well.

Next is investment policy. To realize SOC Vision2035, it is important to strengthen carbon neutrality investments and growth investments more than ever. In terms of growth investment, we will invest in Advanced Materials business, expansion of overseas business and creation of new business. Including maintenance update, we intend to invest approximately JPY 500 billion over the next 13 years through 2035.

Next is our medium-term management plan for fiscal years 2023 to 2025. In anticipation of SOC Vision2035, we have formulated the 2023 to 2025 midterm management plan through Backcasting to determine what we need to do in the first 3 years.

Here is the strategy outline for the 3-year period from fiscal '23 to '25. Improving profitability of existing businesses and building foundations for growth would be positioned as company-wide strategy to strengthen our management foundation. We will work to improve profitability of existing businesses through recovery of profitability in our cement business, which generated a loss in fiscal 2022, and by launching the next-generation LN modulator in our optoelectronics business.

In building foundation for growth, we concentrate resources on the electronic materials business for semiconductor manufacturing equipment, centering on the electrostatic check in the growing Advanced Materials business. Expand overseas business centering on the downstream business in Australia and develop new business in the decarbonization field.

Earnings target and management indicators. As for the target for FY 2025, we aim to achieve the sales of JPY 265 billion, up JPY 60 billion over FY 2022 and operating income of JPY 21.4 billion, up JPY 30 billion over FY 2022. As for management index, we aim at 8.0% or more of ROE and 5.0% or more of ROIC. By segment, we aim to achieve stable earnings in Cement and Advanced Materials segment and achieve profitability in all segments.

Business strategy. Let me start with Cement business. 3 key strategies are recovery of profitability, foundation building and the promotion of decarbonization. We aim to fully achieve the target of price hike for the recovery of profitability. In foundation building, we will promote downstream Australian business to develop the foundation for overseas business expansion. In promotion of decarbonization, we will make capital investments to reduce coal consumption and to increase alternative thermal energy.

Advanced Materials business. In this medium-term management plan, by concentrating resources on the electrostatic chuck business, we will strengthen ability to respond to existing customers. We are considering the unprecedented level of capital investment to properly meet the requirement. And to expand the business further, we expand the products beyond the electrostatic chucks.

Mineral Resources, Cement-related products and Optoelectronics. In Mineral Resources business, to capture demand of aggregate in the areas where mining resources are increasingly depleted, we will make investment to increase production, and we will continue the development to secure mineral resources. In Cement-related products business, we will meet the need of labor and energy saving to respond to the needs of environment-friendly products and labor shortage on site. And we will prepare for the future demand in urban infrastructure development. In Optoelectronics business, we will have market launch of the next-generation LN modulator. In [ noncommunication ] area, we will develop contract model to achieve the profitability.

New business. In New business, there are many businesses on the development and demonstration stages and they are on the business creation stage. But we will strive to maximize their commercialization during this medium-term management plan. They are mainly the initiatives for commercialization of businesses for the carbon neutrality. Going beyond cement and concrete field, we explore potentials through open innovation.

Strengthen management foundation. To execute the business strategies presented before, we will also strengthen the management foundation. By executing human resources strategy and the DX strategy, we will promote the efficient business expansion. And for the business expansion, we'll strengthen R&D strategy and IP strategy as well.

Investment plan. During this medium-term management plan, we will make investment of JPY 108 billion. JPY 17 billion will be spent for carbon neutrality and JPY 41 billion will be spent for growth investment and foundation investment. Carbon neutrality investment will lead to CO2 emission reaction through the coal consumption reduction and increased receiving of recycled materials to expand alternative resources thermal energy. Gross investment will be mainly spent for the production capacity enhancement, in Advanced Materials business and the Australian downstream business development.

Financial policy. We target ROE of 8.0% or more in this medium-term management plan. We maximize profit with business expansion. And cash generated by earned profit and asset reduction will be allocated to investment for the sustainable growth and return to shareholders in optimum balance for the capital optimization to improve ROE.

Shareholder Return Policy. We'll improve earnings, continue stable dividend and strive to enhance the shareholder return. To be specific, we aim a total return ratio of 50% or more for 3-year average based on the continuos stable dividend.

Capital allocation. In this medium-term management plan, we consider that by spending capital generated out of the operating cash flows through improved profitability and cash earned by the sales of strategically held share, we'll invest and return to shareholders in a well-balanced manner.

ESG target. For the corporate sustainable growth, we'll improve both the financial and nonfinancial values. In Environment field, to achieve the carbon neutrality vision of SO-CN2050, we'll ensure to promote the initiatives to reduce CO2 emission thoroughly. In Society field, we'll strengthen initiatives to secure, develop and retain human resources. And through the initiatives respecting human rights, we'll strive for social coexistence and symbiosis. In Governance field. In line with the Sumitomo Osaka Cement corporate governance basic policy, we'll strive for the sustainable growth and the long-term corporate value improvement.

Always keeping an eye on SOC Vision2035, we'll steadily work on the business strategy, financial policy and nonfinancial target presented in the medium-term management plan this time, and we will strive to achieve the earnings target and management indicator target.

This concludes my presentation. Thank you for your attention.

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