Resonac Holdings Corp

XMUN:SWD

Earnings Call Transcript 2018-Q1

[Toshiharu Kato, executive]

Ladies and gentlemen, I'm Toshiharu Kato, CFO of Showa Denko. Thank you very much for your interest in the performance of our company. I'd like to now present the financial results for the first quarter of fiscal 2018.

Number of consolidated subsidiaries is 62. Number of companies under the equity method is 11, unchanged from the end of last fiscal year.

January to March average exchange rate was JPY 108.3 to the $1. Yen appreciated JPY 5.3 year-on-year from 113.6. Last year's end-of-the-year exchange rates used to evaluate assets and liabilities was JPY 113. At the end of March, yen appreciated JPY 6.8 to JPY 106.2 to the dollar.

As for euro, January to March average was JPY 133.2 to the euro. Yen depreciated JPY 12.1 year-on-year from JPY 121.1 to the euro. FX sensitivity, excluding the foreign exchange contract is that JPY 1 appreciation pushes down the operating income by JPY 500 million per year.

With higher oil price from the second half of last year, domestic naphtha price increased JPY 6,000 or 14.3% year-on-year from JPY 41,900 per kiloliter to JPY 47,900 per kiloliter. Our 2018 forecast is JPY 41,600 per kiloliter.

As aluminum metal supply tightened due mainly to reduced production in China, aluminum LME price increased by $309 or 16.6% year-on-year from $1,854 per ton to $2,163 per ton.

Japan premium was $95 per ton in Q1 2017 and $94 per ton in Q4 2017. It rose to $103 per ton in Q1 2018 and is $129 per ton in Q2 2018. January to March average yen-based market price increased JPY 24,000 or 9.1% year-on-year from JPY 265,000 per ton to JPY 289,000 per ton.

Now please turn to Page 3. This shows the summary of Q1 consolidated results.

Net sales were JPY 214.7 billion, up JPY 31.5 billion or 17.2% year-on-year. Details are shown on Page 5.

Major drivers include the integration of graphite electrode business with SGL GE of Germany in the second half of last year in Inorganics segment and market improvements.

Inorganics sales saw a major growth.

Operating income was JPY 34.4 billion, up JPY 14.7 billion or 74.6% year-on-year. Q1 operating income, ordinary income and net income attributable to owners of the parent were record high quarterly numbers. I would explain the details on Page 5.

Inorganics profit grew significantly through the business integration of graphite electrode and the improved markets.

Chemicals and Others also saw higher profits.

Ordinary income was JPY 32.8 billion, up JPY 15.1 billion or 85.1% year-on-year.

Under nonoperating income and expenses, equities in earnings of affiliates was down JPY 1.1 billion year-on-year due to the time lag to reflect higher materials cost of petrochemical derivative business to selling prices. Smaller foreign exchange losses led to JPY 0.7 billion improvement year-on-year.

Overall nonoperating income and expenses improved JPY 0.4 billion.

Net extraordinary profit and loss improved JPY 0.6 billion without major losses booked in Q1.

With higher profits, income taxes increased JPY 4.4 billion year-on-year to JPY 5.7 billion.

Net profit was JPY 26.2 billion, up JPY 11.2 billion year-on-year.

Mainly with higher profit of Showa Denko Sichuan Carbon Inc., profit attributable to noncontrolling interest increased JPY 1 billion year-on-year to JPY 1.4 billion.

Net income attributable to owners of the parent was JPY 24.8 billion, up JPY 10.2 billion or 70.3% year-on-year.

Next, please take a look at far right-hand side column on this page. This shows the revised first half forecast announced at 3 p.m. today.

Net sales forecast is revised to JPY 452 billion, up JPY 35 billion from the initial forecast. Upward revisions are made in all segments, especially Inorganics and Petrochemicals. I would explain the details later.

Operating income forecast is JPY 68 billion, up JPY 27 billion from the initial forecast.

The forecast remains the same for Aluminum segment due to the expected impact from higher aluminum metal. Upward revisions are made in all other segments, which are trending well.

Revised forecast for net nonoperating number is minus JPY 3.5 billion, considering some impact from yen's appreciation and others.

Ordinary income forecast is JPY 64.5 billion.

Extraordinary profit forecast remains the same at minus JPY 6 billion.

As a result, profit attributable to owners of the parent forecast is JPY 43 billion, JPY 20 billion higher than the initial forecast.

Please turn to Page 4.

Extraordinary profit declined JPY 0.2 billion year-on-year without major items booked in Q1.

Extraordinary loss was JPY 0.9 billion, JPY 0.7 billion lower than the year before without major items. As a result, net extraordinary number improved JPY 0.6 billion to minus JPY 0.9 billion.

Please turn to Page 5. This shows the consolidated sales by segment.

Sales decreased year-on-year in Petrochemicals and Electronics but increased in other 4 segments. Petrochemicals sales were JPY 53.8 billion, down JPY 10.8 billion year-on-year. Due to the once-every-4-year shutdown maintenance of ethylene plant from March 8 to April 20, olefin volume decreased. The ethylene plant has already been restarted and is operating fully. With higher market price of buying new acetate and ethyl acetate, organic chemical sales increased. SunAllomer Ltd. sales also grew.

Chemicals sales were JPY 36 billion, up JPY 2.7 billion year-on-year. Mainly with higher market price of acrylonitrile and increased export volume of chloroprene rubber, basic Chemicals sales grew. High production in semiconductor and display industries increased shipment of high-purity gases for Electronics, especially etching gases. Electronic chemical sales rose. Functional chemical sales increased on higher selling prices, reflecting higher materials cost. Industrial gases sales increased slightly.

Electronics sales were JPY 27.7 billion, down JPY 1.9 billion year-on-year. Hard disk volume decreased 15% from the strong Q1 of last year but was better than the initial forecast. Hard disk for near-line server was solid, but 2.5-inch media for PCs decreased and sales declined.

Compound semiconductors and rare earth magnetic alloy sales increased on higher shipments. Lithium-ion battery material sales grew with higher shipment to China.

Inorganics sales were JPY 51.4 billion, up JPY 38.3 billion year-on-year. Fine ceramics shipment for electronic materials grew, but ceramic sales decreased on lower volume of general-purpose alumina. Graphite electrode sales grew significantly with higher selling prices, reflecting tight supply and higher volume and the contribution of SHOWA DENKO CARBON Holding GmbH consolidated in the second half of last year.

Aluminum sales were JPY 24.8 billion, up JPY 1.3 billion year-on-year. Road product sales increased on higher shipment of high-purity foils for capacitors for industrial machineries and automobiles. Aluminum specialty components sales increased on higher shipment for industrial machines and automotive components. Despite higher sales in Vietnam due to lower volume in Japan, the aluminum can sales decreased slightly.

Sales of others were JPY 34.3 billion, up JPY 2.3 billion year-on-year on higher sales of SHOKO Co. Ltd.

I would explain the revisions of the forecasts later on.

Please turn to Page 6. This shows consolidated operating income by segment.

Profit grew in 3 segments and declined in other 3 segments year-on-year.

Inorganics profit showed a major increase.

Petrochemicals profit was JPY 3.3 billion, down JPY 7.2 billion year-on-year. Once-every-4-year shutdown maintenance led to lower olefin volume. Steep rise of butadiene market in Q1 2017 was not repeated. As a result, olefin profit decreased significantly. Full operation of vinyl acetate and ethyl acetate continued except for the shutdown maintenance. Higher material prices of acetic acid, ethylene and others led to lower organic chemicals profit. Polypropylene supply continues to be tight. SunAllomer Ltd. profit increased.

Chemicals profit was JPY 3.6 billion, up JPY 0.5 billion year-on-year. Basic chemicals profit increased mainly on higher international market price of acrylonitrile and increased export and higher market price of chloroprene rubber. Electronic chemicals profit increased on higher volume of high-purity gases for electronics used in semiconductor where 3D NAND production grew and display industry. Industrial gases profit slightly decreased on higher electricity and logistics cost. Functional chemicals profit declined due to higher petrochemical-related material prices despite strong demand.

Electronics profit was JPY 2.9 billion, down JPY 3.2 billion year-on-year. Compared with the strong performance of 2.5-inch media for PCs in Q1 last year, volume decreased and profit declined for hard disks. Compound semiconductor and the rare earth magnetic alloy profits grew with higher volume. Lithium-ion battery materials profit increased slightly on higher volume for China.

Inorganics profit was JPY 24.9 billion, up JPY 25 billion year-on-year. Ceramics profit increased on higher volume of high value-added products such as fillers. Graphite electrode profit showed a major increase on market price improvement due to tight supply and higher volume. Consolidation of SHOWA DENKO CARBON Holding GmbH in the second half of last year also contributed significantly.

Aluminum profit was JPY 1.3 billion, down JPY 0.2 billion year-on-year. Road products profit increased slightly on higher shipment of high-purity foils for capacitors in Japan and at Showa Denko Aluminum (Nantong) in China. Aluminum specialty component profit was about the same as the year before.

Despite higher profit of Hanacans in Vietnam, aluminum can profit decreased on lower volume for beer in Japan and higher aluminum metal price.

Profit of Others was JPY 0.8 billion, up JPY 0.6 billion year-on-year with higher profit of SHOKO Co. Ltd. and Others.

Let me now explain the revisions of first half forecast.

Please go back to Slide 5 and pay attention to the far right-hand side column.

As sales are trending well, we are revising the forecast upward in all segments. Revised first half sales forecast is JPY 452 billion, up JPY 35 billion from initial forecast. Since graphite electrode market price is rising more than our initial forecast, Inorganics sales forecast is increased by JPY 25 billion. Also, reflecting higher olefin market price, Petrochemicals sales forecast is increased by JPY 8 billion.

On Page 6, revised first half operating income forecast is JPY 68 billion, up JPY 27 billion from the initial forecast. All segments are showing good progress.

Although Aluminum segment is solid, its forecast remains the same due to expected impact from higher aluminum metal. Profits in other 5 segments are revised upward.

In Petrochemicals, olefin supply continues to be tight in East Asia. After the shutdown maintenance, our ethylene plant has been fully operating. Ethylene market price is trending higher than our initial forecast. Petrochemicals profit forecast is increased by JPY 1 billion from the initial forecast.

In Chemicals, acrylonitrile market price in basic chemicals is trending higher than the initial forecast. Chloroprene rubber profit has been steady. High level of shipment is expected for electronic chemicals. Chemicals profit forecast is revised upward by JPY 1 billion.

As for Electronics, our first half hard disk shipment is expected to decrease 15% year-on-year, which is better than the initial forecast. High yield is expected to slightly push up the profit. Volume of compound semiconductor and rare earth is expected to exceed the initial forecast. Overall Electronics profit is revised upward by JPY 1 billion.

Revised Inorganics profit forecast is JPY 23.5 billion, higher than the original. With higher volume of abrasives and fine ceramics for electronic materials, ceramics profit will be higher. Graphite electrode is operating fully except for U.S. production expansion. With higher-than-expected international market price, major profit growth is forecast for Inorganics.

Aluminum profit forecast remains the same at JPY 2.5 billion. Domestic beer market is somewhat weak, but strong shipments of high-purity foils for capacitors and aluminum specialty components continue. Aluminum metal price is rising due to the U.S. tariff issue and media report on U.S. sanctions on RUSAL of Russia, which could have a minor impact on domestic aluminum can business.

Now please turn to Page 7.

At the end of March, cash and deposits and inventories increased, while notes and accounts receivables decreased. Overseas, fixed assets declined due to yen's appreciation.

Total assets were JPY 1,017.9 billion down JPY 6.8 billion year-on-year.

With lower interest-bearing debt and others, total liabilities decreased JPY 39.7 billion year-on-year to JPY 620 billion.

After booking profit attributable to owners of the parent and offering treasury stock through international offering, capital surplus increased.

Total net assets increased JPY 32.9 billion to JPY 397.9 billion.

Now please turn to Page 8.

Interest-bearing debt declined JPY 16.8 billion year-on-year to JPY 330 billion. Debt-equity ratio improved 0.12 points from the end of last year to 0.83x.

Stockholders' equity ratio improved 3.5 points to 37.5%.

Please turn to Page 9. Pages 9 through 11 show 2018 full year forecast.

Sales, JPY 935 billion; operating income, JPY 137 billion; net income attributable to owners of the parent, JPY 85 billion. We revised only the first half forecast. The second have forecast remains the same. Therefore, I will not explain the full year forecast.

Please turn to Page 12.

Pages from 12 to 15 show quarterly operating income by segment in bar chart.

Pages from 16 to 19 show topics by segment.

These pages are for your reference. As each business shows good progress vis-à-vis our consolidated forecast announced on February 14, we made upward revisions for first half forecast. We will continue to make our utmost efforts to reach those new forecasts.

This concludes my presentation. Thank you for your attention.