Teijin Ltd

TSE:3401

Earnings Call Transcript 2023-Q1

[Akihisa Nabeshima, executive]

I am Akihisa Nabeshima, CFO of Teijin Limited. Let me go over the financial results of the first quarter of fiscal 2022 and the full-year outlook for fiscal 2022 in accordance with the materials distributed. Please take a look at Page 1. You can see net sales and operating income by segment for each quarter. In the first quarter, in terms of year-on-year comparison, because the demand was strong basically, which led to an increase in sales volume, net sales grew by 7.9% to JPY 243.8 billion.

On the other hand, the operating income decreased by 37.6% from JPY 17.3 billion to JPY 10.8 billion. This represents a progress of 22% against the full-year outlook of JPY 50 billion.

In the Materials Business Field, there was an increase in the sales volume of products mainly for automotive and aircraft applications, and the favorable foreign exchange rates contributed to earnings, while we were affected by lockdowns in China, a sharp rise in raw material and fuel prices and an associated increase in logistics costs. As a result, an operating loss of JPY 0.7 billion was recorded.

As for the Healthcare Business Field, the operating income decreased year-on-year mainly due to the market entry of generic alternatives to FEBURIC from June as well as drug price revisions.

The quarterly profit attributable to owners of the parent, decreased by 25.8% year-on-year to JPY 7.3 billion, even with the improvement in nonoperating and extraordinary income and loss, thanks to the impact of the weaker yen, among others.

As for the full year outlook, we have made no changes to the previously announced forecast for net sales and operating income of JPY 1 trillion and JPY 50 billion, respectively. No change has been made to the forecast of the Materials Business Field, where it is expected to be back in the black due to continuously strong demand and effects of investment in production capacity expansion for fiscal 2022.

In Healthcare, operating income is forecast to decrease due to the market entry of generic alternatives to FEBURIC. There is no change to the previously announced forecast for profit attributable to owners of the parent of JPY 28 billion and annual dividend of JPY 55 per share, which is around the level of the previous year.

On Page 2, you can see key assumptions regarding our main target markets for the result of the first quarter as well as the outlook from second quarter onwards. As for Aramid, the demand in the first quarter was quite strong in automotive, optical fibers and other industrial materials and ballistic and protective apparel markets.

In and after the second quarter, the demand is expected to increase further in the automotive to remain firm in industrial materials and the ballistic and protective apparel. As for Resin, in the office machine market, customers' manufacturing operations declined due to difficulty in procuring parts caused by lockdowns in China and decrease in COVID-19-led special demand for small printers for home use. And this trend is expected to continue from second quarter onward.

In the automotive market, customers' manufacturing operations declined due to lockdowns in China. However, as the EV business is strong in China, customers-declined manufacturing operations will gradually return to the normal levels due to the end of lockdowns there.

With regard to Carbon Fiber, the number of air passengers continue to recover slowly in the first quarter. And from second quarter onward, demand for passenger flights will recover further, mainly in Europe and U.S.

Regarding Composites, the OEM production was still constrained due to the semiconductor shortage and the disruption of supply chains in the first quarter. But the -- from second quarter onward, amid strong demand, production constraints will gradually dissipate.

As you can see in the footnotes, for factors already incorporated, in the first quarter, toward the last half of June, especially, prices of natural gas and raw materials surged. And we have taken a conservative assumption that this will remain the case throughout the year.

Factors not incorporated in the outlook are risks of the global economic recession, particularly in the U.S., impacts from further lockdowns in China and the worst-case scenario of suspension of natural gas supply from Russia to other European countries, among others. Things are still uncertain. We have decided not to take them into account.

Page 3 refers to the Healthcare Business Field. The market for gout and hyperuricemia treatments continue to grow. And from's the second quarter onward, we expect an ongoing increase in the number of patients.

But the sales value, based on drug prices, will shrink due to the market entry of generic drugs. The market for diabetes treatments grew slightly, but competition remained fierce and is expected to stay that way in and after the second quarter.

In Home Healthcare, both HOT and CPAP are expected to continue to grow or remain strong from second quarter onward as was the case in the first quarter.

As for Fibers & Products Converting Business field, in Fiber Materials and Apparel, consumption was on a recovery track in Europe, U.S. and Japan due to relaxation of restrictions on people's activities, while in China, the market was sluggish because of lockdowns. From the second quarter onward, close attention should be paid to the spread of the new Omicron subvariants.

Industrial Materials was affected by semiconductor shortages in the first quarter, but is expected to gradually improve or return to the normal status from second quarter onward.

And in IT, impacts of piracy websites on e-comic decreased but still lasted slightly, but the market itself grew continuously in the first quarter. In the second quarter, the market is expected to grow continuously as in the first quarter.

It seems that the industry is taking various actions against piracy, but our view is that it is not going to be resolved immediately.

From the next page, we will explain about more specific profit and loss numbers. And I will hand this over to Kitahama to go over that part.

[北浜淳二（きたはま じゅんじ）, executive]

I am Kitahama. I will explain about the financial results of the first quarter. Page 6 shows the highlights with year-on-year comparisons.

Net sales increased by 7.9% year-on-year to JPY 243.8 billion, mainly due to an increase in the sales volume for automotive and aircraft applications, backed by continuously strong demand in Materials, selling price revisions made in response to the rises in raw materials and fuel prices and favorable ForEx rates.

And operating loss was posted mainly due to sales declines caused by lockdowns in China, rising raw material and fuel prices and logistics costs, although an improvement in operations after large-scale periodic maintenance in the first quarter of fiscal 2021 in aramid and favorable ForEx contributed to earnings. Healthcare also saw a year-on-year drop in operating income, mainly due to the market entry of generics to FEBURIC and drug price revisions. Consolidated operating income decreased by 37.6% to JPY 10.8 billion.

Despite this improvement in nonoperating and extraordinary income and loss, led to a shrink in the year-on-year decline in the quarterly profit attributable to owners of the parent to just 25.8% to close to a total of JPY 7.3 billion. Page 7, we have already discussed the operating results and P&L. Key financial indicators or ROE and operating income-based ROIC was 6.5% and 5.2% respectively, against annual targets of 6% each. EBITDA totaled JPY 29.2 billion, representing a progress of 23.4% against the full-year target of JPY 125 billion.

To the right top of this page, CapEx was JPY 13.5 billion, down year-on-year even after excluding an impact due to the takeover of the sales rights for diabetes treatments and other related assets. Large-scale capital investments in carbon fiber and aramid fiber had run its course in the total CapEx decline.

Depreciation and amortization went up slightly, affected by large-scale investments carried out up to last year. Exchange rates shown on the right bottom demonstrates the trend of the weaker yen from a year before, crude oil and natural gas prices surges, especially with natural gas in Europe going up for fourfold from the year before. Page 8 shows the results of Material Business Field. As you can see, we posted an increase in sales but decrease in operating income, which recorded a loss of JPY 0.7 billion.

As described on the right, sales volume increased due to strong demand. Despite the income boosting effect of favorable foreign exchange rates, profit was affected mainly by lockdowns in China, rises in raw materials and fuel prices, and the increase in logistics costs.

Looking at the results by business in -- business. In Aramid, both net sales and operating income increased. As shown in the second bullet point, an improved level of operations was seen after a large-scale periodic maintenance carried out in the first quarter of fiscal 2021, and ForEx contributed to earnings.

As in third bullet, though natural gas prices surged, efforts were made to revise selling prices in response. However, as in the first bullet point, stock-outs occurred, mainly due to the malfunction of production processes at spinning mills in the Netherlands resulting in a decline in the sales volume. This has tipped the profit level lower than initially expected.

Next, Resin business posted drops in both net sales and operating income. We have a plant for compounds in Shanghai, China, which was affected by lockdowns in the country.

In April and May, the plant suspended its operation and resumed the operation in the middle of June. Therefore, in the first quarter, this has seriously impacted the business, resulting in a decline in the operating income.

Carbon Fibers saw both its net sales and operating income increased. Demand for products for most applications remained firm. In particular, the sales volume for aircraft applications grew, including the sales mix and pushing up the profitability, which made a great contribution.

Carbon Fiber business was affected by the rise in raw material costs, but selling price revisions were being pursued there as well.

In Composites, net sales increased, but operating income decreased. Consumers' interest in buying cars continues to remain strong in the U.S. However, OEM production remains suspended, primarily due to a shortage of materials, including semiconductor and parts.

That said, the total sales volume increased mainly due to the start in last year, a full-scale sale in a new large-scale program. Raw material prices were still rising. So negotiations for selling price revisions were continued.

Progress has been made on the negotiations as initially assumed. But if you look at the first quarter alone, part of the agreements reached were incorporated in the results, but some are going to be deferred to the second quarter or after.

In terms of implementation, with the revised prices applied retrospectively to the sales posted in the first quarter, this has resulted in a slight decline in the profit in the first quarter. The battery materials posted increases in both net sales and operating income. Demand for separators for smartphones was strong, and Teijin's separators were selected for new smartphone models.

So the factors behind the changes in EBITDA are shown on the left bottom. The volume increased from a year before and the split between sales prices and mix and raw materials and fuel costs pushed down the profit slightly, and ForEx contributed possibly. Others include increased logistics and plant fixed costs as we constructed new factories and expanded existing ones for Aramid, Carbon and Composites.

But we have deviated from the initial forecast due to [ malfunction ] of production processes in Aramid, impacts of lockdowns in China on Resin, passing of raw material cost rises on to prices being delayed to the second quarter in Composites and decreased production by OEMs due to shortage of semiconductors. Hence, a loss of JPY 0.7 billion.

Page 9 on Healthcare. Sales dropped slightly from the previous year, and EBITDA fell by JPY 2.5 billion. On the right, you can see the descriptions on each business. In Pharmaceuticals, sales of diabetes treatment drugs and Somatuline and Xeomin remained robust. In Home Healthcare, HOT and CPAP also remained firm.

However, sales volume of FEBURIC started to decline in June due to the market entry of generic alternatives in that month. In addition, drug price revisions and the absence of licensing income recorded for the first quarter of fiscal 2021 led to a drop in profit.

Page 10, Fibers & Products Converting Business field saw sales increase, and profit remain almost unchanged year-on-year. And shown in third bullet point, on the right, the results were affected by a sharp rise in raw material and fuel prices and logistics costs, an increase in purchase costs due to the depreciation of the yen, to which we responded by striving to revise selling prices. Both Industrial Materials and Fiber Materials and Apparel recovered from the impact of COVID-19. In Industrial Materials, sales of polyester staple fiber for water treatment filters, automotive parts, infrastructure reinforcement materials and artificial leathers were strong.

In Fiber Materials and Apparel, sales of materials and products for Europe, U.S. and China and of heavy clothing for Japan remained robust. Gross profit stayed around the level of the previous year.

In IT, as shown on the left bottom, sales dropped slightly and profit also declined. With the reduced impact of piracy website on e-comic services, from which we had suffered since last year, enhanced efforts were devoted to advertising and promotion in order to return the business to the growth path.

This resulted in a drop in profits, which was just as we had expected. The results of Business Solution was strong, mainly in healthcare services.

As for Others, although there are no numbers shown here, the orthopedic implantable devices business was transferred from healthcare to Others in April 2022, and the business recorded strong sales, mainly due to its acquisition of the spine and trauma business from KiSCO Company in February 2022.

J-TEC, the regenerative medicine business, posted increased sales of autologous cultured cartilage, JACC, but saw a slight decline in autologous cultured epidermis, JACE, resulting in a drop in overall net sales year-on-year.

Page 11 shows nonoperating and extraordinary items. On the left is nonoperating items, which made a year-on-year net improvement of JPY 2.3 billion. Gain on valuation of derivatives under nonoperating income increased, while foreign exchange losses under nonoperating expenses also increased.

But on a net basis, there was an improvement of JPY 2.4 billion, which was a result of positive impact by ForEx, especially by the weaker yen.

Extraordinary items improved by JPY 2.1 billion on a net basis, which is due to gain on sales of investment securities as a result of our continued efforts to reduce strategic shareholdings as well as due to the absence of impairment loss in the first quarter this year.

Page 12 shows the financial position. Both assets and liabilities increased from the end of the previous fiscal year. One of the big factors was the increased value of overseas companies assets and liabilities converted into the yen due to ForEx or the weaker yen.

Furthermore, as shown in the changes in the total assets on the left bottom, inventory assets increased from the beginning of the fiscal year.

In addition to the rise in raw materials and fuel costs, there was a buildup of inventories due to seasonal factors. And the sales volume dropped as compared to the assumptions because of the lockdowns in China and malfunction of production processes in the first quarter.

All this led to a slight increase in inventories, but we expect it to be resolved, going forward. With regard to the cash flow on the right, since there was no major investment, free cash flow was a positive JPY 6.6 billion.

Now the outlook for fiscal 2022. Page 14. As we said at the outset, we have not changed our previous outlook with the net sales of JPY 1 trillion, operating income of JPY 50 billion and profit attributable to owner of the parent of JPY 28 billion.

As compared to the previous outlook, in the Materials Business Field, we have made slight revisions of individual businesses. In particular, the impact of lockdowns in China on the Resin business is now expected to last throughout the year, but this will be offset by increased sales volume for aircraft applications and carbon fiber. So we have decided to leave forecast of both sales and operating income unchanged.

That said, however, there are certain assumptions incorporated. Assuming that the current trends in the ForEx will continue to the end of the fiscal year, we have changed the exchange rate from JPY 125 to the dollar, set at the beginning of the fiscal year, to JPY 134.

We have not changed our crude oil price outlook, but raised our forecast for the average Europe natural gas price slightly, given the current status. There is no change to the dividend at this moment.

Page 15 shows a summary of outlook for fiscal 2022. As you can see, we have made no changes to the outlook of profit and loss key financial indicators, free cash flow or CapEx, which we came forward with last time.

Page 16, the outlook for net sales and operating income by segment has not been changed from the previous one either. However, as I said, there were slight changes made to individual items in the Materials Business Field, which I will discuss on the next page, Page 17. Please take a look at the right-hand side of the table, titled trends behind the operating income forecast, which means compared with fiscal 2022 previous outlook. There's no change to the forecast of Aramid business.

But natural gas prices have been rising. And as I said, in the first quarter, that business was affected by the malfunction of production processes. We expect these to be canceled out by promotion of selling price revisions and favorable foreign exchange rates from second quarter onwards.

On the other hand, the impacts of lockdowns in China and of rising logistics costs on the Resin business is likely to be difficult to be offset throughout the year. And therefore, we have made downward revisions.

As for Carbon Fiber, the sales mix is expected to be improved, especially due to strong sales of products for aircraft application, which should lead to improved profitability. Therefore, we have made an upward revision to the forecast made at the beginning of the fiscal year.

No change has been made to the previous outlook for the Composites. We are experiencing the rise in raw material and fuel costs, but this will be made up for by the revisions in selling prices.

In Composites, part of the passing of the rising raw material costs on to the selling prices was deferred from first to second quarter. But this is expected to be carried out in the second quarter by being retroactively applied to the first quarter sales.

And in the first quarter, semiconductor shortages resulted in a slight decline in production, but we expect this to be made up for by the resumption of the production from second quarter onward. Therefore, we decided not to change the outlook we made at the beginning of the fiscal year.

Page 18 shows Teijin Automotive Technologies U.S., external trends and progress of profit improvement measures. This has been provided since last earnings briefing, and therefore, I will briefly make additional comments on the current status.

As for rises in raw material prices, in the previous outlook for fiscal 2022, announced at the beginning of the fiscal year, we said raw material prices would remain high until the end of fiscal 2022. The prices went up slightly from the levels assumed in this previous forecast, but we expect these heightened levels to be maintained till the end of the fiscal year.

At the beginning of the fiscal year, we anticipated the semiconductor shortage to gradually recover to normal status towards the end of the fiscal year, and there is no change to this outlook. Regarding labor shortage in the U.S., we have not changed our forecast that the situation will improve gradually in the first half of fiscal 2022.

Now on profit improvement measures. In terms of price raises, there is no change from the previous outlook that revised selling prices will be agreed with major OEMs. And in the first quarter, there was a slight delay, but we expect it to be implemented as forecasted when looked at over the entire fiscal year.

As for launching of new programs, there is no change to our previous outlook of higher utilization being planned at the new plant in Texas in the entire fiscal year as well as of a new large-scale program planned to be launched. There is no change to the outlook for the automation of molding processes, [ those fees ] being started up as planned.

Shift to in-house coating processes in main plants was supposed to be complete in the first quarter, which turned out to be mostly in line with the previous outlook. A slight delay in hiring personnel caused a delay in the whole process, but we expect very little impact on the annual effect to be manifested.

Moving on to Page 19. For the Healthcare Business Field, we have not changed our outlook for sales or profits. There's no change to the expected JPY 17 billion drop from the year before in sales of FEBURIC. But the generic center, the market in June, and so we would like to closely watch the speed of their penetration.

Last but not least, on Page 20. You can see factors of changes in EBITDA forecast in fiscal 2022 as compared with fiscal 2021. There were slight changes in the breakdown from the figures shown at the beginning of the fiscal year.

Sales volume is expected to drop slightly, partly due to lockdowns in China. Spread is expected to make a slightly positive contribution due to selling price revisions being carried out.

A positive impact is expected for ForEx as well. Others will have a slight negative impact from the increase in costs, including logistics costs. In total, there's no change to the previous outlook.

That's all. Thank you for your attention.

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