Teijin Ltd

TSE:3401

Earnings Call Transcript

[浜島 直樹, executive]

Now I would like to explain Teijin's Financial Results for the second quarter of fiscal 2024 and its outlook for fiscal 2024. As mentioned by the moderator, I will explain the first and second parts and Uchikawa will explain the third and fourth parts.

First, I would like to explain our financial results for the second quarter of fiscal 2024. At the bottom of the slide, you will find a description of important premises concerning this business results report. The first one, the sale of Infocom shares was announced on June 18 of this year. But all procedures for the sale of Infocom shares were completed on October 22. Therefore, the impact of the sale of Infocom shares is not included in these second quarter results.

As for the part below, we will be impairing the North American operations of our Composites business. The impairment loss on fixed assets is included in the quarterly financial results as the impairment is carried out in this quarter.

As you can see on the next page, the net loss, which corresponds to profit for this quarter, is a very large figure at negative JPY 51.4 billion in the second quarter, but this does not include the gain on the sale of Infocom. As a result, I will explain in the latter part of this presentation, we have made a positive outlook for the full fiscal year with a profit of JPY 25 billion, which corresponds to profit for the quarter. Accordingly, we have listed these 2 premises although they are a bit pushy.

The following is the overall summary as compared with the same period of the previous year. As for revenue, Materials and Fibers & Products were very strong, resulting in a JPY 35.3 billion increase in revenue, and a JPY 7.2 billion increase in adjusted operating income compared with the same period of the previous year. The effect of the profitability improvement measures for the Composites business in Materials, which we have been working very hard on, additionally appeared. And the Resin and Plastic Processing business increased its sales volume through very hard work. And the Fibers and Products continued to perform very well, resulting in an increase of JPY 7.2 billion in profit.

Again, as we recorded the impairment loss of the North American business, the net loss was negative JPY 51.4 billion, when compared with the second quarter of the previous year.

This is the analysis of changes in adjusted operating income by segment, and the first part is for Materials. Revenue was JPY 234.5 billion and adjusted operating income was JPY 1.7 billion. The waterfall chart on the upper part of the slide shows an increase of JPY 4.2 billion from negative JPY 2.4 billion in the first half of fiscal 2023 to JPY 1.7 billion in the first half of this year. Changes in volume and raw material and fuel costs and other positive effects resulted in a JPY 1.7 billion increase in profit, offsetting the negative JPY 6 billion in sales price and mix.

Let me talk a little more about each business. In the Aramid business, which caused some concern last fiscal year, we were able to stabilize operations at the plant at an early stage and sales volume has been increasing. However, lower sales prices pressure for lower interest rates due to lower raw material and fuel prices and intensified competition in some areas have had a negative impact on the business.

As for Resins, sales volume has increased, so the business saw an increase in profit. As for Carbon Fibers, sales volume for aircraft applications is increasing. This is very solid. However, competition in recreation and pressure vessels and other applications is intensifying, and we are in a hurry to change our production system so that we can make a profit. That production adjustment caused deterioration in capacity utilization leading to a decrease in profit.

For Composites, additional effects of the profitability improvement measures have appeared. We also increased the selling price through our efforts. In addition, although it was a temporary factor, we have also been able to recover from equipment breakdowns. So there was a decrease in depreciation and amortization, which brought a change to an increase in profit.

This is the analysis of changes in adjusted operating income for the Fibers and Products business and revenue was JPY 173.9 billion and adjusted operating income was JPY 10.1 billion. When we look at the waterfall chart on the upper part of the slide, the income for the first half of fiscal 2023 was JPY 7.5 billion, but this was added by change in volume and change in sales price and mix of JPY 3.5 billion. Coupled with the increase in SG&A and other expenses associated with sales expansion, finishing at JPY 10.1 billion.

This increase in sales volume was due to strong sales of both fiber materials and apparel and industrial materials with fiber materials and apparel benefiting from strong sales of textiles and apparel products from North America and China. As for industrial materials, strong sales of polyester staple fibers for water treatment filters, which post a very high market share and artificial liver supported our fibers and products business.

The next shows Healthcare. Revenue was JPY 69.3 billion and adjusted operating income was JPY 5.4 billion. As you can see in the waterfall chart, the income for the first half fiscal 2023 was JPY 9 billion. But unfortunately, there were negative effects such as the NHI price revision and increased costs for home equipment, et cetera. And as a result, it finished at JPY 5.4 billion. However, in order to desperately maintain this JPY 5.4 billion, we have made efforts to increase the sales volume of CPAP and OSTABALO, which is a drug for osteoporosis. We ended up with a JPY 3.7 billion decrease in profit when compared with the same period of the previous year.

Finally, in the Other segment, the last segment, revenue was JPY 29.9 billion, and adjusted operating income was JPY 5.5 billion, an increase of JPY 4.9 billion compared with the same period of the previous year. In this segment, sales of separators in battery components and membranes were very strong. And also sales of membranes that remove various kinds of liquid debris in the semiconductor manufacturing process was strong. Strong sales of artificial joints in the regenerative medicine implantable medical device division also supports the increase in profit in this Other segment.

Regarding finance income, if I may make one note, there was a deterioration due to the impact of foreign exchange rate, which led to a negative JPY 3.9 billion as shown. Regarding our financial position, as we have recorded an impairment loss on the North American operations of the Composites business, total assets, the top part are negative JPY 55.8 billion. Equity has decreased and D/E ratio has increased to 1.35, indicating deteriorated trend.

This is all for the second quarter financial results, and I will explain the outlook for the full year from this page. As is written in this pushy note, since this is the forecast for the full year, it includes both the sale of Infocom shares and the impairment loss of the North American operations of our Composites business. This is the summary for the full year, and we are projecting a JPY 49.5 billion increase in revenue and a JPY 6 billion increase in adjusted operating income compared to the previous year.

In this part, revenue has not been changed from the previous outlook, the outlook at the first quarter. We expect adjusted operating income to increase by JPY 5 billion. The profit, which was undetermined at the time of the first quarter is expected to be JPY 25 billion. This profit expected to be JPY 25 billion is the figure after including all gains from the sale of Infocom and the impairment loss of the Composites business in North America. We assume that the ROE at that time will be 6%.

In the square on the right is our dividend forecast, and we hope to increase from the previous outlook. For the annual dividend, we would like to increase from JPY 30 to JPY 50. Dividends are described on Page 19 and capital allocation appears later. And I will add an explanation in that section.

I will explain in more detail. Here is a summary of the analysis of adjusted operating income. The year-on-year change in adjusted operating income from fiscal 2023 results is expected to be an increase of JPY 6 billion from JPY 22 billion to JPY 28 billion. Since the previous forecast was JPY 23 billion, JPY 28 billion means that an increase of JPY 5 billion is expected. With regard to this year-on-year change, the positive effects, such as the increase in sales volume of materials, the additional effect of profitability improvement measures and the decrease due to impairment loss as well as the increase in sales volume of Fibers and Products for Fiber Materials and Apparel and Industrial Materials offset the negative JPY 11.2 billion in Healthcare. In the end, adjusted operating income is expected to increase by JPY 6 billion from the previous year.

Compared with the previous outlook, the fibers and products business is expected to see an increase of JPY 2 billion to the higher-than-expected sales volume in fiber materials and apparel and industrial materials, while the Healthcare is expected to see an increase of JPY 1 billion to further sales of CPAP and an increase of JPY 2 billion attributable to separated sales due to a stronger increase than we had expected. In total, a JPY 50 billion increase is expected.

More details are shown here. First, the waterfall chart for materials compared with the previous year and where the previous outlook shows the change from the previous year. This was an increase in volume from the previous year and other positive effects such as improved productivity of Composites and reduced depreciation, amortization due to impairment loss of again, Composites, while there was a decrease in Spread. As a result, we expect a year-on-year increase of JPY 8.7 billion from a negative JPY 1.7 billion to JPY 7 billion. Some of the explanations are repeated, but I will explain in a little more detail for each business.

In the Aramid business, we have achieved stabilization of production and sales volume increased. However, there are negative effects such as lower sales prices due to intensified competition. Compared with the previous outlook, we are projecting that the income will be slightly lower than the previous outlook. This was due to a combination of temporary slumps in demand, we believe. For one thing, our Aramid business for tire applications are temporarily weak due to the fact that the automotive industry in Europe is a little sluggish.

Furthermore, the bulletproof applications, the production volume is limited in the value chain, leading to a temporary drop. In addition, the installation of 5G equipment has been delayed in China and other countries. And we expect that this, combined with other factors will lead to a decrease in profit. For Resin Plastic Processing, we are forecasting an increase in profit as we achieved an increase in sales volume due to the recovery in market conditions, and we believe that sales for some office equipment applications will be even higher than expected.

As for Carbon Fibers, again, the volume of Carbon Fibers for aircraft applications has been very strong. but the volume of carbon fibers for other applications has been declining. So given a possible deterioration in capacity utilization due to the production adjustment for reorganization to make a profit, we expect a decrease in profit.

The Composites business is expected to see an increase in profit as the effect of profitability improvement measures has additionally appeared and compared with the previous outlook, there is also a decrease in depreciation, amortization due to impairment loss on fixed assets. Considering all these factors, we assume that adjusted operating income will see zero increases or decreases.

For Fibers and Products, we forecast revenue of JPY 345 billion and adjusted operating income of JPY 16.5 billion. This is due to increased sales in both the Fiber Materials and Apparel segment and Industrial Materials segment. And as a result, we expect an increase in profit compared with the previous year and the previous outlook. Compared with the previous year, we expect an increase of JPY 3.5 billion and compared with previous outlook, we expect an increase of JPY 2 billion in adjusted operating income. In regard to this, we are assuming an increase of JPY 2 billion in profit as the Fiber Materials and Apparel are performing well compared with the previous outlook. And in particular, highly profitable businesses are doing well.

In Healthcare, we expect revenue of JPY 140 billion and adjusted operating income of JPY 7 billion. This is a waterfall chart compared with the previous fiscal year. The impact of the NHI price revision and the license fee, which were present in fiscal 2023 are no longer present in fiscal 2024, and we expect an adjusted operating income of JPY 7 billion. Please note that the JPY 7 billion represents an increase of JPY 1 billion from the previous outlook. This is due to the fact the number of rented CPAP devices is currently increasing.

Lastly, in the others part of segment-specific adjusted operating income, strong sales of separators in the regenerative medicine and CDMO of businesses are expected to offset the increase in expenses associated with the expansion of these businesses. And as a result, we expect an increase in profit compared with the previous fiscal year as well. We expect an increase of JPY 4.4 billion year-on-year. In addition, we have received a few more increase and separators are likely to sell well. So we expect an increase of JPY 2 billion in adjusted operating income. This concludes my presentation and I will change places with Uchikawa.

[Akimoto Uchikawa, executive]

Yes. Now I, Uchikawa will explain the progress of strategic options and capital allocation associated with it. First of all, as Moriyama explained, we have decided to sell our Composites business in North America. So I will report on it on this occasion. As we had previously promised, we have made company-wide efforts to improve profitability. The Composites business in North America is no exception to this commitment. We are proud to say that we have made significant improvements and have achieved progress in the turnaround of the profit, where we can see a prospect of returning to profitability.

On the other hand, as we have repeatedly explained, for me, it is, of course, important whether or not we reach the figures or not. But determining whether we are able to do what we had originally intended to do and whether it will create value in the future is also a critical issue. We have taken the time to examine the business, and it seemed to have the potential to grow, but considering whether it will achieve stable business growth and achieve the target ROIC level in a stable manner, we have determined that it will be extremely difficult for the business to do so, and we have, therefore, decided to sell it.

With regard to the North American business, we have narrowed down the list of potential buyers and are continuing negotiations with an eye to selling the business. Negotiations still in the final stages, including the sale price and we are aiming for a closing by the end of the year, and we will report back with more details as they are finalized. Meanwhile, for the remaining European and Japanese operations, we have strong relationships with OEMs in those regions.

The businesses are already profitable and Japanese and European OEMs, who advanced in environmental field, which we are good at or hope to take advantage of in the future. We hope to make a recovery pivoting on them or since they are important bases that are closest to our customers, even in the mobility field, which we will focus on in the future, we would like to continue to operate these businesses.

Next, I would like to explain the transfer Infocom shares. As announced on June 18, we proceeded with the sale process. All procedures were completed on October 22. We believe that we have completed or taken the necessary steps for a major part of the portfolio transformation through these actions. And so in this fiscal year, we will ensure that the remaining actions to less focused and underperforming businesses will be completed in order to start a counter offensive. Now that the big one is over, I believe that we have finally reached a point, where we can steer towards expansion and accelerated growth in the industrial areas that we have already identified.

I will take turn to explain. This page shows capital allocation. In addition to the sale of Infocom shares already announced, we have made progress on the sale of our North American business. The amount of the regular cash gained to be generated by fiscal 2025, has become almost predictable although there is a slight possibility of fluctuation in the future. I would like to show you the capital allocation here. Here is our approach to future growth strategies, enhancement of financial soundness and shareholder returns. Let me explain a bit about this right side, in particular.

In order of priority, I believe the growth investment is probably the most important. In the gross investment part, I've discussed with Uchikawa that we must first improve the profitability of existing businesses, and we are considering making investments in them. In the Healthcare field, in particular, we have already finalized all of our strategies. And we are considering investments in data utilization and IT promotion to maximize the value of home healthcare.

In addition, considering sustainability, we are considering investments in fuel transition for in-house power generation equipment at the Masimo factory, although some might say, it is a little late. In addition, I believe that we must never forget about circular investment in the era of base investment and we must properly make circular investments so that the manufacturing industry can operate its production in a stable manner. Furthermore, we will definitely include IT infrastructure investment. On that basis, we would like to consider growth investments in key industry sectors.

As I mentioned in the midterm plan, though it was a little bit confusing, but when it comes to the mobility area, it is thermal management. In the future, semiconductors and electronic components will become very common. Taking the heat of that electronic component is one of the very important solutions, meaning of growth in that area. And as you can see, the word super-heat resistance, we are also skilled in technologies to handle materials with extremely high temperatures. For example, in the Carbon Fibers business, we have the capability for such technology.

In this context, we have narrowed down to see, if there are any areas in which we can play a role. And we have welcomed CTO this October 1. He came from a well-known company in the chemical industry. Our new CTO has expertise in both healthcare and materials. We would like to discuss with him innovation in both areas and consider together whether growth strategy, we have spent a long time thinking about is really appropriate and how he as CTO, will develop the technology, and we hope to invest in that area as well.

M&A may be a central part of such process, but we would like to be very careful when considering M&A. As you can see the word appropriateness for Teijin, we would like to take a lot of thought and consideration of the appropriateness for our company based on a reflection of past experience to carry out such activities.

The text below is about the development of Healthcare. And as you can see, it's a word rare diseases, though it is not only about rare diseases. We intend to invest in the introduction and development of products, whether pharmaceuticals or medical devices for which home healthcare could have an active role. What I mean by home healthcare could have an active role is that we will invest in a medicine that is very cumbersome, involve a variety of assistance after the visit to home and a medical device that requires a variety of assistance. I would like to invest in such things.

The next part is financial soundness, which is important. As you can see, the word repayment of interest-bearing debt. The debt-to-equity ratio has deteriorated slightly, so that we are repaying interest-bearing debt in an effort to improve the debt-to-equity ratio and rebuild our financial base. We would, of course, like to return to our shareholders any surplus from such growth investments and financial soundness. We would like to increase the dividend from fiscal 2024, raising the amount from JPY 30 to JPY 50 for the annual dividend.

We recognize that the dividend of JPY 30 is a reduced dividend. So we would like to raise the dividend to JPY 50 as soon as possible and make every effort to ensure a stable dividend thereafter. There will be an additional surplus, which we will certainly use to repurchase treasury shares. But please note that we plan to use some of the treasury shares repurchased for employees incentives, et cetera.

Next, I would like to explain the reorganization of Chief Officer functions. We have already shown in which areas we will intend to develop and grow under our midterm plan. We have newly established a Chief Technology Officer to take on the role of accelerating the technical aspects in particular. This corresponds to CTO, as described earlier. With this function, we hope to promote the creation of innovation to creating a new portfolio as well as synergies among businesses, which we have not been able to successfully create.

Meanwhile, we had major production problems during the COVID-19 period. In light of the situation, we've established a new Chief Production Engineering and Procurement Officer to manage all processes from procurement to manufacturing and engineering under a single Chief Officer and to stabilize production and maintain improved production technology on a global basis under the leadership of the relevant corporate organization.

Third is a reorganization to the form of Human Resources Sustainability Officer. By consolidating human resources and sustainability into one Chief Officer, we hope to further accelerate the promotion of sustainability management that we are aiming for. The purpose is to create and strengthen the base under these chief officers to realize our vision, including not only environmental and social, but also human capital investment.

In the end, as shown in the figure below, we have changed from the left structure to the right structure with additional green parts, so we will further accelerate business growth and development. That is all from me about the report on the reorganization. This concludes our explanation. Thank you very much.