Toray Industries Inc
TSE:3402
Earnings Call Analysis
Q3-2024 Analysis
Toray Industries Inc
Toray Group, a diversified conglomerate, has experienced a challenging third quarter for the fiscal year ending March 2024. Their consolidated revenue declined by 3.8% to JPY 1,829.4 billion, core operating income fell 4% to JPY 77.2 billion, and profits took a significant hit with a 38.8% drop to JPY 45.7 billion. Special items saw a JPY 24 billion swing to negative JPY 5.8 billion, reflecting tougher conditions. However, the depreciation of the yen has inflated the translated yen value of overseas subsidiaries, leading to a total assets increase to JPY 3,388.4 billion, and a rise in total liabilities to JPY 1,625.6 billion. On the brighter side, equity also grew to JPY 1,762.8 billion, with a stable debt-to-equity ratio of 0.6.
Commitment to future growth is evident in Toray's increased capital expenditures, which surged by JPY 26.6 billion to JPY 95 billion. Depreciation and amortization inched upwards by JPY 1.3 billion to JPY 99 billion, and R&D investments also saw a modest increase to JPY 50.2 billion. In a display of operational efficiency, the company managed to stay cash flow positive, with a free cash flow of JPY 19.3 billion.
Toray operates across various business domains, each with its own set of challenges and opportunities. Fibers & Textiles struggled with a 5% revenue dip to JPY 745.4 billion, while core operating income managed a 10.7% increase to JPY 43.8 billion. The Performance Chemicals segment wasn't as fortunate, with revenue falling 5.5% to JPY 659.6 billion and operating income declining by 18.8% to JPY 24.3 billion. The Carbon Fiber Composite Materials segment remained relatively stable in revenue but faced a slight core operating income decrease. Conversely, the Environment & Engineering segment showed a strong performance with revenue up 5.7% and core operating income up 13.4%. The Life Science segment, however, grappled with a decrease in revenue and a flip to negative operating income due to market pressures and competition.
Looking forward, Toray anticipates a sluggish recovery pace for the global economy due to high interest rates, dampened spending, and the stuttering Chinese market. With this in mind, the company has revised its full year forecast, now expecting JPY 2,470 billion in revenue, a JPY 105 billion core operating income, and JPY 58 billion in profit for FY ending March 31, 2024. This forecast assumes a foreign exchange rate of JPY 140 to the U.S. dollar and takes into account both operational outcomes and market conditions.
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Thank you very much for joining us today despite your busy schedule. On behalf of Toray Group, I would like to take this opportunity to extend my gratitude through your continued understanding and your interest in our management and business activities.
Now I would like to report Toray's business results for the third quarter ended December 31, 2023, and the business forecast for the fiscal year ending March 2024. Now I would like to follow the table of contents shown on Page 1. I would like to begin with a brief summary of business results for the third quarter ended December 31, 2023. Please turn to Page 3. Consolidated revenue for the 9-month period decreased 3.8% compared with the same period of year earlier to JPY 1,829.4 billion. Core operating income decreased 4% to JPY 77.2 billion, and profit decreased 38.8% to JPY 45.7 billion.
Page 4 is about special items. Special items for the 9 months period worsened by JPY 24 billion to negative JPY 5.8 billion compared with the same period of the previous fiscal year. Page 5 is about assets, liabilities, equity and free cash flow. As for financial condition at the end of December 2023, both assets and liabilities were affected by the increase in translated yen amount of overseas subsidiaries because of the depreciation of the yen. Total assets stood at JPY 3,388.4 billion, up JPY 194.3 billion from the end of the previous fiscal year due primarily to increases in trade and other receivables, inventories on tangible fixed assets.
Total liabilities increased JPY 67.4 billion from the end of the previous fiscal year to JPY 1,625.6 billion, owing mainly due to increases in bonds and borrowings. Total equity increased by [JPY 127 billion] compared with the end of the previous fiscal year to JPY 1,762.8 billion. Owner's equity was JPY 1,655.9 billion. Interest-bearing liabilities was JPY 998.1 billion, and D/E ratio was 0.6. Free cash flow was positive at JPY 19.3 billion.
Page 6 explains about capital expenditures, depreciation and amortization and R&D expenditures. Capital expenditures for the 9 months increased by JPY 26.6 billion to JPY 95 billion on a year-to-year comparison. Meanwhile, depreciation and amortization increased by JPY 1.3 billion to JPY 99 billion. R&D expenditures increased by JPY 0.8 billion to JPY 50.2 billion compared with the same period of the previous fiscal year. The table on Page 7 describes revenue and core operating income by segment. In addition, the graph on this page shows factor analysis of JPY 3.3 billion decrease in core operating income for the 9 months on a year-to-year comparison.
The difference in quantity was minus JPY 6.6 billion due to a decrease in production and sales volume, mainly in the Performance Chemicals segment. The net change in price was a plus JPY 15.7 billion compared with the same period of the previous fiscal year due mainly to maintain and expansion of spreads in addition to proceeding, passing on cost increases to sales prices amid the downward trend in raw material prices. Cost variance, et cetera, was minus JPY 13.4 billion, mainly due to increase in fixed costs. Using Page 8 and after, I would like to explain the results of each segment.
First, Fibers & Textiles. Revenue of the overall segment decreased 5% to JPY 745.4 billion compared with the same period a year earlier and core operating income increased 10.7% to JPY 43.8 billion. Apparel applications were impacted by worsening market conditions and hygiene material applications were sluggish from the worsening supply-demand balance. Industrial applications maintained a recovery trend on the back of continued demand recovery in automobile applications and expansion in EV applications.
Page 9 is the Performance Chemicals segment. Revenue decreased 5.5% to JPY 659.6 billion compared with the same period a year earlier and core operating income decreased 18.8% to JPY 24.3 billion. I would like to explain the conditions of each business on the next page. In the Resins and Chemicals business, due the impact of demand decline in the Chinese market and other factors, while automobile applications in Japan showed signs of improvement. In the Films business, the impact of inventory adjustment persisted in supply chain for electronic parts.
In the Electronic & Information Materials business, demand for OLED-related materials and circuit materials showed some recovery. Page 11 is the Carbon Fiber Composite Materials segment. Revenue decreased 0.9% to JPY 209.3 billion compared with the same period a year earlier and segment posted core operating profit of JPY 17.4 billion, 3.7% decrease from the same period a year earlier. I would like to explain the expenses of each application on the next page. In the aerospace applications, the production rate of commercial aircraft of the major customer has steadily recovered.
The sports applications was slow due to the [full fledge] inventory adjustment mainly in general products for outdoor, leisure. The wind turbine blade applications entered into an adjustment phase on demand for the industrial applications, including pressure vessels softened. Page 13 in the Environment & Engineering segment, revenue increased 5.7% to JPY 165 billion compared with the same period of the year earlier, and the core operating income increased 13.4% to JPY 14.6 billion.
In the Water Treatment business, shipment to the U.S. and China, the 2 major markets for reverse osmosis membranes was strong. Further, sales of a construction subsidiary in Japan were also strong. Page 14 is the Life Science segment. Revenue decreased 4.5% to JPY 38.4 billion compared with the same period a year earlier, and core operating income decreased by JPY 1.4 billion to negative JPY 0.8 billion. In the pharmaceutical business, sales of oral anti-pruritic drug, REMITCH were affected by the introduction of its generic versions and NHI drug price revision and sales of overly active prostacyclin derivative DORNER were affected by inventory adjustment overseas.
In the Medical Devices business, although sales of dialyzers were affected by the soaring prices of raw materials on the fuels, shipment of dialyzers for hemodiafiltration in Japan was strong. Page 15 shows the business results of major subsidiaries of the region. Toray International, sales of Fibers and Textiles, Resins, Chemicals and Films decreased.
Other subsidiaries in Southeast Asia, in the Fibers and Textile business, apparel applications were affected by the worsening market conditions, while in the industrial applications, automobile applications were on the recovery trend. The Performance Chemicals business, mainly in Resins business was affected by the sluggish Chinese market conditions, but the spread showed a trend toward improvement. Another subsidiary in China, in the Fibers and Textile business, the apparel applications were affected by the sluggish market conditions in the U.S. and Europe. However, domestic sales was strong.
In the industrial applications, automobile applications shows a recovery trend. The Performance Chemicals business was affected by the demand decrease in resin products. And for subsidiaries in the Republic of Korea, in the Fibers and Textiles, supply and demand balance of nonwoven fabric worsened. Meanwhile, in the Performance Chemicals business, sales of film and electronic and information materials products expanded.
Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2024. Please turn to Page 17. The pace of recovery in the global economy is expected to remain slow due to factors such as the high interest rates in the U.S. and Europe, dampening consumer spending and capital investment and the slow recovery in the Chinese economy. The Japanese economy is also expected to show a gradual recovery. However, the prolonged real estate recession in China, unstable prices of primary commodities, including food and energy, slowdown in consumption in the U.S. and Europe, owing to the delay in start of interest rate cuts and foreign exchange fluctuations caused by a change in the Bank of Japan's monetary policy are among downward risks for the economy in Japan and abroad.
For the fiscal year ending March 31, 2024, Toray revised its full year consolidated forecast announced on November 8, 2023, taking into consideration its business performance for the 9 months of the fiscal year on the changes of business environment. It now expects revenue of JPY 2,470 billion, core operating income of JPY 105 billion and profit of JPY 58 billion. This forecast from January onwards is based on an assumed foreign currency exchange rate of JPY 140 to the U.S. dollar.
Page 18 shows the consolidated business forecast for the fiscal year ending March 2024 by segment. Page 19 shows the comparison of core operating income between the forecast on us on November 8 and the new forecast with breakdowns into segments. The process behind the differences are shown on the right side of the table. This concludes my presentation. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]