Kuraray Co Ltd

TSE:3405

Earnings Call Transcript 2018-Q1

[Keiji Taga, executive]

Good afternoon. Keiji Taga, Senior Executive Officer, officer responsible for corporate management planning office. Thank you for joining us in our conference call despite your busy schedule. Starting this year, we decided to hold earnings conference calls for the first quarter and the third quarter. Since this is our very first earnings call, bear with us for any inconvenience. Now let me start my presentation. Please turn to Page 2. Results for the first quarter of fiscal year 2018 were: net sales, JPY 149.2 billion, up 18.1% year-on-year; operating income, JPY 23.3 billion, up 2.3%; ordinary income, JPY 22.9 billion, up 3.7%; and net income attributable to owners of the parent, JPY 15.7 billion, up 3%. Both sales and profit were higher compared to the same period of the previous year.

We united our method of evaluating main items accounted for under inventories to the first-in, first-out method. Accordingly, we have recalculated the previous year's results, retroactively applying the new method. And as will be explained later, Calgon Carbon Corporation results are included in the earnings starting this quarter.

Net sales increased year-on-year as the result of the inclusion of Calgon Carbon results, selling price increases reflecting higher raw material and fuel prices and currency effects. Profits were also higher, successfully absorbing the cost increase due to the rise in raw material and fuel prices. Please turn to Page 3. Described here are the segment changes made since January. With the completion of the acquisition procedures of Calgon Carbon on March 9, that company has been included in the scope of consolidation from the first quarter of fiscal 2018. And as of April 1, Calgon Carbon division was incorporated into the Functional Materials segment. The exact amount of goodwill is expected to be determined by the end of the fiscal year, so we use a tentative estimate of goodwill for this quarter.

The CLARINO division was transferred from the Functional Materials segment to Fibers and Textiles segment starting this fiscal year. The new segment makeup is as shown on the slide. There are no changes to other segments. Please turn to Page 4. Review of each segment starting from the slide. First, Vinyl Acetate segment. Higher sales and slightly lower profit compared to the same period of last year. Compared to the plan, both sales and profits are trending generally in line with the budget. Operating income for this segment was adversely affected by the changes in the depreciation method in estimated useful lives used for tangible fixed assets as well as the method of allocating corporate expenses.

For PVA resin, the U.S. plant, which began regular operations last year, contributed to increased sales in the North American market, but increases in raw material and fuel prices weighed in on the results.

Sales of optical-use poval film increased. Decision was made to invest in new facilities at the Kurashiki Plant, which are to come online at the end of 2019.

For water-soluble PVA film, sales volume continued to increase. PVA film posted sales expansion but was impacted by the higher raw material and fuel prices.

For EVAL, ethylene vinyl alcohol copolymer, sales were brisk, growing for both automotive gas tank and food packaging applications, but the second quarter expects the impact of maintenance turnaround and the debottlenecking work at the U.S. plant. Please turn to Page 5. The Isoprene segment posted higher sales and lower profit year-on-year. Compared to the budget, both sales and profit are generally proceeding in line with the plan. This segment expects annual maintenance turnaround in the second quarter and accordingly, the operating income is projected to decline in the second quarter. Results from fine chemicals and liquid rubber were firm owing to expansion of sales while SEPTON saw sales declined year-on-year as the first quarter of 2017 benefited from demand surge as a run-up to the price hike. Sales volume expanded for GENESTAR, heat-resistant polyamide resin for automotive, connector and LED reflector applications. Page 6. As mentioned earlier, with the inclusion of Calgon Carbon's results, the Functional Materials segment posted a year-on-year increase in sales and profit for the first quarter. Compared to the budget, net sales are expected to be much higher and profit is also trending to be slightly higher.

In the methacrylic resin business, market conditions remain healthy, but sales of resins were weak for some applications due to inventory adjustments. In the medical business, expansion in sales of zirconia-based dental material products contributed to overall brisk sales. In Carbon Materials business, sales volume of general-purpose applications decreased while sales at Calgon Carbon remained favorable. Page 7, please. Fibers and Textiles segment had lower sales and lower income in the first quarter. In terms of progress against the plan, both net sales and operating income are somewhat underperforming. The sales volume of CLARINO was weak with decline in shipments for sports shoes. The sales volume of KURALON decreased due to shipment delays for some applications with higher raw material and fuel costs also affecting sales. Sales of consumer goods and materials were favorable overall. Page 8, please. On this page, we show first quarter results by segment and compare them with same quarter a year ago for your reference.

Next is Page 9. This slide explains the impact of Calgon Carbon Corporation on our fiscal 2018 business performance. In terms of net sales, we estimate an increase of JPY 35 billion each in both the first and the second half of the fiscal year. Tentative goodwill is estimated to be USD 756 million or JPY 85.5 billion in Japanese yen. We plan to have a 20-year straight-line amortization. Therefore, the amortization of goodwill for fiscal 2018 will be JPY 4 billion on a tentative basis. As I mentioned at the outset, the amount of goodwill is to be finalized at the end of fiscal 2018. Therefore, since there are many uncertainties, we do not reflect this onto our full year operating income. As for the impact to our balance sheet, it is as shown on the table on both the assets and liabilities sides. Please turn to Page 10. This shows the factors contributing to the difference of JPY 500 million in operating income between the first quarters of fiscal 2017 and 2018.

In terms of volume and capacity utilization, since volumes increased for optical-use poval film, water-soluble PVA film, EVAL, GENESTAR and medical materials, also Calgon Carbon Corporation was consolidated. These factors accounted for JPY 4 billion increase in operating income. For terms of trade, the yen's appreciation against mainly the euro had a positive impact, but that was not enough to cancel out the increase in raw material and fuel costs resulting in JPY 500 million negative impact. For operating expenses and others, depreciation costs for Calgon Carbon Corporation and amortization for its goodwill were the main factors behind the JPY 3 billion negative impact. Page 11, please. On this page, we compare the assets section of the balance sheet with the end of last year. Current assets increased by JPY 32 billion. This was due mainly to increase of JPY 22.7 billion for inventory and JPY 10.8 billion for notes and accounts receivable, mainly from newly consolidating Calgon Carbon Corporation. Noncurrent assets increased by JPY 116.1 billion. This again was due to consolidating Calgon Carbon Corporation, which increased tangible fixed assets by JPY 34.1 billion and tentative goodwill at the end of March by approximately JPY 80 billion, including exchange rate impact. Please turn to Page 12. This shows the liabilities and net assets section in the balance sheet. Current liabilities increased by JPY 128.7 billion. The main components include an increase in short-term loans payable due to the consolidation of Calgon Carbon Corporation, which was JPY 77.1 billion and an increase of JPY 46 billion due to issuance of commercial papers. Noncurrent liabilities increased by JPY 30.3 billion. Again, main factors include consolidation of Calgon Carbon Corporation, increasing long-term loans by JPY 23.9 billion and also JPY 4.5 billion increase in liabilities for retirement benefits. For net assets, retained earnings increased by JPY 9.3 billion while foreign currency translation adjustments decreased by JPY 20.4 billion, resulting in a drop of JPY 10.9 billion overall. Page 13, please. Here, we show the revised earnings forecast for the first half and full year of fiscal 2018 compared with the initial plan. With the acquisition of Calgon Carbon Corporation completed, we have effected that current expected net sales impact and have revised the forecast as shown here. Page 14, please. On this slide, we show the first half and full year earnings forecast that were revised as of first quarter 2018 compared to the same period a year ago. Next, Page 15. This is for your reference. Net sales by segment after the revision is shown, along with comparisons with the previous fiscal year and the initial plan for both the first half and full year of fiscal 2018. Please turn to Page 16. This is again for your reference. Operating income by segment after the revision is shown, along with comparisons with the previous fiscal year and initial plan for both the first half and full year of fiscal 2018. Please turn to Page 17. Here, we explain about share buybacks. As we have stated in the press release we put out today, we will conduct a share buyback as we did last year where we will buy back our shares between May 16 and October 31, 2018, with an upper limit of 2.2 million shares or JPY 4 billion. The details are shown on the slide. That concludes my explanation. Thank you for your attention.