Kuraray Co Ltd

TSE:3405

Earnings Call Transcript 2020-Q1

[Keiji Taga, executive]

This is Taga. Thank you very much for joining our conference call at the expense of your very busy schedule. Now I would like to start the explanation of the FY 2020 Q1 Earnings Presentation.

Please go to Page 2. The performance of Q1 FY '20, with the economy decelerating worldwide, hit by the coronavirus, the sales declined. Along with this, the operating income and ordinary income declined year-on-year. As the slide indicates, the net sales decreased by 3.3% to JPY 136.9 billion. Operating income declined by 18.2% to JPY 12 billion. Ordinary income decreased by 11.6% to JPY 11.3 billion, net income increased by 10.2% to JPY 6.7 billion. Sales and profit decreased, however, net sales increased year-on-year.

Please turn to Page 3. From here, I will explain the performance of each segment. The first is Vinyl Acetate segment. The poval resin, the sales volume declined due to stagnant global demand. Optical-use poval film, due to the effect of an LCD panel inventory adjustment continuing from the second half of last year, shipments stayed level with the previous year. Water-soluble PVA film, the sales steadily expanded for use in unit dose detergent packets. PVB film, mainly the sales for automotive applications remained weak. EVAL increased sales for food packaging applications, while sales for gas tank applications were weak due to a decline in the number of vehicles produced. Because of these reasons, for the first quarter, sales and profit declined year-on-year.

Please turn to Page 4. Isoprene segment. For the Q1, both sales and profit declined. Shipments of fine chemicals declined, especially those in China. The sales of elastomer struggled in Asia, but U.S. demand remained firm. For GENESTAR, sales volume increased due to anticipatory demand in China for electric and electronic devices. Demand for connectors for automotive devices remained favorable.

Please turn to Page 5. Functional material, Q1, both sales and profit grew slightly. Methacrylate, although sales volume of resins and sheets increased, the business was affected by worsening market conditions. Medical, sales were steady due to anticipatory demand in export for dental materials in the first quarter. But demand is decelerating hit by coronavirus, COVID-19, as many dental clinics have closed mainly across the U.S. and Europe. Calgon carbon. Demand of drinking water application remained steady in North America, but sales in Europe were affected by sluggish demand.

In the Carbon Materials business, sales of high value-added products increased.

Please turn to Page 6, fibers and textiles. In Q1, profit and sales decreased. For CLARINO, sales decreased due to stagnant demand in Asia and Europe. Fibers and industrial materials. KURALON for cement reinforcement use remained weak. Sales of products used in reinforcing rubber were negatively affected by a decline in vehicle production, while Vectran sales resulted firm. Consumer goods and materials. Sales of KURAFLEX were weak as demand for cosmetic and automotive applications fell despite an increase in sales for mask-related applications.

Please refer to Page 7. This slide is about sales and operating income by segment of Q1 of FY 2020 actual in comparison with FY '19 result. This is for your reference.

Please turn to Page 8. This shows the difference in operating income of Q1 FY 2020 and FY '19. Sales and capacity utilization. Water-soluble poval filament GENESTAR year-on-year grew its sales. However, poval resin, fine chemical, KURALON and such businesses had weaker demand by JPY 1 billion. Terms of trade, we enjoyed the falling prices of raw material price, however, the appreciation of yen against the euro had gone. In total, there were almost no impact.

Expenses and others, optical-use poval film, water-soluble PVA film had a new line started operation for depreciation and amortization, there was an increase. Totally, it increased by JPY 1.6 billion.

Please refer to Page 9. Here, we show the asset section on the balance sheet compared with the end of last year. The current assets, along with the sales decline, notes and accounts receivable trade, declined by JPY 2.8 billion. Cash and cash deposits increased by JPY 4.8 billion. Inventory increased by JPY 4.5 billion. In total, it increased by JPY 7.4 billion. Noncurrent asset was minus JPY 5.5 billion. This is due to the amortization of intangible fixed asset, minus JPY 3.7 billion.

Please turn to Page 10. This is the liability and net assets on the balance sheet. Current liabilities decreased by JPY 11 billion. This was by issuing the commercial papers, which was increased by JPY 26 billion and the payment of settlement for the fire incident that occurred in the U.S. plant was recognized as accrued expense, has decreased by JPY 29.4 billion. And the accounts payable for the equipment decreased. By these reasons, the current liabilities decreased. The noncurrent liability increased by JPY 21.7 billion. This comes from the increase of JPY 23.4 billion for the long-term loans payable. And net asset decreased by JPY 6.9 billion according to the foreign currency translation adjustment. And in total, it was decreased by JPY 8.7 billion.

Please turn to Page 11. Here, we explain about the group's initiatives to counter COVID-19 and business forecast. We place utmost priority on ensuring safety and health of group employees, their families and all other stakeholders. And as a material company, support supply chains by stable provision of our products. In order to play these roles, we are on the endeavor to continue on with our business. With a slower demand, we have a plan to make adjustment for production in several businesses. But at this point, there are no areas which are suspending operation at the request of national governments and local governments.

We are already seeing the impact of COVID-19 to our Q1 results. We consider the impact to become more larger in the second quarter onwards.

For the first half, we have factored in all elements that could be foreseen and revised over our forecast, as shown on the slide. The net sales compared from the initial plan, JPY 30 billion decreased to JPY 260 billion, operating income, JPY 13 billion and declined to JPY 15 billion.

Regarding the full year forecast. Since the calculation of the impact is difficult, we are going to be withdrawing the forecast already announced in February and leave it as blank. We will officially make announcement as soon as it is determined.

Please turn to Page 12. This slide is the revised forecast for first half of FY 2020 compared with FY '19 results. Please use it as your reference.

Please turn to Page 13. Here, we have revised forecast of FY 2020 for first half in comparison with the initial plan.

Please refer to Page 14. This is also for your reference. It has the revised FY 2020 forecast for net sales per segment in comparison with FY '19 results.

Please turn to Page 15. This is also for your reference. It has the revised forecast for FY 2020 by income of segments in comparison with FY 2019 results.

Please turn to Page 16. This has the revised forecast of FY 2020 by net sales of segments compared with the initial plan.

Lastly, please turn to Page 17. This is also for your reference. It has the revised forecast of operating income by segment for FY 2020 compared with initial plan.

With that, I would like to conclude my explanation. Thank you very much.

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