Kuraray Co Ltd

TSE:3405

Earnings Call Transcript 2020-Q2

[Masaaki Ito, executive]

Ladies and gentlemen, thank you very much for attending and viewing our first half earnings presentation despite your very busy schedule. First of all, I would like to start by extending my great sympathy to those hit by the torrential rain, a record rainfall in Japan, and sincerely pray that people hit by this disaster will be able to recover their daily lives as early as possible. And taking this opportunity, I would like to extend a word of gratefulness and respect to those people who are working at a medical frontline and other people relating. For the first half earnings presentation for Kuraray Co., Ltd., as a measure to counter COVID-19, we are making the presentation through the camera. Without ado, we would like to start our presentation for our first half earnings.

Please go to Page 2. For the first half of 2020, hit by the expansion of the COVID-19, the world economy has been decelerating, and many businesses have been suffering demand and sales decline. As indicated, as a result, the net sales in all income declined significantly compared to the previous year same term. The basis calculation for foreign exchange and raw materials and fuels are described at the bottom of the slide. Please go to Page 3. In this slide, this is explaining the initiative done in the first half of fiscal year 2020. For pursuing competitive superiority, optical-use poval film began operations of a wide-width film line at the Kurashiki Plant. For water-soluble poval film, expanded production capacity began operations at a new U.S. plant and decided to construct a new plant in Poland in order to respond to the growing demand in the EU. For EVAL, we are still continuing study for a new plant. Calgon Carbon. In order to respond to the expanding demand worldwide for activated carbon, we have decided to create a new line. This is a capability increase of 25,000 ton per year, and we scheduled to start operation at the end of 2022. Regarding KURAFLEX. Currently, we changed the meltblown nonwoven fabric facilities, which are under construction, also to produce for mask filters, and for expanding new businesses field.

Regarding VECSTAR, accelerated sales with an eye toward 5G proliferation and considered introducing mass production facilities. For PLANTIC, completed construction of resin production line in U.S. with plans to begin production and supply from the second half. And for enhancing comprehensive strengths of the Kuraray Group, it is just as shown on the slide. Please refer to Page 4. In this slide, it indicates a forecast for FY 2020. For first quarter business result, we have been indicating that business forecast for second half was undecided. And this time, considering the actual result of first half and thinking about the environment today, we have been summarizing the forecast as the slide shows. And for the calculation base, the foreign exchange and domestic naphtha price has been changed as shown on the slide.

Please go to Page 5. This is about FY 2020 shareholder returns. As indicated on the slide, the payment is going to be JPY 21 per share as planned. For year-end dividend, because we assume business results declined significantly, we would like to change the dividend payment to JPY 19 from JPY 21 from the initial plan, and the dividend for the year would be JPY 40 per share. And based on the full year forecast, the payout ratio will be 105.8%.

Please go to Page 6. This year marks the very last year of our midterm management plan throughout 2020. We are scheduling to create a new midterm management plan starting 2021. However, with the worldwide spread of COVID-19, the world economy is unseeable and business environment is difficult to see through. Therefore, the [ joining ] up of new midterm management plan and announcement is going to be postponed for a year. For new midterm management plan, it is going to be starting at 2022 and last until 2026, and it is going to be a 5-year plan. 2026 is a memorable year for ourselves. This is the 100 years anniversary of Kuraray Co. And it is also the very last year for Kuraray Vision 2026. For 2021, we would like to create a management plan for the single year. And for the midterm management plan, we would like to announce this when the appropriate time comes.

[Keiji Taga, executive]

Now next, I would like to explain about the FY 2020 first half earnings result. This is going to be explained by myself, Taga. I would like you to go to Page 8.

Here, I would like to explain by segments. First of all, we would like to start from Vinyl Acetate segment. The poval resin sales volume declined due to stagnant global demand. For optical-use poval film, although LCD panel manufacturers reduced inventory adjustments, shipments stayed leveled with the previous year due to effects from COVID-19. Water-soluble PVA film, sales continue to expand for use in unit dose detergent packets. PVB films, sales were weak for construction and automotive applications. And EVAL. Although sales for gas tank applications were heavily impacted by a decline in the number of vehicles produced, sales volume increased for food packaging applications. By this, net sales and operating income went down compared to the previous year. Please go to Page 9. This is the Isoprene segment. The segment also declined net sales and operating income compared to the previous year same term. Sales on isoprene chemicals and SEPTON were affected by slowing demand mainly in China and the rest of Asia.

GENESTAR. Sales for automotive applications were affected by the decline in vehicle production, while sales remained steady for electric and electronic device applications. Please go to Page 10. For Functional Materials segment, the net sales and operating income went down year-on-year. Methacrylate. The overall business was affected by worsening market conditions despite an increase in demand for spatter-blocking barrier panels. Medical. The dental materials business struggled, especially in the United States and Europe as a result of an increase in dental clinic closures in response to spreading infections. Calgon Carbon. Under the COVID-19, sales was steady even during the situation because this business' products underpin people's daily lives. In the Carbon Materials business, high value-added product sales increased.

With Ito already explaining, with expanding demand for high-performance activated carbon, we decided to expand the facilities at the U.S. plant of Calgon Carbon. Please go to Page 11. This is Fibers and Textiles segment. The net sales and operating income declined year-on-year. For CLARINO, sales volume decreased due to receding demand in Asia and Europe. For KURALON, sales for cement reinforcement use remained weak. Sales of products used in reinforcing rubber were negatively affected by a decline in the number of vehicles produced. Consumer goods and materials. Sales of KURAFLEX were weak as demand for cosmetic and automotive applications stagnated despite an increase in the sales for mask-related applications. Please go to Page 12. This slide indicates sales and operating income by segment. It is a comparison with the previous year. Please refer as your reference.

Please go to Page 13. In this slide, this is an explanation of cash flow for FY 2020 first half. The operating cash flow is JPY 12.1 billion. Investing cash flow is minus JPY 48.2 billion. Free cash flow is minus JPY 36.1 billion. For the first half of FY 2020, there were no expenses for merger and acquisition. The CapEx, acceptance basis, we have constructed new plant in Thailand. However, compared with the previous year, it was minus JPY 4 billion to JPY 40.8 billion. The depreciation and amortization of JPY 2.6 billion to JPY 31 billion. R&D expenses, down JPY 0.3 billion to JPY 10.3 billion. Please refer to Page 14. In this slide, this is the explanation of factors affecting the change in operating income. In the operating income, in the first half of 2020 compared to FY 2019, it was down by JPY 8.3 billion, and the reason is as follows. Factor of sales volume is positive JPY 1 billion with the start of operation of the new line for optical-use poval film and water-soluble PVA film.

For utilization, as already explained at the segment part, many businesses experienced lower demand, and sales and production decreased. And as a result, in total, it was minus JPY 10 billion. Next, for selling price, product mix and raw materials and fuel. The fuel pricing has been low in price, which was plus JPY 3 billion. And to that, the selling price product mix had been minus JPY 1.5 billion. For foreign exchange, mainly impacted by the weak euro, this was minus JPY 0.5 billion. For depreciation and amortization, mainly from the optical-use poval film and water-soluble PVA film, this is related to the starting operation of the new line, which was the decrease of JPY 2.6 billion. Expense and others declined by JPY 2.3 billion, which became a positive factor to operating income.

Please go to Page 15. This slide is indicating the asset part of the balance sheet and a comparison with June end and December end. The current asset increased by JPY 93 billion. Although the inventory decreased, we increased cash at hand. And by that, we have been increasing long-term loans payable, and issued commercial papers and bonds payable. This resulted to cash and cash deposit of plus JPY 117.5 billion. The noncurrent asset was decreased by JPY 0.4 billion. With that, the total asset became JPY 92.6 billion increase. Please go to Page 16. This slide indicates the liabilities and net assets of the balance sheet. Current liabilities increased by issuance of the commercial paper and accrued expense decreased, which was plus JPY 0.5 billion. For noncurrent liabilities, it increased by JPY 98.4 billion. The reason was already explained at the asset part. This was increase of the long-term loan payable and issuance of the bond payable. The net assets, mainly the reduce of the foreign currency translation adjustment, it reduced by JPY 6.3 billion. By this, the first half of 2020 equity ratio is 47.7% and compared to fiscal year 2019, it reduced by 5.3%. However, the healthiness of our financial position is maintained. Please go to Page 17. In this slide, we are indicating the forecast for FY 2020. The net sales and incomes are already explained by Ito. The EPS is based on JPY 13 billion, which is JPY 37.8. For dividend, based on this net income, we are scheduling to pay JPY 40 per year. For capital expenditure, decision basis, as already mentioned, the first half main initiative, the water-soluble PVA film new plant has been built in Poland, and we have increased capacity for Calgon Carbon new line, and we are scheduling JPY 90 billion for this.

For acceptance basis CapEx, the water-soluble PVA new line capacity increase and the Isoprene [ Thai ] new plant construction, by this we are expecting JPY 95 billion. For depreciation and amortization, it is plus JPY 3.5 billion to JPY 61.7 billion, and R&D expenses is down JPY 0.2 billion to JPY 21 billion.

Please go to Page 18. This slide indicates the full year forecast for FY 2020 and change affecting operating income based on FY '19 actual results. Factor of sales volume, we expect this to be positive JPY 2 billion by the new capacity increase for optical-use poval film and water-soluble PVA film. For utilization, for both first half and second half, many of the businesses have been decreasing sales and in accordance we have been going through the production adjustment and having deterioration in utilization, which is minus JPY 26.5 billion.

For selling price, product mix, raw materials and fuel. With the drop of raw material fuel prices, we are expecting plus JPY 9.5 billion. However, the selling price and product mix is having a negative impact of JPY 6.5 billion. For foreign exchange, both dollar and euro is weaker to the yen, and we expect minus JPY 1 billion. For depreciation and amortization, for optical-use poval film and water-soluble PVA film, we are starting operation. And here, it is increased, which is going to be the decrease of JPY 3.5 billion.

For expenses and others, by postponing nonurgent expenses, we are expecting an increase of JPY 4.8 billion. Please go to Page 19. By reference, the revised full year forecast for FY 2020 is indicated in comparison with FY 2019 actual and shown by first half and second half. And please go to Page 20. As referenced, this is a forecast of net sales by segment in comparison with previous year, after the revisal of the FY 2020.

Please go to Page 21. This is also for your reference. This is a forecast of operating income by segment after revisal and comparison with the previous year. I would like to conclude my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]