Kuraray Co Ltd

TSE:3405

Earnings Call Transcript 2021-Q2

[Hitoshi Kawahara, executive]

Thank you very much to all of you for joining us today in Kuraray Group's financial results briefing. I'm President and Representative Director of Kuraray, Hitoshi Kawahara. Due to the ongoing impact of the COVID-19, please allow us to be holding this briefing again online. It has been over half a year since I assumed the post of President. And since then, I have had many dialogues and discussions with employees at each of our domestic and overseas spaces through the use of web conferencing, [ which is a new standard ] in the management of our company under this COVID-19 situation. And in that experience, I have been repeatedly reminded of the vitality and the potential of people working in this -- Kuraray Group, have been immensely encouraged by leading the group. With that, I'm here determined and committed to gather all the strengths that we have to create a Kuraray Group that thrives with its full vitality and creativity. We very much appreciate your continuous interest in what await ahead of us. Now let me share with all of you a summary of our financial results for the second quarter of fiscal year 2021. This is Page 2. Here in this table are the results of the first half of fiscal year 2021. Economic recovery driven by the U.S. and China market led to increased demand and sales in many of our businesses. As a result, as shown on this page, net sales increased by JPY 40.3 billion year-on-year to JPY 302.3 billion. Operating income increased by JPY 10.8 billion to JPY 30.4 billion. And net income increased by JPY 2.5 billion to JPY 11.7 billion, resulting in a significant increase in both sales and profit. The actual numbers for foreign exchanges and raw fuel are shown in the table below. Page 3. This slide is representing a company-wide operating income bridge. A breakdown of factors affected the change in operating income. The volume difference was the factor, brought JPY 18.1 billion increase in profit, as sales increased and capacity utilization improved in many businesses. As a result of all these, overall profit increased by JPY 10.8 billion, offsetting the increase in raw fuel costs and logistic costs. This is Page 4. Fiscal year 2021 has a single-year management plan. And it is a year that connects the previous midterm management plan which run up to 2020 and the next midterm management plan starting 2022. This slide is highlighting the key management issues for 2021 and progress we have made so far. As for the capital investment set in the previous midterm management plan, we are making steady progress toward its launch with thorough health and safety management, though having this difficult situation with COVID-19. In the environmental solutions business, we integrated the Calgon Carbon division and Carbon Materials division, main product of both being activated carbon; and managed to establish a unified management system. Through the integrated management, we will further accelerate our initiatives to maximize synergies. The decision on the new EVAL plant will be made at an early stage of the next midterm business plan formulation, which will start next year. The expansion of copper-clad laminate Vecstar FCCL will be carried out in line with the advancement of 5G market penetration. In promoting our digital strategy, we launched the global digital transformation promotion team on July 1. This team will be responsible for developing and driving a -- comprehensive global digital strategies to enhance the unification and execution speed of the company's digital strategies. Now we are moving on to Page 5. In light of the first half results and the current business environment, we have revised our full year earnings forecast for fiscal year 2021. Net sales are expected to increase by JPY 40 billion from the previous forecast to JPY 610 billion, operating income by JPY 11 billion to JPY 66 billion and net income by JPY 3 billion to JPY 33 billion. As reported in the results for the first half part, sales have been growing in many of our core businesses. Demand is expected to remain strong in the second half of the fiscal year, and we expect to increase both sales and profits to offset rising raw fuel costs and logistic costs. Page 6, please. This slide shows the trend in sales and operating income from fiscal year 2017 to 2021. Although the tough business environment continued throughout fiscal year 2019 and '20, we expect both net sales and operating income to recover significantly into fiscal year 2021. And as a result of it, we expect net sales to exceed the 2018 level, JPY 603 billion and operating income of JPY 65.8 billion. This means that the net sales be the record high. Please see Page 7. For fiscal year 2021, we plan to pay an interim dividend of JPY 20 per share and a year-end dividend of JPY 20 per share, in line with the policy of the previous midterm plan, total return ratio of 35% or more of -- and dividend of JPY 40 or more per share. Assuming the full year net income forecast of JPY 33.0 billion as mentioned earlier, the dividend payout ratio will be 41.7%. Now Page 8. In this slide, I would like to introduce some of our initiatives for the next midterm management plan, which is currently being formulated. In this section, innovation, sustainability and people are listed as important themes that the Kuraray Group should address from across organizational and global perspectives. With regard to innovation, we will build a system in which members with various skills and experiences in R&D, production and technology, marketing, et cetera will work globally beyond the boundaries of their organizations to create new businesses on a continuous basis. In our sustainability efforts, the Kuraray Group aims to become carbon neutral by 2050. Specific methods for reducing greenhouse gases and interim targets will be announced at a later date. At the same time, we'd like to enhance our products and services that contribute to the improvement of the natural and living environment and present them in an easy-to-understand form in the near future. Under the theme of people, we will utilize a diverse range of human resources on a global scale to create a company that is a great place to work. We will foster a corporate culture that boldly takes on challenges without fear of making a few failures on a way to progress. As a foundation to support our various measures, we are working to establish a competitive advantage through the use of digital technologies. With regard to digital transformation, the global digital transformation promotion team, which was launched on July 1, will take the lead in accelerating process reforms and innovation creation. This concludes my summary of the financial results for the second quarter of fiscal 2021 and the initiatives to be incorporated into the next midterm management plan.

[Keiji Taga, executive]

From here, I, Keiji Taga, will explain the details of the financial results. This is Page 10. This slide shows the second quarter results for net sales and operating income for each segment compared to the same period last year. As explained by Mr. Kawahara earlier, as a result of growing demand and increased sales, many of our business achieved year-on-year increases in both sales and profit. Please see Page 11. The following is the description of the business situation by segment. The first is the Vinyl Acetate segment. Both sales and profit increased in this segment compared to the previous year. As for the sales status of each business, please refer to the comments at the top right of this page. Operating income increased by JPY 7.7 billion from the previous year. The reason for this are as follows: Volume brought JPY 12.0 billion increase in profit, with increase in sales in all businesses. As a result of price negotiations, selling price, product mix brought JPY 3.0 billion profit increase. In raw materials, fuel and exchange rate, raw fuel prices remained at high levels, resulting in a profit decline of JPY 6.6 billion. Others was a negative factor of JPY 0.7 billion mainly due to an increase in logistic costs. This is Page 12. In the Isoprene segment, sales and profits increased in the second quarter compared to the previous year. Please refer to the comments in the top right table for the sales status of each business. Operating income increased by JPY 1.1 billion. Volume was a factor, contributing to an increase of JPY 2.1 billion due to an increase in sales volume. Selling price, product mix brought JPY 0.3 billion increase. In raw materials, fuel and exchange rate, high raw material and fuel prices continued, hence resulting -- resulted in the decline in profits of JPY 1.1 billion. As for others, though depreciation expenses dropped -- an increase in logistics expenses, resulting in bringing the profit decrease of JPY 0.2 billion. Page 13. In the Functional Materials segment, sales and profits increased in the second quarter compared with the same period of the previous fiscal year. The status of sales for each business is as shown in the comments at the top right. Operating income increased by JPY 2.0 billion. Volume has given an increase in profit of JPY 2.8 billion, with increased sales in each business segment. Selling price, product mix has given an increase of JPY 0.4 billion. Raw materials, fuels and ForEx brought a negative impact of JPY 0.6 billion in profit. In terms of others, there was a decrease in amortization of goodwill, but with the increase in logistics costs, there was an overall negative JPY 0.7 billion impact to profit. Please see Page 14. In the Fibers and Textiles segment, sales and profits increased in the second quarter compared with the same period of the previous year. Please refer to the comments listed in the top table for the status of sales in each business. Operating income increased by JPY 0.3 billion. In terms of volume, there was positive JPY 1.3 billion impact as the sales of each business grew. Selling price, product mix has contributed to be giving minus JPY 0.4 billion impact to profit. This is what -- the product mix change that happened. Raw materials, fuels and ForEx gave a minus JPY 0.2 billion impact. And as for others, a negative impact of JPY 0.4 billion was given to profit with the increase in logistic costs. Please see Page 15. This slide shows the cash flow and key indicators for the first half of fiscal year 2021. Operating cash flow was JPY 21.1 billion. Investment cash flow was minus JPY 37.8 billion, and free cash flow was minus JPY 16.7 billion. On an acceptance basis, capital investment decreased by JPY 6.0 billion year-on-year to JPY 34.8 billion while having the construction of a new plant in Thailand. Depreciation and amortization expenses decreased by JPY 2.2 billion to JPY 28.8 billion. Research and development expenses were JPY 10.3 billion, the same amount as the same period of the previous year. Please see Page 16. This slide shows the assets section of the balance sheet compared to the end of last year. Current assets decreased by JPY 28.1 billion in total as trade receivables increased by approximately JPY 12.0 billion due to the increase in sales, but cash and deposits decreased by approximately JPY 42.0 billion due to the redemption of commercial paper. Fixed assets increased by JPY 22.4 billion. This was due to the increase coming from the capital investment, plus the increase in the valuation of fixed assets of overseas subsidiaries due to the depreciation of the yen. This is Page 17. This slide shows the liabilities and net assets section of the balance sheet. Total liabilities decreased by JPY 36.1 billion. In addition to the redemption of commercial paper and corporate bonds, the main factor was the payment of a settlement for a fire incident at our U.S. subsidiary. Net assets increased by JPY 30.4 billion. As a result, the capital adequacy ratio increased by 3 points from the end of fiscal year 2020 to 50.5%. Page 18. In this slide, we will explain our full year earnings forecast for fiscal year 2021. Net sales and profits are as Mr. Kawahara explained earlier. Net income per share will be JPY 95.93 based on the JPY 33 billion. The company plans to pay an annual dividend of JPY 40 per share. The capital investment that's currently decided is JPY 50 billion. On an acceptance basis, we expect to receive JPY 80.0 billion through the expansion of activated carbon production facilities at Calgon Carbon in U.S. and the construction of a new isoprene plant in Thailand. Depreciation and amortization is expected to drop by JPY 4.5 billion to JPY 58.0 billion. R&D expenses are expected to increase by JPY 0.4 billion to JPY 21.0 billion. Please see Page 19. This slide shows the revised forecast that's compared with the previous year's results and the previous forecast. Since we did not revise our full year forecast when we announced our first quarter results in May, the previous forecast is the same as the initial forecast. Compared to the results of the previous fiscal year, we're expecting sales increase of more than 10% in most segments, and we're expecting profits to increase in all segments. In comparison with the previous forecast too, sales and profits will be more in almost all segments. Now Page 20. This slide shows the breakdown of which factor is affecting how much the operating income when compared to fiscal year 2020. The volume will push up the operating income by JPY 29.8 billion due to the sales continuing to stay strong from the first half and onwards. Selling price, product mix factor will give another positive JPY 15.9 billion impact, where the price increase penetrates through the market more. These factors will compensate the negative impacts which will be given by the increases in raw fuel and logistics costs, resulting in an overall profit increase of JPY 21.7 billion. Page 21. This slide is for your reference. Operating income bridge analysis is provided for each segment. Page 22. This slide shows a comparison between the revised forecast for fiscal year 2021 and the actual results of fiscal year 2020. This is Page 23, another page for your reference. Here we are comparing the net sales revised forecast for 2021 and 2020 actuals for each segment. The last page is this Page 24. Here, each segment's operating income revised forecast for 2021 is compared with the results of the previous year. Thank you very much for your attention. This concludes our presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]