Kuraray Co Ltd

TSE:3405

Earnings Call Transcript 2022-Q2

[Hitoshi Kawahara, executive]

Good afternoon, ladies and gentlemen. Thank you for taking time out of your busy schedule today to participate in Kuraray Group's earnings presentation. I am President Kawahara. I will now give an overview of the financial result for the second quarter of fiscal year 2022. In the first half of fiscal year 2022, demand remained strong in many of our businesses, as restriction on economic activities eased in many countries. Although raw materials and fuel prices and the logistics cost rose, we were able to achieve significant increase in both sales and income as a result of our cost cutting efforts and sales price revisions.

As a result, as shown on the slide that sales increased JPY 55.7 billion year-on-year to JPY 358 billion, operating income increased JPY 7.7 billion to JPY 38.1 billion and net income increased JPY 12.5 billion to JPY 24.2 billion. Net sales reached a record high for the first half of the fiscal year, and all incomes were at record high levels. The result for exchange rates and raw materials and fuels are shown in the material.

Please turn to Page 3. This slide shows a company-wide summary of factors affecting change in the operating income. While raw materials and fuel exchange rate was a factor in the JPY 27.2 billion decrease in the operating income due to soaring raw material and fuel prices, selling price and product mix was a factor in JPY 31.9 billion increase in operating income as a result of selling price revisions in many businesses. In addition, others was a factor of JPY 2.8 billion, and profit increased partly due to the effect of the inventory valuations gain or loss, despite the increase in logistics cost and expenses. Please turn to Page 4. This slide shows the growth investment set forth in the medium-term management plan PASSION 2026 and the progress of major project under execution. In the area of optical-use poval film, we decided and announced in May 2022 to expand production facilities in our plant in Kurashiki City, Okayama Prefecture in response to the expected expansions of LCD panel area in the future as a result of the trend towards larger TV sizes. The new facility is scheduled to start operations in mid-2024.

In addition, major capital investments currently under construction are proceeding largely according to the plan. Isoprene Thailand facility, the Polish production facilities for water soluble PVOH film and Calgon Carbon reactivated carbon production facilities in Belgium are scheduled to start operation this fiscal year. The Calgon Carbon activated carbon production facilities in the U.S. are scheduled to start operations in the first quarter of 2023. We will firmly launch these facilities, which are necessary to support Kuraray's growth and contribute to earnings as soon as possible.

Page 5, please. This slide shows the result for the first half of fiscal year 2022 of the financial KPIs set forth in the medium-term management plan. The results for each KPI for the first half of fiscal year 2022 were ROIC of 6.5%, EBITDA of JPY 69.3 billion and ROE of 8.1%. We will continue our effort to improve capital efficiency and strengthen our cash generation capability.

Please turn to Page 6. We have revised our full year forecast in light of the first half results and the current business environment. Net sales are revised upward to JPY 740 billion, up JPY 60 billion from the previous forecast, taking into account progress in selling price revisions and the impact of foreign exchange rates, among other factors.

Demand was firm in the first half of the year, but in the second half of the year, the prolonged invasions of Ukraine by Russia and the resulting rise in energy prices as well as accelerating inflation are raising concerns of the economic recessions in some of the regions. In light of these circumstances, the previous forecast for each income remained unchanged.

Page 7, please. The shareholder return policy in the midterm management plan is total return ratio of 35% or more, dividend of JPY 40 or more per share and flexible implementations of share buybacks. Based on this policy, we plan to pay an interim and year-end dividend of JPY 21 per share or an annual dividend of JPY 42 per share for fiscal year 2022.

With regard to share buybacks, we repurchased JPY 10 billion and approximately 9.4 million shares from February 10 to June 23, 2022. Based on the assumptions of JPY 45 billion in net income in our full year forecast mentioned earlier, we expect the total return ratio of 53.5%.

I have now explained the financial result for the second quarter of fiscal year 2022. Next, Taga, Director and Managing Executive Officer, will explain the details of the financial results.

[Keiji Taga, executive]

I'm Taga. I will now explain the details of the financial results. Please refer to Page 9 of the slide. This slide shows the first half result of the net sales and operating income of each segment in comparison with the same period of the previous year.

As Kawahara explained earlier, we focused on cost reductions and selling price revisions, resulting in year-on-year increases in both net sales and operating income in many businesses.

Please turn to Page 10. From here, I will explain the business situation by segment. First is the Vinyl Acetate segment. In this segment, both sales and income increased compared to the same period of the previous year. Please refer to the comment in the upper right for the sales situations of each business.

Operating income increased by JPY 8.4 billion over the previous year. Due to higher raw material and fuel prices, raw materials and fuel and exchange rate pushed down the income by JPY 19 billion. On the other hand, selling price and product mix increased income by JPY 22.9 billion due to price negotiation resulting in an overall increase in segment income.

Please refer to Page 11. Next is the Isoprene segment. Sales increased, but income decreased in this segment compared to the previous year. Please refer to the comment in the upper right for the sales situations of each business.

Operating income decreased by JPY 0.8 billion. Due to progress in price negotiations, the total of sales price and product mix was a factor for an increase of JPY 3.1 billion. On the other hand, raw materials and fuel exchange rate was a factor for a decrease of JPY 2.7 billion due to the impact of higher raw materials and fuel prices. In addition, temporary difficulties in procuring raw materials and logistics disruptions contributed to a JPY 0.9 billion decrease in volume.

Please turn to Page 12. In the Functional Materials segment, both sales and income increased in the first half compared to the same period of the previous year. The sales situations of each business is shown in the comments. Raw materials and fuel exchange rate pushed down the income by JPY 3.7 billion.

On the other hand, selling price and product mix was a factor of increase by JPY 4.4 billion due to price negotiations, including the increase in raw materials and fuel prices in the previous year. As a result, operating income increased by JPY 0.4 billion.

Page 13, please. Next is the Fibers and Textiles segment. This segment also posted year-on-year increases in both sales and income. Please refer to the comments listed for the sales situations of each business. Operating income increased by JPY 1.6 billion. Raw materials and fuel exchange rate was a factor of decline in income by JPY 1.3 billion. Selling price and product mix pushed up income by JPY 1.6 billion due partly to increased sales of high value-added products, such as Vectran.

Please go to Page 14. In this slide, I will explain cash flow, the key data for the first half of fiscal year 2022. Operating cash flow was JPY 21.4 billion, investing cash flow was negative JPY 30.8 billion, and free cash flow was negative JPY 9.4 billion.

Capital expenditure on an acceptance basis was JPY 33.9 billion, down JPY 1 billion year-over-year. Depreciation and amortization expenses increased JPY 2.4 billion to JPY 31.2 billion. R&D expenses increased JPY 0.6 billion to JPY 10.9 billion.

Please go to Page 15. This slide compares the asset section of the balance sheet with that of the end of last year. Current assets increased by JPY 31 billion. This was due to a JPY 34.7 billion decrease in cash and deposit and a JPY 16.2 billion increase in trade receivables due to higher sales and weaker yen as well as an increase of JPY 45.5 billion in inventories due to foreign exchange and high raw materials and fuel prices

Noncurrent assets increased by JPY 63.5 billion due to an increase from capital investment and the rise in the value of noncurrent assets of overseas subsidiaries due to the weaker yen.

Please turn to Page 16. This slide shows the liabilities and net asset section of the balance sheet. Liabilities increased JPY 16.4 billion as a result of a JPY 13.4 billion increase in notes and accounts payable trade and the issuance of commercial paper and bonds totaling JPY 30 billion, despite the decrease of JPY 40.3 billion mainly due to repayment of long-term borrowings.

Net assets increased JPY 78.1 billion. As a result, the equity ratio increased by 2.3% from the end of fiscal year 2021 to 53.7%.

Page 17, please. On this slide, I would like to explain our full year forecast for fiscal year 2022. Net sales and each income are as Kawahara mentioned earlier. Earnings per share will be JPY 134.45 based on JPY 45 billion in net income. The annual dividend is expected to be JPY 42 per share.

Capital expenditures on a decision basis will be JPY 80 billion. Capital expenditure on an acceptance basis is expected to be JPY 84 billion due to expansions of Calgon Carbon activated carbon production facilities in the U.S. and the construction of a new isoprene plant in Thailand, et cetera.

Depreciation and amortization expenses are expected to increase by JPY 4 billion to JPY 63 billion due to the effect of foreign exchange rates. R&D expenses are expected to increase by JPY 2.2 billion to JPY 23 billion.

Please go to Page 18. This slide shows the revised forecast in comparison with the previous year's result and the previous forecast. Compared to the previous year's actual result on the previous forecast, we plan to increase net sales in many segments. The overall operating income forecast has been left unchanged, although there is some strength and weakness in each segment, taking into account the result of the first half of the fiscal year as well as the recent rise in energy prices and concerns about an economic slowdown.

Please turn to Page 19. This slide shows the factors affecting the change in the operating income forecast. In addition to a JPY 58.2 billion decrease in raw materials and fuel exchange rate, others will be a JPY 0.2 billion decrease due to soaring logistics costs and other factors.

On the other hand, selling price and product mix will be a factor of JPY 62.8 billion increase due to price revisions that are more widespread than expected at the beginning of the year. As a result, we expect a total increase in income of JPY 5.7 billion.

From Page 20 onwards, you will find factors affecting the change in operating income by segment and detailed numerical information for the revised forecast. Please refer to them for reference.

This concludes my explanation. Thank you very much.