Kuraray Co Ltd

TSE:3405

Earnings Call Transcript 2018-Q3

[Keiji Taga, executive]

Thank you for attending Kuraray telephone conference. I am Taga, Senior Executive Officer responsible for Corporate Management Planning Office. I would like to start the FY '18 third quarter earnings presentation. Please turn to Page 2. This is the result of the third quarter of the fiscal year 2018. Net sales of JPY 449.9 billion, up by 18.5% year-on-year. Operating income is JPY 57.2 billion, down by 2%. Ordinary income is JPY 54.8 billion, down by 4%. Net income is JPY 35.1 billion, down by 6.5%. The result is increased sales but decreased profit year-on-year.

With the addition of Calgon Carbon to the consolidated figure and increased sales of many businesses, we increased revenue year-on-year. However, because of increase of raw materials and fuel costs, impact by the delay in construction to expand capacity at EVAL factory and the incident happened in May in the United States, the operating profit decreased.

Following the change in the method used for evaluating inventories through the first-in, first-out, figures for the third quarter of fiscal 2017 have been restated. Please turn to Page 3. I'm going over the segment-by-segment business situation. First, Vinyl Acetate segment made increased revenue and decreased profit year-on-year. From the first quarter of FY '18, operating income is negatively affected by the changes in the depreciation method and the estimated useful lives used for the tangible fixed assets as well as the method of allocating corporate expenses. We made a downward revision of operating income by minus JPY 500 million from the full term plan of the financial result announcement of the second quarter because of impact of the U.S. EVAL factory's regular maintenance and the incident.

When the company made the second half plan, we've recorded JPY 1 billion decrease in operating income. However, the longer delay of the start of production of main lines, which completed capacity increase expansion construction, we added minus JPY 2 billion as a negative impact. Therefore, in the second half total, we expect a decrease in operating income by JPY 3 billion. On the other hand, optical-use poval film, PVA resin and PVB film's positive impact are also expected. In total, the level of downward revision is minus JPY 500 million. Please turn to Page 4. Isoprene segment made increase in revenue and a slight decrease in operating income. We made a small downward revision of full term net sales plan of the financial results announcement of the second quarter. Sales of fine chemicals, SEPTON, and the liquid rubber all increased, but raw material and fuel cost increase made a negative impact. Sales of GENESTAR increased, particularly for automobile use and connectors. However, raw material and fuel cost increase made a negative impact also. Please turn to Page 5. For the Functional Materials segment, both net sales and operating profit increased year-on-year because of inclusion of result of Calgon Carbon. Both net sales and operating income numbers were revised upward from the full term net sales plan of the financial results announcement of the second quarter because we expect the continuation of good market condition of methacrylic resin and price adjustment.

Methacrylic resin also are going well with a good market condition and expansion of high value-added product sales. For medical, sales of zirconia-based dental material products expanded. For Carbon Materials, sales of general purpose application decreased, but Calgon Carbon sales increased mainly in the United States. Please turn to Page 6. Fibers and Textiles segment made decreased net sales and operating income year-on-year. We also made a downward revision of net sales plan from the full term net sales plan of the financial result announcement of the second quarter. Shipment of CLARINO for use in sports shoes declined, but sales for luxury item continued to expand. Raw material and fuel cost increase negatively impacted KURALON. On the other hand consumer goods and materials also increased with the expansion of sales of high value-added products such as cosmetic application and others. Please turn to Page 7. This is a summary of results and operating income by segment for your reference. Please turn to Page 8. The slide shows year-on-year increase and decrease of operating income for FY '18 third quarter. Volume and capacity utilization contributed to operating income increase by JPY 18.5 billion because of newly consolidated Calgon Carbon's positive impact and increased sales optical-use poval film, PVB film, water-soluble PVA film and GENESTAR. Terms of trade were positively impacted by the foreign currency exchange rate, namely weaker yen against euro, but was negatively impacted by increased raw material and fuel cost, therefore, in total, made a negative JPY 2.5 billion.

Operating expenses and others are mainly affected by the consolidation of Calgon Carbon. In addition, GSAP running cost, R&D cost and labor cost increased to make total increase by JPY 17.2 billion. Please turn to Page 9. This shows a comparison of assets on the balance sheet against the end of last year. Breakdown of increase of current asset of JPY 38.7 billion are: inventory assets, plus JPY 25.9 billion; notes and accounts receivable, plus JPY 16.9 billion. These are mainly affected by the consolidation of Calgon Carbon. Inventory asset increased by JPY 8.8 billion compared to the amount at the end of June 2018 because of reasons such as increased raw material and fuel cost, weaker yen and regular maintenance-related inventory accumulation. Breakdown of increase of noncurrent assets by JPY 142.9 billion is increase of tangible fixed asset by JPY 55.5 billion and increase of intangible fixed asset by JPY 86.9 billion, including tentative goodwill with Calgon Carbon consolidation. Please turn to Page 10. This slide shows liabilities and net asset in the balance sheet. The main reason for the increase of current liability by JPY 41.6 billion is the increase of short-term debt by JPY 38.8 billion concerning the acquisition of Calgon Carbon. Noncurrent liabilities increased in total by JPY 124.2 billion. Long-term debt increased by JPY 77.9 billion, and corporate bond increased by JPY 40 billion because of switching from short-term loan used for Calgon Carbon acquisition to long-term debt. Net asset is increased in total by JPY 15.7 billion because of increased earned surplus by JPY 21.7 billion, although we spent JPY 3.7 billion for share buybacks in the second quarter. Please turn to Page 11. This slide compares the revised plan of FY '18 against the restated FY '17 results. As it is reported in earnings report, there is no change of forecast in total sales and profits from the previous report. Vinyl Acetate segment was negatively impacted by the change of depreciation and allocation of indirect cost method and the effect of the U.S. EVAL regular maintenance and the incident. Because of these reasons, we forecast decreased operating income. However, because of the contribution of the good business, if we exclude the impact of the change of accounting method, the operating income actually increased year-on-year. We expect the sales of Isoprene segment to grow because of increased sales of elastomer and GENESTAR but operating profit to be flat because of the increased raw material and fuel costs. The Functional Materials segment sales are expected to grow with the consolidation of Calgon Carbon. We planned to fix goodwill at the end of FY 2018. We do not include Calgon Carbon impact for the consolidated operating income because of uncertainty.

For existing business operating profit, methacrylic resin is doing particularly well, and we expect increased sales and profit year-on-year. For Fibers and Textiles segment, in consumer goods and materials, non-woven fabric KURAFLEX high value-added products sales is expanded, and CLARINO sales volume also increased, but we expect a small decrease of sales and profit because raw material and fuel cost increased for KURALON. We forecast increased sales and profit for the Trading segment with the business expansion in Asia. Please turn to Page 12. This slide shows net sales by segment. The third quarter result and full year forecast are shown for your reference.

Please turn to Page 13. This slide shows the operating income by segment. The third quarter results and full year forecast are shown for your reference. Thank you very much for listening.