Nissan Chemical Corp

TSE:4021

Earnings Call Transcript 2021-Q1

[Junichi Miyazaki, executive]

I am Miyazaki. Thank you for joining us today. Please turn to Page 2. As for the result for the first quarter FY 2020, sales were JPY 49.3 billion, OP was JPY 9.8 billion and net income was JPY 7.6 billion. For the overview, please turn to Page 3. As highlight, year-on-year comparisons are shown here. OP in the previous year was JPY 9.3 billion, and it went up to JPY 9.8 billion this year, up JPY 0.5 billion year-on-year.

Sales and the profit by segment are shown on Page 9 and 10. In chemicals, sales decreased sharply in melamine, TEPIC and environmental-related products, and OP went down. In Performance Materials, OP went up due to the robust Display Materials and the Semis Materials and reduced fixed cost. In Agrochemicals, sales of ALTAIR increased, but shipment of Fluralaner decreased as expected. Sales of ROUNDUP decreased. Fixed cost, including R&D, increased and OP went down.

In Pharmaceuticals, sales of Custom Chemicals increased, but LIVALO sales decreased and OP went down. As for net income, with no extraordinary income posted in this year, it was JPY 7.6 billion, down JPY 0.2 billion from JPY 7.8 billion in the previous year. In the previous year, JPY 0.9 billion of gain on sales of investment securities was posted.

Next, in comparison to the outlook, OP India outlook was disclosed as JPY 8.5 billion, but the result was JPY 9.8 billion, JPY 1.3 billion above target. In chemicals, sales of melamine, TEPIC and environmental-related products were below target, and OP was below target. On the other hand, in Performance Materials, robust Display Materials and the Semis Materials and lower-than-expected fixed costs resulted in the OP above target. In Agrochemicals, sales were below target, but as the fixed cost was below target, OP was above target.

In Pharmaceuticals, due to solid Custom Chemicals, OP was above target. Net income outlook was JPY 6.8 billion, but the result was JPY 7.6 billion, JPY 0.8 billion above target. Certainly, there is no revision in the full year outlook this year. The outlook for the second quarter and the full year is not revised from the announcement as of May 15. In the previous meeting, I said that the full year outlook does not reflect the effects of COVID-19 pandemic. As of today, we deem that the impact will be limited as a whole. As for return to shareholders, share repurchase of JPY 7 billion, 1.334 million shares, is completed on July 28. Please turn to Page 5 for nonoperating income and expenses. In FY '19, income minus expenses was JPY 640 million. And this year, it was JPY 600 million, down by JPY 40 million.

Please turn to Page 6 for cash flows. The rich cash flow was sustained. Compared to the first quarter FY '19, operating cash flow increased by JPY 2.4 billion year-on-year, and investing cash flow was minus JPY 1.5 billion, with the increase of expenses by JPY 0.9 billion. In the previous year, due to sales of investment securities, JPY 1.7 billion of cash inflow was marked. As for payout to shareholders, please refer to columns of share repurchase and others. In the previous year, as of the end of the first quarter, repurchase was still ongoing. And out of the total of JPY 6 billion, JPY 3.8 billion was completed and the remaining JPY 2.2 billion, which was deposited at the trust bank, was posted as minus in the item of Others. In this year, out of the total JPY 7 billion, JPY 4.1 billion of repurchase was completed. And the remaining JPY 2.9 billion, which was also deposited at the Trust Bank, was posted in Others. As a result, cash at the end of the first quarter was JPY 16.6 billion, up JPY 1 billion year-on-year.

Please turn to Page 7 for balance sheet. In the first quarter ended in June due to collection timing, accounts receivable went down sharply, as usual. Intangible assets, as of June this year was JPY 7.2 billion against JPY 1.4 billion in the previous year. This is mostly due to the increase of goodwill and other intangible assets related to the acquisition of Quinoxyfen. On the right shown at the bottom, equity ratio was 78.8% this year versus 80% in the previous year. Page 9 shows sales by segment. And OP by segment is shown on Page 10. Year-on-year change is shown in the middle. Year-on-year change of OP in Chemicals was minus JPY 0.2 billion, plus JPY 1.3 billion in Performance Materials, minus JPY 0.5 billion in Agrochemicals, minus JPY 0.5 billion in Pharmaceuticals and plus JPY 0.5 billion in total. On the right, first quarter outlook, as of May, is listed. JPY 1.2 billion for chemicals, JPY 4.2 billion for Performance Materials, JPY 3.6 billion for Agrochemicals and minus JPY 0.1 billion for Pharmaceuticals.

Let me explain by segment. For chemicals, please turn to Page 12. On the left, year-on-year comparison of sales and comparison to plan of major products are listed in a table. Below the table, the first quarter FY 2020 review versus FY '19 is described. In Fine Chemicals, TEPIC sales for general applications went down, affected by COVID-19 overseas. TEPIC for electronic materials were also down due to sluggish demand for [ PCB ] for autos. As a result, TEPIC was down 9% year-on-year. Inventory adjustment impact in Fine Chemicals was plus JPY 0.1 billion. As a result, both sales and OP increased slightly. In Basic Chemicals, sales increased in high-purity sulfuric acid by 19% year-on-year, supported by a strong market demand for cleaning applications for semiconductor. Sales declined in domestic melamine, which was heavily affected by decline of housing starts.

As for export, we have been cutting back the loss-making deals this year to focus on the spread, even with a volume decline, and that policy remains unchanged. As a result, melamine sales were down 55% year-on-year, combining domestic and abroad. Urea, including AdBlue, sales were down 5% due to sluggish adverse sales for trucks and construction machinery. Nitric acid product sales were down 2%, and the total sales of Basic Chemicals were down 19% year-on-year. In Basic Chemicals, both sales and OP decreased. Total segment sales of chemicals went down by JPY 1 billion and OP went down by JPY 0.2 billion. For the comparison with the outlook as of May, the outlook is shown on the right. In Fine Chemicals, as mentioned before, TEPIC and environmental-related products were below target and both sales and OP were below the target. In Basic Chemicals, most of the products, including melamine, urea, including AdBlue, high-purity sulfuric acid and the nitric acid were below target. And both sales and OP were below target. In total sales of chemicals were below target by JPY 1.1 billion and OP was below target by JPY 0.5 billion. Please turn to Page 14 for Performance Materials. This slide shows first quarter FY 2019 actual, first quarter FY 2020 plan and actual of subsegment. Their sales distribution remained almost unchanged from the first quarter in the previous year. Please turn to Page 15 for the sales review of major products in Performance Materials. As shown in the table on the left, SUNEVER sales were up 14% year-on-year and they were above plan. For Semis, KrF was up 26%, ArF was up 19%, and total ARC was up 23%, and they were all above plan. Other semiconductors materials were up 20%, but they were below plan. In total, Semiconductors Material sales were up 22% and were above target. As for inorganic sales shown on the right, SNOWTEX sales were up 8%, slightly above plan. Organo/Monomer Sol was down 9% in the below plan. And oilfield materials were down 84% and were below plan.

Please turn to Page 16 for SUNEVER sales distribution by mode. As shown in the table on the left bottom by arrow, TN sales went down year-on-year, VA was up, and IPS combining photo alignment IPS and rubbing IPS, sales went up and they were well above plan. As a result, total sales were up 14% year-on-year and were above plan. Please turn to Page 17 for Performance Materials sales and profit. As for the year-on-year comparison shown on the left, display increased both in sales and OP. In particular, photo alignment IPS sales increased. They grew for smartphones, but the growth for non-smartphone application was notably strong. Sales of rubbing IPS have been declining, but they returned to growth in this quarter. It was also backed by the firm demand for non-smartphone applications. VA sales were up, but TN sales were down. Semis Materials, sales and OP increased. Sales of ARC and other Semis Materials were up, as mentioned. Steady demand of logic was sustained, and the DRAM and the flash memory were making strong recovery. And fixed cost reduction, mainly in R&D has made additional contribution. Inorganic sales of OP decreased.

Sales of SNOWTEX for polishing silicon wafer and the CMP went up, but the sales for non-polishing were flat. Organo/Monomer Sol sales were down slightly. Oilfield material sales went down due to sluggish shale oil market, as mentioned. Fixed cost went down by JPY 0.4 billion for the segment. As a result, sales went up JPY 2 billion, and OP was up JPY 1.3 billion. Compared to the outlook shown on the right, display sales and OP were above target. Photo alignment IPS sales for smartphone were below target. Rubbing IPS sales were well above target due to strong demand for non-smartphone applications, including PC and tablet. Sales of VA and TN were slightly below target. But we had a benefit of fixed cost, which was lower-than-expected by JPY 0.3 billion. Next on Semis Materials, sales and OP were above target. ARC sales were above target, but other Semis Materials sales were below target. Entire Semis market was more solid than expected. And fixed cost was lower-than-expected by JPY 0.5 billion, and they have led to OP well above target. In Inorganic Materials, sales of SNOWTEX was slightly above target. Organo/Monomer Sol sales were below target and oilfield materials sales were below target. But fixed cost was below target. And as a whole of inorganic materials, sales were below target and OP was above target. Fixed cost was below target by JPY 1 billion for the whole segment, and sales were above target only by JPY 0.2 billion, but OP was above target by JPY 1.1 billion. Please turn to Page 24, Agrochemicals. Main products are listed in the table on the left. Fluralaner sales were down 16% year-on-year. But they were above plan. ROUNDUP was down 6%, and its sales were below plan. ALTAIR sales were remarkable, up 20%, but they were below plan. TARGA sales were strong, up 36%, and they were above plan. GRACIA sales went up 3%, and its sales were disappointing in Agrochemicals. And they were below plan. PERMIT was down 42%, and it was below plan. LEIMAY was up 26%. GRACIA sales are shown by orange bar chart below. And they were considerably lower than the plan for the first quarter as you see here.

Please turn to Page 21 for Fluralaner. Let me comment on one thing here, which was already press released, on BRAVECTO. As shown on the third bullet point, BRAVECTO for dogs, in July, a monthly chewable for puppies of milk was approved in the U.S. As you know, main products of BRAVECTO for dogs are 3 months chewable tablet. So this product for puppies has much shorter durability of drug effect. As shown below, sales will be down year-on-year, and we did not revise the outlook. But as you see here, sales outlook in the third quarter and the fourth quarter are higher than those in the corresponding period of the previous year. For Page 22, sales and profit review of Agrochemicals. As shown on the left, as year-on-year comparison, TARGA sales went up for the front-loaded export and a new move with overseas major manufacturers for the use for mixture. ALTAIR shares went up for the launch of domestic second-generation products. Sales of Quintec, LEIMAY and the GRACIA for export went up. On the other hand, the sales of Fluralaner went down due to inventory adjustment as expected. GRACIA for domestic sales went down because of less pest due to low-temperature in Japan from April to June. PERMIT suffered a backlash from the increased shipment in the previous year as expected. In FY '19, that registration for corn in EU was granted, and that was followed by substantial shipment growth, and we observed the backlash after the spike.

Sales of ROUNDUP MAXLOAD for farmers went down for distribution inventory drawdown. This can be a part of impact by COVID-19. It was rather difficult for sales staff to visit the retail stores to fuel stock of ROUNDUP. And as a result, that distribution inventory level continued to fall without restocking. AL sales went up with the continued shift to high-end product AL 3. However, combined sales of MAXLOAD and the AL went down. Fixed cost went up by JPY 0.3 billion due to R&D expenses and the depreciation cost of Quinoxyfen. Inventory adjustment cost benefited us by JPY 0.2 billion. In total, sales were down JPY 0.1 billion and OP was down JPY 0.5 billion year-on-year.

Compared to the outlook shown on the right, sales of TARGA were above target. Fluralaner sales went down year-on-year due to inventory adjustment. But due to the shifted shipment from the second quarter, they were above target. As for LEIMAY, our forecast was simply incorrect. On the low side, domestic GRACIA was below target, as mentioned. ROUNDUP MAXLOAD was below target due to aforementioned reasons. And AL was above target. ALTAIR was below target due to slightly short supply in Japan. Domestic PERMIT was below target due to partly the shift to ALTAIR. Lower fixed cost was a contributor of JPY 0.5 billion. Inventory adjustment was also positive by JPY 0.3 billion. In total, sales were below by JPY 0.6 billion, but OP was above by JPY 0.4 billion, showing the opposite trend of sales and OP. Please turn to Page 24 for Pharmaceuticals. Year-on-year sales comparison of LIVALO and Custom Chemicals are shown on the left. As for LIVALO, please also refer to the review below. Domestic sales went down slightly. Export was down sharply, and sales went down by 48%. But they were above plan. Custom Chemicals sales went up by 49%, and they were above plan. Total segment sales were down by 20% year-on-year, but they were above plan. As shown on the left bottom, LIVALO sales were down and Custom Chemicals sales were up year-on-year. And the total sales were down by JPY 0.37 billion, and OP was down by JPY 0.46 billion.

When you refer to the table on the right, you'll see drug discovery, which is LIVALO and Custom Chemicals, with their sales and OP. Compared to the outlook, as shown on the right, LIVALO were above target in both the domestic sales and export. Custom Chemicals were partly benefited by the front-loading of shipment, pushed up also by the net growth in sales and price increase, sales were above target. Total sales were above target by JPY 0.31 billion and OP was above target by JPY 0.07 billion. Custom Chemicals sales increased by JPY 0.25 billion from FY '19 to '20, but OP was down by JPY 0.01 billion. This is mainly due to variation loss on inventories, JPY 0.12 billion with a price cut of raw materials. Please turn to Page 25 for ESG. As for ESG index, in June 2020, we were selected as an inclusion in the S&P JPX Carbon Efficient Index for the second consecutive year, and we were selected as a constituent of FTSE4Good Index Series and Blossom Japan Index. Please turn to Page 26. Full year and half year outlook as of May is shown here. And as mentioned before, they remain unchanged without any revision this time. Page 27 and onward. Let me walk you through our characteristics for those who are new to us, though they might be familiar to those who have joined the meetings before. Page 27 shows OP margin. Chemical industry tends to be volatile, but we have been sustaining OP margin of 10% or more since 2003. It is notable that it has been over 18% in the last 3 years. Please turn to Page 28. Our most important financial indicator is ROE. And the target in the current midterm plan is to maintain 16% or above. And the actual ROE in FY '19 was 16.9%. Please turn to Page 29. We officially commit the total payout ratio. In the current midterm plan, 75% of total payout ratio is committed for FY '20. We achieved 75.1% of total payout ratio in FY '19, one year ahead of the schedule. Page 30. Dividend payout ratio has been steadily increasing. FY '19 target was 42.5%, and FY '20 target is 45%. Ending FY '19, we achieved 42.8%. For FY '20, given total payout ratio target is 75%, targeted share repurchase is 30%, and the dividend payout ratio is 45%. Page 31, share repurchase. We have been repurchasing shares every year, except 2009 and 2011, and have canceled all repurchased shares within the year. We repurchased 41 million shares from FY '06 to FY '19, canceling 41.6 million shares. For this year of FY '20, as of today, we repurchased 1.33 million shares for JPY 7 billion, as mentioned.

Page 33. The final characteristic of the company is R&D. We have been sustaining R&D expenses to sales of 8% to 9% over years. R&D staff accounts for about 40% of professional staff, as shown by the left bottom pie chart on Page 34. Out of the total professional staff of 1,165, about 450 are R&D staff. Before conclusion, please come back to Page 26 for the full year outlook again. As for FY '20 outlook, first half OP is JPY 16.1 billion and second half is JPY 23.2 billion. Compared to FY '19, OP is down in the first half and up in the second half. And the total is up year-on-year. Therefore, given the first half OP outlook is originally planned to go down at the end of the second quarter, please do not take the decreased OP as negative surprise. We originally expect the profit will be higher in the second half in the outlook.

This concludes my presentation on the first quarter FY 2020. Thank you for your attention.