Toppan Inc
TSE:7911
Earnings Call Analysis
Q2-2024 Analysis
Toppan Inc
The company reported a sturdy yet slightly subdued financial performance for the first half of fiscal 2023, with net sales marginally down by 0.2% to JPY 800.2 billion. Investors should note that despite economic pressures, the decrease in net sales was minimal. However, the profit metrics indicated some strain, with operating profit down by 11.4% to JPY 25.3 billion, ordinary profit falling 13.4% to JPY 32.5 billion, and profit attributable to the parent plunging considerably by 66.1% to JPY 18 billion.
Scrutinizing individual segment performances reveals a diverse landscape. The Digital Transformation (DX) business, Erhoeht-X, demonstrated growth, especially in security and digital content areas. The Electronics segment sales increased by 4.1%, contributing to a 7.4% rise in operating profit, signifying a strong market demand for semiconductors. Meanwhile, the Information & Communications segment saw a slight dip in sales and operating profit, and the Living & Industry segment had a modest uplift in sales and profits.
The company fortified its cash flow from operations, which escalated by JPY 26.7 billion year-on-year to JPY 65.2 billion. Notably, the increase in free cash flow to JPY 32.7 billion underlines improved working capital management and controlled capital expenditures.
Looking forward, the company expects net sales and operating profit to stay steady, pegging the operating profit forecast for March 2024 at JPY 78 billion, with a noted revision of the expected profit attributable to owners to JPY 68 billion, thanks to investment security sales. There has been a sizable adjustment in exchange rate expectations, from JPY 125 to JPY 135 against the U.S. dollar, in anticipation of ongoing yen depreciation.
The company's strategic shareholding reductions and divestments surpassing JPY 400 billion since April 2018 signal a bold reshaping of the portfolio. The planned sale of Recruit shares, valued at approximately JPY 40 billion in the third quarter, showcases further commitment to this financial strategy.
With a generous dividend proposal of JPY 24 per share for the interim dividend and an annual dividend of JPY 48 per share, coupled with a share buyback program worth JPY 40 billion this fiscal year, the company reflects a solid commitment to shareholder value. The planned strategy sets the total return ratio to an impressive 81.3% for the end of the fiscal year.
The company acknowledges the vital role of human resources and diversity in sustaining growth and has initiated various developmental programs. An ESOP (Employee Stock Ownership Plan)-based compensation mechanism aims to align employee interest with shareholder value, fostering long-term engagement and value creation.
The company's guidance projects net sales of JPY 530.5 billion and operating profit of JPY 31.5 billion for the Living & Industry segment, with positive expectations for both domestic and overseas businesses. In the Electronics segment, growth is anticipated, particularly from the semiconductor business, with expected strong demand for photomasks. The targeted strategic synergy of JPY 5 billion over three years, aiming to achieve JPY 1 billion this fiscal year, exhibits a proactive approach to harness group synergies for enhanced financial performance.
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I am Kurobe from the Finance and Accounting Division. Thank you for taking time out of your busy schedule today to attend our earnings call for the first half of fiscal 2023, which is the fiscal year ending March 2024. I will explain the fiscal 2023 first half results and forecast for the full year.
First, I will explain our business results for the first half of fiscal 2023.
Page 4 shows the consolidated results for the first half of fiscal 2023. Net sales was down 0.2% year-on-year to JPY 800.2 billion. Operating profit was down 11.4% to JPY 25.3 billion. Ordinary profit was down 13.4% to JPY 32.5 billion, and profit attributable to owners of the parent was down 66.1% and to JPY 18 billion.
Please turn to Page 5. Net sales of Erhoeht-X, which is our DX business, increased in such areas as global security and digital content. In the packaging business in Japan, expansion centered on SX packaging, including flexible packaging and folding gardens. In semiconductors, sales of FC-BGA substrates and photomasks increased, but BPO sales declined due to a contraction of onetime government projects.
Semiconductor profits grew from increase in sales. However, overall operating profit was down with higher amortization cost from standardization of useful life of photomask equipment, decrease for finance printing overseas due to order cycle, lower packaging and decor materials overseas due to plant damage from heavy rains in India, and lower demand from inflation in Europe and North America.
Profit attributable to owners of parent decreased due partly to a decrease in gain on sale of investment securities and an increase in impairment loss.
Please turn to Page 6. Looking at change in operating profit versus prior year. Profit was actually up from JPY 23.5 billion a year ago, if you exclude the impact of amortization costs from useful life standardization of photomask equipment. The details of change in operating profit are explained on Page 7. Against the operating profit of JPY 28.6 billion in the first half of fiscal year 2022, infrastructure development cost increased (sic) [ decreased ] by JPY 4.1 billion, led by cost increases from replacing legacy facilities. Overseas living business profits were down JPY 2.1 billion due to flood damage to plants caused by heavy rains in India, and sluggish demand caused by inflation.
In addition, factors such as order cycle for overseas finance printing had a negative impact of JPY 1.7 billion on profits.
In contrast to these negative factors, Erhoeht-X increased profit by JPY 1 billion, mainly in digital content and global security. Japan SX profits increased by JPY 800 million, mainly in flexible packaging. Semiconductor profit expanded by JPY 7.4 billion, led mainly by FC-BGA and photomasks. Existing businesses was up JPY 1.5 billion in profit, with contributions from existing domestic package and [ DPS ]. As a result, after adjustment, operating profit for the first half of fiscal 2023 was JPY 31.4 billion, an increase of JPY 2.8 billion. Please turn to Page 8. I will now explain our performance by segment. In the Information & Communications segment, sales declined 2.4% year-on-year to JPY 414 billion, and operating profit fell 7.8% to JPY 11 billion. In terms of sales, digital marketing was strong in areas such as development of retail media for the distribution and retail industries, and in the global security business, which saw increased demand in Europe and the Middle East. In the metaverse-related business, product promotion measures and high-precision online simulation business grew, and we developed the web version of Metapa, a virtue mall app, and steadily increased projects, but saw BPO business contraction of the previous fiscal year's onetime government projects, leading to lower overall sales.
Operating profit grew due to higher digital business-related sales, but due to overseas finance printing falling from order cycle and existing businesses such as business [ forms ] declining. Overall, operating profit was down.
Please turn to Page 9. In the Living & Industry segment, net sales increased 0.5% year-on-year to JPY 263.6 billion, and operating profit grew 0.2% to JPY 13 billion. Sales fell for packaging and decor materials overseas due to a sump in demand caused by inflation in Europe and North America and water damage to plant caused by heavy rains in India. However, SX packaging expanded in Japan by meeting the needs for microwavable and aluminum-flee materials. So overall, sales were positive. Operating profit for packaging and decor materials overseas fell along with sales. But in Japan, packages grew as a result of higher sales and price revisions. Overall, operating profit was up.
Please turn to Page 10. For the Electronics business segment, sales increased by 4.1% year-on-year to JPY 133.8 billion, whereas operating profit increased by 7.4% to JPY 22.4 billion, resulting in both increased revenues and profits. While sales of TFT-LCD panels for automotive applications experienced reduced demand, sales of FC-BGAs increased significantly, mainly for large and high multilayer products with high added value for data centers, servers, among others. Photomasks increase in sales, taking in demand in Asia.
Due to increased profits from sales expansion, operating profit increased resulting from offsetting increased amortization costs due to standardization of the useful life for photomasks. In new businesses, we worked to expand sales of LC MAGIC LCD light control film, which was applied for the word's first light control glass for automobile side windows.
Please take a look at Page 11. Cash flow from operating activities for this fiscal year was JPY 65.2 billion, or JPY 26.7 billion increase year-on-year due to factors such as improved working capital resulting from decreased inventories and reduced corporate tax payments. Cash flow from investing activities was minus JPY 32.5 billion, or JPY 36.8 billion decrease year-on-year due to large-scale sales of strategic shareholdings implemented in the previous fiscal year. As a result, the net total of cash flows from operating and investing activities, or free cash flow, amounted to JPY 32.7 billion. We will continue to strive for sustainable growth and maintain an appropriate cash balance that envisions ensuring financial soundness and realizing stable shareholder returns.
That concludes the overview of the first half of the fiscal year ending March 2024. Next, I will describe our forecast for the fiscal year ending March 2024. Please move to Page 13. For our consolidated result forecast announced on May 16, 2023, net sales, operating profit and ordinary profit have been left unchanged. However, we have revised upward the profit attributable to owners of the parent to JPY 68 billion, up JPY 25 billion from the previously announced figure.
In addition, since the yen has depreciated more than expected, we have revised the exchange rate from the previous JPY 125 to JPY 135 to the U.S. dollar, which is the assumption for the forecast.
Please turn to Page 14. Let me now explain the details of our revision from the May 16, 2023 announcement. The initially forecasted operating profit of JPY 78 billion for March 2024 included an increase in amortization costs due to the standardization of the useful life of photomasks. However, this has further increased due to, among others, the effects of exchange rates. In addition, there was an increase in onetime expenses associated with the transition to a holding company structure to strengthen the management infrastructure.
Contrary to these negative effects, by expanding growth and priority businesses and reviewing foreign exchange rates, we expect operating profit for March 2024 to yield JPY 78 billion, unchanged from that announced on May 16. The entire company will get united to focus on achieving our goals, and we look forward to your continued support. That concludes my explanation for the forecast for the full year.
Next, President Maro will explain the status of efforts focused under the medium-term plan.
Thank you for sparing time out of your busy schedule to join us today. I am Maro, President of the company. I will explain the efforts focused on our medium-term plan. Once again, I'd like to review the results of the first half of fiscal 2023. Although both sales and profits decreased for the first half, a quarterly breakdown shows that sales and profits returned to the previous year's level in the second quarter, after declining in the first quarter.
Also, if you look at the right at second quarter changes versus first quarter, earnings capability of growth businesses is steadily improving. Although not on the slide, second quarter results include temporary negative impacts such as natural disasters and trouble with manufacturing facilities in the Living business and increased depreciation costs in the photomask business. Our view is that in terms of our real capabilities, profits are accumulating more than what appears in the results.
Next, let me talk about the full year forecast. Based on the first half results, we are confident that we will be able to achieve the revised full year operating profit target of JPY 78 billion. There are no major change in the overall profit composition, and we expect to achieve the profit target by offsetting the temporary downside factors through the expansion of growth business, including DX, Japan SX, overseas living and semiconductor businesses. Explanation about the expansion of profits from growth businesses for each segment will follow. First is the Information & Communications segment. The full year forecast for this segment is net sales of JPY 897.5 billion and operating profit of JPY 50 billion. Driven by subsegments, other than Secure Media segment, we expect overall higher sales and profits. Looking at the subsegments, Digital Business is expected to have higher sales and profits due to the growth of Erhoeht-X cross priority categories. In BPO, the temporary impacts from prior year's onetime projects felt in the first quarter no longer persist, and sales are expected to increase in the second half and profits are expected to be positive for the full year.
As for existing businesses, Secure Media will see lower sales and profit due to the impact of order cycle in the overseas financial printing business in the first half. In the Communication Media business, both sales and profits are expected to increase due to the impact of order cycle for textbooks.
Next, I will explain the status of Erhoeht-X, which is to be the main driver for BPO revenue growth in the digital business. For Erhoeht-X as a whole, both sales and operating margin have been extending from the first to the second quarter, and both sales and profits are expected to grow for the full year, with net sales of JPY 291 billion and operating margin of 6%. The performance of each of the 5 priority categories is generally in line with the overall trend. And in the Information segment, the portfolio transformation to DX business is progressing well.
As for the key points for each of the priority categories, for the hybrid BPO segment, we expect a decrease in sales, but an increase in profit margin for the full year. Currently, we are making steady progress in taking in target projects in focus domains and the proportion of continuous BPO expanded to 70% in the first half. The security is expected to see both sales and profit increase. In Japan, the payment business and information gathering and distribution and browsing services such as airports and EngagePlus will grow.
Overseas, the payment and government ID businesses in Europe and the Middle East are expected to expand. Marketing DX is expecting both sales and profits to increase, and we will expand revenues by providing business transformation service model focused on the common issues faced in each industry. Digital content is expected to increase both sales and profit, with the digital textbook business in the educational ICT domain growing significantly. Manufacturing and distribution DX is also expected to see higher sales and profit, and we expect converting proof of concepts into actual orders in the second half and beyond.
Next, I will explain the status of hybrid BPO, which accounts for about 50% of Erhoeht-X sales. As I mentioned earlier, we are making steady progress in securing target projects in focus domains. In finance, we are promoting BPO services that use AI-OCR centered on administration work that requires operational and specialist knowledge and experience in paper forms, such as foreign exchange, tax, public funds and inheritance.
Currently, we are driving standardization of the business model and expanding the number of clients and projects. For the central government, we are steadily securing research and pilot projects for implementation of medium- to long-term policies by respective government agencies and auxilliary projects for long-term policies. For local governments, orders for public administrative services are expanding nationwide. In doing so, we are signing comprehensive collaboration agreements with local authorities and establishing our position as administrative DX promotion partner. Also, we launched collaboration with core system vendors to standardize operations in [indiscernible] administration center. In quasi-public, the business is expanding favorably by taking in outsourcing demand for noncore operations of electricity and gas industries.
In terms of KPI progress, in the first half, number of clients and orders taken in the focus domains increased over the prior period and the proportion of continuous BPO in the first half reached 70%. The BPO business has become profitable since the second quarter, and we expect it to steadily expand in the second half and beyond as the progress of [ PPIs ] will start contributing to revenues.
Next is the progress of group synergies. We have launched a project to create fusion synergies within TOPPAN Edge in between entities in the TOPPAN Group and are currently promoting initiatives to achieve actual results. In terms of sales synergies, we will promote initiatives in the categories of hybrid BPO, Security and Marketing DX at Erhoeht-X as described in the slide. And in terms of cost synergies, we will promote joint procurement and materials globally and cost productions to optimize the production system. The target for synergy creation is JPY 5 billion over the 3 years of the medium-term plan, and we expect to create approximately JPY 1 billion this fiscal year.
I will now move on to the Living & Industry segment. The full year forecast for this segment is expected to post net sales of JPY 530.5 billion, and operating profit JPY 31.5 billion, driven by the strong domestic business. Overseas business is expected to turn into a positive profit growth in the second half, resulting in segment-wide rises in both sales and profits.
The total Packaging business is expected to grow in both sales and profits. By subsegment, domestic business is likely to see increased profits due to growth in flexible and other SX packaging. In overseas, despite the continued inflation impact on barrier film business throughout the year in Europe, the temporary effects in the first half of natural disasters in India and manufacturing facility disruptions in Indonesia will be mostly resolved and profit is expected to increase.
The Decor material business is expected to post increases in both sales and profits. The growth in special design business for planning, designing and construction of interior space for non-housing markets is expected to result in increased profits in domestic business. For overseas, though the effects of inflation will remain a challenge for the Interprint business throughout the year, we have managed to get out of the worst status of the second half of the last year.
Moving on to the activities in the second half for Living & Industry segment. In the domestic packaging business, we're working to expand sales and promote the development of packages that meet customers' SX needs as a measure to increase profitability. We will expand geo packaging in pharmaceutical and food industries to meet the demand as alternative for aluminum as well as secure competitive edge through development of sustainable packaging integrated with the IP strategy.
For progress in structural reforms, as part of the reorganization of the folding carton manufacturing business, the transfer of production from Sagamihara to [indiscernible] plant has begun in second half and is progressing as planned. In addition, we have recently decided to carry out the transfer of bottled pouch contract filling business. We will continue to examine the viability of businesses needing review and promote portfolio transformation in the Living & Industry segment.
For overseas packaging business, we are stepping up efforts to increase both sales and reduce costs to improve profitability. In response to the declining demand in Europe and U.S., in [ geo barrier], in terms of costs, we will reassess the production network of manufacturing bases and strive to reduce cost of sales.
In terms of sales, we are working to secure orders by developing customers in Europe and Asia Pacific. On the other hand, the development of barrier films, the products for mono-material solutions for Europe is making steady progress to produce results from the next fiscal year.
In addition, there is no change to our medium-term measures of growth investments for development of SX packaging supply network that range from film manufacturing to barrier processing and packaging production, which is steadily being executed as planned.
For film manufacturing, we're constructing a new plant in Indonesia, introducing a new production line in India, and for barrier processing, constructing a new plant in Czech Republic. And for packaging production, we acquired Skymark, a U.K.-based flexible packaging converter, in September. Efforts to improve earnings in the overseas decor materials business are underway, focusing on reduction of variable and fixed costs. Also, as we anticipate growth after market recovery, we are making efforts to strengthen our competitive edge by diversifying the product types through film production and sales, expanding our sales network in Indian and Chinese markets and developing SX decor sheets with biomass and recycling specifications.
Through these efforts, we will achieve increased profits in the entire Living & Industry business in this fiscal year and bring it to increased profit in the next and beyond.
Next, I will discuss the Electronics segment. For the overall Electronics segment, we forecast net sales of JPY 250.5 billion, an operating profit of JPY 44 billion, down in both sales and profits due to the temporary impacts of the previous fiscal year's price levels and an increase in amortization costs due to the standardization of useful life for photomasks in this fiscal year. However, driven by the semiconductor businesses, we can expect an increase in profit in euro terms if those impacts are excluded.
By subsegment, semiconductor business, the demand for FC-BGAs for servers and network switches is expected to weaken in the second half. We will continue our efforts on well-performing AI products. So the second half is likely to be in the market correction phase. The FC-BGA business will continue to grow in the next fiscal year and beyond in the medium term as data traffic volume will remain on a steady upward trend.
Demand for photomasks will remain strong for the full year, and we will drive production expansion utilizing our global bases.
For display business, despite the impact from market conditions, including inventory adjustments in anti-reflection films, we expect to take in orders centered on product types for which demand is recovering, and we are forecasting an overall decrease in sales, but increase in profit for the full year.
Next is the progress of the financial strategy. The reduction in strategic shareholdings is proceeding as planned. At the end of September, we were down by 17 stocks as compared to the end of March, and by 107 stocks compared to the end of March 2018. In addition, the value of divestments since April 2018, including partial sales of our holdings, has exceeded JPY 400 billion. Going forward, we plan to sell Recruit shares worth about JPY 40 billion in the third quarter. We will continue to promote asset sales based on rationality verification, while considering the cost of capital and financing perspectives.
For efforts for shareholder returns, we plan to pay an interim dividend of JPY 24 per share, an annual dividend of JPY 48 per share. As part of the efforts for shareholder returns, we are in the process of buying back shares of JPY 40 billion as planned based on the policy to buy back JPY 100 billion worth over 3 years as specified in the medium-term plan. As a result, the total return ratio is expected to be 81.3% at the end of this fiscal year. We will promote stable and flexible shareholder returns based on a policy of total payout ratio of 30% or more.
I would now like to reiterate our forecast for this fiscal year. No changes are made to the initially announced figures from net sales all the way down to ordinary profits. Profit attributable to owners of the parent have been revised to JPY 68 billion due to sale of investment securities. ROE is expected to be 5.1% on the basis that includes the special factor of sale of investment securities. The foreign exchange rate was revised to JPY 135 to the U.S. dollar.
Last but not least, I will describe our efforts on human capital and diversity. As TOPPAN Group aims to contribute to sustainable growth and society under our philosophies, respect for people and understanding of how deeply we depend on people, it considers human resources as important corporate asset and innovation from people developed through maximizing the value of human resources as sources for business growth. Under this policy, as shown here, we are implementing various initiatives, including creating human asset development programs, promotion of diversity and inclusion, focus on employee wellbeing and personnel systems.
Today, from among the personnel systems, I will briefly explain the mechanism of the stock-based compensation for employees, which we made a timely disclosure for at the same time as the earnings announcement on November 13. The stock-based compensation for employees to be introduced this time is an employee incentive plan based on the ESOP Trust. Eligible employees are permanent employees of the 4 companies, TOPPAN Holdings, TOPPAN Digital TOPPAN Edge. Shares of the company will be awarded in accordance with the level of achievement during the target period of 3 fiscal years under the medium-term plan. We expect to raise consciousness of share price and medium- to long-term enterprise value by having eligible employees take the same perspective as capital markets as well as to help strengthen group engagement through appropriate distribution of added value.
This concludes the explanation of our efforts under the medium-term plan. As we transition to a new management structure with a holding company in October, we will strive to maximize group synergies among the holding company and operating companies so as to achieve our medium-term plan. We look forward to continued support of our shareholders and investors. Thank you for your attention.