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Edited Transcript of 3401.T earnings conference call or presentation 1-Nov-19 6:00am GMT

Q2 2020 Teijin Ltd Earnings Presentation

Tokyo Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Teijin Ltd earnings conference call or presentation Friday, November 1, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Yoshihisa Sonobe

Teijin Limited - CFO, Senior Executive Officer & Director

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Presentation

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Yoshihisa Sonobe, Teijin Limited - CFO, Senior Executive Officer & Director [1]

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This is Yoshihisa Sonobe. I would like to review the financial results for fiscal 2019 second quarter and the outlook for fiscal 2019 using the slides.

First, the overall key point. As for business performance for fiscal 2019 first half or the second quarter, operating income decreased by JPY 2.4 billion year-on-year. This was because the market conditions for polycarbonate resins that were very strong during the first half of the previous year turned very sluggish this year and because the mainstay pharmaceuticals febuxostat felt the impact of generic products in Europe and U.S.

Meanwhile, compared to the previous forecast of JPY 32 billion announced in August, the operating income of JPY 33.8 billion was JPY 1.8 billion higher.

This was because the automotive composites business at CSP, Continental Structural Plastics Holdings, posted recovery in profitability as planned and also due to a strong performance of Aramid Fibers, the Healthcare business in Japan and IT business. As a result, the operating income for the first half totaled JPY 33.8 billion.

As for outlook for fiscal 2019, overall, there is a great impact of sluggish automobile sales.

While there is a firm demand for CSP's mainstay Composites products for pickup trucks and SUVs in North America, and thus the business is performing strongly. Impact of sluggishness in automotive sales in Europe and China is becoming more evident in the Materials business.

In light of a possible slowing down of the global economy, including the effect of worsening U.S.-China trade frictions and geopolitical risks, we have revised downward the full year operating income forecast to JPY 55 billion from the previous forecast of JPY 60 billion announced in August.

Let me now go over the results for the first half. Please turn to Page 4. Compared to the same period of the previous year, mainly due to sluggish market conditions for polycarbonate resins and the impact of overseas generic products on mainstay pharmaceuticals, net sales decreased slightly from JPY 439.4 billion to JPY 436 billion.

Operating income posted a slight year-on-year decline, added with the worsening of nonoperating items, reflecting the impact of foreign exchange movements, along with recording of onetime expenses associated with the transfer of subsidiaries in Films under extraordinary loss, profit attributable to owners of parent decreased year-on-year from JPY 33.9 billion to JPY 20.4 billion.

Some more details on the results for the first half, a year-on-year comparison. Page 5. Net sales and operating income have already been covered. Net of nonoperating items worsened by JPY 4.2 billion due to the deterioration of gain or loss on foreign exchange.

Net of extraordinary items worsened by JPY 7.7 billion year-on-year. I will explain the details later.

Income before income taxes decreased by JPY 14.4 billion or 33.1%. Profit attributable to owners of parent dropped from JPY 33.9 billion to JPY 20.4 billion.

As for relevant indicators, ROE decreased from 16.7% to 10%. ROIC, based on operating income, was 10.1%. Those indicators exceeded 10%. While the profit for the period was slightly lower, a decline in EBITDA was kept at JPY 8 million as depreciation expenses increased slightly.

CapEx increased by JPY 3.7 billion, mainly in relation to the full-fledged investments made for Carbon Fiber expansions in the U.S.

As for exchange rates, a slight appreciation of the yen against the U.S. dollar, while the Euro appreciated strongly against the yen.

Next, net sales and operating income by segment. Quantitative aspect will be explained in detail later. First, the numerical review. Net sales for Materials totaled a decrease from JPY 332 billion to JPY 325.8 billion down JPY 6.2 billion. There were pluses and minuses.

In terms of minuses, Material Business Group, comprising of existing Aramid Fibers, Resin and Plastics Processing, Film and Carbon Fiber, this existing Materials businesses posted a decrease of JPY 1.6 billion in sales due to foreign exchange effect as well as the impact of sluggish automotive sales.

As for Composites and Others, primarily CSP business, sales increased owing to strong North American business.

Overall, Materials posted a slight sales decline of JPY 6.2 billion. For Healthcare, sales dropped from JPY 80.4 billion to JPY 78.9 billion, a slight decrease of JPY 1.5 billion.

While there was an impact of generics on mainstay pharmaceutical products in Europe and the U.S., this was largely made up for by growth of FEBURIC in Japan and growth in Home Healthcare, in particular, expansion of sales from the rental business of CPAP, or Continuous Positive Airway Pressure, units for sleep apnea syndrome treatment.

As for operating income and loss for Materials, decreased from JPY 14.6 billion to JPY 12.9 billion, down JPY 1.7 billion. As mentioned earlier, this was because market conditions for polycarbonate resins that were very strong during the first half of the previous year, turned very sluggish this year.

For Healthcare, as mentioned earlier, there was an impact of generics, which was made up for by sales of FEBURIC in Japan and Home Healthcare products, but still a slight decrease in profit. Others, plus JPY 1.3 billion. As IT business of e-com posted higher profit, namely, growth in e-comic distribution service and Others.

Page 7, some qualitative review by business. In the Materials business field, as mentioned earlier, sluggish automotive sales affected the demand of our customers and thus, affected our sales.

For Aramid Fibers, sales volume for automotive applications declined slightly for such products as friction materials for brakes and Others, rubber reinforcer for rubber hose for engines and tire cords, slight decline in sales volume became evident.

Product mix and pricing efforts contributed to profits, as price hike efforts that we started in the fourth quarter of last fiscal year began to gain traction.

For Carbon Fibers, aircraft applications performed steadily as we are mainly supplying to Airbus. But among non-aircraft applications, sales for resins for compound applications declined. Our Carbon Fibers are used as fibers or fillers for resins for automotive, electric and electronic applications. And with weaker demand for those product areas, our sales declined. In the meantime, we continued with our upfront investments on Carbon Fiber operations in North America and elsewhere.

In Resin and Plastics Processing, lower product prices due to worsening polycarbonate market conditions could not be fully made up for by reductions in raw material prices.

Resins for automobile applications were affected as well. As for Composites and Others, as we saw in relation to sales, we recorded firm sales of mass-produced automotive components by CSP.

In Polyester Fibers & Trading and Retail, sales in fiber materials and apparel remained sluggish as the industry overall continues to face a difficult situation, as you are aware.

In Industrial Textiles and Materials, which mainly supply to automotive applications in such applications as automotive seats and airbags, our sales were largely affected by the sluggishness in the auto industry.

In the meantime, sales of Materials for infrastructure and water treatment applications remained strong and contributed to profits.

In the Healthcare Business Field, in Pharmaceuticals, sales of FEBURIC continue to expand steadily in the domestic market, but profits declined due to the impact of generics in Europe and the U.S.

In Home Healthcare, rental volume of CPAP units for the treatment of sleep apnea increased strongly.

In Others, the IT business, the e-comics distribution service and IT services for hospitals posted a steady performance, contributing positively to profit.

Next, nonoperating items and extraordinary items in the income statement. As for nonoperating items, it might be difficult to see as there are so many items. But a net of nonoperating items changed from positive JPY 3.6 billion last year to minus JPY 700 million this year. This difference was due to the year-on-year difference in gain or loss related to changes in foreign exchange rates. We are looking at the year-on-year difference in a net of gain or loss on valuation of derivatives and gain or loss on foreign exchange.

Last fiscal year, as the yen was weaker against the RMB and Euro, there was a gain on valuation of derivatives and a loss on foreign exchange. Whereas this year, we recorded foreign exchange gain of JPY 1.9 billion and a loss on valuation of derivatives of JPY 2.1 billion. And net loss in foreign exchange was JPY 200 million.

Altogether, a year-on-year deterioration in relation to foreign exchange rates amounted to JPY 2.7 billion.

As for the rest, a slight decline in equity and earnings of affiliates as well as a decline in dividends income due to the sale of shares for which the holding purpose has diminished.

Among extraordinary items, a net of extraordinary income and extraordinary loss was positive JPY 3.6 billion last year, whereas minus JPY 4.1 billion this year, a deterioration of JPY 7.7 billion.

There were 2 major factors. In fiscal 2018, there was a settlement received amounting to JPY 4.5 billion recorded under extraordinary income, whereas this year, we recorded business structure improvement expenses under extraordinary loss in relation to the sale of the Film business to Toyobo.

Between these 2, the absence of the settlement received and the recording of the business structure improvement expenses, the net of extraordinary items worsened year-on-year.

Next, financial position. Total assets increased by JPY 10 billion. But the yen appreciated during this period. On the lower right-hand side, you can see the exchange rates, yen to the dollar and the yen to the Euro. Due to the impact of foreign exchange rates, the total assets amount has been contracted by JPY 15.4 billion.

So on constant currency, the total assets increased by about JPY 25.4 billion. The breakdown of the changes in total assets were cash and cash deposits increased by JPY 14.1 billion due to the issuance of corporate bonds during this first half of the year.

Before the redemption, given favorable issuing environment. We made the issuance, which increased cash.

Trade receivables was reduced in all businesses, down JPY 16.2 billion from the beginning of the year. Tangible and intangible assets increased by JPY 16.5 billion. The main reason for the increase was an increase in tangible assets due to the application of IFRS 16 leases amounting to JPY 9.5 billion.

As -- there were goodwill of the Renegade, which we acquired in the first half, totaling about JPY 6 billion and investment on Carbon Fiber facilities.

As for cash flows, net cash and cash equivalents provided by operating activities in the 6 months increased from JPY 33.9 billion to JPY 41.6 billion. As we saw earlier, net profit for the period declined from JPY 33.9 billion to JPY 20.4 billion, down by about JPY 1.3 billion.

But as working capital improved, net cash outflow was reduced from JPY 20.5 billion to JPY 1.7 billion, thus, a slight increase in operating cash flow.

Free cash flow was net outflow of JPY 7.1 billion, about the same as in the previous year.

That's the overview of the results for fiscal 2019 first half. Moving on to the outlook for full year 2019. Numbers are shown as -- are as shown here on the slide.

Overall, Materials segment was relatively strong in the first half despite the impact of the automotive industry. But for the second half, we expect that the impact of the sluggishness of the auto industry will be felt more strongly on an annualized basis.

There might be a downturn in the industry as a whole, due to a decline in demand for automobiles in Europe and China and the trade friction between the U.S. and China.

For the CSP business, strong demand for pickup trucks and SUVs in North America are expected to continue, but we expect the strike at GM, General Motors, that ended recently after about 40 days, might have a slight impact on our sales.

More significantly, there is a risk that with the resumption of production at GM, a sudden upsurge in orders might result in hurting our productivity.

In addition, as we are participating in GM's new model programs, we are also seeing a risk that due to delays in the programs overall, some of the sales we had been expecting might not be realized until later.

In light of these various risks, we have revised the outlook for fiscal 2019.

Here are some highlights of the full year outlook. Net sales revised from JPY 900 billion, as announced in August to JPY 860 billion, down JPY 40 billion. But by business segment, Materials is revised downward but Healthcare remains unchanged.

Operating income is revised from JPY 60 billion to JPY 55 billion, down JPY 5 billion.

By segment, Materials is revised downward by JPY 5 billion, but no change for Healthcare.

Reflecting revision in operating income forecast, profit attributable to owners of parent is revised downward from JPY 41 billion to JPY 34 billion, down JPY 7 billion.

Downward revision has been made in light of an increase in extraordinary losses mentioned earlier and recording of extraordinary loss items assumed for the second half.

Despite a downward revision of profit for the period from JPY 41 billion to JPY 34 billion, down JPY 7 billion, dividend forecasts remain unchanged at annual dividend of JPY 60 per share as shown on the lower right.

Some additional comments on the summary of outlook for fiscal 2019. Net sales revised downward from JPY 900 billion by JPY 40 billion, and operating income revised downward by JPY 5 billion, ordinary income revised downward by JPY 6 billion, reflecting nonoperating items such as lower equity in earnings and losses of affiliates.

Profit attributable to owners of parent revised downward by JPY 7 billion. Accordingly, ROE is forecasted to be 8% or 2% lower compared to the previous outlook.

ROIC based on operating income, 8% or 1% lower, and EBITDA of JPY 108 billion, revised downward by JPY 7 billion from the previous outlook.

While operating income is revised downward by JPY 5 billion, with the expected decrease in depreciation expenses, EBITDA was revised downward by JPY 7 billion.

Last but not the least, key financial indicators in relation to the medium-term management plan. ROE target is 10% or higher. And it is not likely that we will achieve this in fiscal 2019 after achieving the target in fiscal years 2017 and '18. But the average for fiscal years 2017 through 2019, although I'm not sure this is the right way to look at it, does exceed 10%.

EBITDA is expected to fall short of the mid-term target for fiscal 2019 of JPY 120 billion. The target of ROIC based on operating income of 8% or above has already been achieved.

That concludes my presentation. Thank you for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]