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Edited Transcript of 3405.T earnings conference call or presentation 12-Nov-19 10:59am GMT

Q3 2019 Kuraray Co Ltd Earnings Call

Osaka Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Kuraray Co Ltd earnings conference call or presentation Tuesday, November 12, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Keiji Taga

Kuraray Co., Ltd. - Managing Executive Officer & Director

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Presentation

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Keiji Taga, Kuraray Co., Ltd. - Managing Executive Officer & Director [1]

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Good afternoon, ladies and gentlemen. I am Taga. Thank you for joining us in our conference call today.

From this year, the head of each in-house company is joining us in the briefing. For today's conference, Mr. Sano, company president of functional materials company, is with us. I encourage you to take this opportunity to ask him questions.

Now let me take you through the results for the third quarter of fiscal year 2019.

Page 2, please. Q3 fiscal year 2019 results.

Due to the global economic slowdown, demand decreased in many businesses, leading to a decline in sales. As a result, as you can see in the slide, we had those results. Sales were down 4.7% to JPY 428.9 billion. Operating income is down 22.1% to JPY 42.3 billion. Ordinary income is down 27.1% to JPY 37.9 billion. Net income decreased 41.8% to JPY 19.4 billion. There was a significant decline in sales and profits compared with the same period last year.

The figures shown here for the previous year are actual figures applied retroactively because post-acquisition accounting for Calgon Carbon, which was acquired in March 2018, was finalized at the end of last year. In addition, as shown in the press release issued on October 24, an extraordinary loss of approximately JPY 14 billion was recorded as damage payment related to the settlement for the fire incident that occurred in our U.S. subsidiary. Also an extraordinary income of approximately JPY 10 billion was recorded as insurance income related to this incident.

Exchange rates, raw materials and fuel prices are as shown on the slide.

Please go to Page 3. Business conditions by segment.

First is vinyl acetate segment. PVA resin, which was affected by the economic slowdown, experienced a decrease in sales volume, especially for general-purpose products. Optical-use poval film experienced a decline in shipments due to the impact of LCD inventory adjustment. Water-soluble PVA film performed well as demand for unit dose detergent packet applications continue to grow. In PVB film, sales of high-performance interlayer film SentryGlas expanded, but sales of standard films for automobiles decrease. EVAL was sluggish in the gas tank application due to a decline in vehicle production volume. The food packaging application is taking time in recovering sales after the fire incident, causing a decrease in the cumulative total up to the third quarter. As a result of these factors, we experienced a decline in sales and profits in the third quarter compared with the same period of last year. Compared with the second half plan, both sales and profits in the third quarter were lower.

Page 4, please. The isoprene segment had lower sales and profits in the third quarter compared with the same period of the previous year. Both isoprene chemicals and SEPTON were affected by the economic slowdown, resulting in reduced sales. GENESTAR increased sales for automotive connectors and LEDs, but due to stagnant demand, sales volume for electric and electronic devices decreased. In this segment, sales and profits in the third quarter were lower than what was planned for the second half.

Page 5, please. In the functional materials segment, sales and profits declined year-on-year in the third quarter. The actual figures for Calgon Carbon for fiscal year 2018 reflect the finalization of PPA retrospectively. Sales of methacrylic resin decreased due to a deterioration in the market conditions. In medical, sales of dental materials zirconia remained firm. Calgon Carbon expanded demand for drinking water applications in North America but experienced slow sales growth in Europe due to stagnant demand. In the Carbon Materials business, we continued to expand sales of high-value-added products. In this segment, the third quarter sales and profits were below the plan for the second half.

Please see Page 6. The fibers and textiles segment experienced lower sales and profits in the third quarter compared to the same period of the previous year. CLARINO continued to achieve steady sales in luxury product applications but reduced sales for shoes. KURALON exports were weak for cement reinforcement. And also, for use for reinforcing rubber, it was affected by a decline in vehicle production. As for customer goods and materials, the sales volume of KURAFLEX for commodity use declined. In this segment, sales and profits in the third quarter were lower than planned.

Page 7. This slide shows segment-by-segment third quarter results compared to the same period of last year. Please refer to it later.

Next, Page 8, please. This slide shows a variance analysis of JPY 12 billion, which is the difference in operating income between the third quarter of 2019 and the third quarter of 2018. You can see the variance analysis. First, volume and capacity utilization. It was minus JPY 9 billion due to a decrease in sales volume of optical poval film, PVA resin, elastomer, methacrylic resin and so forth; and production adjustments associated with them. Terms of trade was negative JPY 500 million due to negative impact of the weak euro, which was partly offset by positive impact of raw materials and fuel cost reduction. Operating expenses and others was minus JPY 2.5 billion due to an increase in depreciation expenses and SG&A.

As a result of these factors, the total operating income was minus JPY 12 billion.

Please turn to Page 9. This slide compares the asset section of the balance sheet as of the end of the third quarter and end of last year. Current assets increased by JPY 2.3 billion due to an approximately JPY 10 billion in insurance income accompanying the settlement of litigation in the United States, despite a decrease in notes and accounts receivable trade. Fixed assets increased JPY 28.9 billion, mainly due to an increase in construction in progress associated with capital expenditures and an increase in tangible fixed assets of JPY 42.2 billion related to on-balancing of lease transactions following the application of the new lease standard, offsetting the decrease of JPY 13.8 billion in intangible fixed assets, including goodwill.

Please turn to Page 10. This slide shows the liabilities and net asset section of the balance sheet.

Current liabilities increased JPY 24.9 billion. This includes JPY 11.8 billion decrease due to repayment of short-term loans payable and JPY 8.3 billion decrease in notes and accounts payable trade. It also reflects an increase of JPY 24 billion due to the issuance of commercial paper, the booking of a loss of JPY 14 billion due to legal settlement in the United States as accrued expenses and an increase in accounts payable for equipment. Due to these factors, the total increased by JPY 24.9 billion. Long-term liabilities increased JPY 23.3 billion. Main factors were the JPY 17.6 billion increase due to the on-balanced lease transaction, as explained in the asset section; and the JPY 7.7 billion increase in long-term loans payable.

Net assets decreased JPY 17.1 billion. The main factor were JPY 6.6 billion decrease due to the buyback of shares and a JPY 15.3 billion decrease in foreign currency translation adjustments.

Please turn to Page 11. This slide shows the forecast for fiscal year 2019. As I mentioned earlier, I compared the segment's second half plan with the third quarter results. All segments were below the plan.

In our main business, vinyl acetate and isoprene for automotive applications, display applications and electric and electronic device applications demand was slow. And even in the fourth quarter, we cannot expect a major change in demand conditions. Therefore, we have revised our fiscal year 2019 forecast, as shown on the slide. Comparison between the previous forecast and the revised forecast is as follows: sales, down JPY 22 billion to JPY 578 billion; operating income, down JPY 10 billion to JPY 57 billion; ordinary income, down JPY 10.5 billion to JPY 52 billion; net income, down JPY 9.5 billion to JPY 28.5 billion.

As mentioned earlier, we recorded an extraordinary loss of approximately JPY 14 billion in the third quarter due to the lawsuit related to the fire incident at our U.S. subsidiary. At the same time, we recorded approximately JPY 10 billion of insurance income. On the other hand, currently pending disputes may cause new losses in the future, but they are not included in the revised full year forecast because it is difficult for us to make a reasonable estimation at this time.

The full year ForEx, raw material and fuel price assumptions are as shown on the slide.

Page 12, please. Sales and operating income by segment. This slide shows a comparison between the previous forecast and the revised forecast.

Page 13, please. This slide shows the business performance forecast for each segment for fiscal year 2019 compared to the fiscal year 2018 results.

Page 14, please. For your reference, the third quarter fiscal year 2019 results and the full year forecasts are shown by segment and in comparison with the previous year.

Page 15, please. For your reference, this slide shows the operating income for the third quarter 2019 and the full year forecast by segment compared with the previous year.

This 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.]