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Edited Transcript of 4021.T earnings conference call or presentation 7-Feb-20 7:15am GMT

Q3 2020 Nissan Chemical Corp Earnings Call

Tokyo Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Nissan Chemical Corp earnings conference call or presentation Friday, February 7, 2020 at 7:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junichi Miyazaki

Nissan Chemical Corporation - CFO, Head of Finance & Accounting Dept., Senior EVP - Corporate Strategy & Coordination and Director

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Presentation

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Junichi Miyazaki, Nissan Chemical Corporation - CFO, Head of Finance & Accounting Dept., Senior EVP - Corporate Strategy & Coordination and Director [1]

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I am Miyazaki of Nissan Chemical Corporation. Thank you for joining us. I'd like to present following the material.

Please turn to Page 3 for the third quarter highlight. As for the third quarter, operating profit was JPY 4.4 billion in the previous year, but it was JPY 3.4 billion this year, down JPY 1 billion year-on-year.

Results by segment are shown on Page 11 and 12. So I'll briefly comment here. As for Chemicals, melamine and TEPIC continued to be weak and sales in environmental-related products were also weak, and operating profit went down significantly.

In Performance Materials, Display Materials, especially photo-alignment IPS sustained its robustness and with a reduced fixed cost, operating profit increased. In agrochemicals, despite serious increase of GRACIA, shipment of Fluralaner decreased as expected, and operating profit was down.

Pharmaceuticals operating profit went down due to LIVALO sales decrease.

Next, I'll explain vis-à-vis the outlook for the third quarter. Compared with the outlook announced in November, total operating profit was above target, marking JPY 3.4 billion against JPY 2.6 billion in outlook, up by JPY 0.8 billion. By segment, chemicals operating profit was significantly below target due to the weakness of melamine, TEPIC and environmental-related products.

Performance materials operating profit was above target due to robust display materials, strong recovery of semis material and reduced fixed costs. Agrochemicals operating profit was above target due to front-loaded shipment from the fourth quarter. Pharmaceuticals operating profit was slightly below target due to weaker-than-expected Custom Chemicals. Net income in the third quarter was JPY 3 billion against JPY 2.3 billion in outlook, up JPY 0.7 billion.

As for the year-on-year comparison of the first to third quarter, operating profit was JPY 21.4 billion against JPY 23.8 billion in the previous year, down JPY 2.4 billion. In Chemicals, in addition to sales decrease in melamine, inventory adjustment negatively affected profit and operating profit went down. Performance Materials operating profit was up due to robust Display Materials, underpinned by the growth in both of smartphone and the non-smartphone applications of photo-alignment IPS and fixed cost reduction. As for Agrochemicals, I made a similar comment just before, but despite substantial sales increase in GRACIA, due to expected sales decrease in Fluralaner, Agrochemicals operating profit went down. As for Pharmaceuticals, domestic sales in LIVALO increased but export was down, and the sales in Custom Chemicals was slightly down and the total Pharmaceuticals operating profit was down.

On Page 4. First, as shown in number 2, the full year outlook remains unchanged. The third quarter results were above target as mentioned but the fourth quarter might be below. So as of today, we do not revise the outlook. As for number 3, I will explain the fourth quarter segment sales trend vis-à-vis the fourth quarter segment sales outlook as of November.

Regarding Chemicals, in Fine Chemicals, price of TEPIC for general application will continue to dip, and its volume will continue to go down due to inexpensive Chinese products. TEPIC for electronic materials will be down due to continued sluggishness of major customers' demand in solder resist ink among others. As a whole, Fine Chemicals sales will be below target.

Total Basic Chemicals sales will be also below target. As for melamine, inexpensive Chinese products' expansion still continues, and we cannot expect market price recovery as of today.

Regarding Performance Materials, as for Display Materials, strong series of SUNEVER, especially photo-alignment IPS, both for smartphone and the non-smartphone applications will be sustained, and Display Materials sales will be above target. As for Semis materials, given the recovery in the third quarter, major customers' utilization recovery will be sustained and sales in Semis materials will be above target.

As for Inorganic, all of SNOWTEX for non-polishing materials, Organo sol and Oilfield materials in the U.S. are lackluster and Inorganic sales will be below target.

Regarding Agrochemicals, general agrochemical sales will be above target. As the launch of Quinoxyfen, which was acquired in November, that's included in the initial outlook. So the upside likelihood is high. And Fluralaner will be almost in line with the target.

Regarding Pharmaceuticals, both of LIVALO and Custom Chemicals will be in line with the target of the fourth quarter. Page 5 was just covered.

Please turn to Page 6. As for shareholders' return, dividend remains unchanged. The first half dividend was JPY 42, the second half will be JPY 46 and the full-year dividend will be JPY 88. Share repurchase of JPY 4 billion is ongoing, and it will be completed shortly.

Page 7 shows nonoperating income and expenses.

When you see the net income and expenses, total of the first to third quarter in the previous year was JPY 1.57 billion and the total of corresponding period of this year is JPY 1.74 billion, down by JPY 0.54 billion year-on-year. Major factor is, first, foreign exchange gains and losses. In the previous year, JPY 0.07 billion of gain was posted. But this year, a loss of JPY 0.14 billion was posted, and that resulted in the decrease of JPY 0.21 billion. And the nonoperating income of the previous year in the item of others, there was a gain on a series of investment securities, JPY 0.27 billion. And in this year, all of this is transferred to extraordinary income, and that resulted in the decrease of JPY 0.27 billion in nonoperating income.

Please turn to Page 8 for cash flows. In this fiscal year, some notable changes are posted and let me explain them. In operating cash flow, amortization of goodwill of JPY 0.2 billion, shown on the fourth line, is that of Quinoxyfen. Investing cash flow, purchase and series of investment securities of JPY 2.6 billion on the second line is net sales of securities. In financing cash flow, share repurchase and payout to shareholders was JPY 5 billion in the previous year. But in this year, JPY 6 billion repurchase was completed in the first half. And we announced a JPY 4 billion in November, and it is still ongoing. So in total, JPY 8.3 billion was already repurchased. And the remaining JPY 1.7 billion, which is not repurchased yet, is included in others (2) below. This others (2) includes JPY 0.8 billion share repurchase related to introduction of performance-linked stock compensation plan, as shown in the note 2.

Page 9 shows balance sheet. As you know, in our company, accounts receivable is built up towards the end of March, the end of the fiscal year, especially in Agrochemicals. And then payment will be collected gradually. Accounts receivable moved substantially from the end of March, especially collection of account receivable is substantial.

As for investment securities, from March to December, (inaudible) has been picking up, but we sold shares. So as shown in the table of investment securities at the bottom, listed stock decreased from JPY 25.6 billion in March to JPY 23.9 billion, down JPY 1.7 billion.

Page 11 and 12 show segment figures. As shown in the column versus outlook in red on Page 12, Chemicals were minus JPY 0.8 billion, Performance materials, plus JPY 1.4 billion, Agrochemicals plus JPY 0.3 billion, Pharmaceuticals minus JPY 0.1 billion, and the total was plus JPY 0.8 billion, being above the outlook.

Let me provide segment information. Page 14 shows Chemicals. And the left table shows the trend of major products. In the third quarter, in Fine Chemicals, TEPIC was minus 10% year-on-year. And the first to third quarter sales were minus 1% year-on-year and it was below target, planned in November. Environmental-related product sales were also down by 16% year-on-year. Total Fine Chemical sales were down 6% year-on-year, and it was also below target.

Melamine sales in the third quarter were down substantially by 30% year-on-year. And the first to third quarter sales were down by 12%. Urea, including AdBlue sales, were up 3% in the third quarter year-on-year and they were above target. High-purity sulfuric acid sales were up 5% in the third quarter but it was below target. Total Basic Chemical sales were down 12% in the third quarter, down 6% in the first to third quarter, and they were below target. Sales and operating profit changes are described below.

Third quarter year-on-year review is shown on the left. As you see, operating profit in Fine Chemicals and Basic Chemicals decreased and sales in total segment were down by JPY 0.9 billion, and operating profit was down JPY 0.4 billion. As shown on the right, compared with the outlook as of November, here also, operating profit in Fine Chemicals and Basic Chemicals were below target. And total segment sales were down JPY 1.3 billion, and operating profit was down JPY 0.8 billion.

Please turn to Page 17 for performance materials. As for Display Materials, in the third quarter, SUNEVER sales were up 9%, and sales in the first to third quarter were up 5% year-on-year. Total Display Materials sales were up 9% in the third quarter and up 5% in the first to third quarter. Semiconductors materials sales are shown below. In the third quarter, both of KrF and ArF show negative growth year-on-year, but they were above the target and it indicates that the declines were more moderate than expected.

Other semiconductors materials sales were up 10% in the third quarter, and they were below target as we expected stronger growth. Total Semiconductors Material sales were flat year-on-year in the third quarter, and they were above target.

Inorganic sales are shown on the right. All of SNOWTEX, Organo sol, Oilfield Material sales were below target. Total Inorganic sales were down 12% in the third quarter year-on-year.

Page 19 shows profit overview. Changes in segment are described below on the left. And the total sales were up JPY 0.4 billion, and operating profit was up JPY 0.6 billion in the third quarter, as shown at the bottom. By subsegment, Display Materials operating profit was up, Semis materials were flat, inorganic materials was down year-on-year.

In comparison with the outlook, as shown on the right, sales were up JPY 0.8 billion, and operating profit was up JPY 1.4 billion, as described at the bottom. A second black point from the bottom shows lower fixed costs by JPY 0.6 billion was an additional benefit. As a result, Display Materials operating profit was above target, semis Materials was above and the Inorganic operating profit was below target.

Please turn to Page 22 for agrochemicals. Fluralaner sales were below target as the shipment, the small volume was shifted to the fourth quarter. ROUNDUP sales were up 10% year-on-year in the first to third quarter, they were above target, benefited by the front-loaded MAXLOAD sales from the fourth quarter. AL was in line with the outlook. ALTAIR sales were above target. And TARGA sales were above target. PERMIT sales for the U.S. were shifted to the third quarter from the fourth quarter and they were above target. GRACIA sales soared, up over 400%.

GRACIA sales are shown in bar chart on the left below. Actual first to third quarter sales were below plan, but this is due to the slightly weak export with prioritized sales in Japan. Quintec is described on the right. We acquired the brand from Corteva in November 2019 and started to sell the product in December. Sales in December was only JPY 10 million plus.

Quintec is a very popular product in the U.S. as a protectant fungicide to control powdery mildew. And as shown in the press release, it can generate rich cash flow as also shown in this table. And amortization will be 5 years on straight line method.

Page 23 shows Fluralaner. Nothing special happened since the second quarter. And as shown in quarterly sales chart, originally, the third quarter sales were projected as very small in the outlook, but that sales were shifted to the fourth quarter, and the actual sales in the third quarter were nil. Fourth quarter sales will be in line.

BRAVECTO Plus, a spot-on solution for cats' internal and external parasite infestations, was launched in the U.S. in December.

Page 24 shows the third quarter overview. Sales of the products which are listed here increased. And Fluralaner sales decreased. It was expected. But additionally, fixed cost increased, Quinoxyfen amortization of JPY 0.2 billion and inventory adjustment cost imposed a negative impact, and sales went down JPY 0.4 billion, and operating profit was down JPY 0.6 million year-on-year.

Comparison with the outlook at the third quarter is shown on the right. Sales of ROUNDUP, ALTAIR, TARGA, PERMIT among others, well above target and Fluralaner and GRACIA were below target, which were mostly caused by the shipment timing change to the fourth quarter. Fixed cost was higher by JPY 0.1 billion than expectation, including Quinoxyfen amortization of JPY 0.2 billion. As a result, sales were up JPY 0.3 billion, and operating profit was up JPY 0.3 billion.

Page 26 shows Pharmaceuticals. LIVALO sales were down 23% in the third quarter, and down 16% in the first to third quarter but they were above target.

Custom Chemical sales were down, and they were below target for the third quarter and combined total sales were almost in line with the target. As shown on the right, in the third quarter, both of sales and operating profit were down JPY 0.3 billion year-on-year, respectively. But compared with the outlook, sales were flat, and operating profit was down JPY 0.1 billion.

Page 28 shows the table of the full year outlook, which was provided at the first half results presentation on November 8.

As shown on Page 30, we expect substantial shipment of Fluralaner in Agrochemical in the fourth quarter, and operating profit in the Agrochemicals in the fourth quarter is expected to be JPY 12.4 billion.

Operating profit in the third quarter outlook as of November was minus JPY 2.2 billion. But in the previous year, Agrochemicals operating profit in the third quarter was minus JPY 1.3 billion, and fourth quarter was JPY 9.9 billion, showing the notable difference.

This concludes my presentation on the third quarter FY 2019 results. Thank you for your attention.