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Edited Transcript of 4021.T earnings conference call or presentation 8-Nov-19 7:00am GMT

Q2 2020 Nissan Chemical Corp Earnings Presentation

Tokyo Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Nissan Chemical Corp earnings conference call or presentation Friday, November 8, 2019 at 7:00:00am 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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Now I will present the results. Please turn to Page 5 for the first half results. Operating profit in the first half decreased from JPY 19.4 billion in the same period of the previous year to JPY 18 billion, down by JPY 1.4 billion. Compared to the outlook announced in May, it was up by JPY 0.2 billion from JPY 17.8 billion outlook. Net income was down from JPY 15.4 billion in the previous year to JPY 14.5 billion, down by JPY 0.9 billion. However, compared to the outlook of JPY 13.7 billion in May due to extraordinary income and loss of JPY 0.9 billion, it went up by JPY 0.8 billion. As for the extraordinary income and loss, as shown here, we had an extraordinary income by a gain of JPY 1.7 billion on the sales of 12 securities. And as an extraordinary loss, we posted JPY 0.8 billion cost for a fee for a licensing arrangement relating to Fluralaner.

For the second half FY 2019 outlook, please turn to Page 7 and 8. As for the second half outlook, operating profit in the previous year was JPY 17.7 billion, and the outlook for this year is JPY 20.6 billion, up by JPY 2.9 billion, and against the outlook in May, it is down by JPY 0.3 billion. As for the net income, against JPY 14 billion in the previous year, it will be JPY 16.1 billion, up by JPY 2.1 billion, but it is down by JPY 0.4 billion compared to the outlook in May.

As for the second half FY '19, as shown in the red square on Page 8, year-on-year operating profit in the third quarter is down by JPY 1.8 billion, and in the fourth quarter, it is up by JPY 4.7 billion, showing substantial gap. This substantial profit decline in the third quarter is mainly due to the shipment tightening of Fluralaner. And let me share this information [with you] in advance.

For the full year outlook, please turn to Page 9. Operating profit will be up by JPY 1.5 billion year-on-year from JPY 37.1 billion in the previous year to JPY 38.6 billion this year. But compared to the outlook, it is down by JPY 0.1 billion. Net income will be up by JPY 1.2 billion with extraordinary income of JPY 0.9 billion from JPY 29.4 billion in the previous year to JPY 30.6 billion. Against the outlook, it is up by JPY 0.4 billion.

At the end of Page 9, let me comment on shareholder return. As for dividend, first half dividend is JPY 42 and second half is JPY 46, in total JPY 88, up JPY 6 year-on-year. This JPY 88 per share is the amount we promised in May and payout ratio will be 42.1%. Share repurchase of JPY 6 billion was completed in July. And today, we announced the additional repurchase of JPY 4 billion starting from next week. Combining these 2 share repurchases, total is JPY 10 billion, up JPY 1 billion from JPY 9 billion in the previous year. Total payout ratio will be 74.6%.

Cash flow continues to be reached, as shown on Page 11. As shown in the second column from right in the outlook as of November 2019, cash and cash equivalents at the end of the period will be JPY 38.1 billion. Operating cash flow remains almost unchanged against the outlook. But as for investing cash flow, cash-based investment decreases slightly and cash inflow due to gain on sales of securities was JPY 2.9 billion. These resulted in reduced investing cash flow. Financing cash flow increases due to JPY 1 billion increase in share repurchase from the initial outlook, as mentioned. But in total, cash is built up by JPY 1.9 billion against the beginning of the fiscal year.

Page 14 shows operating profit outlook by segment. First half actual is shown in the center, and the year-on-year change is shown on the right. Total operating profit was JPY 18 billion, as shown in the center, down JPY 1.4 billion, from JPY 19.4 billion in the previous year. By segment, Chemicals were down JPY 0.9 billion, Performance Materials were up JPY 0.1 billion, Agrochemicals were down JPY 0.4 billion, and Pharmaceuticals were down JPY 0.1 billion. Outlook is shown on the right as JPY 17.8 billion. And compared with this, the actual was up JPY 0.2 billion, Chemicals were down JPY 1 billion, Performance Materials were up JPY 0.8 billion, Agrochemicals were up JPY 0.2 billion against the outlook.

Second half outlook is JPY 20.6 billion, up JPY 2.9 billion year-on-year compared to JPY 17.7 billion in the previous year. As shown here, Chemicals will be up JPY 1.3 billion, Performance Materials will be flat, Agrochemicals will be up JPY 1.6 billion, and Pharmaceuticals will be up JPY 0.2 billion year-on-year. Outlook as of May is shown on the right, and the second half total is JPY 20.9 billion. Compared to this, Chemicals are up JPY 0.4 billion, Performance Materials are down JPY 0.7 billion, Agrochemicals are up JPY 0.4 billion.

Now I'll explain by segment. Please turn to Page 25 and 26. I wouldn't comment in detail, but let me refer to the sales year-on-year change. As for Fine Chemicals, first half actual was plus 3%, far below the outlook of plus 14%. Second half will be in line with the outlook. And the full year outlook is plus 8%, which is below the initial outlook of plus 14%. In Basic Chemicals, first half actual was minus 2%. As the initial outlook was plus 10%, it was below the outlook. Second half outlook is plus 8%, and the full year outlook is plus 3%, which is below the initial outlook of plus 7%.

For profit by segment, please turn to Page 27 and 28 for Chemicals. Each one of the first and the second quarter, first and second half review and outlook vis-à-vis the corresponding period of the previous year and outlook are shown here, but let me comment on the first half review and the second half outlook on Page 28 due to time constraint.

In Chemicals, Fine Chemical sales were up, but operating profit went down due to inventory adjustment. In Basic Chemicals, both the sales and operating profit went down with JPY 0.2 billion down in sales and JPY 0.9 billion down in operating profit. Against the outlook, as shown on the left bottom, both the Fine and Basic Chemicals were below the outlook. And in total, sales were down JPY 2.1 billion, and operating profit was down by JPY 1 billion. As for the outlook for the second half on the right, both in Fine and Basic Chemicals, recovery and the service expansions are expected to achieve sales and operating profit increase. As a total segment, sales will be up JPY 1.8 billion and operating profit will be up JPY 1.3 billion. Against the outlook, as shown at the bottom, sales will be up JPY 0.4 billion and operating profit will be up also by JPY 0.4 billion.

Moving to Performance Materials. Let me start with Display Materials on Page 31. For the first half sales review of SUNEVER in Display Materials, it was plus 3%, as shown here. It was well above the outlook of minus 3%. Full year outlook was revised from 0% to plus 3%.

For Semiconductor Materials, please turn to Page 33. As shown on the right bottom in the table, first half actual sales were minus 4%, down compared to the outlook of flat. Second half will be plus 6%, close to the outlook as of May, and the full year outlook is plus 1%, which is below the full year outlook in May. As for inorganic materials, including SNOWTEX, mainly oilfield materials were sluggish and in all of the first and the second half and the full year, sales are substantially below the outlook. Sales were minus 11% in the first half, second half will be flat, and the full year will be minus 6%. Outlook in May was plus 5%, and this shows substantial downtrend.

Page 36 shows profit in Performance Materials segment. In the first half, sales of SUNEVER increased substantially, backed by sales increase in photo-alignment IPS and the VA despite a decrease in rubbing IPS. Sales in Semis Materials and Inorganic Materials were down, as mentioned, but fixed cost was reduced, and therefore, although sales were down by JPY 0.6 billion, operating profit was up JPY 0.1 billion. As shown below, against the outlook, operating profit was plus JPY 0.8 billion. Key contributors are upside in SUNEVER sales, photo-alignment IPS and VA and reduced fixed costs. As for the second half, shown on the right, SUNEVER sales continued to grow year-on-year. Semis Materials sales will be up, and the Inorganic Materials will be flat, but fixed cost will increase JPY 0.4 billion year-on-year. Accordingly, sales will increase by JPY 1.1 billion but profit will be flat. As shown below, against the outlook in May, sales will be down by JPY 0.5 billion and operating profit will be down by JPY 0.7 billion. As shown at the bottom, profit in Display Materials will be in line with the outlook, but Semis Materials and Inorganic's will be down.

For Agrochemicals, please turn to the table on Page 38. In our November outlook, sales of Fluralaner are expected to decline slightly against the outlook in May. ROUNDUP is slowing down as well. ROUNDUP MAXLOAD for farmers were in line, but in ROUNDUP AL for general household, we promoted a series of low-priced products to expand user base and the product mix change will result in sales decline. As for ALTAIR, due to strong sales in the newly-launched second-generation products, sales will be above the outlook in May. As for new product GRACIA, its sales are shown by bar chart on the left bottom. In the first quarter, the sales were well above the outlook. But as for the first half actual, it was very close to the outlook in May. In the first half, front-loaded sales were adjusted in the second quarter, and the results were in line with the outlook. But as our market referrals have been very strong, in the second half, sales will be much stronger compared to the initial outlook as shown by dark green bar. Midterm plan target sales are shown in the right chart. And we expect that the target sales of FY '21 in the midterm plan will be achieved in the initial year.

Please turn to Page 39 for Agrochemicals. I will explain the new development in the pipeline shown at the bottom in the slide of main products. As shown in red, the launch of NC-656, an in-house developed herbicide, is expected in 2027 with high visibility. It has excellent efficacy against the resistant grass weeds and it is our first full year application rice herbicide. In Japanese agriculture, herbicide granule is spread to [fly to the] paddy field to prevent weeds from growing above water surface. This in-water application is adopted mostly in Japan and Korea. But in other countries, including Vietnam and Thailand and others, full year applications directly to weeds are more prevalent. Our company didn't have full year application-type herbicide so far, and this is the first of this type. Expected peak sales are JPY 10 billion, and this will develop into the second or third growth engine for us in the future following GRACIA.

Fluralaner is described on Page 40, as shown in red. Finally, in July, it was registered in China and was launched in July. Quarterly sales of Fluralaner are shown here. As usual, sales fall drastically in the third quarter, and that reduces the third quarter profit of the entire company substantially, as shown before. The first half sales of FY '19 are shown in purple, and the first and the second quarter combined sales are above the outlook. But there will be some adjustment in the second half and also due to the appreciation of yen, for the full year, sales will be slightly below outlook.

For the profit of Agrochemicals, please turn to Page 42. As for the first half, sales were down JPY 0.8 billion, and operating profit was down JPY 0.4 billion. Sales in GRACIA were up and the sales in ROUNDUP, both of MAXLOAD and AL were up in the first half. In the previous year of 2018, as you may recall, due to heat spells in summer, long rains and typhoons, sales of herbicide were weak in general. But in this year, we didn't have these recurrences. Sales in ALTAIR were also good. But in Fluralaner, sales declined due to inventory adjustment of BRAVECTO. Inventory adjustment cost impact was negative of JPY 0.3 billion, and operating profit was down JPY 0.4 billion. As far against the outlook of the first half, as shown on the left bottom, sales of GRACIA, Fluralaner, PULSOR and ALTAIR were above target. Fixed cost was below the budget by JPY 0.4 billion. As a result, despite sales were down, operating profit was up JPY 0.2 billion in the first half. As for the second half shown on the right, sales of GRACIA, PERMIT and Fluralaner will grow further. Fixed costs will increase by JPY 0.4 billion. But we expect sales will be up JPY 2.4 billion, and operating profit will be up JPY 1.6 billion. Compared to the outlook in May, as shown at the bottom, sales will be up JPY 0.5 billion and operating profit will be up JPY 0.4 billion. Sales of GRACIA and ALTAIR will be above target, but Fluralaner sales will be slightly below target.

Let me move to Pharmaceuticals. Sales of LIVALO are shown at the bottom with FY '18 actual and FY '19 outlook. In the last few years, domestic sales of LIVALO have been eroded due to generic growth. In particular, in the last 2 years, sales were very weak due to inventory adjustment in domestic end-market. But in this fiscal year, domestic LIVALO sales recovered slightly. Pricing export API has been dropping, and that turned the sales to downtrend.

Please turn to Page 46. Besides ethical pharma business, another business in pharmaceuticals is Custom Chemicals. This business started as custom manufacturing and process researching services engaging from preclinical stage. But recently, generic API is rather difficult to manufacture, sometimes due to the process patent granted to a preceding drug. And we are exploring new fields by proposing a new manufacturing process for generic. Maxacalcitol and Eldecalcitol are such examples. Sales are shown below. They are not sufficient to offset the decline of LIVALO, but most of sales and profit have been growing steadily.

Page 47 explains PeptiStar. We made JPY 0.9 billion investment. As for the business plan, as shown in the third bullet point from the bottom, R&D center was completed in April, and the manufacturing fab was completed in July at PeptiStar. Our role is in solution-phase synthesis, which will not be adopted in the initial stage, and we expect its adoption later when solid-phase production capacity is not sufficient in the future.

Please turn to Page 50 for profit overview of Pharmaceuticals. In the first half, LIVALO sales were down due to weak export as mentioned, and Custom Chemicals sales were flat. Sales were down JPY 0.3 billion, and operating profit was down JPY 0.1 billion. They were almost in line with the outlook as shown on the left bottom. As for the second half, LIVALO sales will be down year-on-year and Custom Chemicals sales will be up due to strong generic-related sales, as mentioned. Against the outlook in May, sales will be in line and operating profit will be up JPY 0.1 billion.

Page 51 shows CapEx, depreciation and R&D expenses. Page 55 describes ESG-related topics. In July 2019, NCC was included in the MSCI Japan Empowering Woman Index. The company was included in the Dow Jones Sustainability Asia Index for the second consecutive year. In the area of governance, we established the Nomination and Remuneration Committee as optional advisory body in April and introduced performance-linked stock compensation plan for board members. The company was selected as one of 50 candidates of the Corporate Value Improvement Award hosted by Tokyo Stock Exchange for the second consecutive year. Our characteristics are shown from Page 57 for those who are not very familiar with our company.

Page 61 shows share repurchase. I talked about the report just before and in FY '19, we had a cancellation of 1 million shares twice, in total of 2 million shares. And most of the repurchased shares are already canceled. This concludes my presentation on the results of the second quarter and the outlook for this fiscal year. Thank you very much for your attention.

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