Asahi Kasei Corporation (3407) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call on Asahi Kasei Corporation. Thank you very much for your attendance today. I am Futoshi Hamamoto of Investor Relations. Let me introduce the members of our company present today. In addition to Koshiro Kudo, CFO, here with us today are Yozo Sato, Corporate Accounting and Control; Takuya Takahashi, Basic Materials Strategic Business Unit or SBU; Nobuhiro Yamaguchi, Performance Products SBU; Hiroaki Sugiyama, Specialty Solutions SBU; Eiji Ishikawa, Specialty Solutions SBU; Izumi Kawata, Asahi Kasei Microdevices Corp.; Kensuke Sakai, Asahi Kasei Homes Corp.; and [ Yuji Kide ], Asahi Kasei Pharma Corp. Now I'd like to invite Koshiro Kudo to start his presentation on the financial results.

Thank you. I am Koshiro Kudo. I will walk you through the financial results of fiscal 2020. Please turn to Page 4. We achieved net sales of JPY 2,106.1 billion, operating income of JPY 171.8 billion, ordinary income of JPY 178.0 billion and net income attributable to owners of the parent of JPY 79.8 billion. The year-on-year decline in Material and Homes was mostly canceled out by the rise in health care, allowing the entire group to be almost even with the previous year in both net sales and the operating income. We suffered a large year-on-year decrease in net income attributable to the owners of the parent chiefly as a result of a temporary income tax expense related to reconfiguration of the organizations of Veloxis Pharmaceuticals Inc. However, as the tax expense posted was JPY 24 billion, if you were to add the JPY 24 billion to the JPY 79.8 billion in net income attributable to the owners of the parent, we would have achieved the level comparable to that in fiscal 2019. We also maintained annual dividends at JPY 34 per share in accordance with the policy of stable and continually increased dividends. Compared to the forecast made in February 2021, we were ahead at every level of the profits. Let us move on to Page 5. I will give you the summary of the impacts of COVID-19. First of all, Material was hit by the decline in demand for automotive-related and petrochemical products mainly in the first quarter, but saw a recovery in demand and improvement in market prices from the second quarter. There was also increased demand for lithium-ion battery separators and electronic materials resulting from stay-at-home demand. On the other hand, as for apparel-related markets, severe conditions for fibers continued. There are some signs of recovery seen more recently, but this is mainly in overseas markets. Our understanding is that the domestic situation has remained quite challenging. In Homes, mainly due to the emergency declarations issued, the number of visitors to model homes declined resulting in the severe environment for orders sustained throughout the year. However, by reinforcing measures to attract customer traffic through means other than model homes, such as online events, we have seen signs of recovery in orders more recently. In Health Care, a large increase in the demand for ventilators was seen in critical care. In addition, there was increased demand for virus removal filters related to development and manufacture of COVID-19 drugs and vaccines. However, Health Care was no exception when it comes to sales activities as sales calls to hospitals were curtailed by COVID-19 restrictions. Please turn to Page 6. Next, let me explain about net sales and operating income by segment. In Material, we were significantly affected by COVID-19 mainly in the first quarter, but saw a recovery from the second quarter for automotive markets and petrochemical market prices. However, the improvement fell short of making up for the decline in the first quarter, resulting in the Material segment posting decreases in both sales and operating income year-on-year. In Homes, despite the real estate business showing firm performance, sales and operating income decreased year-on-year because of a decline in orders associated with the impact of 2019 consumption tax hike as well as due to COVID-19 in order-built homes and remodeling. In Health Care, on the other hand, sales and operating income increased year-on-year with a large increase in demand for ventilators and firm performance in Pharmaceuticals and medical devices, though sales activities were inhibited by COVID-19. The operating income in fiscal 2019 was JPY 92.4 billion for Material, JPY 72.7 billion for Homes and JPY 43.5 billion for Health Care, whereas in fiscal 2020, all 3 segments recorded between JPY 60 billion and JPY 70 billion, respectively. Please move to Page 7, which shows statement of income on a consolidated basis. Net sales totaled JPY 2,106.1 billion, down JPY 45.6 billion year-on-year. However, this includes sales recorded by newly consolidated companies, such as Veloxis. And therefore, if we were to exclude them, we would have fallen by JPY 79.4 billion or 3.7% year-on-year. As for SG&A expenses, we saw a decrease of about JPY 17 billion centered on travel expenses due to COVID-19. However, amortization of intangible assets related to Veloxis acquisition and labor expenses, especially for Critical Care went up. As a result, the total SG&A expenses increased by JPY 11.1 billion from a year before. Net extraordinary income and loss was negative JPY 28.1 billion in fiscal 2019 and negative JPY 27.1 billion in fiscal 2020, posting almost the same values in both years. I will elaborate more on this later in my presentation. For income taxes, an income tax expense of about JPY 24 billion was incurred in fiscal 2020 on the intragroup asset transfer for the reconfiguration of Veloxis organizations. Page 8 shows consolidated balance sheet. Total assets increased JPY 96.7 billion from the end of March 2020. Goodwill and other intangible assets decreased due to amortization, but PP&E increased and investment and other assets increased due to higher market value of investment securities and total assets increased. Liabilities decreased by JPY 14.4 billion due to interest-bearing debt decrease of JPY 44.9 billion. As of the end of the first half, we had a forecast of interest-bearing debt for the end of FY 2020, but the results were JPY 659 billion, which were lower than the forecast. As a result, D/E ratio was 0.45, and we almost sustained the guidance level of 0.5. Page 9 shows consolidated cash flows. As for operating cash flow, efficiency of working capital, including inventories improved and the cash inflow increased year-on-year. As for investing cash flow, in FY 2020, with the absence of JPY 141.5 billion payment for Veloxis acquisition in FY 2019, cash outflow decreased. As for financing cash flow, in addition to the dividend payment, repayment of borrowings resulted in the cash outflow. After paying dividend, free cash flow turned to positive JPY 50.1 billion, showing the improvement year-on-year. So far, I covered the results of FY 2020. Please turn to Page 11. I'll explain the forecast for FY 2021. As for the forecast for FY 2021, net sales were JPY 2,375 billion, operating income is JPY 190 billion, ordinary income is JPY 196 billion and net income is JPY 155 billion. Compared to the FY 2020, sales are up 12.8%. Operating income is up 10.6%. But net income is up substantially by JPY 75.2 billion or 94.3% in the plan. Temporary tax expenses of JPY 24 billion related to reconfiguration of Veloxis organization were paid in FY 2020. And in FY 2021, tax expense reduction almost equivalent to the previous year's tax expense is expected and that generates substantial gap. As for sales and operating income forecast, expecting significant recovery of performance in Material, we plan to achieve increase both in sales and profit. As a result, dividend in FY 2021 forecast is expected to be JPY 34 per share. And we continue to pursue stable and continually increase dividend, keeping the conventional policy unchanged while making decision in consideration of full year results. Payout ratio is 30.4% in the forecast for FY 2021. And in terms of the average of the previous 3 years of FY '19, '20, '21 of the current midterm management plan, payout ratio is over 40%. Page 12 shows sales and operating income forecast by segment. As for Material, as mentioned before, large increase in sales and income is forecasted with recovery of automotive market and petrochemical market prices. As for Homes, increased sales and income forecasted with the consolidation of McDonald Jones Homes Pty. Ltd. and a firm performance in each business. As for Health Care, decrease in sales and income is forecasted with leveling of spike in demand for ventilators in Critical Care despite firm performance in each business. Thus, I covered forecast for FY 2021. And now I'd like to pick up some items to explain from Appendix. Please turn to Page 15 for extraordinary income and loss mentioned before. In FY 2019, impairment losses were JPY 21.9 billion, which includes impairment loss of JPY 17 billion for synthetic rubber factory in Singapore. In FY 2020, impairment losses remained at JPY 1.9 billion without any major loss. Loss on semiconductor plant fire of Asahi Kasei Microdevices is shown below. In FY 2020, it was JPY 22.3 billion. Loss on product compensation, JPY 2.1 billion, is shown below in FY 2020, but it is not related to semiconductor plant fire of this time. As a result, net extraordinary loss in FY 2019 was JPY 28.1 billion. And in FY 2020, loss was JPY 27.1 billion with improvement of JPY 0.9 billion, almost unchanged from FY 2019. Please turn to Page 16. Page 16 shows overseas sales by business category. As for Homes, with some overseas business expansion, as of today, majority of sales are domestic ones. Including Homes, overseas sales ratio increased from 40% in FY 2019 to 42.8% in FY 2020, up 2.8 percentage points. In particular, the Americas overseas sales ratio increased from 13.6% in FY 2019 to 15.9% in FY 2020. And in China, it increased from 8.8% to 9.4%. For many Japanese companies, China serves as a major overseas sales region, but in the case of Asahi Kasei, through acquisition of health care businesses in Americas and acquisition of Sage Automotive Interiors, overseas sales ratio in Americas stays high. Finally, let me comment on Page 22. This slide shows operating income forecast by business category covering 3 years. As for Basic Materials and Performance Products, in the first quarter FY 2020, operating income fell sharply, but the recovery is expected in FY 2021. Operating income in FY 2021 will exceed the level of FY 2019. As for Specialty Solutions, income increased from FY 2019 to FY 2020 and the strong momentum would be sustained in FY 2021. As for Homes business category, operating income in FY 2019 was remarkably high, JPY 67.4 billion, and it dropped markedly to JPY 59.7 billion. But in FY 2021, with recovery in the second half, it would grow to JPY 63 billion. Health Care operating income was JPY 17.8 billion in FY 2019, JPY 23 billion in FY 2020 and will be JPY 24.5 billion in FY 2021, achieving steady growth. As for Critical Care, as mentioned before, in FY 2020, operating income increased drastically to JPY 44.6 billion with special demand for ventilators. In FY 2021, with some slowdown, operating income will be JPY 30.5 billion, which shows increase of JPY 5 billion over FY 2019, indicating steady progress. This concludes my presentation. Thank you.

Now we would like to take questions. Watabe from Morgan Stanley MUFG Securities.

I have 2 questions. My first question is in Material, could you tell me your assumptions for main products of Basic Materials in your forecast for fiscal 2021? And Performance Products is expected to soar in operating income, more than doubled from the second half and a significant rise even from the fourth quarter of fiscal 2020. Could you give me reasons behind this? On the other hand, the operating income of Specialty Solutions is expected to remain almost flat. Is it because of the impact from the fire at the semiconductor plant? Could you give me more details, including updates on separators?

Takahashi from Basic Materials will answer your question on Basic Materials.

As Kudo explained on Page 22, the operating income from Basic Materials was almost 0 in the first half of fiscal 2020 and started to recover in the second half to JPY 13.9 billion. In fiscal 2021, it is expected to post JPY 12 billion in the first half and JPY 15.5 billion in the second half, indicating it is on the recovery track. When you say main parts of Basic Materials, I believe you're referring to acrylonitrile or AN. Around February 2020, the U.S. was hit by a cold wave, which, among others, resulted in the soaring AN market. The impact is still lingering in April-June of 2021 and is expected to begin to subside around June and to further settle down from July to September. In the second half, our new plant in China is likely to come on stream. Given such factors, the spread -- it is expected to settle down gradually from April-June quarter to July-September quarter and over to the second half.

Yamaguchi from Performance Products. As you are aware, in fiscal 2020, the operating income plunged in the first quarter but showed a strong recovery in automotive applications in the second half and a gradual recovery in apparel applications. In fiscal 2021, we expect a strong recovery in demand for automotive applications and a gradual one in apparel applications to continue. The operating income reflected recoveries more than those seen in the sales volume. Partly due to the business practice, positive changes in terms of trade tend to lag behind the recovery in the sales volume. In other words, the sales volume starts to change first, followed by changes in terms of trade. In particular, in automotive applications, the sales volume was very strong in the second half of fiscal 2020, but the terms of trade failed to catch up. However, in fiscal 2021, there will be an improvement in terms of trade, which allows us to forecast a significant increase in the operating income. Sugiyama will answer the question on Specialty Solutions.

As you said, in fiscal 2021, we expect a positive growth in sales but no change in the operating income. That is because in fiscal 2021, we will need to account for an impact from the fire in the semiconductor plant compared to the previous year. As for the breakdown of the expected increase in sales, automotive-related products, which dipped especially in the first quarter of fiscal 2020, is likely to perform well in fiscal '21. We also anticipate an increase in the sales volume of electronic materials in fiscal 2021. Lithium-ion battery separators are also expected to increase in sales volume, but their prices are going down gradually every year and we have taken that into account in our forecast. The impact of the fire at the semiconductor plant will be negative in both sales and profit. And including all these impacts, we have come up with the forecast of increased sales and flat operating income.

In Critical Care, although it may be difficult to give us specific figures, could you tell us what was the contribution from the ventilators in fiscal 2020? Furthermore, how do you see the recovery of LifeVest wearable defibrillators? Could you share with us the breakdown of the increases and decreases of the operating income of Critical Care?

Hamamoto of IR will answer the question. Ventilator is expected to return to levels we used to see before the COVID-19 pandemic. In that sense, it will become a relatively low profile part of the entire performance of Critical Care. The mainstay of Critical Care is LifeVest and other defibrillators, and ventilators will return to their conventional low key presence. In terms of the scale of the business, Critical Care rose in sales by JPY 49 billion from fiscal 2019 to 2020 while LifeVest and other defibrillators struggled to grow under the pandemic as strongly as they used to. Majority of the increase was attributed to the growth in ventilators. While we expect the demand for ventilators to settle down from fiscal 2020 to 2021, the total sales decline is forecasted to be only JPY 26 billion. This means that we have assumed LifeVest and other defibrillators to recover and get back on the growth trajectory to help offset the loss revenue of ventilators.

Am I correct to say that you have already started to see signs of recovery?

Yes. Orders for LifeVest have been recovering more recently.

Yamada from Mizuho Securities. My first question is about Homes. With regard to the forecast for fiscal 2021, with the newly consolidated McDonald Jones of Australia, how much incremental operating income can we expect? If I remember correctly, you had owned about a 40% stake in McDonald Jones before consolidation, and therefore, I would assume the net equity in earnings of affiliates to go down. Could you clarify the impacts on which items to increase and which items to decrease? Moreover, how did you take into account the price rates of steel and other materials in your forecast for fiscal 2021? Order backlog for order-built homes declined by close to 10% from the end of fiscal 2019 to the end of fiscal 2020, and yet, your forecast for fiscal 2021 is fairly aggressive. Could you elaborate on the breakdown of your forecast?

Sakai from Homes. Overseas business is expected to grow in operating income from fiscal 2020 and the contribution from the business in Australia is included to some extent. As for the breakdown of the forecast for fiscal 2021, there was a significant dip in the order backlog due to COVID-19, which should have a serious impact on the number of homes units to be delivered. However, given that unit prices are becoming higher and the fixed costs will continue to be reduced following the effort in fiscal 2020, order-built homes expects to see a slight increase in the operating income year-on-year. Remodeling was severely affected by COVID-19 in fiscal 2020, but is likely to recover in fiscal 2021. Thus, we expect to see an increase in both sales and operating income for the entire segment of Homes.

The forecast for sales of the business in Australia is about JPY 100 billion. Isn't it?

At this moment, our forecast for the sales of the business in Australia is JPY 75 billion.

But I believe the cost of materials will also rise. To what extent do you take that into account?

As you rightly said, the cost of various materials, including steel, has been going up. And as in fiscal 2020, the cost of logistics has been rising as well. Though I cannot give you any specific numbers, those factors have been incorporated in the budget as items to push up the costs.

Did you assume that, for instance, the cost of steel materials will rise by JPY 20,000 per ton?

I'd like to decline mentioning specific numbers, but we do assume a significant rate of increase.

Is it fair to say that while assuming a significant rate of increase in costs, with such a decline in the order backlog, you're still confident enough to generate this much profit?

Yes. We will continue our efforts to reduce costs and plan to increase profit mainly in remodeling and overseas businesses.

My second question. I'm now looking at the main pharmaceutical sales on Page 31. Sales of Teribone osteoporosis drug has increased in fiscal 2020 despite an impact from romosozumab. Am I correct to understand that impact from romosozumab was not so severe in fiscal 2020, and your new formulation of Teribone autoinjector has helped achieve the year-on-year growth? I'm also interested to know how you looked at the potential impacts of abaloparatide, which is expected to be launched going forward and the impacts of generic drugs. Furthermore, could you also explain why the sales volume of Recomodulin, recombinant thrombomodulin, dipped slightly in fiscal 2020 from a year before.

[ Kide ] from Asahi Kasei Pharma will answer the question. As for Teribone, the self-injection formulation is growing rapidly in sales, and in that sense, there's room for both Teribone and romosozumab in the market. Abaloparatide is a new drug, and we do not know when it is going to be launched yet. However, abaloparatide is a drug administered once every day through self-injection. And therefore, the way we look at the drug is that it will pose more direct competition to Forteo than to Teribone. What we need to do is to make sure Teribone will be prescribed to those patients it is supposed to be prescribed to. As for Recomodulin, sales have been declining recently. It was partly because hospital beds were once in acute shortage due to the influx of COVID-19 patients, leading to a decline in the number of patients with diseases such as DIC, disseminated intravascular coagulation, requiring admissions into large hospitals. Having said that, however, our share in DIC treatment drugs has not dropped. Moving forward, now that Recomodulin has been recommended for DIC associated with sepsis, in the sepsis treatment guideline, we expect its sales to turn upward again. In fact, sales in April and in May after the extended holidays of Golden Week, sales of Recomodulin have been showing strength.

As for DIC, patients will die if they don't get injected with the drug and yet, is it your view that demand for the drug decreased? I find it hard to believe that instance of DIC decreased due to COVID-19. Furthermore, if patients with COVID-19 develop thrombi, would they not receive treatment similar to those for DIC?

We have not been able to get a handle what is going on exactly. In the case of patients with life-threatening diseases such as DIC, we suspect the possibility of patients transported to hospitals that are not the large ones that they used to be admitted to, but are smaller and have fewer beds. In that sense, we are now exploring reasons why the number of DIC patients is decreasing.