Kuraray Co., Ltd. (3405) Earnings Call Transcript & Summary

This is Hitoshi Kawahara. And I have been serving as President and Representative Director since January 1, 2021. Thank you for taking time out of your very busy schedule to participate in our earnings presentation. I will begin by explaining the financial results for the full fiscal year 2020. Please go to Page 2. FY '20 results were affected by the spread of COVID-19 and due to the global economic slowdown, demand fell in many of our businesses, resulting in lower sales and production adjustments. As the slide shows, net sales fell 5.9% year-on-year to JPY 541.8 billion. Operating income fell 18.1% to JPY 44.3 billion. Ordinary income fell 17.7% to JPY 39.7 billion. Net income was JPY 2.6 billion. A fall in both sales and profits year-on-year, excluding net income. As in the previous year, net income was significantly affected by loss on litigation in the U.S. Assumptions for the Forex is shown on the table below. Please go to Page 3. This shows the outcome of main initiatives introduced in FY 2020, pursuing competitive superiority. In the optical poval film in the Kurashiki Plant, we have been starting operations since the start of this fiscal year for the wide-width new line. For water-soluble poval film, we started a new line, new for the U.S. plant and for the Europe. In order to respond to the growth of demand, we are now underway in construction for the new plant in Poland. Calgon Carbon, in order to respond to the expansion of the demand worldwide for the activated carbon in U.S. and Europe, we have decided to build new lines. In KURAFLEX, we have started operation for the meltblown facility in Okayama plant. This facility initially was not intended for masks. However, with the spread of COVID-19, this plant has been changed so that mask filter could be produced, too. Expanding new business fields. PLANTIC. In the U.S. resin plan building, we have completed the construction and started production since second half. Enhancing comprehensive strength of the Kuraray Group is shown on the slide. Please go to Page 4. In this slide, we summarize the midterm management plan starting from 2018 to 2020. The PROUD2020. In the PROUD2020 we have been focusing on 4 strategic management plan: pursue competitive superiority; expand new business fields; enhance comprehensive strength of the Kuraray Group; support for protection of the global environment. I would like to expand on how they were implemented. Conducting continuous capital expenditure for growth in core and new businesses. For optical poval film and water-soluble poval film, SentryGlas, such core businesses, we have conducted capital investment. Isoprene, pursue business expansion via our project in Thailand. There were small delays for staffing for the construction of the business side and the small delays for the introduction of facilities, but then we were in preparation to start the operation from 2022. Carbon materials swiftly realized the synergies with Calgon Carbon. Here, from 2018 to 2020, we had a synergy target of creating JPY 3 billion. And to that, we were able to generate more than JPY 2 billion. In order to respond to expanding demand, we have decided to introduce new capacity in both U.S. and Europe in order to create more synergy. Establishing global business foundations. In order to understand timely of the businesses, we have been introducing the global SAP system. And the introduction was completed in overseas subsidiaries during this midterm plan. Support for protection of global environment. Calgon Carbon through its activated carbon businesses is purifying water and air, and contributing to improvement of natural environment and the effective use of resources. The PLANTIC, which is bio origin, and EVAL is contributing to the decrease of food loss and to play a role for the betterment of people's quality of life. Please go to Page 5. The decision based capital investment we planned for the prior midterm management plan excluding Thai project, we were planning to generate JPY 250 billion. But during this term, including the Thai project, actually, we have been able to create JPY 258.8 billion. The decided capital investment for Isoprene Thai plant and water-soluble poval film, U.S., European plant and optical poval film increased in capacity and the increase in capacity for Calgon Carbon capacity increase in U.S. and Europe, where we have been acquiring during this midterm plan. And other than capital investment, we have been merging and acquired the world's largest activated corporation, Calgon Carbon. Please refer to Page 6. This is a plan for FY 2020, the final year of PROUD2020 and the results for the previous 3 years. We planned aggressively to expand sales and create new businesses. But due to the decline in sales caused by the fire accident in U.S. in 2018, and the global economic downturn caused by the trade friction between the U.S. and China and economic slowdown in the world, we were unable to achieve our goals for net sales and operating income. In addition, due to the loss related to the U.S. lawsuit, EPS was significantly below the target. The earnings forecast for Calgon Carbon, whose acquisition was completed in 2018, was not included in the previous midterm plan. The impact of this acquisition on net sales is shown in the gray. Operating income is expected to be negative until fiscal year 2019 due to the large amortization of goodwill, but is almost near 0 in FY 2020. Please go to Page 7. In PROUD2020, we planned the fiscal year 2020 operating income to be JPY 90 billion. However, we were able to land at JPY 44.3 billion and this is a summary of the difference of JPY 45.7 billion. In the previous midterm plan, we set the goal of creating new demand and creating and expanding demand in emerging markets, but sales in many businesses, mainly the Vinyl Acetate segment did not go as expected, resulting in a JPY 24 billion decrease in profit. In the area of delay in new development, delays in the development of products in each business and delays in the development themes of new businesses resulted in a decline of JPY 6.0 billion. The total decrease in profit due to the impact of COVID was minus JPY 25 billion, including the decrease in sales and the decrease in capacity utilization. In raw materials and fuels and selling prices, although gains from cheaper raw materials and fuels were taken into account, the total impact was an increase of JPY 0.5 billion due to the impact of selling prices and exchange rate fluctuations. Others increased by JPY 8.8 billion, mainly due to a decrease in expenses. Please refer to Page 8. The previous midterm management plan was for 3 years until 2020, and a new plan was to be formed starting 2021. However, due to the uncertainty of the COVID-19, we decided to delay the formulation of the plan by 1 year. The next management plan will be a 5-year plan ranging 2022 to 2026. And accordingly, in fiscal 2021, we will focus on safety operations and steady executions under COVID-19 and promotion for formulation of new medium-term plan and will follow on the following priority issues. First, we will steadily promote the capital investment decided in the previous medium-term management plan, namely the project of Isoprene in Thailand, new facilities at the new Calgon Carbon plant in the U.S. and the new water-soluble poval film plant in Poland. And secondly, in the activated carbon business, we have had 2 divisions, the Calgon Carbon division and the Carbon Materials division. And starting this fiscal year '21, the 2 division is going to be integrated to become Environmental Solutions division. Through this integration, we are committed for creating further synergy. For EVAL new plant, we will continue to assess demand due to COVID-19. For VECSTAR FCCL, we expect growth in demand along with the spread of 5G in full scale. Therefore, we will discuss capacity increase in that area. We have also created a new organization internally to control the IT digital strategy for the whole group to transform our operation globally and to build systems to support our business. Please go to Page 9. This slide shows a forecast for FY 2021. As assumptions, the exchange rate has set up JPY 105 to the dollar and JPY 125 to the euro. The domestic naphtha price is assumed to be JPY 35,000 per kiloliter. As shown in the slide, in fiscal year 2021, we expect to increase net sales by JPY 28.2 billion to JPY 570 billion year-on-year. Operating income, plus JPY 10.7 billion to JPY 55 billion. Ordinary income, plus JPY 10.3 billion to JPY 50 billion. Net income is expected to increase by JPY 27.4 billion to JPY 30 billion. Please go to Page 10. Here we explain our dividend policy. For the dividend for FY 2020, the interim dividend was JPY 21 per share. And for the year-end dividend, it was JPY 19 per share, and total annual dividend was scheduled for JPY 40 per share. In fiscal '21, in line with our policy of the total return ratio of at least 35% and dividend of at least 40% following our previous midterm plan, we will be paying interim dividend and year-end dividend, JPY 20 per share for both. The dividend payout ratio is 45.9% based on the full year forecast mentioned above. That concludes my presentation.

Now I will detail you on our earnings result. Taga will be explaining to you. Please go to Page 12. From here, I will explain the condition of our businesses by segment. First of all, Vinyl Acetate segment. Poval resin. Sales remained weak due to stagnant global demand and a subsequent production adjustment. Optical-use poval film. Sales volume increased due to demand recovery, especially for large displays. Water-soluble PVA film, MonoSol. Sales expanded for using unit dose detergent packets. PVB film. Demand gradually recovered from third quarter onward despite the demand for construction and automotive application were stagnated. EVAL. Sales remained weak for gas tank applications, while sales increased for food packaging applications due to at-home consumption. With that, net sales and operating income declined year-on-year. Please go to Page 13. Isoprene segment. The net sales and operating income decreased year-on-year. Sales both of Isoprene Chemicals and SEPTON, thermoplastic elastomer began to recover from fourth quarter despite being affected by stagnant demand, mainly China and the rest of Asia. GENESTAR. Sales remained brisk for electric and electronic device applications. Please go to Page 14. The Functional Materials. Net sales and operating income declined year-on-year. Methacrylic resin. Overall business was affected by rising raw material costs and worsening market conditions despite an increase in sales of spatter-blocking barrier panels and displays. Medical. Sales reduced in the first half, mainly in Europe and U.S. due to clinic closings caused by pandemic. Calgon Carbon and Carbon Materials. Sales were steady, especially of products for water treatment applications even during pandemic, as such products underpin people's daily lives. With expanding demand, we decided to expand facilities at plants of Calgon Carbon, U.S. high-performance activated carbon. Belgium, reactivated carbon for industries. Please go to Page 15. Fibers and Textiles segment. Net sales declined, and operating income declined significantly year-on-year. CLARINO. Sales volume decreased due to receding demand for shoe applications in Asia and luxury good applications in Europe. Fibers and Industrial Materials. KURALON decreased for cement reinforcement and rubber materials. Consumer Goods and Materials. Sales volume decreased by stagnant demand, automotive and cosmetic applications, while sales for mask-related applications increased. Please go to Page 16. This is FY 2020 actual of each segment compared with FY '19. This is for your reference. Please go to Page 17. Here, you can see the difference of operating income compared with FY '20 versus FY '19. The operating income of FY '20 decreased by JPY 9.8 billion year-on-year, and these are the reasons. Volume increased by JPY 2 billion, which is capacity increase of optical poval film and water-soluble poval film. Utilization. with the impact of COVID-19, deceleration of world economy has made us decline in sales volume in poval resin, PVB film, elastomer, CLARINO and KURALON. With this, production adjustment was conducted, which became JPY 14.5 billion negative impact. Selling price and product mix and raw materials. Raw material was a positive factor of plus JPY 7 billion. However, selling price and product mix was minus JPY 5 billion to the operating income. Dollar and euro were not showing much movement, therefore, there was no impact from foreign currency. Depreciation and amortization increased due mainly with the start of operation of a new capacity for optical poval film and water-soluble poval film, which was minus JPY 4.3 billion negative factor. Expenses and others. Along with the decrease in transportation and decrease in expenses with fewer sales activity, it was plus JPY 5 billion to the operating income. Please go to Page 18. Here, I will explain extraordinary loss for fiscal year 2020. Loss on litigation is the expense for U.S. litigation, which was minus JPY 23.2 billion. Loss on liquidation of business, this is an expense of withdrawing from part of our businesses in U.S. subsidiary. Costs related to the suspension of operations. With slower demand from COVID-19, this is expense associated with large production adjustment. It also includes expenses for stopping operation hit by trouble by external utility supply. Loss on disposal of tangible fixed assets will be put on top. And in total, we recorded JPY 33.5 billion extraordinary loss. Please go to Page 19. Here, we explain the cash flow of fiscal year 2020. The operating cash flow was plus JPY 79.9 billion. Investment cash flow was minus JPY 83.3 billion. As a result, free cash flow was minus JPY 3.4 billion. We did not have a cash out for M&A. The EPS was JPY 7.48. For BPS, it was JPY 1,450.32. Capital investment. At Calgon Carbon, we decided a capital investment for U.S. and Belgium. With that, based on decision basis compared with the previous year, it is plus JPY 10 billion to JPY 61.4 billion. Acceptance basis. The capital expenditure was JPY 19.1 billion down to JPY 78.3 billion. Depreciation and amortization, it was JPY 4.3 billion, up to JPY 62.5 billion. Research and development expenditure was down JPY 600 million to JPY 20.6 billion. Please go to Page 20. This is the asset of our balance sheet compared with the end of December FY '19. Current assets increased by JPY 66.5 billion. This is due to the fact that inventories decreased, long-term loans payable increased and issuance of bonds payable in order to increase our liquidity. Noncurrent assets decreased by JPY 6 billion. This comes from the new Isoprene plant of Thailand construction and progress and other tangible fixed assets increased by JPY 14.6 billion. And to that, the intangible fixed asset, including goodwill, decreased by JPY 18.9 billion. Please go to Page 21. This is the liabilities and net assets on the balance sheet. For current liabilities, the current portion of bonds payable within the year, this increased, and there was an increase of settlement amount for the U.S. litigation. For this litigation, the accrued expense decreased, then there was a repayment of the commercial papers. In total, there was a decrease of JPY 6.6 billion. Non-current liabilities increased by JPY 90.1 billion, and this comes from the increase of long-term loans payables and bonds payable. Net assets decreasing by the retaining earnings and the decrease of foreign currency translation adjustment, this reduced to JPY 23.1 billion. With this, equity ratio of FY 2020 was 47.4%, down 5.6 percentage points from FY '19. Please go to Page 22. This is the FY 2021 forecast explained. For the net sales and all income, they were already shared by Kawahara. For net income, based on JPY 30 billion, the EPS will be JPY 87.23. For the dividend, we are scheduling to pay JPY 40 for the annual year. Decision based on capital expenditure. We plan JPY 75 billion, including EVAL new plant and VECSTAR capacity increase. Acceptance basis, capital expenditure. We are expecting JPY 85 billion, which includes the Isoprene Thai new plant construction and the water-soluble poval film, MonoSol, the new plant construction in U.S. and Poland. Depreciation and amortization, minus JPY 3 billion to JPY 59.5 billion. R&D expenses, JPY 900 million, up to JPY 21.5 billion. Please go to Page 23. This is the fiscal year 2021 forecast of net sales and operating income by segment with comparison to FY 2020 actual. In major segments, we are expecting increase of net sales and operating income. For Vinyl Acetate segment, the optical poval film, poval resin, PVB film and water-soluble poval film and EVAL, we are expecting the volume growth in all of these businesses. For Isoprene segment, fine chemical elastomers, we are expecting demand recovery. And for GENESTAR, we are going to be further increasing our sales. For Functional Materials segment, we are expecting to increase sales for dentist material and activated carbon. For Fibers and Textiles segment, we are assuming demand recovery for CLARINO and KURALON. Trading segment, we are expecting demand of recovery for business in Fiber and Textile. Please go to Page 24. This is the FY 2021 factors affecting change in operating income in comparison to FY 2020. Starting this time, we are announcing change and factors by segment. In line with this, we changed the items. In FY 2021, we expect the increase of operating income by JPY 10.7 billion, and the reason is as follows. For volume, as already shared with the other slide, in almost all businesses, we are expecting the sales growth by the recovery of demand, which is contributing by JPY 13.5 billion. For selling price, product mix and raw materials and foreign exchange, the raw material is impacted by minus JPY 500 million and by product mix, we are expecting minus JPY 1.5 billion decrease. For expenses and others, the depreciation and amortization will decrease by JPY 3 billion. However, logistics, transportation and R&D expenses will increase. In total, it is going to be a negative impact by JPY 900 million. Please go to Page 25. This slide shows the operating income by segment with factors affecting changes. This is for your reference. Please go to Page 26. This is FY 2021 first half, second half business forecast in comparison with FY 2020 actual for your reference. So after Page 27, we have forecast for FY 2021 first half, second half business result by segment for your reference. This concludes our explanation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]