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

Good afternoon, ladies and gentlemen. I'm President, Hitoshi Kawahara. Thank you for coming. Thank you very much for taking time out of your very busy schedule to attend Kuraray's management briefing. In order to prevent the spread of the COVID-19, today's meeting will be held in a hybrid format with a meeting held at Kuraray's headquarters and a live streaming session. I will now move on to the explanations of today's session. In February of this year, Kuraray announced the Kuraray Group medium-term management plan, PASSION 2026. In conjunction with PASSION 2026, we have formulated a new corporate tagline, Possible starts here, which we have begun to implement today. At the beginning of this presentation, I would like to introduce this tagline. Next, I will explain in more details of our initiatives and sustainabilities, which was also explained in PASSION 2026 as well. The company used corporate slogans from the 1980s through the 1990s and from the 2000 through the 2010s. The corporate slogans used with the alpaca from the 2000 to 2010s, helped to spread awareness of the company, partly due to the popularity of the alpaca. However, both slogans were in Japanese and were limited to use within Japan. The Kuraray Group's overseas sales now account for approximately 70% of its total sales, and approximately 40% of the group's employees are non-Japanese. Against this backdrop, we decided to use a straightforward English phrase that is easily understood by non-native English speakers, including Japanese, in formulating the new tagline. We will use Possible starts here as our global tagline. Possible starts here expresses our strong desire to create new value together with our customers and partners with the Kuraray Group as a starting point. Since our founding, we have believed that our mission is to contribute to the improvement of the natural and living environment by pioneering new areas of industry with our highly original technologies. The role of companies in realizing a sustainable society is becoming more and more important. We will continue to cherish the thoughts and values embodied in this tagline, and all of our employees will work with pride and enthusiasm to solve social issues with an even greater sense of mission. This is the brand story behind our tagline, which conveys more deeply the thoughts and values that we have cherished since our founding. Please take a look at the integrated report, Kuraray Report 2022, that we have distributed to you. For those of you who are participating online, this is also available on our website today. From today onward, the tagline will be used in conjunction with the corporate logo on our website and in advertisement, et cetera, as the communication tool to convey our thoughts to our stakeholders. I will now introduce the Kuraray Group's sustainability initiatives. Under PASSION 2026, we have identified sustainability as an opportunity as you are aware, and the entire group is working together to promote it. PASSION 2026 incorporates a wide range of measures, and all sustainability-related measures were put together and have been published at the sustainability midterm plan. In the sustainability midterm plan, these measures are classified into 3 categories of Planet, Product and People, and we have tried to present them in an easy-to-understand manner under the name of the 3P model. The Kuraray Group aims to achieve the fourth P, Prosperity, or Social Prosperity by steadily implementing the measures shown in the 3P model. Today, I would like to focus on reduction in greenhouse gas, or GHG, emission and expansions of product contributing to the natural and living environment among these factors shown on the left side as well as the right side of this slide. For other measures, please refer to the website shown in the lower right corner. The trend towards decarbonization is an opportunity for both the reductions in GHG emissions and the expansions of product contributing to the natural and living environment that we are focusing on today. We are committed to developing new fields of business using pioneering technology that improve the environment and enhances the quality of life throughout the world. Under this mission, we have been providing technology and products that reduce GHG emissions at the stage of use by our customers and final products. In the future, we will significantly reduce GHG emissions in the manufacturing process of these technologies and products, which are Scope 1 and 2; and GHG emissions and the raw materials and supply chain or Scope 3. This will result in even greater reduction in Scope 3 emissions for customers and end products. This will also help us achieve the GHG emissions-reduction target required by the Paris agreement. And by promoting these 2 measures in tandem, we will be able to create more value than ever before. Innovation in the development of technologies, products and applications for the realizations of these 2 measures will be the new growth driver for the group. In addition, we can expand our opportunities for innovation not only by ourselves but also through collaboration with other companies. For example, we recently concluded a long-term supply contract with Origin Materials, Inc., of the U.S. for wood-derived biopolymer raw materials, and we will continue to promote co-creation with others. In this way, the group will continue to create new value by viewing sustainability as an opportunity. We will continue to create new value and promote activities so that our customers around the world will recognize the value of our efforts. This slide was also presented in PASSION 2026. We aim to reduce our Scope 1 and Scope 2 GHG emissions by 30% in 2030 compared to 2019, the benchmark year, and to achieve the net-zero carbon emission by 2050. The 30% reductions in 2030 is a target value based on the accumulations of relatively reliable measures that can be implemented on our own initiative at this time. We will also use our internal carbon pricing to encourage investment in energy conservations and process improvement. We will accelerate the introductions of renewable energies, particularly overseas. A dedicated project team has begun to develop CCUS, or carbon capture utilization and usage technology, although it will take some time to establish the technology. By steadily implementing these measures, we will achieve our 2030 goal. After 2030, we will gradually promote energy conversions of in-house power generation in Japan, leading to a net-zero carbon emission by 2050. Next is the Scope 3 reduction road map. One of our major goals in advancing Scope 3 reductions is to obtain Science Based Target, or SBT, certifications in the early part of fiscal 2024. We will expand the calculations of Scope 3 emissions, which previously covered only domestic emissions to the entire group and identify categories to be reduced. We will also obtain life cycle inventory, or LCI, or carbon footprint data from our major suppliers to increase the accuracy of our Scope 3 calculations. At the same time, we will establish numerical targets for Scope 3 reductions, including joint work with our supply chain. We will aim to obtain SBT certifications as early as possible in fiscal 2024 after finalizing these targets by the end of fiscal 2023, the next year. From here, I would like to talk about the expansion of products contributing to the natural and living environment. In formulating PASSION 2026, we review the materiality with the participations of all general managers in Japan and overseas in 2019, with the aim of expanding product that contribute to the natural and living environment in an effective manner. And we have made creating value through business, one of the 2 major elements of the materiality. In the process of formulating PASSION 2026, each business division and group company incorporated product sales and development plans that contribute to the materiality into their own midterm plans. Recognizing the need to screen the subjective plans of the business divisions and group companies using objective criteria, we decided to use a tool called PSA, or Portfolio Sustainability Assessment, which is used by many European chemical manufacturers. The details of Kuraray's PSA system will be described later, but product that score a 5 or 4, which are the 2 highest scores on the 5-point scale in this system, are designated as product that contribute to the natural and living environment and the company-wide plan was formulated based on this criteria. The company has set a target to increase the ratio of sales of these products from 46% in 2020 to 55% in 2024 and 60% or more in 2026. This PSA system was developed by the World Business Council for Sustainable Development, WBCSD, to enable all companies regardless of sector to build a sustainable product portfolio and dedicated guidelines have been created for the chemical industry. With the support of Sphera, the Kuraray Group has created a Kuraray PSA system that fully complies with these specific guidelines. The guidelines consist of 5 mandatory and 3 optional evaluation items. In addition to the 5 mandatory items, one item was selected from the optional items and the system was designed. The PSA system is characterized by the fact that the basic unit of evaluations is not a product, not just the product per se but a combinations of product applications and region, which is called PARC, P-A-R-C. By combining applications and region, market signals can be accurately reflected. Evaluation is based on 3 evaluations category as is written here, basic requirement, stakeholder requirements and performance. The second category, stakeholder requirement, is the so-called market signal-based evaluation. For each category, the evaluation items shown in black are those specified in the WBCSD guidelines. And the items shown in red were designed by adding our own items as necessary from the viewpoint of sustainability. The guideline stipulates that the scoring rules for each evaluations category and the final evaluation should be a 3-point or a 5-point scale. Kuraray chose a 5-point scale and designated product with score of 5 and 4 as products contributing to the natural and living environment, as I mentioned earlier. Some companies also consider a product with a score of 3 as contributing to the natural and living environment. However, Kuraray chose to go with 5-point scale. In the PSA system, both products contributing to the natural environment and the product contributing to the living environment can be evaluated. In addition to evaluating the response to market requirement for each application and the second stakeholder requirement on the previous page. In the third section, performance evaluation, we set up factors that contribute to the natural environment, but also to the living environment. And in the case of products that contribute to the living environment, we select these items and compare them with benchmarks to obtain a score. This method is also defined in the WBCSD guidelines, which allows PSA to evaluate not only a product that contributes to the natural environment, but also products that contribute to the living environment. The Kuraray Group has established a long-term goal for reducing its own GHG emissions. And therefore, under the Kuraray PSA system, all park evaluation must include GHG emissions reduction items for manufacturing. This slide shows examples of product and applications as well as key points for PSA evaluation. For example, EVAL as a packed food packaged materials was highly evaluated from the viewpoint of circular economy. Because the weight of EVAL in the entire packaging material is small, and it can be recycled as a base material of olefin such as biopropylene or polyethylene. Another factor that contributed to the positive evaluation were the reductions of food waste by extending the life of food products. The PSA rating of EVAL for gasoline tank application, however, was low due to a Europe regulation that bounced the sales of vehicles with internal combustion engines after 2035. The fact that activated carbon used for water and air purifications can be reactivated and used repeatedly and that it is highly compliant with environmental regulations and the removal of pollutants are factors in its high evaluation. However, it's used for absorption of hazardous substances that coal-fired power plants in the U.S. is rated low because some states have decided to close coal-fired power plants. Because PSA adds applications and region to the evaluations unit, different evaluations results can be obtained even for the same products. An example of a product that contributes to the living environment is dental materials. Dental materials reduce the burden on patients by shortening treatment time. And at the same time, by making the product last longer in the mouth, the risk of retreatment and or the time to receive another treatment is reduced. This was instrumental in reducing the burden of the patients, thereby enjoying high evaluation. We saw the key points of PSA evaluation. We believe that this PSA system can be applied in many other places besides screening for product that contribute to the natural and living environment. For example, when used as an indicator, it can be used as a stage-gate system in the development phase to determine the directions of development. It can also be used as a decision criterion when deciding on capital investment in new constructions or expansion. In addition, the system can be used as a simulation system for marketing and applications development by business divisions and group companies in their daily operation to identify important items from the perspective of sustainability at the time of idea generation, thereby enhancing the effectiveness of development. In addition, the system can be used for existing product as well, allowing the identifications of point of appeal to customers and expansions of opportunities for matching seeds with needs. We will broaden the use of the PSA system to make our product portfolio more sustainable. Furthermore, screening results from the PSA systems are used as one of the elements in the evaluations of social and environmental values on the vertical axis shown on this graph in portfolio management. Although the PSA evaluations is qualitative in nature, the results are graded on a 5-point scale, making it possible to quantify and visualize the portfolio. In the future, we plan to enhance this vertical access evaluation by adding an evaluation using the internal carbon pricing or ICP. This slide shows the ICP system of the Kuraray Group. The Kuraray Group introduced the ICP system last year and fiscal 2021. In conjunctions with the start of PASSION 2026, the ICP price of JPY 10,000 per ton of CO2 will be applied from this fiscal year. Currently, the ICP evaluations is used as an incentive to actively encourage the investment that reduced GHG emissions, while investments that increased GHG emissions are judged on the basis of whether measures have been taken to reduce the increase in emissions and whether the business strategy is appropriate for the increase in emissions. In addition to this, we are planning to recognize the GHG emissions of each business and product as an ICP expense so that we can visualize whether or not we can withstand the burden of carbon taxes, which are likely to be introduced worldwide in the future. We visualizing this evaluation. In this way, we will take on the challenge of upgrading our portfolio, which is one of the major goal of PASSION 2026 by adding as many quantitative evaluation elements as possible to the evaluations of social and environmental values on the vertical axis. That is all from myself. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]