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

Thank you for being with us here today to participate in the Kuraray Group's Financial Results Briefing. I'm the President and Representative Director, Hitoshi Kawahara. Let me begin now with the overview of the fiscal year 2022 earnings. Please see the second page. In fiscal year 2022, while gradual recoveries continued as restrictions on economic activity eased in many countries, the global economy showed signs of slowing in the second half of the year, and the future continued to look uncertain and unpredictable. Raw material and fuel prices and our logistics cost rose or remained high, and the Kuraray Group focused on stably supplying high value-added products by leveraging the global network it has built up over the years, while at the same time, revising prices of the products affected by the sharp rise of raw material and the fuel prices. And as a result, as shown on this page, our net sales increased by JPY 127 billion year-on-year to JPY 756.4 billion. Operating income increased by JPY 14.9 billion to JPY 87.1 billion, and net income increased by JPY 17 billion to JPY 54.3 billion. Net sales, operating income and ordinary income all reached record highs and the net income attributable to owners of the parent also reached a record high level. The foreign exchange and raw materials and fuel prices for the period were as you see at the bottom of the slide. Please go to the Page 3. This slide is the company-wide operating income bridge, a breakdown of factors that affected the changes in operating income. While raw materials and fuel and exchange rate was a negative factor of JPY 45.8 billion due to high raw material and fuel prices, selling price and product mix was a positive factor of JPY 73.3 billion due to sales price revision and our shift to high value-added products. In others, there was an increase in distribution costs and in other expenses. But with the impact of inventory valuation difference in total others was JPY 4.2 billion plus factor for our operating income. Now Page 4. This slide shows the fiscal year 2022 results for the financial KPIs set forth in the PASSION 2026, our Mid-Term (sic) [ Medium-Term ] Management Plan, the FY 2022 results for each KPI were ROIC of 7.0%, EBITDA of JPY 152.6 billion and ROE of 9.0%. We will continue our efforts to improve our capital efficiency and cash generating capability. Please see Page 5 now. The shareholder return policy under the Medium-Term Management Plan PASSION 2026 is -- as has been indicated, total return ratio of 35% or more and then dividend of JPY 40 or more per share and a flexible implementation of share buybacks. The year-end dividend for fiscal year '22 has been revised from the previous forecast of JPY 21 to JPY 23 per share for an annual dividend of JPY 44 per share, including the interim dividend of JPY 21 per share. Regarding the share buybacks. The company repurchased a little over 9.4 million shares at a cost of approximately JPY 10 billion from February 10 to June 23, 2022, as stated here. As a result, the total return ratio for fiscal year 2022 will be 45.5%. Next is Page 6. This page shows our forecast for fiscal year 2023. Regarding the business environment for the current fiscal year, there is an uncertain outlook for the situation of Russia and Ukraine and the accompanying extreme instability in the current fuel prices. And in major countries, there are signs of economic deterioration due to monetary tightening. In addition, China is expected to experience some turmoil as a result of lifting of its Zero COVID policy. And we see that the fiscal year 2023 business environment is to be overall uncertain and challenging. Under such circumstances, we will start operation of isoprene plants in Thailand and activated carbon production line in the U.S, which would bring increases in depreciation burden hence the factors of decrease in profit, but we are also planning to expand our business in our core business in vinyl acetate business by maintaining a solid global supply system and steadily capture demand to achieve medium-term growth. And in light of all of those, in fiscal year 2023, we expect net sales to increase by JPY 73.6 billion to JPY 830 billion compared to fiscal year '22, and operating income to decrease by JPY 3.1 billion to JPY 84 billion. And net income to decrease by JPY 3.3 billion to JPY 51 billion. Page 7. Based on the earnings projections stated, as for fiscal year 2023 shareholder return, we plan to pay an interim and the year-end dividend of JPY 24 each for a total annual dividend of JPY 48, and we will flexibly implement share buybacks as becomes necessary. Please see Page 8. On Page 8 and following Page 9, we explained the measures set forth in our Medium-Term Management Plan, PASSION 2026. This Page 8 shows how we did in the fiscal year 2022. In terms of the goal we have set forth in our Medium-Term Management Plan, the PASSION 2026, building a more sophisticated business portfolio and what we will be particularly focused on in fiscal year 2023 for the same goal. In fiscal year '22, we decided to invest in the businesses with growth potential such as optical poval film, EVAL and liquid rubber. We also proceeded to liquidate and withdraw from unprofitable businesses based on quantitative and qualitative assessments. In fiscal year '23, we will safely launch large-scale facilities that we have already invested in, such as the new isoprene base in Thailand, the new water-soluble poval film plant in Poland and the new activated carbon production line in the United States and bring them to contribute to earnings as soon as possible. And as announced today, the new isoprene plant in Thailand has been in operation since this February, launching a gradually product by product. In addition, we will continue to allocate resources to grow the businesses, such as EVAL, VECTRAN and the medical dental materials aiming for further growth to achieve the goals set forth in PASSION 2026. Please go to Page 9. This page shows you the fiscal year '22 results and fiscal year '23 key focus topics for the 3 challenges also set forth in PASSION 2026. The top of the page is referring to fiscal year 2022, the bottom half '23. The yellow parts are the talent Sustainability as an Opportunity; the blue, Innovations Starting from Networking; orange, Transformation of People and Organization. In fiscal year '22, regarding the yellow challenge, sustainability as an opportunity, we expanded the disclosures in line with the TCFD framework introduced PSA as our portfolio evaluation indicator and expanded the use of internal carbon pricing scheme. And regarding the challenge in blue, innovations starting from networking, 10 themes in 6 strategic areas, including automotive, agriculture, and paper and packaging are progressing toward business commercialization. And in the area of transformation of people and organization in orange, we have expanded the use of CRM, customer relationship and management system, and sharing the results of an analysis of collected data with the innovation networking center to uncover unmet needs of customers. And in fiscal year 2023 too, we will continue those efforts. And in addition to those, we will promote initiatives such as for sustainability applying for SBT certification and a strengthening sustainability procurement. For innovation, accelerating development and commercialization of 10 themes by fully utilizing company-wide resources such as technology, people and facilities. And for DX, digital transformation, promote DX personnel training programs. And in addition, we will strengthen our investment in human resources based on the brief belief that people are the source of our competitiveness. This was in brief our fiscal year 2022 financials overview and forecast for 2023. Now Keiji Taga, Managing Executive Officer, will explain the details of the results.

Hello. This is Taga. I will now explain the details of the fiscal year 2022 financial results. Please find Page 11. This slide shows net sales and operating income results for each segment compared to the same period last year. Although net sales increased in almost all segments. Some segments saw a decrease in operating income, mainly due to the impact of higher raw material and fuel prices and economic slowdown in the second half of the year. This is Page 12, here onwards will be the details of each business segment. First is the Vinyl Acetate segment. This segment saw an increase in both sales and profit compared to the previous year. Please refer to the comments in the right-hand table for the detailed account of each business. Operating income of Vinyl Acetate segment increased by JPY 19.3 billion over the previous year reflecting higher raw material and a fuel prices. Raw materials and fuel prices and exchange rate function was a negative factor of JPY 29.1 billion. On the other hand, selling price and product mix gave a plus JPY 50.8 billion with product price revisions and our shift to high value-added products. All in all, Vinyl Acetate operating income increased from last year, while the changes in the sales volumes of major products will be explained later in this segment. Although the volume of optical poval film decreased by about 20% from the previous year, other products such as EVAL contributed significantly to the segment's overall profit growth. Please go to Page 13. Isoprene segment. Isoprene segment reported higher sales and lower operating income as compared to the previous year. Please find a detailed explanation for each business at the top right table. Operating income for the whole isoprene segment decreased by JPY 1.8 billion. The selling price and product mix was a factor of a plus JPY 7.3 billion due to the price revisions. On the other hand, raw materials and fuel exchange rate was minus JPY 5.1 billion negative factor due to higher raw material and fuel prices and volume was a minus JPY 2.4 billion negative factor due to temporal raw material procurement difficulties, production defects and inventory adjustments in automotive components and electronic devices. Page 14. The Functional Materials segment also reported higher sales and lower profit compared to the same period last year. Please find the details explained for each business at the top right price revision in response to rising raw materials and fuel prices was a factor of a plus JPY 10.4 billion, as you see it at selling price and product mix. On the other hand, raw materials and fuel prices and exchange rate was a negative factor of JPY 6.9 billion. And in addition, the volume and others were also negative factors. Please see Page 15. Fibers and Textiles, this segment reported higher sales and profits compared to the same period of last year. Again, please see the details on the right-hand side. Operating income increased in total by JPY 1.5 billion. While raw materials, fuel and exchange rate was a negative factor of JPY 3.7 billion. Selling price and product mix was a positive factor of JPY 4.8 billion. Page 16. This slide shows the difference between the fiscal year 2022 forecast announced in November 2022 and the actual results. As you can see, operating income increased by JPY 9.1 billion, mostly due to Vinyl Acetate business. As you know, the mild winter has caused natural gas prices to drop in Europe. While most of this impact has been carried over to fiscal year '23, there is some impact to the '22 as well. The main reason for the discrepancy between the forecast and the actual increase in profit are as follows: the most significant was the upward effect of volume and price revisions for EVAL. Another significant one is the price revision for poval resin. Others are the product mix improvement of the advanced interlayer film. And the increase in demand for optical use poval film or -- over before the Chinese year -- New Year. Next is Page 17. Fiscal year 2022 cash flows and important KPI results compared to the previous year. Operating cash flow was JPY 51.7 billion, investing cash flow was minus JPY 72.0 billion and free cash flow was minus JPY 20.2 billion. The acceptance basis, capital expenditures increased by JPY 6.7 billion year-on-year to JPY 72.6 billion. Depreciation and amortization expenses increased by JPY 6.5 billion to JPY 65.5 billion. R&D expenses increased by JPY 1.8 billion to JPY 22.7 billion. Page 18. This slide compares the assets section of the balance sheet with the end of last year. Current assets increased by JPY 63.8 billion. While cash and deposits decreased by JPY 28.2 billion, trade receivables increased by JPY 21.2 billion due to increased sales and the weaker yen and inventories increased by JPY 67.7 billion, partly due to the effect of exchange rates and high raw fuel prices. Noncurrent assets increased by JPY 66.8 billion due to an increase in capital investment and a rise in the value of noncurrent assets of overseas subsidiaries, again, due to the weaker yen. Page 19. This slide shows the liabilities and net assets sections of our balance sheet. Liabilities increased by JPY 41.6 billion as a result of the issuance of commercial paper and corporate bonds and the depreciation of the yen against foreign currencies. Net assets increased by JPY 88.9 billion. As a result, the equity ratio increased by 1.6 points from the year-end of fiscal year 2021 to 52.9%. Page 20. The slide shows our forecast for fiscal year 2023. Net sales and each income are as Kawahara touched upon earlier. Net income per share will be JPY 152.38 based on the JPY 51.0 billion. The annual dividend is planned to be JPY 48 per share. Capital investment on a decision basis will be JPY 90 billion. On an acceptance basis, capital investment is expected to be JPY 77.0 billion, including the expansion of optical use poval film production facilities at the Kurashiki Plant. Depreciation and amortization expenses are expected to increase by JPY 11.5 billion to JPY 77.0 billion due to the start of operations of the isoprene production facility in Thailand and activated carbon production facility in the U.S. R&D expense is expected to increase by JPY 1.3 billion to JPY 24.0 billion. Page 21. This slide shows the operating income bridge from 2022 results to '23 forecast. Selling price and product mix is expected to bring plus JPY 23.6 billion due to the effect of the product price revisions that were negotiated during 2022. On the other hand, the other segment was responsible for a JPY 32.9 billion decrease in net income. This is due to, number one, selling, general and administrative expenses including labor costs. Number two, an increase in depreciation expenses accompanying the operation of large facilities, as explained earlier. And three, the inventory valuation difference. Each of these 3 factors account for about 1/3 of the total. All in all, operating income year-on-year decrease is calculated to be JPY 3.1 billion. From Page 22 onwards, this is for your reference. This concludes my explanation. Thank you very much for your listening.

Right. So we'd like to go to the Q&A section. But before start getting the questions from the audience, I would like to cover the frequently asked questions, how the volume has increased on each product. And IR Department Head, Takizawa, will read out the numbers.

This is Takizawa. As we always do, let me report you the volume change percentages of each product. So I will be talking about '21 to '22 and then '22 to '23 plan. And from this time onwards, last year, we actually had an orientation and on the activated carbon and you asked about the volume. So have added an activated carbon to this list. And this volume of activated carbon, there is a new and the recycled, and the usage is the same. So volume wise, we're going to be providing you the data of the combined. So first is the optical use of poval film, '21 to '22 is minus 20%. '22 to '23 plan, we are projecting a plus 10% and a little more. For water-soluble poval film, '21 to '22 was flat, '22 to '23 plus -- slight positive is what we are estimating it to be. PVB, '21 to '22, flat; '22 to '23, slight plus. EVAL '21 to '22 was a plus, a little shy of 10% and '22 to '23 plan, a slight positive number as what we are projecting. So PVOH resin, '21 to '22 was minus -- slightly more than 15%. And '22 to '23 plan, we are projecting minus a 10% or a little more. Elastomer '21 to '22 was minus around 10% and '22 to '23 plan we're expecting it to be slightly more than plus 20%. GENESTAR '21 to '22 was minus 20% or a little less. '22 to '23 plan, we're expecting plus 35%. On activated carbon, '21 to '22, a slight positive was the result and the '22 to '23 plan is plus 5% or slightly more. Kuralon from '21 to '22, minus 5% or a little less and '22 to '23 plan would be flat. That's it from myself. Thank you.

Thank you.

Right. And then we would like to start taking questions from the audience in this room. If you do have questions, please raise your hand, and we will bring you a microphone. It'd be great if you can start off with your affiliation and your name. Thank you.

My name is Yamada from Mizuho Securities. I have 2 questions. The first is about the fluctuation in the performance of the Vinyl Acetate segment. Could you tell us a little more about fiscal year 2022 actual and the fiscal year '23 forecast? The '22 actual seems to be quite out of sync with the projection you provided at the time of the third quarter. With that in mind, how much did the performance of the Vinyl Acetate segment fluctuate? And to what extent did the optical use poval film fluctuate in the first and the second half of the fiscal year? In addition, in the analysis of the factors behind the fluctuation, the selling price and the product mix showed an increase that are far exceeded the negative impact of the raw material and fuel prices. Also, I'd like to know the reason why the fiscal year 2023 volume difference is small. Is this because that 10% increase in optical use poval film was offset by the overall decline in PVOH resin. Also, as for the composition improvement in fiscal year 2023, is that correct to think that, that is mainly due to PVOH resin? Finally, regarding the negative at JPY 13.1 billion in others, is it correct to understand that the negative associated with the inventory valuation difference is well incorporated I have a few more questions, but the results of the Vinyl Acetate segment, which includes a PVOH resin quite different from what you explained in the third quarter. So first of all, it would be great if you can answer to that.

So I will answer. This is Taga about the overall situation. As I mentioned in the slide presentation, the Vinyl Acetate segment alone increased approximately JPY 10 billion from the third quarter announcement with EVAL being the largest in terms of magnitude, followed by PVOH resin, advanced interlayer film and the optical use poval film. So this is due to a temporary increase in rush demand before the Chinese New Year. Sales of water-soluble poval film has remained almost unchanged. The sales overall have not actually increased much on profit. So I think that is the point that you may not agree completely or be convinced, but EVAL has increased in volume and the sales price. So I think EVAL has achieved both. Conversely, the volume of the PVOH resin has fallen. However, the better composition made a larger contribution to the selling price and the total effect was in the positive direction. As for the advanced interlayer film, the volume itself hasn't really changed, but the product mix became better, for instance, the construction purpose when in Western World was better than expected and so it ended up in it being plus. As I mentioned earlier, we had a thought that the last optical use poval film would be bad for the entire second half of the year, but we had some demand in December and this area turned out to be positive. This was the overall situation. As explained earlier in the operating income analysis bridge for fiscal year '23 on Slide 21, the negative JPY 30 billion in others include over JPY 10 billion each in SG&A expenses and depreciation expenses. With that, the difference of a little over JPY 10 billion is what we call the inventory valuation difference. I understand that the negative impact of the increase in depreciation expenses have a little to do with the Vinyl Acetate segment, right? In fiscal year '23, depreciation expenses will increase for the company -- for the whole. But for Vinyl Acetate in 2023 it is not depreciation expense, but the negative inventory valuation difference that is the major impact.

Well, you have asked several questions at the beginning with many different angles. So we might not have addressed all the questions. Can you elaborate once again what hasn't been answered by Taga.

You said that the optical use of poval film would be 50% less for the second half, and that would be the pace for the third quarter, but I don't think -- that was not the case. How much was the situation better than projected? You said that the contribution of the increase in profit was largely from the EVAL, the next PVOH resin and advanced layer film -- interlayer film, the next and the least was the optical-use poval film, is that correct? And on 23 -- Page 23, there is this figure minus [ JPY 13.1 million ] and the plus [ 93 ] (sic) [ JPY 9.7 million ] was the number for '22. I guess the inventory valuation difference bringing profit as this has been excluded in the budgeting of '23. So there's no special factors incorporated in the budgeting for the '23?

Right. So first of all, about the optical-use poval film of 2022, as you said, at the end of the third quarter, we were expecting the fourth quarter to be at similar level as third quarter. But at the end of the fourth quarter, we discovered that the fourth quarter was better in percentages, the quarter-on-quarter, fourth quarter was plus 40%. But in our plan, the optical-use poval film, you're asking when would the recovery for the optical-use poval film would start -- apology? So the fourth quarter 2022 was better than third quarter, but it wasn't really -- the recovery was more of the advanced capture of the demand of the Chinese New Year's of January. So the true recovery will be a little bit later. And either way, fourth quarter 2022 we had a better number than projected, and that's why we see there's a little bit of a discrepancy from the announced number of the third quarter.

How about the special other factors?

For other factors, for 2022, I guess, Taga already explained, EVAL and PVOH resins price -- prices. The impact was bigger than we expected. And then also EVAL had a bigger volume than we expected. Those are the factors.

So on Page 12, there is this others plus JPY 9.7 billion. And the -- on Page 23, minus JPY 13.1 billion of others of Vinyl Acetate, those are largely coming from the fluctuation of the inventory valuation difference, minus [ JPY 13.1 million ] of fiscal year 2023 is bigger. So the total of the 2 years would be minus in total is how you're projecting the overviews.

Yes, regarding the others, for 2022, we benefited from the inventory valuation difference and the number turned out to be plus. But for 2023, particularly for the first half, it will be counterbalancing that, hence, will be negative.

Let me check one more thing. I will make my next question simple. Regarding optical-use poval film. You mentioned that sales in the third quarter dropped by 50% from the average of the first half. So if we assume JPY 20 billion in the first half, the sales will be [ JPY 50 billion ] in the third quarter, [ JPY 70 billion ] in the fourth quarter and [ JPY 320 billion ] in fiscal year 2022. In contrast, the sales in '23 increased by about 10% to a pace of [ JPY 350 billion ] or so? In other words, is it correct to assume that the average for fiscal year 2023 will not return to the first half of 2022?

Yes, we see the first half to '23 starting to return, but not completely. I imagine that if we go to the second half of the year, and see the half-on-half, we are expecting 30% increase. And so second half of 2023 will be coming back to the similar level of the first half of 2022.

Okay. So second half of '23 will be a similar level as the first half of '22. Okay. Got it. Thank you very much for your patience answering to my question, but I have another one. Regarding the new construction of facilities for Calgon Carbon, we were told at the last briefing that since the utilization rate would be high, we should be able to cover to some extent with the marginal profit. I see that still in your plan. So can I confirm that your confidence level is quite high of this. Also regarding Isoprene, unfortunately, the depreciation expenses, not all of it will reduce the profit, correct? But can we expect it to see a larger marginal profit around fiscal year 2024?

Thank you for your question. First of all, about Calgon Carbon, what you said is pretty much correct understanding. The second quarter will be the beginning of the operation. It's not going to be achieving 100% of the utilization rate, but then we will maximize the utilization from the very beginning phase. And for the isoprene, Omatsu, will answer about isoprene.

So 2024, we have 3 products and 1 of the 3 can generally cover its depreciation burden with a marginal profit. We expect that the other 2 will not be reaching to that level within that year.

What is the 1 product that we'll be able to cover the depreciation ?

GENESTAR.

Right. Thank you very much for your question. Anyone having questions.

The next is Mr. Watabe of Morgan Stanley MUFG Securities.

Right. This is Watabe of Morgan Stanley. Apologies for not being able to make it to the venue. Looking back at fiscal year 2022, is that correct to understand that the reason you left operating income unchanged at JPY 78 billion at the time of the third quarter is that you thought it would go a little higher. But since it was the third quarter, you didn't change it that the upside was significant. Regarding the Vinyl Acetate segment, I'd like to know if you have any quantitative figures on the movement of inventory valuation difference from second quarter to third quarter and the third quarter to fourth quarter?

So this is Kawahara first aspect. Regarding the forecast at the timing of the third quarter, it is not that we didn't disclose what we knew. On the demand side, especially in Europe, the sharp rise in the price of natural gas caused a cooling down of the economy. In addition, we had anticipated a rapid contraction in demand due to rising interest rates in Europe and the U.S. In that sense, when we left the operating income forecast of JPY 78 billion unchanged, we did not only anticipate an upward swing but also naturally assumed a downward swing as well. So we decided to go with the middle range, JPY 78 billion. We saw quite a significant level of risk involved in the situation, and that's why we didn't upgrade the number. And the second aspect, Taga will answer.

So the inventory valuation difference is the hardest part to understand, I guess, Basically, the biggest is that where the cost of raw materials is rising. Portion remaining in inventory goes to the next fiscal year whereas the Vinyl Acetate segment is the most affected by this. In addition, the fact that the inventory at the end of the fiscal year did not decrease as much as expected, also had an impact. Does this answer your questions?