Resonac Holdings Corporation (4004) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Kohei Morikawa, President and CEO of Showa Denko. I'd like to extend my sincere gratitude to you all for joining us for today's briefing session despite your busy schedule. With the integration of Showa Denko and Showa Denko Materials, we seek to create a hybrid advanced material company that possesses both midstream materials technologies and downstream application technologies and we will compete globally with the portfolio that I will elaborate on today. Having that in mind, I announced a long-term vision for the newly integrated company. To explain our ideal state as a newly integrated company, President Hisashi Maruyama of Showa Denko Materials is with us today. Mr. Maruyama, would you comment upon the announcement of the long term vision?

I am Maruyama of Showa Denko Materials. Thank you very much for joining us today. Showa Denko Materials has been contributing to society through new functional and value creations that meet requirement of times in the growth segment based on materials technology. And by becoming a member of Showa Denko Group that excels in midstream materials technology, we will be able to deepen our position to create useful function and provide value that will be appreciated in the world. With the completion of TOB, employees of both companies discussed and confirmed that synergies will be achieved, not only in the technological front, but also in many aspects, including supply chains and customer networks. Many of us, including myself, are thrilled for making a new step forward. Now with the spread of COVID-19, we are forced to transform our business type globally, but we like to take it as a great opportunity to transform the company with the opportunity of new business integration. I have been discussing with President Morikawa and management of Showa Denko every week or more to deepen mutual understanding and to know better about the future directions of both companies. In the process, I was able to confirm that the future path that both companies pursue are surprisingly alike, and the expectation for the integration is extremely heightened. The long-term vision that present Morikawa explains today shows of a future direction and is the outcome of our discussion, and I believe that this is the optimal one. Execution has already started. As a chemical company, we look forward to creating a chemistry so that we would create a new corporate value. Thank you. Next, Morikawa will present the long-term vision for a newly integrated company.

I will do the presentation. Please turn to Page 2. Firstly, I'd like to share today's agenda. As you may know, Showa Denko announced a tender offer for Hitachi Chemical in December last year and completed the TOB in April of this year. Today, I'd like to explain our long-term vision for the newly integrated company, how we will create the long-term synergy, our long-term numerical targets and finally, how we intend to realize short to midterm synergy from the perspectives of business portfolio, restructuring, profit improvement, asset streamlining and organizational integration. Next page, please. First, I'd like to explain about the long-term vision and the synergy for the newly integrated company. Please turn to Page 4. When integrating the 2 companies, we discussed the purpose of the newly integrated company, with a goal to change societies through the power of chemistry. The newly integrated company will seek to contribute to the sustainable development of global society by creating functions required at the times as an advanced materials partner. Page 5, please. In addition, as a global to- level functional chemical manufacturer, we aim to be a company with a strong presence in the global market, and that contributes to a sustainable global society and are committed to realize these goals. Page 6, please. Next, I'd like to talk about the significance of integration, as we seek to realize this ideal state. In recent years, there has been an increasing need to resolve environmental and social issues and to pursue SDGs to achieve this end. To resolve these issues, there have been growing demand for various types of social and infrastructure reform, such as industrial platforms, mobility and energy and increasing expectations for materials manufacturers to create innovations. We realized technological breakthrough by combining Showa Denko's midstream materials technology, Showa Denko Materials downstream application technologies and evaluation and analysis technologies from both companies and we will meet expectations for materials innovation. Furthermore, as a top-level functional chemical manufacturer, we'll contribute to a sustainable global society, as a whole, by providing new functions that meet the needs of our customers. Page 7, please. So how will we realize our ideal state? The key is our unique and robust business portfolio that we have built by integrating the 2 companies. Our 4 business categories with different roles will each contribute with high competitiveness, thereby enabling us to continue providing new functions to the market and achieve sustainable growth, namely: core growth business, which largely underpin the growth; next-generation business, which sustain the company's future growth; stable earnings business, which will generate stable profit; and finally, fundamental technologies and materials business, which will contribute by providing technological platforms to 3 other business categories. The combination of these 4 business categories, each with different roles for growth, is a key to realize the ideal state and is of immense significance. Page 8, please. Another important feature is that these 4 business categories are each comprised of businesses with strong competitive advantages. For example, core growth business encompasses businesses in global #1 and 2 positions, such as semiconductor materials and mobility, resin-molded automotive module. Regenerative Medicine, CDMO business, which is representative of next-generation business also has the second highest number of orders in the world. In the stable earnings business, we also have businesses such as graphite electrode and hard discs, which have a high global share in the market, where the competitive environment is stabilizing. Furthermore, Fundamental Technologies and Materials business has 3 materials and technologies, namely inorganics, organics and aluminum, and they function as a technology platform to support innovation in each of the other business categories. In particular, technologies and materials provided by Fundamental Technologies and Materials business will strengthen the competitiveness of each of other business categories. Furthermore, technology and materials in the Fundamental Technologies and Materials business will be reinforced in a wide range of business categories. The unique feature of this portfolio is the consistent virtuous cycle of the strengthening of these businesses and technologies, that enables the highly competitive business categories to reinforce one another. Page 9, please. Among our business portfolio, I'd like to explain the core growth and the next-generation business categories, which will drive future growth at the company. Auto and electronics business will continue to face intense competition in the gross market as the direction of technology development and players are increasingly fixed. The Showa Denko Group will capture the market growth, leveraging our top position and enhanced technological capabilities. In Mobility business, we expand into both areas of high uncertainty and uncertainty through the business portfolio. Lastly in Life Science business, with market expected to grow going forward, we will capture growth by leveraging our first-mover advantage. Page 10, please. Hereafter, I'd like to look at business individually. First is the electronic semiconductor-related Materials business. Our semiconductor-related Materials business is a business that generates JPY 200 billion per year in revenue, enough to drive the growth of the Group, which has a sales of around JPY 1 trillion and is in the top position in the global market, far ahead of all the other players. In addition, not only the large business scale, but the business also offers a wide range of products. As a feature, our each product boast the global top-class competitiveness and the share. And 85% of the total shares are generated by the product, the global #1, 2 ,#3 market shares. We will strengthen our leading position in the market as a top global player with both of scale and strength through development of next-generation products. Next page, please. Next is our Mobility business. As I explained earlier, we consider mobility to be the market, where both changes of high certainty and the changes where uncertainty remains co-exist for the time being. First, an area with high certainty is a weight reduction. We regard it as a highly certain trend against the backdrop of greenhouse gas reduction and will steadily capture growth through the provision of resin-molded backdoor modules and both companies, multi-materials solutions. Another trend, along with the weight reduction is our electrification, of which the expansion of needs for some management associated with electrification is considered highly certain. So we will pursue the proposal of material packages with exceptional heat resistance in anticipation, with a focus on power module. On the other hand, the area in which uncertainty remains high, I mean the trend toward electrification is the outlook for penetration of each powertrain, projecting that EV will account for a large share, the Showa Denko Group will not only engage in the development materials for lithium-ion batteries. We will also proceed with the preparations so that we can propose some more management materials packages that maximizes performance of SiC power modules. Certainly, our ESG, our Regenerative Medicine in a growing market, Showa Denko Group has a first-mover advantage. In the Regenerative Medicine, CDMO business, it is necessary to be able to properly use various element technologies related to sericulture and production. And with our global top-class track record and curative knowledge lead us to having a highly competitive advantage. Furthermore, we have built a global production structure ahead of the other peers, by which we will accelerate receiving orders and recoup investment for monetization and preparation for future market changes. In addition, this market is expected to see significant cost innovations over the next few years. In this regard, Showa Denko Group is proactively developing manufacturing technologies ahead of the competitions. We will also capture current growth and quickly capture future changes, leveraging our first-mover advantage, which we will draw on to build that mid- to long-term competitive advantage. Next page, please. Among core growth and next-generation businesses explained so far, we are focused on 5 more specific businesses as pillars of our mid- to long-term growth. In electronics, this refers to semiconductor wafer process and packaging process business. In Mobility, multi-materials, resin-molded automotive module business and some management business centered around our power module. Meanwhile, in life science, it refers to Regenerative Medicine CDMO business. Combined sales for these high-growth business in 2020 are approximately JPY 230 billion, which will expand to a scale of JPY 600 billion by 2030, achieving CAGR of 10% through innovations, including technological synergies of both companies. Through innovations in these 5 businesses, including the technological synergy, we expect to generate additional operating income of JPY 18 billion in 2025 and JPY 48 billion in 2030, which will ensure a return on investment for the integration. In order to show you how we realize the impact of this innovation, I'd like to introduce several examples of innovation generated through synergies. Next is Slide 14. First is our semiconductor wafer process business. As semiconductor performance is increasing due to the expansion of 5G and autonomous driving and others, there's a need for technological innovation in semiconductor materials. While players such as GAFA start to approach material manufacturers seeking to manufacture key devices in-house, indicating that the materials related innovation is growing in importance, achieving technological breakthroughs in the material market is becoming increasingly difficult each year. We will continue to meet the needs of our customers by breaking through the technology trade-offs with combined technologies of 2 companies. The shipment area of semiconductor wafers is expected to grow 5% per year from now on. We will achieve higher business growth by developing and deploying next-generation products through technological synergies. Next is Slide 15. Next is semiconductor packaging process. In addition to increasing performance of semiconductors through refinement of wafer process, higher performance through innovation in the packaging process is also needed. Even in this area, we will respond to the technological challenges faced by our customers by combining resin design technologies, filler technologies and other Showa Denko technologies, with Showa Denko Materials products. Another key is our packaging solution center, which is highly valuated by semiconductor manufacturers. We will provide new value to our customers by designing combined materials based on the valuation technology. With the semiconductor integrated circuit market projected to grow at about 6% per year, we would also leverage our technological capabilities to achieve sales growth that exceeds the market growth rate. Slide 16. Lastly is heat management. With the shift to electronic control in electrification of vehicles, heat challenges will become one of the most important issues. In light of this, we will address the technological challenges and needs of our customers by expanding the lineup of heat management materials and combining materials, leveraging analysis and module evaluation technologies, both of which we consider our strength that others do not have. This is a market where about 20% growth is expected by leveraging the wide range of materials and solutions generated through the integration of the 2 companies, and we are committed to capture this high growth. Next is Slide 17. Our vision of hybrid advanced materials company that combines midstream materials technologies with downstream application technologies is illustrated by comparing ourselves to soil and the trees that grow in it. Chemistry to synthesize, which encompasses the Showa Denko's midstream materials; chemistry to formulate, which constitute Showa Denko Materials downstream application; and chemistry to think, which includes both company's evaluation and simulation technologies, structural analysis and computational science. These 3 types of chemistries and fundamental technologies and materials business category, play the role of nutrients in the rich soil, namely: functions, making it possible to produce and nurture quality trees; core growth; next-generation; and stable earnings business categories. Of course, we can also bring in saplings from other sources and grow them in the rich soil. In that process, new nutrients will be supplied through the business operations and will lead to the development of businesses with new functions. This cycle of business strengthening and technology enhancement will make it possible to achieve a self-directed portfolio transformation and sustained high growth. Next is Slide 18. As mentioned at the start of my presentation, we aim to be a company with a strong presence in the global market and that contributes to a sustainable global society. To achieve this, we will meet the expectations of our customers through innovations that combine technologies and contribute to a sustainable society as a whole through business operations. We would also pursue business activities in accordance with the 17 SDGs, our sustainable development goal. And as a integrated company will contribute to the SDGs through various technologies and businesses, taking ESG efforts to the next level. Some examples are: next-generation semiconductor materials to optimize various social infrastructure; plastic/chemical recycling; hydroelectric power generation; graphite electrodes for electric furnaces; weight reduction and electrification in Mobility; and improving the quality of life through our Life Sciences business. We will continue to contribute to a sustainable society, as a whole, through those businesses. Next, I would like to give you an overview of our long-term numerical targets, slide 20. With our business philosophy to satisfy all stakeholders, Showa Denko Group will provide products and services that are useful and safe, satisfying our shareholders and fulfilling a mission as a member of international society. As management indicates to achieve this, we have set a TSR as a comprehensive indicator of corporate value enhancement, long-term numerical targets, such as EBITDA and net debt equity ratio. Slide 21. In terms of specific numerical targets, first, we aim to be in the top 25% in the chemical industry in terms of TSR in the medium to long term. Additionally, in 2025, we are aiming for JPY 1.6 trillion in sales, 20% in EBITDA margin on sales and 15% of ROE and net D/E ratio of close to 1.0x. As for sales and EBITDA, these targets could change due to the future portfolio restructuring. However, we have set EBITDA margin, ROE and net D/E ratio as targets to achieve irrespective of portfolio restructuring. Next is Slide 22. Next, I'd like to explain specifically how we will achieve profit growth. Regarding EBITDA margin from 2020 to '25, we will raise it to 15% by 2025 through business growth, centered on electronics and mobility, the innovation initiatives I described earlier as well as structural reforms. In addition, we aim to achieve EBITDA margin of 20% with recovery from the impact of COVID-19 and the growth from market fluctuations. Even if the market conditions deviate from expectations, we will offset it through the business restructuring and additional structural reforms to achieve EBITDA margin of 20%. Next is Slide 23. In terms of our shareholder return policy, in light of our current situation, we will achieve business growth, first, by paying back debt, prioritizing the allocation of cash to growth investments with the goal of achieving the net D/E ratio close to 1.0x. We will strive to pay out a stable a dividend as possible during this time. On top of that, over the medium term, we aim to raise net D/E ratio to close to 1.0x. And once we achieve a certain level of business growth, we will pay generous dividends and aim for the total return ratio of 30%. Next is Slide 24. We are also considering to link the compensation of executives to long-term numerical targets that I have presented. While specific indicators and ratios are still under consideration, we are committed to achieving our long-term numerical targets, of which will be reflected in the management team's compensation system. Lastly, I would like to share details of initiatives to realize short to medium-term synergy. Next is Slide 26. There are 3 major short to medium-term initiatives: sale of businesses based on the business portfolio restructuring; improved profit structure; and streamline assets and fully integrate organizations. Regarding business divestiture, as I explained in August meeting, for the first half results and full year forecast, we expect to sell off businesses with enterprise value equivalent to JPY 200 billion through business portfolio restructuring. To improve our profit structure, we will first improve our profit base by more than JPY 25 billion as of 2023. And then we will generate JPY 50 billion in cash as part of our near-term measures to streamline assets. In terms of organizational integration, our first goal is to integrate the chain of command and head office functions in July 2021. And then to fully integrate Showa Denko and Showa Denko Materials into a single corporate entity by 2023. Next is Slide 27. Next, I'd like to explain the profit improvement initiatives in detail. In addition to improving the sales related to profit, reducing procurement and logistic costs and reducing other costs, we plan to reduce operational headcount by about 1,500 employees as business process optimization. As a result, we expect to achieve a cumulative impact of JPY 28 billion on the current profit structure by the end of 2023. Next is Slide 28. We would also consider and implement additional initiatives for which specific quantitative efforts cannot be measured at this point in time, and we will steadily achieve a cumulative impact. For example, we will develop products that utilize both Showa Denko and Showa Denko Materials technologies and materials increased profits through cross selling, further reduced material cost, consolidate operational sites and improve productivity. Slide 29. Next is asset streamlining. As I explained in August, we expect to achieve a JPY 50 billion improvement for immediate countermeasures against the deteriorating economic environment. In addition, we will consider additional measures over the medium to long term. Slide 30. Regarding organizational integration, we would integrate and reorganize Showa Denko and Showa Denko Materials businesses based on the concept of core growth, fundamental technologies and materials, next-generation and stable earnings business groups, as I explained earlier about our business portfolio. And we'll share the specific organizational structure when the time is right. Following electronics and mobility, we envisage that our portfolio will be composed of functional materials, which groups together our fundamental technologies and materials businesses; stable earnings business; and life sciences. Next is Slide 31. As part of our collaborative efforts by our newly integrated head office functions, we are also currently building a Stage for Fusion in Kanagawa Ward, Yokohama City. At this facility, we seek to create and promote new ESG-oriented research themes that combine diverse technologies from Showa Denko and Showa Denko Materials. Slide 32, last page. Lastly, I'd like to explain the schedule for organizational integration. First, we will integrate the chain of command and corporate functions in July 2021. In the second half of 2021, we plan to integrate our head office sites. And in 2023, we will integrate Showa Denko and Showa Denko Materials into a single corporate entity to strive for realization of our long-term vision. This concludes my presentation. Thank you very much for your attention.