Teijin Limited (3401) Earnings Call Transcript & Summary

This is Yoshihisa Sonobe, Senior Executive Officer, Representative Director of the Board. I will go over the results for fiscal 2019 and summary of the previous medium-term management plan. Page 1, key points, starting with fiscal 2019 business performance. Operating income was JPY 56.2 billion, down around 6% from JPY 60 billion in the previous year and 2% above the previous outlook of JPY 55 billion announced in February. Similar to the third quarter briefing, Aramid Fibers, Healthcare in Japan and the IT business remained strong and contributed to earnings. Negatives included impact from the generic products in Europe and the U.S. on a mainstay pharmaceutical febuxostat as well as sluggish market conditions for polycarbonate resins. In February and March, COVID-19 impact was felt mainly by Composites and Carbon Fibers but to the limited scale. EBITDA was JPY 107.2 billion, missed the target for the final year of the previous medium-term management plan, which envisioned over JPY 120 billion, but in terms of 3-year average, secured growth over the previous 3-year period. Year-end dividend remains unchanged at JPY 30 per share for an annual dividend of JPY 60. Outlook for fiscal 2020 and the impact of COVID-19. Our plan put together before the COVID-19 outbreak envision a structure in which the impact of drug price revisions being compensated mainly by increased sales of Aramid Fibers, Composites and Healthcare in Japan. But with COVID-19 factored in, we have recalculated and now expect revenues and earnings to decrease year-on-year. In particular, Materials, which serves the core markets of automotive and aircraft, expect a year-on-year decline in revenue and profits. We assume that the performance of Healthcare and IT will be little affected due to stable cash-generating ability. Page 4, slight repeat, but I'll just go over some of the highlights. Net sales decreased year-on-year due to the impact of generics on mainstay pharmaceutical in Europe and U.S., sluggish market conditions for polycarbonate resin, weakness in Polyester Fibers & Trading and Retail reflecting unseasonable weather, the impact of transfer of subsidiaries in Films and COVID-19, down 3.9% year-on-year at JPY 853.7 billion. Operating income was JPY 56.2 billion, a decrease due to factors mentioned earlier. Items below operating income, nonoperating income declined, reflecting the impact of foreign exchange movements, that is foreign exchange gain last year versus exchange loss this year, as extraordinary loss onetime expenses were recorded associated with the transfer of subsidiaries in Films as well as goodwill impairment related to automotive materials subsidiary, J.H. Ziegler in Germany, in Polyester Fibers & Trading and Retail. Profit attributable to owners of parent was JPY 25.3 billion, down 44% year-on-year. Page 5. ROE, 6.3%. ROIC based on operating income, 8.7%. EBITDA, JPY 107.2 billion. CapEx, almost as planned at JPY 68.6 billion. Dividend, as mentioned earlier, no changes from previous outlook. Exchange rate, yen appreciated somewhat year-on-year, oil prices were slightly lower year-on-year. Next, Page 6, Materials Business Field. Net sales were down JPY 37.7 billion. EBITDA was slightly higher, plus JPY 0.9 billion. Depreciation and amortization increased by JPY 3.1 billion, and operating income was down JPY 2.2 billion. Bridge chart at the bottom. Volume differential was slightly negative. It was positive through the third quarter. So this reflects some impact of COVID-19. As for sales price and raw material and fuel cost, Aramid Fibers had significant positive impact on sales price and mix, while polycarbonate resin price spread narrowed. Net effect was plus JPY 4 billion. As described on the right, Aramid Fibers saw a decline in sales volume for automotive application such as friction materials and rubber reinforcement due to the impact of a decrease in demand for automotive but contributed to profits through product mix and pricing efforts. In Carbon Fibers, sales volume decreased slightly mainly reflecting inventory adjustments in the supply chain. In polycarbonate resin, prices of commodity products declined, reflecting a decrease in demand as well as COVID-19 outbreak towards the end. In Composites, film sales had been recorded -- or firm sales had been recorded but later declined as U.S. automakers suspended production in response to the impact of COVID-19 outbreak from March affecting the volume differential. In Polyester Fibers & Trading and Retail, sales in Fiber Materials and Apparel were sluggish mainly reflecting unseasonable weather. While in Industrial Textiles and Materials, sales remained favorable. In Healthcare Business Field, please look at the bridge chart on the left, volume differential, net effect of minus JPY 1.5 billion: coming from global, JPY 7.5 billion minus; and Japan, plus JPY 6 billion, owing to increased sales of FEBURIC and Home Healthcare. Net effect was slightly negative. Sales price and mix, slightly negative, reflecting NHI drug price revisions. Overall business in Japan was strong. In Others, basically, Infocom results, which posted steady performance in the e-comics distribution service as well as in IT services for hospitals and enterprises, which did slow down somewhat towards the end. Nonoperating items to be noted are 2 items, equity and earnings of affiliates, plus JPY 1.6 billion year-on-year. With the withdrawal from the manufacturing joint venture in Korea, associated loss was eliminated this year. The absence of loss this year translated into a year-on-year increase. As for the impact of foreign exchange, please look at foreign exchange gains, gain on valuation of derivatives, foreign exchange losses and loss on valuation of derivatives altogether. In fiscal 2018, gain on valuation of derivatives was JPY 2.4 billion, while foreign exchange losses amounted to JPY 0.8 billion for a net effect of positive JPY 1.6 billion. For fiscal 2019, foreign exchange gains, positive JPY 1.1 billion, and loss on valuation of derivatives, minus JPY 1.1 billion. Net impact of foreign exchange year-on-year was JPY 2.7 billion. This is mainly attributable to the difference between the foreign exchange gain in fiscal 2018 and foreign exchange loss in fiscal 2019. As for extraordinary items, settlement received JPY 4.5 billion last year, but none this year. Impairment loss, JPY 11 billion. Last year, we recorded impairment loss related to the separator business in Korea. This year, impairment related to Ziegler in Germany and impairment related to airbag and car seat companies in China were recorded totaling JPY 11 billion, up JPY 5 billion. As for business structure improvement expenses, we recorded onetime expenses associated with the transfer of subsidiaries in Film, including personnel cost provisions. Net of extraordinary items worsened by about JPY 13 billion. Page 10, financial position. To be noted is the interest-bearing debt, an increase of JPY 12.7 billion, but most of this increase was due to the application of IFRS 16 leases amounting to JPY 12.1 billion. So apple-to-apple, almost flat. Changes in total assets. Trade receivables decreased significantly by JPY 27 billion. There are 2 factors. One was the transfer of the Film business, which lowered the trade receivables. The other, more importantly, was a decline in sales during the fourth quarter. And accordingly, trade receivables declined year-on-year. Tangible and intangible assets mainly investment in Carbon Fiber in the U.S. Investment securities, minus JPY 19.5 billion mainly reflecting lower market value of investment securities. Cash flows. Cash flows from operating activities, plus JPY 13.3 billion year-on-year. While net income for the period declined, working capital was lower, resulting in an increase in the operating cash flow. Balance sheet exchange rates, stronger yen as a trend was observed. As for key financial indicators, ROE at 6.3% fell short of target for fiscal 2019 of 10%, but the 3-year average was over 10%. ROIC based on operating income achieved the target of 8%. EBITDA, the target of over JPY 120 billion in fiscal 2019 was not achieved, but the 3-year average was over JPY 110 billion, representing an improvement over the preceding 3-year period. Next, analysis of changes in the EBITDA during the 3-year period, Page 12. As described there, EBITDA has grown steadily due mainly to restructuring and sales expansion measures. And anticipatory expenses has been allocated proactively for future growth. I would like to look at the details by business, so please turn to Page 13. Materials and Healthcare businesses are described separately. In Materials, slight increase from JPY 55.1 billion to JPY 57.3 billion. Main factors were sales price and mix and raw material and fuel cost, lower selling price of polycarbonate resin due to sluggish market conditions and higher raw material and fuel cost had a slight negative impact. But growth in volume with acquisition of CSP and Aramid price mixing and volume increase had a positive impact. Restructuring initiatives such as suspension of plants delivered benefits. Before the transfer of the Film business, the plants were suspended, which brought about positive effect, which is reflected here. In Healthcare, sales of Healthcare in Japan such as FEBURIC and Home Healthcare expanded steadily, compensating for drug price revisions and generic penetration outside Japan. Effective restructuring initiatives such as shown on the extreme left was in relation to the withdrawal from the U.S. Home Healthcare business by Braden Partners. Page 14, cash allocation for the 3-year period. The plan was to spend JPY 300 billion on CapEx and mergers and acquisitions, which was to be financed by what's described under source. EBITDA was short of the target, but operating cash flow was almost as expected in the medium-term plan with lower working capital needs. Operating cash flow as a result was over JPY 250 billion. We aggressively reduced strategic shareholdings and, as part of business restructuring, transferred subsidiaries in Films and sold the Osaka headquarter buildings and others. Through the sale of assets and subsidiaries, we generated JPY 71.5 billion in cash, which more than made up for the investment need. While fulfilling dividend payment, we also implemented share buyback as shareholder return to improve capital efficiency. In the meantime, we managed to increase cash and deposits on hand. That concludes my presentation. Thank you for your kind attention.

This is Jun Suzuki, President and CEO, Representative Director of the Board. Please turn to Page 16. What you see here is the first page of the presentation on the new medium-term management plan announced on February 5. We are projecting into 10 years later towards 2030 and considered what needs to be done now over the 3-year period. Creating growth platforms is the basic policy for the 3-year period. To create growth platforms, we identified 3 areas, namely creating opportunities, reducing risks and strengthening management basis, focusing on 4 key success factors as described there. That is what we explained on February 5. Based on that, we have put together short-term management plan basic policy as shown on Page 17. In this first year, we are to address key business issues for Growth Platform Creation, paving the way for achieving the goals. Despite the impact of COVID-19 outbreak, no changes are being considered to this basic policy. In terms of strategic focus areas, in Materials and Healthcare segments, we have identified expanding automotive composite business for aircraft, and in Healthcare, expanding functional foods, orthopedics and new medical products business and creating new comprehensive community health care related business. And we are to allocate more than 60% of investment in these areas. In terms of the basic -- and that basic policy remains unchanged. In terms of profitable growth, we are to increase production capacity and sales of Aramid Fibers, create value unique to Teijin through organizational reform in Healthcare and build a comprehensive community health care system foundation as mentioned earlier. In terms of strengthening management basis, we will focus on environment contribution and accelerating innovation and ensure achieving these during the 3-year period. For that, we will mitigate climate change by offering more environmental value solutions, contribute to the achievement of circular economy by utilizing our materials and technologies, enhance innovation capabilities through organizational restructuring, collaborative businesses, utilizing digital transformation and promoting diversity and inclusion. No change to that basic policy. Page 18. Having said that, impact of COVID-19 is being felt. From January to February, virus outbreak peaked in China, but gradual recovery is taking place in China, we are told. Since last March, spread of infection mainly in Europe and U.S., caused a sharp drop in demand and suspension of OEM factories mainly in automotive and aircraft industries. And Teijin's Materials segment has begun to feel the impact on sales and plant operations. And we see declines in sales activities and delays in R&D because of stay-at-home orders and movement restriction orders around the world. We launched the Novel Coronavirus Response Headquarters led by myself, but basically -- or actually, as an initial emergency response, on January 31, we set up emergency response headquarters headed by CSRO to address such issues as employees in China and supply chain issues. But with drastic change in the situation and given that it has become global pandemic and given the need to separate emergency response measures and more long-term matters over months or year, in April, we established the Novel Coronavirus Response Headquarters headed by myself so as to address BCP measures to continue the business while considering how we can contribute to early recovery of society, at the same time, to consider what needs to be done now to prepare for the post COVID-19 phase. Page 19, what specifically are we doing at Teijin Group to address COVID-19? Here, you can see management strategy, business operating and active initiatives for COVID-19 measures. In terms of management strategy, as mentioned earlier, we are continuing to maintain the mid- to long-term strategy. But at the same time, we are focusing on minimizing financial risks and maintaining supply chain stability. As will be explained later, financial situations are quite different from right after the Lehman crisis, the global financial crisis phase and now. So with discipline, we are confident that we can weather through the current period. In terms of business operation, first, we worked on ensuring the safety and the health of stakeholders. By stakeholders, of course, we mean our employees, but our customers as well. And by customers, particularly given that we are in the health care business as well, patients and health care professionals are our direct customers, and securing safety would be the top priority. We have to rigorously prevent the spread of infections, and we have to make sure supplies to patients are not disrupted. So the priority is on securing health and safety and at the same time continue business operation. So for that, rigorously prevent spread of infection. We are, at the same time, promoting work from home or telework as much as possible. For example, for headquarter functions, over 90% of our staff are working at home. So we have a very clearly defined framework. In terms of active initiatives for COVID-19 measures, as you can see, we are considering how best to contribute to society, not for profit-making per se, but rather consider what we can do to contribute to returning to normal. For example, supplying of pharmaceuticals and medical equipment, which is our business, but any disruption in supply will be a matter of life and death if a patient is involved. So stable supply of pharmaceuticals and medical equipment and continuous provision of medical services, that's a fundamental must. In addition, as you're aware, we are providing medical gowns and disclosing the paper patterns for the medical gowns and establishing the supply system for ciclesonide. We are also preparing to increase production of proprietary oxygen concentrator and joined the COVID-19 Countermeasure Declaration as a founding member, that we'll not assert our intellectual property rights against any COVID-19-related developments. This is a global declaration, the initiative advocated by Kyoto University professors, and we are collaborating with Canon and others in this. Page 20. Financial condition and earnings structure. We're comparing the situation right before the global financial crisis and the present situation. We are comparing the end of fiscal 2007 and the end of fiscal 2019. We are keeping adequate committed lines of credit and we have secured liquidity. As you can see, cash and deposits are now 8x larger. Liquidity ratio on hand improved from less than 1 month to 2.3 months. And net debt to equity ratio has improved and shareholders' equity ratio has improved as well. As you can see on the lower left graph and as Mr. Sonobe explained earlier, COVID-19 impact on Healthcare and IT is limited. Major impact is felt by the Materials segment, which I think is true globally. And as you can see in this graph, EBITDA breakdown has changed dramatically. Currently, as you can see on the right-hand side, almost 50-50, meaning Healthcare and IT accounting for half of the total, not affected much. So the question is, how much is the impact on Materials and what measures to take to counter that impact? Whereas in fiscal 2007, more than 3/4 was Materials. And the liquidity was very low at that time, so we suffered greatly. As described on the right-hand side of the slide, changes in earnings structure through portfolio transformation in Materials are described there. More resilient to the market fluctuations, which is, of course, a positive factor. And we are enhancing cost competitiveness and strong relationship with customers and expanding earnings in Aramid Fibers. And we are reducing the ratio of commoditized materials and applications business, increasing high value-added products in resin and plastic. And we are becoming more fab-light in terms of the fixed cost reductions. And we are diminishing unprofitable projects overall. Now changes in the market prioritization, which is a negative factor, which is the risk from COVID-19. We have increased dependence on automotive and aircraft industries, which account for around 30% in the Materials sales, and we expect a significant impact here. Moving on to Page 21. Assumptions for fiscal 2020 forecast with consideration of COVID-19 impact. Fiscal 2020 forecast will depend on the duration of the impact of COVID-19. That will be the crucial question. Basically, we are using the baseline assumptions announced by IMF in April. So for the first quarter, April-June, COVID-19 will significantly impact. For the second to the third quarter, July-December, economic activity will be normalized gradually. And in the fourth quarter, January to March, expect to subside overall. Still, precise business forecast is not feasible at this point in time. So going forward, looking at changes in situations, we will be disclosing revised figures. But based on this basic assumption, a rough forecast has been put together, which we are presenting today. Page 22, outlook highlights. Revenue and earnings will decrease from the previous fiscal year in Materials, which serves the core markets of automotive and aircraft. Revenue and profits declined from the previous fiscal year due to the impact of COVID-19. For Healthcare, the drug price revisions on FEBURIC would be just about the only factor taken into consideration. The impact of COVID-19 on Healthcare and IT will be insignificant due to the stable cash-generating ability. Overall, net sales JPY 750 billion; operating income, JPY 40 billion; ordinary income, JPY 40 billion; profit attributable to owners of parent, JPY 23 billion; ROE, 6%; ROIC, 6%; EBITDA, JPY 95 billion; CapEx, JPY 70 billion, but we will be flexible on this. We have not yet decided on the dividend due to the significant uncertainty in the assumptions for operating forecast. The full-term average exchange rate and the Dubai crude oil prices are as shown on the slide. Next page, forecast by segment, Materials and Healthcare shown separately. Let me explain how to read this chart. We are showing the fiscal 2019 actual results and fiscal 2020 outlook before COVID-19 impact and the fiscal 2020 outlook with COVID-19 impact taken into consideration and year-on-year difference with the COVID-19 impact taken into consideration. Net sales, as you can see, Healthcare, little impact, JPY 5 billion lower than the original plan, whereas in Materials, JPY 135 billion lower than the original outlook based on that basic assumptions described earlier. Operating income, similar story. For Materials, JPY 9 billion or JPY 14.5 billion lower than the pre-COVID outlook. Healthcare, no change at JPY 28 billion. Others, also no change at JPY 40 billion (sic) [ JPY 8 billion ]. Total compared to JPY 53 billion originally now projected at JPY 40 billion, JPY 13 billion less than the original forecast. Factors for changes in EBITDA forecast in fiscal 2020. Again, showing the actual for fiscal 2019 and the original forecast and incorporating the impact of COVID-19. Slight increase to JPY 109 billion was the original forecast. Major factors in volume, Aramid, Composites, febuxostat and Home Healthcare, but sales price and mix difference coming from drug price revisions to febuxostat and others. And raw material and fuel costs slightly negative already assumed in the original forecast. Foreign exchange, little effect. And Others, upfront payment increased to minus JPY 9.2 billion. At JPY 109 billion, up JPY 1.8 billion year-on-year, a slight increase. But with the impact of COVID-19, sales volume, negative factor; raw materials and fuel cost, positive factor as we are now assuming the crude oil price of USD 30 per barrel down from $60. So this should be a plus, but not enough to cover the reduction in sales volume, resulting in minus JPY 25 billion. At the same time, we will be executing countermeasures such as fixed cost reduction, which should bring about the benefit of JPY 11 billion or so with minus JPY 14 billion assumed originally. Now we forecast JPY 95 billion for fiscal 2020. Page 25, impacts of COVID-19 and measures in each segment. Basically, no changes in mid- and long-term business strategy in spite of short-term impact. In Materials segment, impact on sales volume in overall business relating mainly to automotive and aircraft application is expected. Direct impact on sales volume in Composite Materials for automotive industry due to the suspension of OEM factors from March are being felt, but we hear the operations will resume in May. Tier 1 are directly following activities of OEM in the U.S. So we believe the production will resume accordingly. But different business cater to different layers of the industry. And therefore, the timing might be different. So we have to watch closely. In the aircraft-related business, sales volume is being reduced because of a decline in aircraft demand and prolonged recovery risk due to continued flight cancellations and deterioration of LCC performance. As for countermeasures, we are executing measures of fixed cost reduction to minimize decline in earnings and factory operation adjustment, furlough employees in the U.S. are already being implemented. And we are reconsidering and adjusting production (sic) [ project ] implementation, including facility expansion. In Healthcare segment, overall impact on earnings will be negligible. We will ensure providing products and services for patients with measures for infection prevention. But there is a tendency to refrain from hospital visits and surgeries other than those for COVID-19 or other diseases requiring urgent medical attention. So for example, new business, joint replacement for knees, hip and spine. Of course, there would be emergency surgeries performed, but the number itself is limited, and we do see the tendency to postpone hospital visits or surgeries in these areas. And we are suffering from a decline in sales activities due to stay-at-home requirements. And of course, R&D activities are affected as well. For IT segment, overall impact on earnings will be negligible. At Infocom, we are having 2 businesses, e-comics services and the services for hospitals. Against the backdrop of stay-at-home, we are expecting the e-comics services to perform firm. We are seeing some impact on the services for hospitals. So for the measures in the Healthcare segment and IT segment, we are prioritizing securing all stakeholders' safety, including patients, and continue the essential business for society and customers. Basic policy is to be continued since the overall impact on earnings will be negligible. We will proceed with stable cash generation. And that concludes my presentation. Thank you for your kind attention.