Teijin Limited (3401) Earnings Call Transcript & Summary

I am Nabeshima. I will explain the financial results of FY 2020. Please turn to Page 1 for the impact of COVID-19 on Teijin Group Results. We have already explained the results up to Q3 in February, and Q4 made a recovery as predicted in the February 2021 outlook. To be more specific, overall recovery trends continued mainly for automotive applications, aircraft demand remained weak and medical protective equipment such as gowns made only a limited contribution to business results. Please turn to Page 2. This page is about trends in main markets will result in FY 2020 and outlook for FY 2021. Regarding automotive market, recovery trends continued in FY 2020 with a rapid recovery in Q2 in the U.S. SUV and pickup truck market as well as recovery in Europe started in Q2. As for FY 2021 outlook, the recovery is expected to continue, although it will not achieve the FY 2019 level. As for aircraft, demand declined substantially in FY 2020. And in FY '21 outlook, it is expected to start a recovery despite the continuing sluggish demand. In Healthcare, sales of the main pharmaceutical product and home health care equipment rental service remained firm. And in FY '21, despite annual drug price revision, sales will remain firm owing to the contribution of diabetes drugs succeeded from Takeda Pharmaceutical. Regarding medical protective equipment, in FY 2020, we provided a large supply to ailing medical front in the early stage of the pandemic, especially in the first half and the demand was almost fulfilled in Q3, and the situation will remain the same in FY '21. As for IT, demand for e-comics expanded owing to stay-at-home demand. And this trend will remain unchanged in FY '21. The impact from pirated sites, which became apparent in Q4 of FY '20, is expected to end in the first half of FY '21. Please turn to Page 3 for key points in this announcement. Regarding the results for FY 2020, despite the COVID-19 pandemic, EBITDA remained at the same level as in FY '19, and operating income was JPY 54.9 billion, a slight decrease by 2% year-on-year. Strong performance of medical gowns and IT business contributed to the results, and Healthcare business remained firm despite the impact of drug price revision. And Materials business was affected by weaker demand mainly for automotive and aircraft applications. Profit attributable to owners of parent was minus JPY 6.7 billion, mainly due to recording impairment losses on fixed assets owned by the Carbon Fibers business with anticipation of long-term decline in aircraft demand. Despite the loss in FY 2020, the annual dividend will be JPY 50 per share, a decrease of JPY 10 year-on-year. As for FY 2021 outlook for performance and dividend, with the recovery from the impact of COVID-19 and the effects of major investments such as drugs from Takeda Pharmaceutical, EBITDA is forecasted to significantly increase year-on-year. And operating income is estimated at JPY 60 billion. These results will exceed FY '19 results. Reflecting the predicted profit growth from the previous fiscal year, the annual dividend target is JPY 55 per share with an increase of JPY 5. Next, please turn to Page 6. This page shows highlights of FY 2020 results, as shown by the graph due to the reasons I just explained. Net sales were down 2% and operating income was down 2.3% year-on-year, respectively, to record loss for the fiscal year. Please turn to Page 7 for the summary of operating results. Net sales were JPY 836.5 billion, operating income was JPY 54.9 billion, ordinary income was JPY 53.7 billion, extraordinary items were minus JPY 44.3 billion due to the impact by impairment losses on fixed assets of Carbon Fibers business and profit attributable to owners of parent was minus JPY 6.7 billion. ROE was minus 1.7%; and ROIC based on operating income was 8.6%, which was at the same level of FY '19, and this level satisfies the target in FY '22, the final year of the current the medium-term management plan. EBITDA was JPY 106.8 billion, again at the same level of FY '19. CapEx is shown on the right, which was a little more than JPY 60 billion, depreciation & amortization was JPY 51.8 billion and R&D expenses was JPY 32.7 billion. Annual dividend for FY 2020 is JPY 50 per share as explained earlier. Please turn to Page 8. Changes from previous year are provided by segment. As for Materials segment, net sales were JPY 297 billion, EBITDA was JPY 31.5 billion and operating income was JPY 1 billion. As described on the right, this segment was significantly affected by COVID-19 regarding aramid fibers, although sales declined in all applications such as tire reinforcing material and automotive applications as well as optical fibers. Its sales volume recovered later in the fiscal year with the recovery in relevant markets. Polycarbonate resin also made a recovery in sales volume in the second half to maintain the annual sales at the same level as in the previous year. To add a sharp rise in the market price of its key raw material, BPA, the sales price was revised. As Carbon Fibers saw a significant decrease in sales volume for aircraft applications, we focused more on sales for wind power generation and recreation applications. And we continue to develop intermediate materials and prepare for the new Carbon Fiber plant in North America. For Composites, production and sales of automotive parts are CSP declined due to the significant decrease in OEM production at the beginning of the term. But from Q2 onward, a rapid recovery was made especially for SUVs and pickup trucks. CSP has also implemented incentive measures to improve the employee retention rate, which has been their issue. Each business area could reduce SG&A expenses as a result of restricting sales activities due to COVID-19. Please turn to Page 9 for Healthcare segment. Net sales were JPY 148.7 billion, EBITDA was JPY 43.7 billion and operating income JPY 31.5 billion. ROIC based on operating income was 41%. Pharmaceuticals were impacted by the drug price revision in April 2020, mainly for FEBURIC. Still, sales volume of FEBURIC and Somatuline, a treatment for acromegaly and neuroendocrine tumors, grew steadily. For Home Healthcare, Home healthcare services were chosen for many patients to avoid in-hospital infection of COVID-19 and this increased the number of rental units. The growth of CPAP devices used for sleep apnea syndrome treatment slowed down as the less number of patients were hospitalized for examination due to COVID-19. Regarding new business in Healthcare, implantable medical devices such as artificial joints and absorbable osteosynthesis materials were affected by postponed surgeries at the beginning of FY '20 due to COVID-19, but the number of surgeries recovered in Q2 onward. Please turn to Page 10. In the Fibers & Products Converting segment, early supply of large quantity of medical gowns, where demand surged due to COVID-19, contributed significantly to operating results. Also masks with infection prevention function and short polyester fibers for water treatment membrane remained strong. Automotive parts started to recover in the second half. And while textiles and heavy clothing struggled, sales of clothes to meet stay-at-home demand were robust. Regarding IT, the business solution field was affected by COVID-19, mainly for medical institutions. E-comics service and the digital entertainment field remained strong. As for others, Japan Tissue Engineering, or J-TEC, became our subsidiary through takeover bid and it was recorded in balance sheet at the end of FY 2020. Please turn to Page 11 for nonoperating items. They remained almost at the same level as the previous fiscal year. One of the factors was foreign exchange gain or loss as well as gain or loss on valuation of derivatives offset each other. Regarding extraordinary items, extraordinary income was almost the same as in FY '19. While gain on sales of investment securities decreased, gain on step acquisitions increased to offset the decrease in total. As for extraordinary loss, including the impairment loss on fixed assets of Carbon Fibers business mentioned earlier, the total impairment loss was JPY 44.1 billion, and the total extraordinary items was minus JPY 44.3 billion. Please turn to Page 12 for financial position. Total assets as of the end of March were JPY 1.036.4 billion. Liabilities were JPY 608.2 billion, including interest-bearing debt of JPY 380 billion. This is at the same level of the previous term. Net assets were JPY 428.3 billion and D/E ratio was 0.94x. A waterfall chart is provided below to explain changes in total assets, which increased JPY 32.2 billion. Cash and deposits increased and trade receivables rose due to sales growth in Q4. Tangible and intangible assets increased by JPY 200 million. This includes impairment loss of minus JPY 44.1 billion and the goodwill of J-TEC was JPY 15.1 billion. And goodwill of CSP Victall in China was JPY 4.6 billion and about JPY 10 billion impact of foreign exchange rate due to weaker yen. Investment securities increased as a result of increase in market value of shares held. Cash flows are shown on the right. Operating activities were JPY 107.7 billion, and investing activities include CapEx as well as the investment in J-TEC and CSP Victall. And free cash flow was JPY 28.1 billion, which was almost the same level as FY '19. That is all for the explanation of financial results for FY 2020. Next, Jun Suzuki, CEO of Teijin, is going to explain about outlook for FY 2021 and medium-term management plan, or MTP.

I am Suzuki. I will explain about outlook for FY '21 and MTP. Page 14 explains about FY 2020, the first year of our 3-year MTP. In the first half, we were significantly impacted by COVID-19, mainly in Materials business. But at the same time, we confirmed there was no change in materiality we work on and the trend of green recovery and new normal. So we decided once again not to change the direction of MTP and execute investments to create platforms for sustainable growth. FY 2021 is the second year of the 3-year MTP. The outlook of COVID-19 still remains uncertain. However, we expect the economy will make a recovery to the FY 2019 level, maybe not in Japan, but at least in other countries with the progress of vaccination. We expect Materials and Fibers & Product Converting businesses will continue to recover, and Healthcare and IT businesses will remain firm. We are already making large-scale investments to achieve medium- to long-term goals, and we'll continue such growth investments. Let me move on to Page 15 to show what we have done in FY 2020 and what we are going to do going forward in terms of capital investment and M&A. Upper left part of this page is about Materials and lower right part is for Healthcare. And items boxed by a colored docket line indicate Healthcare-Materials collaboration fields. As shown here, we implement various investments, large and small as well as joint research projects with venture companies. First, let me briefly explain about a large-scale investment of JPY 133 billion for succession of sales rights from Takeda Pharmaceutical. Next page is about succession of 4 diabetes drugs sales from Takeda Pharmaceutical announced in February. And its outline is provided on the left. This transfer was not included in the financial results of FY 2020. As asset transfer execution was April 1, 2021, this is recognized as asset transfer in the current fiscal year. What we expect is shown by the graph on the right as we will face a patent cliff of FEBURIC in FY '22. We estimated sales profit decline indicated by the blue line. But now, we have the 4 diabetes drugs from Takeda Pharmaceutical, which are expected to make a full year contribution in FY '21. This orange line is FEBURIC and 4 diabetes drugs. And improvement indicated here comes from sales profit of 4 diabetes drugs. Although in FY 2022, sales profit of FEBURIC will decrease sharply, and this will affect the orange line to gradually decrease. We assume now we have drugs which will help us to keep total sales profit higher than the estimated sales profit for FEBURIC in FY '20 and '21, at least until FY '22 or '23. This is the first major topic, but we do not consider this as just another product licensed-in. As a company engaged in drug products and home health care devices such as CPAP devices and HOT equipment, we will make sure to establish synergy with these products. We also aim to take different actions from ordinary product licensed-in at other pharmaceutical companies, that is, to expand initiatives in the comprehensive community-based health care strategy, such as to accelerate preventing diseases and their aggravation. In that sense, drugs and diabetes or lifestyle diseases are critical as they help us to better understand the comprehensive community-based health care strategy and capture all the people involved. We are certain this is our unique synergy that other pharmaceutical companies cannot do. That is why we made this decision to succeed these drugs. Page 17 is about the takeover bid of J-TEC executed in the end of the previous fiscal year. We already explained about it in the announcement of Q3 results, and its overview is provided on the left. As a result of this bid, we acquired 57.72% of its shares to become its major shareholder, and J-TEC remained listed on TSE JASDAQ growth market. The chart on the right shows a goal. Teijin and J-TEC have a lot in common. And this enables us to jointly create new values as co-creation. To be more specific, we expect to expand our regenerative medicine business by the synergy of technological and business foundations in Healthcare and Materials businesses and engineering capabilities. Also, we established corporate business incubation section to foster areas for co-creation directly under the corporate organization instead of within Materials or Healthcare businesses. Currently, we are preparing a business plan together as we implement post-merger integration. Please turn to Page 18 for the basic policy of short-term management plan. We'll tackle major challenges to create growth platforms and pave the way for growth exceeding the pre-COVID-19 level and achievement of the target in MTP with a strategic focus, profitable growth and solutions for environmental issues and innovations. These points are almost unchanged from what we explained in FY 2020. In strategic focus, Materials cover automotive composites business and continue to develop carbon fibers for aircraft. Healthcare will establish foundation of new businesses such as food, comprehensive community-based health care business and creation of innovative medical treatment and promote initiatives to maximize the synergy effect of major investments. And profitable growth for Materials will establish our position as a leader by increasing aramid fiber production capacity and sales. And for carbon fibers, we have already made various measures to improve profit to just decline demand for aircraft applications as we focus on now rather than the future in this profitable growth. In Healthcare, we'll build an integrated community-based sales system with multidisciplinary sales teams this year and expand sales of main products and services such as FEBURIC, CPAP and HOT as well as diabetes products we succeeded in April and promote new product development. Regarding solutions for environmental issues and innovation, in FY 2020, we have completed to set numerical targets for FY '21. We will make sure to manage our progress toward the target for FY '21 as well as toward FY 2022 and 2030. Also, we will contribute steadily to the realization of circular economy. As for innovation, we'll strengthen creating innovation by leveraging organizational reform, co-creation and promotion of DX and D&I. From Page 19 onward, I'll focus more on numbers. Overall, sales and profit are expected to increase year-on-year. Net sales are estimated to increase 4% year-on-year, and this is an increase of 1.9% from FY '19 to JPY 870 billion. Operating income will be up 9.2% from FY '20 or up 6.8% from FY '19 to JPY 60 billion. Profit attributable to owners of parent is estimated to return to profitability by increasing 38.6% from FY '19 to JPY 35 billion. Regarding dividend, annual dividend per share for FY '20 is JPY 50. But FY '21 is forecasted to increase JPY 5 with JPY 27.5 each for interim and year-end dividend to make annual dividend JPY 55 per share. Please turn to Page 20. I have just covered the top part of the table. So let me explain from the outlook for ROE. ROE is now estimated at about 8%. ROIC based on operating income is 7% and EBITDA is JPY 130 billion. Free cash flow and CapEx may look outrageous, but this is to reflect transfer of 4 drugs from Takeda Pharmaceutical for JPY 133 billion. Depreciation & amortization will be slightly larger mainly due to the large-scale investment we made, and R&D expenses will be almost flat. These are the numbers in our outlook. Next page is about net sales and operating income by segment. Sales and profit are estimated to increase in all segments, except Fibers & Products Converting, which is forecasted to decrease sales and profit. As for Materials, Carbon Fibers would take some time to recover but other business areas are expected to grow to the similar level or higher than FY '19. Healthcare is forecasted to make significant increase in sales and profit as existing products will continue good performance and effect of large-scale investment in 4 drugs from Takeda Pharmaceutical. However, for Fibers & Products Converting, as we explained for FY 2020, governmental demand for medical gowns almost ended in Q3 and such demand has not been generated since Q4. So what we are following is the trend of business, excluding medical gowns. This remaining part of the segment is actually growing, but considering the absence of the profit from medical gowns recorded in FY 2020, total segment sales and profit appear to be decreased. But we do not worry about it very much, and we'll closely watch the segment performance, excluding medical gowns. IT is forecasted with increased sales and decreased profit while e-comics sales will remain strong. Its headquarter is scheduled to relocate in October 2021, and this cost will be recognized as expense. And this looks like negative growth in its operating profit. However, excluding this factor, this segment is expected to make a positive growth. Next, please turn to Page 22 for the waterfall chart. We've planned to increase EBITDA by JPY 23.2 billion from JPY 106.8 billion to JPY 130 billion in FY '21. Roughly speaking, sales volume will significantly increase in pharmaceuticals, aramid, composites, et cetera. On the other hand, volume will decrease in Fibers & Products Converting. Spread indicate sales price and mix plus raw material and fuel cost, and we expect this item will record a slightly negative number, but with no major impact, almost no impact of ForEx. For others, we assume SG&A expenses or expenses which have been reduced by restraint activities will slightly increase as business activities are getting gradually active. So we estimate JPY 12.8 billion more expenses here, and this makes our outlook for EBITDA in FY '21 as JPY 130 billion. If we break down this into Materials and Healthcare, each chart looks almost the same as the previous page. For Materials, volume is expected to increase in each area due to demand recovery. However, in spread, sales mix of aramid will be deteriorated with increasing sales volume for automotive application, and the prices of raw materials and fuels are expected to rise. Others are mainly for increase in fixed costs and SG&A expenses. Healthcare is forecasted to increase JPY 23.8 billion from JPY 43.7 billion to JPY 67.5 billion. Volume increase will be mainly from 4 drugs transferred from Takeda Pharmaceutical. Sales price and mix is about minus JPY 2.5 billion due to the impact of drug price revisions. Others is minus JPY 1.7 billion due to increased SG&A expenses. From next page on, let me explain about our outlook toward FY 2022, including MTP. Our original target for EBITDA of JPY 150 billion in FY '22 will remain unchanged. Also, we will continue to strive for achieving our final goal for FY '22, that is, over 10% ROE and over 8% ROIC based on operating income in remaining 2 years of MTP. Having said that, considering changes in business environment, we have revised the forecast of contribution from each business to EBITDA. Originally, Healthcare was forecasted with EBITDA of JPY 45 billion in FY '22. However, with the transfer of 4 drugs from Takeda Pharmaceutical, our latest outlook is JPY 60 billion. Materials has been recovering; however, it is estimated to be still at the same or a little over the level of FY '19 in FY '21. This means the growth is 2 year behind from the forecast when we developed this MTP. Therefore, our current outlook is JPY 65 billion because JPY 80 billion seems a little unreasonable for FY '22. Still ROE and ROIC based on operating income will remain unchanged and, we'll make sure to increase them steadily. Please turn to Page 25 for investment policy. Originally, we plan to take 85% of total investment in the solutions for environmental value, safety, security and disaster mitigation and demographic change and increased health consciousness, which is about JPY 350 billion in 3 years. And in the past 1 year, we have already executed some of the investment. And considering drugs from Takeda Pharmaceutical are already launched in the market and we can collect cash immediately, we raised the total investment amount by JPY 100 billion to JPY 450 billion for 3 years. Lastly, about shareholder return on Page 26. As we continue to allocate cash flow to strategic investment with priority, we also focus on stable dividend payment and flexible stock buyback as our principle. Regarding cash flow, we will maintain a healthy financial structure with a target D/E ratio of 0.9x, although it will be 1.1 or 1.2 in FY '21. As we maintain such a target, we will prioritize allocation to strategic investment for future growth. At the same time, we'll consider stable and sustainable dividend payment and conduct stock buyback flexibly. Dividends are in line with consolidated operating results, aiming to raise the dividend based on profit growth. Our target for medium-term payout ratio is 30% of profit attributable to owners of parent, which is forecasted as JPY 35 billion for FY '21. Therefore, annual dividend for FY '21 is forecasted as JPY 55 per share with JPY 5 increase from the previous fiscal year. That is all for my explanation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]