Teijin Limited (3401) Earnings Call Transcript & Summary

This is Jun Suzuki. For the next 30 minutes or so, I would like to first give the overview of the current medium-term management plan, or MTP, then go over the progress we made in FY '20 and what our plans are for FY '21, as well as for FY '22, the final year of the current MTP. I will do so because I think speaking along the current MTP is the best way to describe the progress, our long-term vision, actions envisioned over a short term within the framework of that long-term vision, as well as the impact of COVID-19. First is the long-term corporate vision. I've shown this slide many times. Our corporate philosophy is threefold, as shown on top: enhancing the quality of life, in harmony with society, and empowering our people. Our long-term vision is a company that supports the society of the future. Four material societal issues are: climate change, safety and security of people, circular economy, and healthy and comfortable living for people. In response to which Teijin is to contribute to a sustainable world through the 3 solutions. As material management issues, we aim to further strengthen our technological base, human resources, corporate governance, CSR and diversity and inclusion, as we have stressed throughout our MTP presentation. The next page shows the positioning of the current MTP. The previous MTP from 2017 to 2019 prioritized business areas and clarified challenges. So the current MTP from 2020 to 2022 envisions sustainable growth toward and beyond 2030, sustainable growth not only of the company but also of society. We have positioned the current 3 years as a period for creating growth platforms to become a company that contributes to realizing a sustainable world. It is with this view that we are proceeding with the current MTP. As explained on the first page, we consider providing 3 solutions, as shown on the bottom, as important business opportunities, namely environmental value solutions for the Earth; safety, security and disaster mitigation solutions for society; and solutions on demographic change and increased health consciousness for the people. We have defined these 3 business opportunities by first identifying the megatrends in society. That is what challenges need to be solved in society over the next 10, 20 and 30 years and then projecting them against the Teijin Group's 3 businesses: Materials, Healthcare and IT, the 3 very different business areas which make Teijin a unique entity. We have defined business opportunities at the intersection of the megatrends and our business areas, as we have explained many times in the past. It is with these business opportunities in mind that we announced our MTP in February 2020, before COVID-19. Then came the COVID pandemic. During the past year, of course, there was a period during which we were kept busy coping with COVID. But at the same time, we examined from various perspectives whether COVID has forced us to reconsider our medium- to long-term direction, whether COVID has significantly changed these business opportunities and megatrends. And if so, is there anything we need to change? And the conclusion we have arrived is that indeed, there is no need to change. For example, with regard to environmental value, the mindset of reducing environmental burden has grown greatly under COVID-19. There is also a clear move to link green recovery to facilitating revitalization of economy. With regard to the demographic change and increased health consciousness, COVID-19 has heightened the need for telemedicine to reduce contact with people as well as brought to light the issue of shortages in hospitals and hospital beds in Japan and elsewhere, which is a challenge deeply rooted in the question of what to do about community health care. I believe that COVID has accelerated the expectations of society for these things and the awareness that these things are indeed necessary. Now 1 year later, after going through such a year, how will we revisit the MTP? Here's the summary on this slide. First, a look back on FY '20, the first year of the MTP. During the first half, we had to deal with the major impact of COVID as operations were suspended in many areas, primarily in the Materials, downstream of our operation on the part of customers and consumers. In particular, the carbon fibers business, which sees the aircraft industry as major profit source and expected as further profit source in the future, has been greatly affected and is still being affected. I will explain this in more detail later. On the other hand, COVID has not diminished the significance or relevance of our medium-term direction or what we are doing toward 2030 during the period of creating growth platforms. In fact, it has made them more significant and relevant. Thus, this has been a year of making investments as a period for creating growth platforms. On the right-hand side of the slide is the summary of our projection and plans for FY '21, the second year of the MTP. The Materials and the Fibers & Products Converting businesses expect continued recovery from COVID, albeit slowly. While the Healthcare and the IT businesses have been affected by COVID in various ways, the overall situation is rather strong or firm and is expected to remain firm. So we will continue to make growth investment in the second and third year, aiming to achieve the medium-term goals for FY '22 and the long-term goals for 2030. From here, I will talk about the Materials and the Healthcare separately. This slide shows initiatives in the Materials business field explained in the MTP announcement. It is roughly divided into profitable growth and strategic focus. The difference between the two is that, as described here, profitable growth is about making profitable businesses grow in a profitable manner, while strategic focus means fostering future revenue sources. In fact, there is another big difference. On the profitable growth side: resins, aramid fibers and carbon fibers that are currently classified as profitable growth are sold or supplied as Teijin's materials on their own so as to expand as the high-performance materials business. On the strategic focus side, which includes carbon fiber intermediate materials for aircraft and composites for automotive applications, we do not insist on selling only as Teijin's materials but rather willingly supply to our customers' combination of our materials with other companies' materials, in fact go as far as to accept being supplementary materials if need be. So what happened to these with COVID-19? And what did we do in FY '20? The profitable growth, Materials have firmly contributed to mobility weight reduction and proactively responded to environmental needs. For example, as will be described later, we are currently expanding the capacity for aramid fibers that are expected to grow in the future. We are also steadily promoting operation preparation for a carbon fiber plant in the strategic focus category. The carbon fiber business faces various issues such as impairment, but based on a longer-term perspective, we are moving ahead with preparation albeit with a delay. Composites for automotive applications are very interesting, in that the production lines stopped completely in April and May of last year but has now returned to about 90% of the previous level. Furthermore, we mainly supply to high-end models of vehicles, and sales of that segment are very strong. So we are now making proactive investment in view of the future needs as well. Next is Healthcare, which is also broadly divided into profitable growth and strategic focus, meaning further growing already profitable businesses versus aiming to foster revenue sources for 2025 or further for 2030. In terms of the horizontal axis on the chart, currently, we are mainly doing business in the treatment area reimbursed by health insurance. In the future, the idea is to expand to rehabilitation and nursing care as well as prevention and health promotion. We classify these as strategic focus. As for what we did in FY '20, major one was the acquisition of the sales rights for diabetes drugs from Takeda Pharmaceutical, and we intend to make it as a major pillar in maintaining and strengthening the business platform. Diabetes drugs can be an extremely powerful tool for the comprehensive community-based health care system as well as comprehensive community-based health care services and its extension, the health administration support business, which we had been envisioning for some time. Diabetes is considered to be an extremely important disease to be addressed in this community-based health care or health administration support businesses, and we have been thinking about it from the beginning. So ensuring that pathway is important for us. We also entered into the business of regenerative medical products through the conversion of J-TEC into a subsidiary. The term collaborative area was used when formulating the MPT to refer to creating new things through collaboration between inside and outside the company. It includes the creation of innovative medical treatment. We believe that we can create new businesses in this area by bringing together our strengths in Materials, Healthcare and engineering. As for the new business related to comprehensive community-based health care, while using the home health care business platform, we are also making various small investments in this area, which is closely linked to the health administration support business. The functional foods business is steadily expanding though it is not yet big. These are the initiatives implemented in FY '20. This is the short-term plan of CapEx and M&A projects presented when we announced the financial results. Only the almost fixed ones are shown. So what are to come afterwards are not included. We plan to invest in a variety of areas. We will make a small investment in a relatively early-stage ventures, and we will make certain investments to those expected to expand in the future. We are strictly managing investment and resources to establish a foundation for the future. In terms of the numerical aspects of the MTP, I explained on the 11th when we announced the FY '20 financial results that the final year targets remain unchanged at EBITDA of JPY 150 billion, ROE of 10% or more, and ROIC based on operating income of 8% or more. I will elaborate on these later. The breakdown of JPY 150 billion has changed. Healthcare was JPY 45 billion in the MTP but now is projected at JPY 60 billion, one big factor being contribution of diabetes drugs acquired from Takeda, as mentioned earlier. Conversely, Materials is reduced from JPY 80 billion to JPY 65 billion. As will be explained later, one of the factors we took into consideration is the slight delay in recovery in all businesses and the delay in market growth due to COVID. Let me be more specific. This is how we envisioned in the MTP to increase the Materials EBITDA from JPY 47 billion to JPY 80 billion. We projected a JPY 33 billion increase to come from capacity expansion, shift to high value-added products, cost reduction, business expansion, productivity improvement and others. The 3 graphs on the right show the sales volume or EBITDA images of aramid, carbon fibers and composites, respectively. The dotted lines represent the image of growth that we had in mind in the MTP. And there were numbers to support this image, the same for carbon fibers and composites. But in FY '20, due to COVID, aramid simply declined and so did carbon fibers. Composites, on a full year basis, managed to stay flat year-on-year. What should be noted in the right graphs is that after FY '20, the rate of growth is projected to return to almost the same level as previously projected. The question is, how many years has it been pushed back? For aramid, for example, it is about 1 or 2 years. And for carbon fibers, it is 3 to 4 years or, depending on the situation, about 5 years. With that projection, we expect the same growth rate as before. This is because, as I said at the outset, we believe there is a good match between the direction we are aiming for, what society wants and what we offer. Due to this delay, EBITDA projection will be about JPY 15 billion short of original JPY 80 billion. Major factors for the downward revision are listed there. We project that it will be evenly distributed among aramid, carbon fibers and composites. The next slide shows how to increase EBITDA from JPY 43.5 billion in FY '21 to JPY 65 billion in FY '22. I think you have a fairly good idea of how we are to increase from JPY 31.5 billion in FY '20 to JPY 43.5 billion in FY '21. The big factor is the recovery in volume. From FY '21 to FY '22, composites expect to improve profitability through programs with good margin and automation introduction. Aramid is to improve and so will carbon fibers. Resin will continue initiatives for producing high value-added products. These will add up to plus JPY 21.5 billion. If the smooth growth curve shown earlier is realized, we believe that JPY 21.5 billion can be achieved with contributions made by each business in the order described here. Let's dig a little deeper whether this is feasible. Regarding composites, we are continuing to invest in developing profitable growth businesses to capture the steady recovery of the automotive market and the major trend toward mobility weight reduction. In fact, the CSP profit margin deteriorated significantly after the acquisition in FY '16 because of increased depreciation of upfront investment and the deterioration of productivity due to the increase in upfront investment. But now we are seeing an end to this downward trend. With continuous productivity improvement efforts and an increase in utilization rate, including the recovery from COVID, we expect long-term stable job security and improvement of labor supply and demand. Now we've announced only up to Texas plant, but the programs for FY '21, '23 or '24 have already been decided internally. The CSP business is actually a business where everything is dependent on whether we successfully win programs in FY '23 and FY '24. These programs will add up to these levels. And whenever we look for a new program, we go after a program that is more profitable, and we are also increasing in-house production rate and automation. So the profit margin is projected to increase. That's what we envision for composites. As for aramid, demand is growing tremendously, to which we are increasing production capacity in a very timely manner, which will greatly enhance our cost-competitiveness. We will further refine our cash flow creation power here. Currently, sales volume by application is automotive, about half; general industries including optical fibers, 32%; and safety and protection, 17%. Sales volume of light vehicles, a major market, fell in FY '20, but are forecasted to continue to grow steadily going forward. We provide various products to automotive, such as tires, friction materials and MRG. Overall increase in the light vehicle volume is very important for the aramid business. Optical fiber is exhibiting a very strong market growth rate, as you can see. We believe this is another area where we can expect steady growth. As for carbon fibers, we aim to turn EBITDA positive within 3 years through regular monitoring of market recovery, program acquisition, profitability improvement and others. Colors are different, but it's the same as what I've been showing the demand trend for carbon fibers. Overall demand is expected to return in FY '23, while it has been generally accepted that the aircraft demand is not likely to return until FY '24. But more recently, we are feeling rather firmly that it might be a little earlier than that. Regarding resin, shift to high value-added products of polycarbonate resin has been successful, resulting in strong profitability. What this chart is showing is, we ran losses in FY '12 and FY '13, and FY '14 was also very bad. And then as a result of the start of the structural reforms in FY '14 and the reduction in production capacity, operating profit improved. Now please note the line graph which shows the market spread, which is currently very volatile. In the meantime, we are maintaining profitability. That's because unlike commodity products, profit of high value-added products does not fluctuate as much as market spreads. We were able to firmly establish such a business structure, and we intend to continue to expand such high value-added products. A major event in the Materials in FY '20 was the establishment of the Environmental Sustainable Technology Innovation Center, ESTIC, in The Netherlands in January 2021. Its main research interests include bio-related, circular-economy-related and hydrogen-society-related areas. It is located right next to the aramid production site. This Dutch aramid production site is only about an hour away from our carbon fiber site in Germany. Given such benefits, this new R&D base is to focus on biomaterial technology, circular economy technology, and hydrogen-society-related technology, as I just mentioned, to come up with environmental value solutions, including materials that are environmentally beneficial while increasing the sensitivity to the world's most advanced materials and environmental concerns over chemicals. Those are the functions expected of ESTIC. Moving on to the Healthcare. This is what we had in mind in MTP, JPY 45 billion, the same as in FY '19, in light of the expiration of the exclusivity of FEBURIC as well as revisions of drug price and medical services fees for other products. We expected the difference of JPY 23 billion to be covered by ITM-058 expansion of pharmaceuticals and home health care, productivity improvement and new business expansion. Actually, there was an impact of mid-year drug price revisions, delay in launch of ITM and new business expansion. While diabetes drugs are to push up EBITDA by over JPY 20 billion in FY '22, our current outlook is an increment of JPY 15 billion to total JPY 60 billion. This is the outlook for FY '21 to FY '22, from JPY 43.7 billion in FY '20, with the addition of diabetes treatment and the growth of FEBURIC, HOT and CPAP, up JPY 23.8 billion at JPY 67.5 billion in FY '21. However, FEBURIC cliff will impact FY '22, which is now projected at JPY 60 billion, down JPY 7.5 billion year-on-year. But for this period, we are planning to establish an integrated community-based sales system through multidisciplinary sales teams as a main initiative. Added with the expanded sales of main products and services, including diabetes drugs, we feel FY '21 and FY '22 targets are achievable. We have been promoting collaboration between our Healthcare business and Infocom Corporation, which is in charge of our main IT business. For example on such products and services as oxygen concentrator, HOT, multipurpose ventilator, CPAP and sonic accelerated fracture healing system sales. Now we are promoting various things that suggest comprehensive community-based health care service. The key is to support these products by the IT business base. Regarding patient information, there are DMAP, VitalLink, visiting nurse platform, and a program for prevention of serious diabetes progression, which is currently partly being carried out through a capital tie-up with PREVENT Inc. Furthermore, there's things as the underlying IT, which is a total home health care network, HOT, MIMAMORI band, monitoring system of oxygen concentrator and CPAP NemLink. These are all based on collaboration with Infocom. We are also looking at new areas to be developed jointly with Infocom as well as outside ventures. This is the entire Healthcare pipeline. It may not be familiar to you, but this represents our view of Teijin's Healthcare business. Pharmaceuticals, health care equipment, comprehensive community-based health care, implantable medical devices, regenerative medicine and food, all is integral part of our Healthcare business. You're perhaps paying attention to pharmaceutical pipeline and health care equipment pipeline, but we take the perspective shown here and consider what direction the Healthcare business is to move in the future and what direction we should focus on. For example, in terms of pharmaceutical programs, we only announced what has reached the real development stage. We have not shown much of the early exploratory stage. In fact, there are a lot behind what you see. Similarly, there are actually a lot of comprehensive community-based health care or food products behind what you see. This is the picture of when we expect the result of these efforts to materialize as a big block. Please bear in mind that we have solid plans of executing them and considering resource allocation. Let me summarize my presentation. For the Materials, original plan was to increase EBITDA from JPY 44.9 billion in FY '19 to JPY 80 billion, but it dropped due to COVID. However, from here, we are to recover in FY '21 and FY '22 in the similar rate as originally projected to total JPY 65 billion. For the Healthcare, MTP expected almost no change from JPY 44.6 billion to JPY 45 billion. Actually, it was almost flat in FY '20. And with the addition of the diabetes drugs, we expect higher results than MTP. When we put the two together, although it was flat in FY '20 due to COVID, achieving JPY 130 billion in FY '21 and JPY 150 million in FY '22 seems feasible. In fact, over a longer range, what's really important is to look beyond the JPY 150 billion in FY '22. This is a portfolio we envision for around 2030, and we are aiming for EBITDA of over JPY 250 billion with this upper part of the strategic focus portion accounting for more than 1/3 of the total. The current MTP has 2 more years to go. Investment during this period will actually be very important to support the growth to JPY 200 billion in FY '25. We have plans for aramid, composites, carbon fibers, health care and J-TEC. What is shown here is the direction of investment and the basic ideas on business. For diabetes drugs and J-TEC shown here, we spent about JPY 150 billion, but there still are areas that need to be invested. So we will raise investment by JPY 100 billion from the original JPY 350 billion to JPY 450 billion. Finally but not the least, finance, financial soundness and shareholder returns. First, regarding finance, the amount of over JPY 130 billion for the acquisition of diabetes drugs was covered by cash and deposits on hand and bridge loans. We are currently considering the most appropriate means of financing, but the Board of Directors has approved the policy of not relying on equity financing. Regarding financial soundness, although the financial position will temporarily deteriorate due to an increase in debt, we will work to lower it to the level of debt-to-equity ratio guideline of 0.9 as soon as possible. Regarding shareholder returns, projected increase in investment is to be financed through increasing net borrowing, and we will not change the shareholder return policy. Therefore, a certain amount will be returned to shareholders and share buybacks will be implemented flexibly if necessary. We will aim for a payout ratio of around 30%. That concludes my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]