Teijin Limited (3401) Earnings Call Transcript & Summary

I am Ogawa, CFO of Teijin. I explain mainly about the financial results based on the presentation material. The first page is about the major point of financial results of FY '22 and the outlook for FY '23. In FY '22, while net sales increased by 10% year-on-year to JPY 1.0188 trillion, operating income decreased by 70% year-on-year to JPY 12.9 billion. However, in the previous outlook, it was forecasted as JPY 10 billion. So it was about 30% higher than the outlook. The factors behind this result were in the Materials segment, even though selling price revisions offset rises in raw material and fuel prices, operating loss continued affected by a significant profit decrease due to production problems and labor shortages at U.S. and European basis as well as the slowdown of the Chinese economy. The Healthcare segment also recognized a decrease in operating income due to the impact of the market entry of generic alternatives to FEBURIC, a mainstay drug for gout and hyperuricemia last June and NHI price provisions. Loss attributable to owners of parent was JPY 17.7 billion. This was due to the impairment loss in the Composites segment recorded in the third quarter as well as a rise in the tax burden rate triggered by increased deficits at overseas subsidiaries. Regarding the outlook for FY '23 by implementing reforms for profitability improvement announced in February, we expect net sales to increase about 3% to JPY 1.050 trillion and operating income to be around JPY 35 billion, about 2.7x higher than that of FY '22. Profit attributable to owners of parent is forecasted to be JPY 13 billion. Dividend will be in line with the plan, and the year-end dividend for FY '22 is JPY 12.5. And for FY '23, we plan to pay out JPY 15 each for both interim and year-end dividend and the annual dividend of JPY 30 per share. Please turn to the next page for the status of FY '22 and the outlook for FY '23 for main target markets. In the Aramid business and the Materials segment, solid demand continued throughout FY '22 for automotive, industrial materials and ballistic/protective apparel, and we expect the same situation will continue in FY '23. In the resin business, customers' manufacturing operations declined for mainstay office machine in FY '22 due to the impact of the lockdown in China. Such a situation is expected to continue in the beginning of FY '23, but will gradually recover from the latter half of the year. Demand for carbon fibers for passenger aircraft was strong in FY '22 as the recovery of passengers continues ahead of the initial forecast made at the beginning of the pandemic, and we expect this situation will continue in FY '23. In the Composites business, OEM production continued to be constrained due to the semiconductor shortage and supply chain disruption throughout FY '22, but we expect the semiconductor shortage to be gradually resolved in FY '23. In the Fibers & Products Converting segment, both fiber materials and apparel as well as industrial materials performed relatively well in FY '22 as they continue to recover from the pandemic. In FY '23, while fiber materials and apparel business are expected to be sluggish a little other areas will make further recovery. In the Healthcare segment, the number of patients with gout and hyperuricemia is on the rise, but sales based on the NHI price are expected to continue to shrink due to the market entry of generic drugs. As for Home Healthcare for HOT or home oxygen therapy, curbing hospitalization continued in FY '22, but such a measure is expected to be lifted in FY '23. The market for CPAP devices is expected to continue to grow, and this situation will continue in FY '23 as well with the recovery in the number of examinations. In the IT segment, the impact of piracy websites on e-comics decreased, and the market grew continuously in FY '22, and this situation is expected to continue in FY '23. Please skip to Page 6 for performance highlights. Net sales, operating income and profit attributable to owners of parent are as explained at the beginning. Page 7 shows PL. Ordinary income was JPY 9.1 billion in FY '22. This was due to significant year-on-year deterioration of nonoperating items shown above as well as deterioration of equity method earnings and financial account balance. For management indicators, ROIC based on operating income was 1.6%, far short over the target level of 8% and EBITDA was JPY 87.8 billion, less than the JPY 100 billion mark. Regarding investment, CapEx was JPY 62.5 billion, while fixed assets significantly increased due to the takeover of diabetes treatments in the previous fiscal year. CapEx remained relatively low level in FY '22. In exchange rates and oil and gas prices, European natural gas price increased from EUR 69 in FY '21 to EUR 116 in FY '22, and this factor negatively affected the profit mainly for Aramid. Page 8 shows comments by subsegment of the Materials segment. For Aramid, net sales increased, but operating income decreased. This was due to the sales decrease due to declined sales volume caused by a fire at the raw materials plant and deteriorated productivity as well as the already mentioned rise in the natural gas price, for which we couldn't do enough price revisions to offset the price hike. For resin, both net sales and operating income decreased. At the beginning of the first half of the last fiscal year, we were forced to suspend operations at our plant in China affected by the lockdown and afterwards, the Chinese economy has slowed down. Carbon fibers returned to the black with increased net sales and operating income as demand for products for most applications, including aircraft remained firm, and we were able to revise the selling prices to address raw material price hikes. Composites grew net sales significantly, but operating income decreased due to a temporary decline in productivity caused by a machine breakdown. In the Healthcare segment, as I mentioned earlier, the sales volume of our mainstay FEBURIC has declined significantly since last June due to the market entry of generic alternatives. While the sales volume of Somatuline and Xeomin is growing, we were affected by the NHI price revision implemented again last year. Next page is about the Fibers & Products Converting segment and the IT segment. Operating income in the Fibers & Products Converting segment was JPY 10 billion in FY '22, up JPY 4.3 billion year-on-year. Both industrial materials and fiber materials in apparel have recovered from COVID and automotive parts, water treatment filters and global textiles also showed steady growth, resulting in an increase in operating income. IT segment decreased operating income by JPY 1.6 billion, while sales of e-comic services are increasing due to the growth of the market. Operating profit decreased due to the increased advertising expenses. Page 11 shows nonoperating items. The total of equity in earnings and losses of affiliates decreased by JPY 6.7 billion year-on-year. This includes the restructuring expenses incurred by the joint venture in Europe. Financial account balance was worsened, affected by the rise in interest rates in Europe and the United States. For extraordinary items, a large impairment loss was recorded in the third quarter of FY '22 in the Composites segment, and this led to us extraordinary items result than the previous year. Page 12 shows the financial position. Total assets increased by JPY 34.9 billion due to the impact of foreign exchange rates. Interest-bearing debt also deteriorated as well by JPY 44.3 billion, also affected by the exchange rates as well as by decreased free cash flow and other factors. Inventories also increased more than JPY 30 billion. This increase was due to higher inventory unit prices affected by higher raw material prices and costs as well as the impact of the yen depreciation. That is all for the financial results for FY '22.

I am Uchikawa, will explain the outlook for FY '23. First, please turn to Page 14 for the medium- to long-term direction. We have set a long-term vision to become a company that supports the society of the future. And currently, we are clarifying the medium- to long-term direction to specify the measures to support the society of the future in 2 areas. One is to protect the global environment and the other is healthcare, where we are narrowing our focus to become a company that addresses issues of patients, families and communities in need of more support from the broader focus of the issue of an aging society with lower birth rate as we have had so far. In the area of healthcare, we have already focused on diseases such as rare and intractable diseases. And we believe that with this focus, we can increase the value by utilizing our business foundation we have cultivated in the Home Healthcare business. We will find a way to take advantage of this area with the focus and achieve further growth. In the area of Materials, we have already narrowed down areas of focus to become a company that protects the global environment, but we will further narrow down the focus and reflect this in medium-term management plan to be announced next year. As you know, Tokyo Stock Exchange issued a notice action to implement management that is conscious of cost of capital and stock price on March 31, 2023. And I would like to introduce some of our ideas today based on this notice. Our earnings have been affected by changes in the external environment in the past and we see declining profitability in multiple businesses, and this has led to low market evaluation. As a result, our PBR has fallen below 1.0. Therefore, we thought it is essential to improve the profitability first, and we decided to delay the medium-term management plan by 1 year, and this is our commitment with the market to improve the profitability by this delay, and we are executing it right now. In addition, we have promised to present the portfolio reform and the medium-term management plan to be announced next year, and we will show the business portfolio restructuring or strategy with consciousness of capital efficiency as well. We intend to get out of the situation with PBR below 1. Next, please turn to Page 15. This is the summary of reforms for profitability improvement that was announced in February with progress indicated in blue. We have identified 3 underperforming businesses and presented measures for each of them. For the Composites business, we promised to recover the planned equipment breakdown that caused a significant impact and to implement various measures to improve productivity and profitability. For this part, we have almost completed price negotiations related to the additional raw material price hikes made last year, and the result will be reflected to the price soon. Also, we are negotiating with customers on price revisions associated with additional increase in labor and utility costs. In addition, we are gradually making progress in improving productivity. For Aramid, we are recovering from the impact of the fire that broke out at the end of last year. And even before the fire, we had some operational issues in production that had prevented sales volume increase. To address this situation, we have already invested for capacity expansion. So in this fiscal year, we will get out of the situation where we were not able to fully utilize the expanded capacity. Also, we will take measures to mitigate the impact of the sharp rise in natural gas prices due to the situation in Ukraine. These are the 3 main pillars we showed you before. As for the recovery from the fire, we have successfully resumed operation of the raw material process ahead of schedule in the fourth quarter of FY '22, and we will continue to make the progress for the spinning process. Overall, we expect that we will be able to reach full-scale operation in the first quarter of FY '23, including the inventory of intermediate materials. Compared to the February announcement, various measures are being progressed considerably ahead of schedule. The last point is Healthcare. In this area, we have promised to focus on the field of rare and intractable diseases from the viewpoint that we can make the most of our current business foundation. To this end, we will proceed with the in-licensing of treatments this fiscal year and narrowed down the focus in main footing of business, content and target areas of our business. At the same time, we are committed to reform the structure to fit the size and content of our resources to match the forecast. To this end, we have already signed a basic agreement with Axcelead, a drug discovery solution provider to establish a joint venture for research in the area of drug discovery. With this joint venture as a start, we will promote the in-licensing rare and intractable disease treatment mentioned earlier and reform on the content and structure of our business. With the change of the business, we plan to reduce the fixed costs for the headquarter staff who support these measures. We have started to implement measures to reduce fixed costs by JPY 4 billion, which will be recognized in FY '25. Furthermore, for the management structure reform, we have reduced the number of directors and clarified responsibility of each director for group management and business profitability, we have been operating under this structure since April for quick management decision-making and execution of decisions made. Let me move on to Page 16 for highlights of the outlook. We expect net sales to continue to increase. Basically, our goal for this fiscal year is to fully recognize the effect of the completed expansion of the production capacity. In addition, last fiscal year, we missed various sales opportunities due to production problems at the U.S. and European basis, and the plan for this fiscal year reflects sales increase by addressing those missed sales opportunities properly. Operating income is based on the same situation, but we also expect productivity improvement in the Materials business, additional selling price revisions, the effects of production increase and sales growth through full utilization of the expanded facilities, recognition of effects of profitability improvement measures, which already announced as well as the elimination of temporary production problems in the previous fiscal year. These are the factors behind operating income increase. This is partially offset by the market entry of generics for Healthcare products and operating income is expected to improve significantly from JPY 12.9 billion in the previous fiscal year to JPY 35 billion. Furthermore, we expect profit attributable to owners of parent, which was in the red in the previous fiscal year to return to the black this fiscal year at JPY 13 billion. Assumptions are as shown below on the lower left. Please turn to Page 17 for the summary. We plan to improve ROE, ROIC and EBITDA to the figures shown in the green column in the middle. Although the outlook for ROE and ROIC are still low compared to the targets we should aim for. We are determined to steadily improve them up to this level first. And for EBITDA, we intend to improve it to at least over JPY 100 billion level in this fiscal year. We do not have any major plans for CapEx, depreciation and amortization and R&D expenses to report for this fiscal year. But for CapEx, we are planning to use some of the budget reduced last fiscal year and postponed to this fiscal year to promote automation and to renew and maintain facilities as active investments to contribute to profitability and productivity improvement. In addition, we are going to start the energy source conversion in Matsuyama as environmental investment, although its effect will not be fully recognized yet. For these measures, we plan to increase CapEx a little. That is all for the summary. Now let me move on to Page 18 for explanation of the status by segment. As I already explained, we plan to make a significant recovery in the Materials segment, mainly by the effects of profitability improvement measures and the recovery from the fire and equipment breakdown. We expect steady and solid conditions for IT and Fibers & Products Converting segments, while in Healthcare, the impact from the market entry of generic alternatives to February last fiscal year is expected to affect the first quarter of this fiscal year, which did not happen in the first quarter of the previous fiscal year. This will decrease the net sales and operating income. And overall, net sales and operating income of Materials are expected to increase, while those of Healthcare will slightly decrease. Let me turn to Page 19 to explain subsegments in the Materials segment. First, I will explain the trend and factors behind the change in operating income. As summarized in the table below, for Aramid, the main pillar of the plan for this fiscal year is to eliminate production constraints due to the fire and problems with consumable part suppliers and fully achieved 100% effect of the expansion that has already been completed. As I said, we are already on track to recover from the fire and resolve the production constraints, and we have already resumed operations. So we are determined to complete these measures. The natural gas price is now actually lower than expected, and we are already reviewing contracts with suppliers in preparation for volatile fluctuations to minimize the impact of the abnormal rise in the price of natural gas. And the carbon fibers business, demand for aircraft is expected to recover further and an improved sales mix also contributes to operating income increase. And the new plant in North America, which has started its operation is planned to start full-scale operation. As a result, sales volume is expected to increase. Lastly, for Composites subsegment, as I mentioned at the beginning, price negotiations are progressing well. The important point now is how much we can reduce costs for productivity improvement. In addition, we have completed repairs at the end of last year to adjust the temporary deterioration in productivity due to the equipment breakdown and associated additional costs will be eliminated this fiscal year. As for the impact of labor shortages, the labor market tightness has eased slightly, and we expect this trend to become more obvious in the second half of the year, but we will continue to monitor the situation carefully. I will explain this by the waterfall chart on the upper right, volume will increase by JPY 19.5 billion, which reflects positive trends in all subsegments. Spread will be increased JPY 11 billion from FY '22, reflecting decreases in price of raw materials and selling price revision to address the price hikes last fiscal year. The impact from foreign exchange rate is not incorporated this time. Lastly, in Others, productivity improvement is supposed to be included. In fact, we expect it, including the elimination of onetime expenses associated with deteriorated productivity due to the equipment breakdown. However, this will be largely offset by the increase in fixed costs, mainly due to soaring labor costs in many countries around the world. So this item is forecasted to increase JPY 900 million. And the total operating income expected for the Materials segment is JPY 11 billion. That is all for the Materials segment. I will now move on to the Healthcare segment on Page 20. And we use the table below for simple explanation. Different from the previous fiscal year, the impact of the generic version of FEBURIC will be recognized for the full year, resulting in a decrease in sales volume and operating income. Also, we have the impact of the NHI price revision of about JPY 2.5 billion this fiscal year, and there will be an absence of licensing income we had last fiscal year. We plan to offset these negative factors by increasing sales of the newly launched drug of OSTABALO and increasing sales volume and the number of rental units for medical devices. However, as you can see in the volume decrease of FEBURIC is larger than those positive factors and the impact of NHI price revisions is indicated in the sales price and mix. Taking these factors into consideration, the current plan project, a decrease in operating income from JPY 23.5 billion in the previous fiscal year to JPY 16.5 billion in the Healthcare segment. Page 21 is about segment information for Fibers & Products, Converting, IT and Others, which is mainly operated by the new business development unit. In the Fibers & Products Converting segment, we are concerned about slightly sluggish overseas fiber materials and apparel market, but this is expected to be offset by a recovery in the automotive market and increased the sales of polyester staple fibers for water treatment filters, and we expect operating income to be JPY 10 billion, the same as in the previous fiscal year. As described here, we are forecasting ROIC to be 7%, also the same as last year, and we plan to maintain a certain degree of improvement in the Fibers & Products Converting segment, which has been struggling so far. Next is the IT segment. Operating income is expected to increase from JPY 8.1 billion to JPY 9 billion. The main reason for this increase is the further growth of e-comics and IT services are also expected to perform steadily. Lastly, I'd like to explain the Others segment, mainly operated by the new business development unit. In this segment, sales increased at J-TEC and good sales of orthopedic implantable devices are positive factors. Also, we expect battery materials such as separators, which were strong in the previous fiscal year to continue solid performance, and we are steadily growing our new businesses. However, in this fiscal year, we plan to launch a CDMO business, as already announced. So there will be associated increase in labor and other expenses. As a result, our outlook for operating income of this segment is down JPY 1.1 billion year-on-year. As such, new businesses are progressing generally in line with the plan. Page 22 shows a waterfall chart to summarize all segments to compare operating income outlook to the previous year result. Operating income in FY '22 was JPY 12.9 billion. This will increase by JPY 21.5 billion due to the volume increase in the material, fibers and products converting and IT segment. For the spread, we plan a positive change as raw material and fuel prices are decreasing, and customers mostly agreed to accept selling price revision to absorb the raw material and fuel price hikes in the previous fiscal year. This is partially offset by the NHI price revision. As I said, we do not incorporate the impact of foreign exchange rates. Lastly, for Others, we are supposed to expect recovery from the equipment breakdown in the previous fiscal year and productivity improvement, but it is offset by the increase in fixed costs due to the sharp rise in labor costs, mainly overseas and production recovery. As a result, the total of Others will be down JPY 7.4 billion year-on-year. This will make the projected operating income JPY 35 billion. Lastly, on Page 23, financial soundness and shareholder return policy are provided. As shown in the graph on the lower left, we are forecasting a D/E ratio after capital adjustment as 1.1x. It had been worsening in the past, but we want to make sure to bring it within the target level this fiscal year. For the shareholder return policy, we will maintain the dividend policy of stable and continuous dividend and set the target payout ratio at 30% of the net profit over the medium term. For FY '23, we plan to pay an interim dividend of JPY 15 and the year-end dividend of JPY 15 for an annual dividend of JPY 30 per share. That is all for the financial soundness and the shareholder return policy. This concludes my explanation on the outlook for FY '23. Thank you. [Statements in English on this transcript were Spoken by an interpreter present on the live call.]