Teijin Limited (3401) Earnings Call Transcript & Summary

During the first half, I will explain the results of the first quarter. Please see the first page of your handout. This is the key points of today's presentation. For the first quarter of fiscal 2025, adjusted operating income was JPY 7.8 billion, a decrease of JPY 2.6 billion from the same period last year and about 22% progress towards the full year outlook of JPY 35 billion. The annual forecast for fiscal 2025 is JPY 35 billion in adjusted operating income, unchanged from the previous outlook. We expect an increase of JPY 7.4 billion year-on-year. Accordingly, we plan to pay an annual dividend of JPY 50 per share, unchanged from the previous outlook. Third, special notes. As announced on March 31, the sale of our composite business in North America will be completed on July 1, 2025. With the completion of the transfer, we will record a loss of approximately JPY 11 billion on sale of stocks of subsidiaries and affiliates, but this has already been factored into our previous outlook of JPY 12 billion in net income for the year. This accounting treatment will be reflected in the financial statements in the second quarter. I will explain the results of the first quarter. This is the actual highlights. Revenue was JPY 243.1 billion, a decrease of JPY 12.2 billion year-on-year and adjusted operating income of JPY 7.8 billion, a decrease of JPY 2.6 billion. Financial income and costs and the nonrecurring items include cost items and nonrecurring expenses, such as expenses related to the structural reform of the Aramid business and impairment losses associated with the decision to close welfare facilities such as dormitories and company housing. As a result, the first quarter profit attributable to owners of the parent company was negative JPY 0.7 billion, a decrease of JPY 5.2 billion year-on-year. Please see Page 5. A breakdown of revenue and adjusted operating income by segment is shown here. As for revenue, a major part of the decline of JPY 12.2 billion in revenue was at the Materials business field, which was negative JPY 9 billion. For adjusted operating income, negative JPY 2.6 billion, each segment is divided in this way. In the pages that follow, we will explain adjusted operating income in more detail. This is about the Materials business field. Adjusted operating income was JPY 1.1 billion, a decrease of JPY 1.4 billion year-on-year. The graph shows a large negative impact in terms of volume and sales price and mix. We are covering these costs through measures such as the difference in raw material and fuel costs and improvement in profitability. But this was not enough slightly and reduced the profit by JPY 1.4 billion in the first quarter of the current fiscal year. The table below shows the breakdown by subsegment. The Composites business and the Resins business recorded almost the same level of profit growth as in the previous year, while the Carbon Fibers business saw a slight decrease in profit and the Aramid business saw a large decrease in profit. The profit increase in the Composites business is due to the effect of the improvement in profitability and the decrease in depreciation expenses resulting from the impairment loss on fixed assets that was largely implemented in the previous fiscal year. In the resins business, the decline in selling prices and the decline in raw material and fuel costs offset each other, and the spread was generally maintained. As a result, overall, we were able to secure earnings at about the same level as the previous fiscal year. As for the Carbon Fibers business, one of the reasons for the decrease in profit is that we have reduced factory operations in line with the decrease in sales volume, which has resulted in a negative factor in terms of the difference in capacity utilization. In addition, the continued decline in sales prices for certain applications such as industrial and recreation applications where competition is intensifying has been a factor in the decline in profits. The effects of the cost structure reforms, which we have been working on are partially offsetting these decline factors. We are working to optimize production and accordingly to reduce costs, mainly fixed costs. Unfortunately, however, we were not able to offset all of the factors that contributed to the decline in profits and profits for Carbon Fibers were slightly down compared to the previous year. As for the Aramid business, as mentioned in the section of factors leading to a decrease this year, large-scale periodic maintenance work is being carried out once every 3 years in the first quarter of the current fiscal year. And this is a major factor leading to a decrease in profits. Some factories have experienced significant declines in capacity utilization. In addition, sales prices of Aramid have declined, including in response to sales expansion. The decline in sales prices, especially for optical fiber applications has been a factor in the decline in profits. In the Aramid business, as in the Carbon Fibers business, we are working to reform the cost structure and optimize production, and we are taking measures to offset some of the factors that have contributed to the decline in profits. As a result, Aramid business for the first quarter has landed on the decline in profit year-on-year. This is about Fibers & Products Converting business. In the Fibers & Products Converting business, adjusted operating income was JPY 4.1 billion, a decrease of JPY 0.3 billion year-on-year because of a slight increase in expenses, but sales remained strong. In Fiber Materials and Apparel, sales of textiles for sports and outdoor applications in North America and for lifestyle applications such as yoga as well as domestic apparel products remained strong. In Industrial Materials, demand for automotive-related applications has been slow to recover, but sales of polyester staple fibers for water treatment filters, seasonal products such as dehumidifying agents and household goods such as TV shopping items have been strong. Now let me talk about Healthcare business. In the Healthcare business, adjusted operating income was JPY 4 billion, an increase of JPY 0.4 billion year-on-year in the first quarter. As you can see in the graph, the volume and the sales price and mix are negative, but these are almost covered by the fixed cost reduction efforts and the structure of the company is such that there is a slight increase in profit in other areas. As for volume, on the plus side, CPAP rentals continued to increase and sales of OSTABALO increased. But on the minus side, sales of diabetes treatments and FEBURIC declined, resulting in an overall volume difference of negative JPY 0.5 billion. As a result, the overall volume was negative JPY 0.5 billion. The sales price and mix was also negative JPY 0.5 billion due to the impact of the drug price revision and other factors. In response, we have reduced fixed costs by JPY 1 billion. Since last year, we have implemented an early retirement incentive program to reduce labor and other costs. This will take effect fully for the fiscal year. In addition, some R&D expenses have been reduced by outsourcing to joint ventures, and we have achieved a fixed cost reduction of JPY 1 billion, which almost offsets the negative impact of sales. In addition, other positive factors include a decrease in depreciation, amortization due to impairment. As you know, at the end of the previous fiscal year, we wrote down JPY 28 billion in intangible assets in consideration of the sales rights for diabetes treatments. The positive side effect of this is a decrease in depreciation expenses. On the other hand, the increase in CPAP rentals has led to the introduction of new devices and an increase in use of CPAP expendables. However, we achieved the plus year-on-year with the effect of decrease in depreciation and amortization surpassing increase in costs this time, resulting in positive JPY 0.4 billion. This is the other business segments. Sales of separators and membranes remained strong. Sales volume increased by JPY 0.5 billion, while prices declined slightly to negative JPY 0.5 billion, resulting in a net increase -- net decrease of JPY 0.5 billion. That means the positive situation has continued during the first quarter since last year. On the other hand, several companies have experienced a decrease in profit with respect to equity-method affiliates in other areas. The earnings of equity-method affiliates, such as an overseas joint venture for the polyester film and a joint venture for Aramid Paper were negative, landing the company at a total of negative JPY 0.7 billion in profit year-on-year. This is an explanation of finance income, costs and nonrecurring items. As for finance income and costs, the increase in expenses year-on-year was minus JPY 1.9 billion. The main reason for the negative JPY 1.9 billion was a foreign exchange loss, which was caused by the loss of the effect of yen's depreciation in the previous year. On the right are nonrecurring items. As I mentioned earlier, a major part of the restructuring costs such as ones for Aramid business includes headcount reduction and other measures. So we are considering reviewing the accrued pension costs and the production system. Accordingly, we have made a decision to close our specialty pulp mill in Arnhem, the Netherlands. One major factor is the resulting impairment loss on fixed assets. Another major factor is that we have decided to close our welfare facilities such as dormitories and company housing and have posted a resulting impairment loss. We posted structural reform cost of JPY 4.1 billion as a whole. Next is the balance sheet. The balance sheet shows an increase of JPY 83.8 billion in total assets compared to the end of March, the main component of which is cash and deposits, which increased by JPY 97.8 billion. On the other hand, interest-bearing debt increased by JPY 105.1 billion and the balance sheet, both cash and cash equivalents and interest-bearing debt showed a slightly larger increase at the end of June. Please understand that this is a special factor at this time and is not a recurring increase. In connection with the sale of shares in our North American Composites business, which I mentioned earlier, this transaction actually took place on July 1. But in preparation for the sale, we increased our borrowings once, and we have both cash and interest-bearing debt. This is where we closed it as such as of June 30 and moved it towards settlement for July 1. We hope that you understand that this situation of the cross-trade is a special factor like snapshot, where in the main part of the transaction has already been resolved since July. Next is cash flow status. Due to the major factors, which I explained earlier at the end of June, the financing activities posted JPY 99.8 billion and the net increase/decrease in cash and cash equivalents posted JPY 97.8 billion. We hope that you recognize these situations. This is the end of the explanation of the first quarter results.

I would like to explain our outlook for fiscal 2025. First, let us look at the trends in the main target businesses we are focusing on. We are focusing on 3 areas: Mobility, Infrastructure and Health Care. Regarding Automotive and Aircraft in the Mobility segment, we believe there are signs of a slight recovery in China and Japan for Automobiles, but Europe continues to experience low growth due to the economic slowdown. Regarding Aircraft, we believe the market continues to grow. However, there have been some procurement constraints in the supply chain, and I believe the effects of these constraints are continuing. In the area of Infrastructure, we are particularly interested in submarine power cables made of Aramid, and we expect the pilot projects will continue to make steady progress. In Fiber and Products in Infrastructure, we are in a fairly strong position in the market for RO membranes and their materials, and we are performing well. In the Electrical and Electronic Equipment, we are seeing steady sales of resins and separators. And I believe the market for renewable plastics will expand, albeit gradually due to the growing interest in the circular economy. In Healthcare, we list Pharmaceuticals and Home Medical Devices. With regard to Pharmaceuticals, the acceleration of genetics is progressing. However, as you know, there are high medical needs in the area of rare and intractable diseases for which we would like to provide care at home. And the Ministry of Health, Labor and Welfare has proposed an enhanced support care system that includes home-based medical care. In home-based medical care, there are 3 million potential patients who have a disease that causes patients to stop breathing in their sleep and must be treated during sleep. The Lancet reports that there are 9 million patients, and we believe that the demand remains high and will continue to increase. This is a summary of the full year outlook. It is written in terms of year-on-year and the previous outlook. As for revenue, it decreased by JPY 145.5 billion. This was largely due to the withdrawal of the Composites business in North America. On the other hand, we expect adjusted operating income to increase by JPY 7.4 billion. We would like to maintain the dividend at JPY 50 per share. The next page is by segment. The outlook for the entire company remains unchanged, but the outlook for Fibers & Products is for continued strong growth. The Materials segment is also unchanged, but as Hamashima explained in the first quarter results, there are strengths, weaknesses within the subsegments like this. Aramid and Carbon Fibers are very tough, but we hope to recover that for the full year. Next is the Materials business field. Revenue is expected to be JPY 330 billion and adjusted operating income JPY 8 billion, an increase of JPY 2 billion year-on-year. In spite of spread of negative JPY 7 billion, we have already started cost structure reforms, profitable improvement and business transfers of Aramid and carbon fibers, and we expect to recover JPY 9 billion through these measures, resulting in an overall increase in profit of JPY 2 billion. Below, you will find a description of each subsegment. As for Aramid, sales prices have been declining. However, this includes measures to expand sales. And if such measures are taken, the product has been selling well for optical fiber cables applications, et cetera. Where there is an increase in sales volume and still not enough, we are strongly promoting optimization of production volume and cost reduction. Sales volume for resin is firm. And for Carbon Fibers, sales volume is increasing year-on-year. However, as for Aircraft, et cetera, however, we still see very strong inroads being made by Chinese and Korean manufacturers, and we intend to make up for this in the full year by promoting cost structural reforms. As for Composites, the closing date was July 1. So we had to manage our business from April to June. Last year and the year before, we have been very strongly promoting activities to improve profitability, and this has taken root and produced positive effects. This is the Fibers & Products Converting business. Revenues are expected to be JPY 350 billion and adjusted operating income JPY 18 billion, almost the same level as the previous year. Although there is a slight plus/minus, but only slightly. We expect Industrial Materials to remain strong and Fiber Materials and Apparel to decrease slightly from the previous year. But overall, we expect the same level as the previous year. Now let me talk about Healthcare. Revenue is JPY 135 billion, slightly down from the previous year, but adjusted operating income is expected to be JPY 12.5 billion, an increase of about JPY 7 billion. In summary, the increase in the number of CPAP rentals and the full year of fixed cost reduction benefits have resulted in an increase in income due to lower depreciation and amortization expenses associated with the impairment. There was a negative factor, as you see in the lower portion. The volume of pharmaceutical sales is still decreasing in some areas. The impact of the drug price revisions and other factors are also JPY 1.5 billion in this area. In addition, the number of CPAP patients has been increasing significantly, so costs associated with the introduction of new devices and increased use of expendables have been increasing. These negative effects are counteracted by positive ones. I mentioned at the outset that the number of potential patients is very high and the number of CPAP rentals is growing very steadily. OSTABALO has also seen an increase in sales volume. Since we are strongly promoting business restructure reforms, we expect adjusted operating income of JPY 12.5 billion due to the positive effects of reductions in fixed costs, a decrease in depreciation and amortization expenses in the last fiscal year and impairment loss on the right to sell a diabetes treatment. Finally, there are other areas. We are looking for revenue of JPY 45 billion and adjusted operating income of JPY 4.5 billion, a decrease of about JPY 2.5 billion year-on-year. The adjusted operating income is expected to be JPY 4.5 billion due to a decrease in sales volume of separators and a little decrease in profit at equity-method affiliates. This concludes my explanation.