Toray Industries, Inc. (3402) Earnings Call Transcript & Summary

Thank you very much for joining us today despite your busy schedule. On behalf of Toray Group, I would like to take this opportunity to extend my gratitude towards your continued understanding and your interest in our management and business activities. Now I would like to report our business results for the fiscal year ended March 2020 and the business forecast for the fiscal year ending March 2021. Please look at Page 1. These are the topics that I will cover today. I would like to begin with a brief summary of business results for the fiscal year ended March 2020. Please turn to Page 3. Net sales for the fiscal year ended March 2020 decreased 7.3% to JPY 2,214.6 billion compared with the previous fiscal year, and operating income declined 7.3% to JPY 131.2 billion. Ordinary income fell 23.2% to JPY 103.4 billion, and net income declined 29.8% to JPY 55.7 billion. As for annual dividend, the company anticipates to pay JPY 16 per share of common stock. ROE was 5%, while ROA was 4.8%. Page 4 is about nonoperating income expenses. During the fiscal year under review, impairment was made for the stocks of Pacific Textiles Holdings in the individual accounting. Consequently, the company recognized a onetime amortization of goodwill of JPY 18.7 billion on a consolidated basis. As a result, equity and losses of affiliates deteriorated substantially compared with the previous fiscal year. And nonoperating income expenses net worsened by JPY 20.9 billion to minus JPY 27.8 billion. Page 5 shows the special credits and charges. Special credits for the period under review worsened by JPY 14.7 billion to JPY 7.7 billion, mainly due to decrease in gain on sales of property, plant and equipment. Special charges improved by JPY 12.4 billion to JPY 17.0 billion. As a result, special credits and charges net worsened by JPY 2.2 billion to a minus JPY 9.3 billion compared with the previous fiscal year. Page 6 is about assets, liabilities and net assets, et cetera. As of end of March 2020, total assets stood at JPY 2,650.7 billion, down JPY 137.7 billion from the end of March 2019, primarily due to decreases in notes and accounts as receivable and investment in securities. Total liabilities declined by JPY 103.3 billion to JPY 1,471.1 billion, owing mainly to decreases in notes and accounts payable and interest-bearing debts. Total net assets decreased by JPY 34.4 billion to JPY 1,179.6 billion due to changes in foreign currency translation adjustment. Owner's equity came to JPY 1,093.7 billion. Interest-bearing debts was JPY 938.9 billion, and D/E ratio was 0.86 points. Free cash flows for the period were JPY 83.4 billion. This graph on Page 7 describes the factor analysis of JPY 10.3 billion decrease in consolidated operating income for the fiscal year ended March 2020 on a year-to-year comparison. The difference in quantity was a minus JPY 17.4 billion due to decrease in sales and production in the Fibers & Textiles and Performance Chemicals segments. The net change in price was a plus JPY 28.8 billion. This was due to the decline in raw material prices compared with the previous fiscal year. Cost variance, et cetera, was minus JPY 17.1 billion due to the increase in production fixed costs accompanying business expansion. The chart on Page 8 shows the net sales and operating income results by segment. Using Page 9 and after, I would like to explain the results of each segment. First, Fibers & Textiles. Overall sales of the segment declined 9.4% to JPY 883.1 billion compared with the previous fiscal year. And operating income fell 16.7% to JPY 60.7 billion. The net changing price turned positive, reflecting the decline in raw materials prices. However, difference in quantity turned negative considerably because each applications were impacted by sluggish market conditions due to the prolonged trade friction between the U.S. and China, the slowdown in the Chinese economy and 2 consecutive years of warm winter. In Japan, while shipment of apparel and industrial applications remained weak in general, Toray Group pursued sales expansion of materials for uniforms in Japan and for sports applications in the U.S. and Europe and focused on strengthening cost competitiveness. Overseas, demand for apparel applications, including garments and textiles as well as automotive applications, the mainstay of the industrial applications, remained sluggish, and Toray Group focused on business structure reform and strengthening of cost competitiveness. The segment was also affected by the stagnation in production and consumption activities, both in Japan and abroad due to the novel coronavirus pandemic. Page 10 is the Performance Chemicals segment. Overall sales declined 11.3% to JPY 770.8 billion compared with the previous fiscal year, and operating income fell 13.2% to JPY 58.7 billion. Although the net change in price remained positive, reflecting the decline in raw materials prices, sales volume decreased due to the slowdown in the Chinese economy and the impact of the novel coronavirus pandemic. I would like to explain the conditions of each business on the next page. Page 11. In the resins business, sales of both automotive and home appliance applications remain slow, primarily due to the impact of the slowdown in the Chinese economy as well as the stagnation in production activities caused by the novel coronavirus pandemic. The chemicals business was affected by the decline in the basic chemicals market. In the films business, sales of battery separator films for lithium-ion secondary batteries increased reflecting demand growth, while polyester films were affected by the inventory adjustment for optical as well as electronic parts related applications. The electronic and information materials business saw strong performance of OLED related materials and electronic circuit materials. Page 12 is the Carbon Fiber Composite Materials segment. Overall sales increased 9.7% to JPY 236.9 billion compared with the previous fiscal year, and operating income rose 81.6% to JPY 21.0 billion. Business remained strong as a whole. There was an expansion of demand for the aircraft application, strong performance in industrial applications in the environment and energy-related fields, such as compressed natural gas tanks and wind turbine blades, and recovery in the demand for sports applications. The net change in price remained positive with steady progress in price increases of general-purpose products on the back of improvement in the supply-demand balance as well as the decline in raw material prices. From a cost perspective, there was an increase in production fixed costs and sales expenses accompanying business expansion. I would like to explain the status of each application on the next page. In the aerospace applications, demand for aircraft remained strong, and the company had positive effects from the consolidation of Toray Advanced Composites, which is formerly TenCate. In sports, despite the sales decrease due to the impact of the novel coronavirus pandemic, each application saw an increase in its high value-added products. In terms of regulatory products among the industrial applications, demand for environment and energy-related fields led by compressed natural gas tank applications and the automotive applications for luxury cars in Europe remained strong. As for large tow products, shipment of wind turbine blade applications continued to expand. As regards to composite business, materials for electrode substrates for fuel cell vehicles and stationary fuel cells remained strong. Page 14, in the Environment & Engineering segment, overall sales decreased 2.1% to JPY 252.3 billion compared with the previous fiscal year, and operating income declined 8.1% to JPY 11.2 billion. In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole in Japan and overseas. Among domestic subsidiaries in the segment, a construction subsidiary was negatively affected by the decline of high-profit project orders, and an engineering subsidiary experienced decreases in the shipment of some electronics-related equipment. Page 15 is the Life Science segment. Overall sales declined 0.8% to JPY 53.3 billion compared with the previous fiscal year, while operating income rose 24.9% to JPY 1.6 billion. In the pharmaceutical business, sales of DORNER were affected by the introduction of its generic versions. While sales of REMITCH were also influenced by the introduction of its generic versions, its shipment was strong, partly due to the growth in the entire market. In the medical devices business, shipment of dialyzers grew strongly in Japan and overseas. In addition, the company pursued cost reduction, including sales expenses. Page 16 shows the business results of major subsidiaries and regions. At Toray International, sales of Fiber & Textiles, resins, films and chemicals remained weak. At Toray Engineering, shipment of electronics-related equipment decreased. Toray Construction experienced negative effects from the decline of high-profit project orders. As for our subsidiaries in Southeast Asia, in the Fibers & Textiles business, some subsidiaries reported weak performance, reflecting the impact of deteriorating market conditions and effects from the decline in sales volume. In the Performance Chemicals business, sales volume of polyester films decreased, and ABS resins were affected by the decrease in sales volume and price decline. As for subsidiaries in China, in the Fibers & Textiles business, garments and textiles for apparel applications were affected by deteriorating domestic market conditions and saw a decrease in shipment when compared with its strong performance during the previous fiscal year. Industrial applications were also impacted by the deteriorating market conditions. As regards to subsidiaries in Korea, the spread for polyester fibers improved in the Fibers & Textiles business. In the Performance Chemicals business, the spread for polyester films improved, and shipment of battery separator films for lithium-ion secondary batteries and electronic circuit materials increased. In other business, sales of RO membranes remained strong. On Page 17, here shows the comparison of operating income between the third quarter and the fourth quarter. Consolidated operating income decreased JPY 6.1 billion from JPY 32.8 billion in the third quarter to JPY 26.7 billion in the fourth quarter. The variance factors of the JPY 6.1 billion decrease are explained on the right side of the slide with breakdowns into segments. Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2021. Please turn to Page 19. Toray has decided to voluntarily adopt IFAs in place of the currently applied Japanese standards. So from the first quarter of fiscal year through March 2021, the consolidated business forecast will be reported on the basis of IFAs. Ordinary business revenue and profit will be disclosed as core operating income as a measure of management performance. Toray Group calculated the forecast based on an assumption that the world would pass the peak of the novel coronavirus pandemic in the second quarter, and economy in Japan and abroad would be on a recovery track from the third quarter through the end of the fiscal year. Toray Group expects consolidated revenue of JPY 1,920 billion, core operating income of JPY 70 billion and profit of JPY 40 billion. In terms of annual dividend, the company anticipates to pay JPY 9 per share of common stock and forecast dividend payout ratio at 36%. Page 20 shows the consolidated business forecast for the fiscal year ending March 2021 by segment. Page 21 shows the comparison of core operating income between the fiscal 2019 IFA's estimation and the fiscal 2020 forecast with breakdowns into segments. Page 22 describes the trends in capital expenditures, depreciation and R&D expenses. Forecast of capital expenditures for fiscal March 2021 is JPY 163 billion, depreciation is JPY 120 billion, and R&D expenses is JPY 68 billion. We will implement measures to thoroughly reduce costs and improve efficiency related to capital investments and R&D by taking a selective approach. By forecasting the market conditions after the novel coronavirus pandemic subsides, Toray Group will make capital investments and conduct R&D that are essential to sustainable growth in the future. This is all I have to explain about the business results for the fiscal year ended March 2020 and the business forecast for the fiscal year ending March 2021. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]