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

Hello, everyone. I'm Akihiro Nikkaku, President of Toray Industries, Inc. 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. Today, I would like to explain our measures and initiatives to expand businesses and improve profitability, in line with basic strategies of the medium-term management program. Please turn to the Page 1. These are the topics that I will cover today. Now I would like to begin with this topic, Toray's vision. Page 3 is about Toray philosoply. Toray's corporate philosophy of contributing to society through the creation of new value with innovative ideas, technologies, products is our attitude, since the establishment of the company, which is contributing to society through business activities. Toray's strength is the power to create innovative technologies and advanced materials. Core technologies and engineering technologies developed over a long period of time have built strong technological platform and a source of new value. Toray philosophy on this slide consists of 7 components. Among them, vision is that Toray Group's sustainability vision, which is Toray Group's direction for the future. This page shows a brief overview of Toray Group's sustainability vision. Toray Group's vision for the world on the right describes the world in which global challenges in balancing development and sustainability are solved. To this end, Toray Group tackles following 4 tasks: accelerating measures to counter climate change; realizing sustainable, recycling-based use of resources and production; providing clean water and air and reducing the environmental impact; and contributing to better medical care and hygiene for people worldwide. Next, I would like to review the achievements and challenges of the medium-term management program, Project AP-G 2022 we have promoted for 3 years from fiscal year 2020. All figures of fiscal year 2022 in this presentation are from the financial forecast announced on February 8, 2023. In AP-G 2022, we worked on following 3 basic strategies: global expansion and growth business fields, strengthening competitiveness and strengthening the management foundation. In addition, as group-wide initiatives, we worked on the following: new business creation, reduction of greenhouse gas emissions in the production stage, advanced business management by utilizing digital technologies and ensuring the Toray's philosophy is fully embraced. First major achievements of AP-G 2022 is expansion of Green Innovation and Life Innovation businesses, the company promoted a global expansion in growth business fields. In Green Innovation Businesses or GR businesses, carbon fiber for wind turbine blades and water treatment membrane will grow strongly. In Life Innovation Businesses, or LI businesses, the land lease of [ non-moving ] public for hygiene products and materials for sports applications increased as well as product scores support personal safety, which was newly added in AP-G 2022. As a result, we expect to achieve the revenue target for both businesses in fiscal year 2022. Second major achievement is reduction of GHG emission and water usage in production activities, which is one of the group-wide initiatives. Due to fuel conversion from coal and wastewater recycling, water expected to achieve the targets of fiscal year 2022. This slide shows the status of major financial KPI in AP-G 2022. Revenue in fiscal year 2022 increased due to demand recovery from the COVID-19 pandemic, it was to pass on the rising raw material and fuel prices to the sales price and imports from foreign exchange. However, revenue is forecasted to decrease compared to the target in AP-G 2022 as sales volume decreased in comparison to the target. Core operating income is expected to significantly decline compared to the target, stemming from the effect of sales decrease on rising raw material and fuel prices. Free cash flow on the DE ratio is expected to improve significantly compared to the target from efforts to reinforce the financial structure. Factors with a large decline in core operating income compared to the target will be explained on the next slide. Please look at the chart on the left. In AP-G 2022, the company has set a target of JPY 180 billion for core operating income. And according to the financial results announced on February 8, 2023, it is expect JPY 50 billion to JPY 100 billion, a decrease from JPY 80 billion compared to the target. The biggest factor is difference in quantity. Sales volume was minus JPY 136 billion, stemming from a decrease in demand due to effects of pandemic, including the Zero COVID-19 Policy in China and the constraint in supply. We made efforts to decrease fixed cost in response to this decrease in quantity, but net effect of minus JPY 67 billion remained after offsetting difference in quantity and fixed costs. On the other hand, we work to proceed with passing on the rise in raw material and fuel prices to the series price, but this has not been enough to cover the price increase, and the result was a net effect of minus JPY 21 billion. In addition, currency variance was plus JPY 8 billion. The table on the right describes the overview by segment. As for factors affecting difference in quantity, there were a decrease in demand of automobile applications, such as rates due to constraints in supply, decrease in demand of the carbon fibers for aircraft applications caused by the COVID-19 pandemic, intensified competition in [indiscernible], and a recent inventory adjustment in displays and semiconductors. On Page 11, achievement status of financial target is summarized. I have already explained about the revenue on core operating income. Consequently, core operating margin on ROA was far from the target value. Page 12 summarizes achievement status of sustainability targets. CO2 emissions avoided in value chain and water filtration throughput contribution by Toray's water treatment membranes are both expected to achieve targets as revenue from GR products expanded. Including above, we want to achieve all sustainability targets. Page 13 is a summary of AP-G 2022. We steadily worked on sales increase in GR and LI businesses on sustainability challenges even in the COVID-19 pandemic. Nevertheless, the company considers there is an urgent need to recover profitability as core operating margin is decreasing, due to rapid changes in market environment, intensify the competition caused by emerging competing companies and cost increases coming from surge in raw material and fuel prices. In addition, in response to the inappropriate actions relating to UL certification in the resins business, which was announced in January 2022, the company need to promote reform of the corporate culture, not to let any misconducts happen again as well as to realize a healthy company operations by enhancing internal controls and promoting even greater compliance awareness. In accordance with such issues, Toray defines 4 challenges in the near medium-term management program as follows: one, expanding business and improving profitability; two, accelerating sustainability measures; three, improving asset efficiency; and four, enhancing internal controls and promoting even greater compliance awareness. Now I will explain new medium-term management program, AP-G 2025 innovation and resilience management, value creation for new momentum, which covers 3 years from fiscal year 2023 to 2025. In AP-G 2025, value creation has been set as the main theme. The subtitle, Value Creation for New Momentum, means that the entire Toray Group will once again focus on creating social value to reach greater heights. The business environment is changing rapidly, and the uncertainty is increasing. While much faster risk management is required, increasing need for sustainability measures and the advancement of digital technology will increase opportunities for the Toray Group, which contribute to solving social issues through its innovative materials. Toray will build its supply chain by connecting its global production basis and for geopolitical risks. Based on the local production for local consumption principle, the group will maintain an in-house stable competitive on optimal software system. Meanwhile, the group has great expectations on the advancement of digital technologies from 2 perspectives: business opportunities that create new demand and enhancement of competitiveness, the strength in Toray's cutting-edge technologies. Diversification of values and additive to work is increasing mobility in the labor market. We consider it most important to inherit the value, since the establishment of the company to make the most of individual abilities and organizational strengths to achieve great results and making the company a place, where diverse workforce thrives. This slide summarizes 5 strategies of AP-G 2025. In AG-G 2025, Toray Group aims for sustainable growth driven by sustainability innovation business, which success to the GR and LI businesses and the digital innovation business that seizes profit opportunities of the advancement of digital technology. There are 5 basic strategies. Strategies for seizing profit opportunities are: one, sustainable growth; two, ultimate value creation; three, product and operational excellence. Strategies for strengthening the management foundation are: four, enhancement of people-centric management; five, risk management and governance. In addition to this, we will continue to maintain an enhanced financial soundness. Page 17 summarizes financial targets for fiscal year 2025. We target revenue of JPY 2.8 trillion; core operating income of JPY 180 billion; and core operating margin of 6%. As for the index for efficiency, ROA is replaced by ROIC. We will set the ROIC target as 5% in 2025, but we will aim to improve this value. As for ROE, the target is 8%. And for free cash flow, the target is positive free cash flow in 3 years total. The guideline of PE ratio is set at 0.7 or lower. Page 18 shows the summary of sustainability targets for fiscal year 2025. In AP-G 2022, since we planned to achieve all the sustainability targets. In AP-G 2025, we set more aggressive targets to accelerate initiatives to realize the target in the Toray Group sustainability vision. From this page onwards, I will explain the 5 strategies in sequence. Basic strategy, one, is sustainable growth. Toray Group has positioned GR and LI businesses as growth business peers in fiscal year 2011 and 2014 and try to seize the business opportunities in these areas. These correspond to Toray Group's vision for the world, and Toray Group's contributions was described in Toray Group sustainability vision announced in July 2018. Based on Toray Group's sustainability vision, in AP-G 2025, we newly positioned the sustainability innovation business, which we redefined a combination of GR and LI businesses and the digital innovation business, which supposed to realize Toray Group's vision for the world as gross business feels for Toray Group, where we can leverage our strengths and expand the revenue growth. They are called SI businesses and DI businesses, respectively. For these gross business fields, we plan invest JPY 450 billion in total, including capital investment and R&D. In addition, we will establish a system for entire group to accelerate cooperation with other companies and provide comprehensive solutions to customers. By taking these measures, gross business peers will account for about 60% of consolidated revenue. I will explain in detail about basic strategy one, sustainable growth. First is expansion of a sustainability innovation business. We will proactively expand following businesses. Carbon fiber composite materials for aircraft, which accelerates measure to counter climate change, materials for hydrogen and fuel cells as well as carbon fiber for wind turbine plates. Recycled materials such as [indiscernible], which contribute to resource [indiscernible]. Water treatment membranes on air filters, which contribute to supply in clear water and air; hygiene products, pharmaceuticals and medical equipment, which contribute to better medical care and hygiene for people. We aim to achieve revenue for SI business of JPY 1.6 trillion in fiscal year 2025 through steady business expansion. Next, I will introduce some growth products from SI business. First, products that contribute to build a hydrogen-powered world. According to Green Growth Strategy of Japan announced by METI in December 2020, to realize carbon neutrality in 2050, expanding renewable energy use and utilization of hydrogen, especially green hydrogen, which is produced using renewable energy sources, is essential. We have developed great array of core materials for production, transportation, storage and use of hydrogen. For instance, we promote development of carbon paper, electrolyte membranes and the catalyst-coated membrane or CCM as core materials for water electrolyzer, which is used to produce green hydrogen. The size of the electrolyte membrane market is expected to expand to JPY 160 billion in 2030. And Toray will promote the commercialization of proprietary hydrocarbon electrolyte membrane during the AP-G 2025 period. Second growth products is carbon fiber for pressure vessels. Toray Group has the world top market share in compressed natural gas CNG and compressed hydrogen CHG tanks. Also CNG tax, demand for CNG tanks used for delivery business and for CNG transport is increasing steadily. Meanwhile, CSG tanks are increasingly being used in fuel of vehicles, logistics, trucks, railcars and ships. We will capture the demand from market expansion of carbon fiber or pressure vessels and maintain world's top market share. Third growth product is reverse osmosis RO membrane products to deliver clean water and air to contribute to reduce the environmental load. Demand for RO membrane businesses are expanding, especially in the Middle East, where large-scale receive order desalination plants are built. And in China, where environmental ratios are being tightened. Developing local production and consumption system to respond quickly to increasing demand for Ro membranes, we have proven track record of delivering to 99 countries, and a number of large-scale water treatment plant were 100. We aim to secure the world top market share through continuous improvement of meticulous after-service through global production, sales and technical support systems, development of high-performance products and promotion of cost reductions. Next, I will explain about another growth business field, digital innovation business. Products of digital innovation consists of the following: of the vast material used for semiconductors and the display applications such as resins, aims directly on the information materials, RO membranes that are essential to produce RO pure water use force and conductor processing. Toray Engineering, Semiconductor Manufacturing and Inspection Equipment, the Toray Fine Chemicals, cleaning and treating solvents. We aim to achieve revenue for DI business of JPY 250 billion in fiscal year 2025 through steady business expansion. I will introduce 2 examples on growth products and initiatives in DI business. First is expansion of application for electronic coating materials. We aim to leverage polymer technology developed over the years to rapidly create high-value-added products that meet customer needs in a timely manner. Toray's positive photodefinable coating materials used for the insulation layer of OLED is de facto standard in this industry. Regarding to other applications, the company will globally promote business expansion utilizing experience and technological expertise in the growing market. Secondly is providing solutions for digital technology fields with materials, processes on equipment. Leveraging the Toray Group's collective strengths and [ standard ] proposing packages of materials, processes paired with manufacturing inspection equipment, the company promote to provide total solutions to customers. And for micro-LED display applications that are expected to grow as next-generation display, Toray's materials processes and Toray engineering, production equipment and propose for customers' quality and production efficiency improvement. In addition, our semiconductor applications, we will contribute to customers' performance and production efficiency improvement by setting up technical hubs in proximity to customers' production sites on proposing materials, production and in spectrum equipment. From this page onward, I will explain about basic strategy 2 and 3 in AP-G 2025, ultimate value creation on the product and operational excellence. This chart shows the relationship between enhancing ability to create value and strengthening our competitiveness to seize new profit opportunities. Based on the Toray Group's 5 strengths on this slide, we will work on enhancing our ability to create value on strengthening competitiveness, leveraging digital technology with a focus on the fault lines. Ultimate value creation shown on the left, by pairing tangible and intangible assets, we will work to extend the value chains and create cross organization on value and create new businesses that help solve social issues. Meanwhile, enhancing products and the operational excellence shown on the right, we will further improve quality, which is the cornerstone of the Toray Group brand and to promote cross-organizational cost reduction activities that leverage the group's corrective strengths. I will explain about the initiatives for basic strategy 2, ultimate value creation. First, I would like to elaborate on the initiatives to create high-added value for businesses. In marketing our added value, an example is shown on fields for semiconductor processes. Improving semiconductor performance and improving customer yields will help to improve the value of customer products and the developing relationships. Extension of the value chain shows the water treatment subscription service using Toray's proprietary real-time monitoring system to predict operation behavior and analyze trouble at customers' plant. Adoption is expanding at a domestic and overseas plants. Building a global value chain for automotive materials shows an example of certain customer needs, including environmental measures responding to needs for new parts and new materials associated with the shift to EVs and proposing solutions swiftly. We will provide value to customers using our global development and marketing system in this month. This slide explains the second initiative, New Business Creation. In AP-G 2025, Toray will continue to drive a group-wide FT project to create revenue source for next growth stage. This project concentrates resources to large-scale themes that the company expects to become growth drivers and accelerate R&D and development of business models of target things. In correspondence to our growth business fields, the company has set related themes as follows: materials related to hydrogen and fuel cells, products and process technologies utilizing [ biomass. ] Environmentally friendly creating solutions, next-generation medical care and next-generation display solutions. Followed by the themes in business expansion piece, we plan to launch business in the business development piece within the AP-G 2025 period. We aim to generate a total of JPY 1 trillion in sales across the target themes in the [ 2020s ]. On this page, I will explain about the basic strategy 3. Products and operational excellence. First example is enhancing quality strength. Toray pursues customer satisfaction and the world's highest quality standards and consider that by increasing product quality, which is a cornerstone of the Toray brand -- of which can be generated. Quality is strengths, as written on this slide, is the ability to provide a stable supply of the products that customers need. In AP-G 2025, by pursuing the group-wide quality strength enhancement project, we will enhance quality strength in every phase from product design and development to production and sales. By doing so, Toray can provide a stable supply of our high-quality products globally to the customers more than ever. Achieving competitive cost -- competition by continuous cost reduction is an enduring issue. In AP-G 2025, we will promote cross-organizational cost reduction that leverage the collective strengths of the organization. And by sharing the information and implementing the cost reduction activities globally, we will work on raising the level of cost competitiveness of the Toray Group as a whole. By promoting cost reductions in every stage of business activities, from production process innovations that lead to drastic cost reduction to streamlining and improving efficiency in every day business, we will aim for cumulative cost reduction of JPY 200 billion over the 3 years. Utilization of digital technology shown here is an important factor in improving our value-creation capabilities on our products and operational excellence. In AP-G 2025, we plan to invest JPY 20 billion in relation to digital technology for building a global data infrastructure to utilize or to apply data accumulated within Toray Group, combining analysis and simulation technologies and to accelerate cooperation with value chain partners. In addition, in order to enhance adoption of digital technologies with the focus on the fault lines, we plan to develop over 2,000 people, who are prudent in digital technologies group-wide. By doing so, we can enhance value creation and increase product and operational excellence in all areas of business activities, such as R&D, production, sales and marketing and corporate management. On this page, we will introduce some examples in creating new materials and services with digital technology. On the bottom left is an example of providing customer solutions, a material concert system to propose new resin materials to customers, which we began in February 2023. On the bottom right shows an example of R&D efficiency, new material development by utilizing integrated MI. From this page onward, I will explain strengthening the management foundation, specifically human resource development, risk management and financial soundness. This page is about basic strategy for enhanced methods, people-centric management. People-centric management is Toray's corporate philosophy in Hereditary Diseases Foundation. By securing and promoting diverse human resources, we will enhance promotion and development of young core human resources, locally hired staff, highly specialized human resources -- women and senior staff. As for human resource development, we will support its self-reliant carrier development of employees. And provided training for these, we can develop workplace competency. By providing the workplace environment, where everyone can be proud to work for Toray Group and building an organizational culture that buy us feedback from the fault lines, we will promote job satisfaction and supportive workplace. Last is basic strategy 5, enhancing risk management and group governance. The Russian invasion of Ukraine is leading to the formation of economic blocks. So we will control various risks such as economic and security risks and contrary risks in relation to business operations appropriately. Also, we will improve the effectiveness of internal controls, remove opportunities for fraud and achieve a sound organizational management. Here, I will explain maintaining an enhancing financial soundness, which supports the business expansion that I have explained up to this point. In the previous midterm management program, there was a significant improvement in free cash flow and DE ratio. In AP-G 2025, in order to achieve both business growth and greater profitability, we will continue our efforts to retain and enhance financial soundness. On the left side of the slide shows the various measures to increase core operating income on the efficiency managed invested capital. By implementing the various strategies that I have explained, we will work on business growth. At the same time, in addition to the cash flow management already implemented, by promoting ROIC management to improve asset efficiency, we aim to achieve both business growth and greater profitability. On the right side of the slide is the 4 categories of profitability and growth potential. In the previous midterm management program, we promoted business structure reform of low growth and low profitability businesses. The AP-G 2025, we will work on expanding the high growth, high-profitability businesses as a group-wide issue and will allocate the necessary management resources flexibly in order to improve profitability. Here, I will explain capital allocation. The guideline for DE ratio will be lowered from around 0.8% to 0.7% or lower to support sound sustainable growth with a strong financial foundation. The target for cash flow from operating activities is JPY 760 [ million. ] Cash flow from investing activity is JPY 720 [ million, ] and we'll aim for positive 3-year total cash flow. And for shareholder return, while maintaining stable continuous dividends, we will aim to increase dividends based on earnings growth. The target for dividend payout ratio is 30% or more. In terms of capital investment, 3-year total is expected to be JPY 500 billion and for R&D, JPY 220 billion. About 50% of the capital expenditures and 80% of the R&D will be allocated to growth business field. Within the capital expenditures, in addition to large-scale investments for business growth, we will make investments in relation to sustainability, investments to enhance quality strength, enhance cost competitiveness by utilizing the digital technology and investments for the renewal of aging facilities. Up until this page, I have explained the initiatives of AP-G 2025 in the fiscal years 2023 to 2025. From this page onwards, I will explain our 2030 sustainability targets, which we are working on in a long-term perspective in order to accelerate the realization of the Toray Group's sustainability vision. This slide shows the 2030 targets of the Toray Group's sustainability vision. Due to our efforts until fiscal year 2022, we expect to serve as the previous sustainability targets earlier than originally planned. Therefore, we will accelerate sustainability initiatives by setting higher targets for fiscal year 2030. We have set a challenging target for the CO2 emissions avoided in value chain, water filtration throughput contribution by Toray's water treatment membranes and GHG emissions in production activities. As for supply of Green Innovation and Life Innovation products, we will integrate them on set a new target and supply of sustainability innovation products. The 2030 target of [ 4.54 ] in comparison to baseline year of fiscal year 2013 is the same level as the previous target. From this page onwards, I will explain the specific initiatives in order to achieve the sustainability targets. This slide shows the carbon neutrality initiatives. On the left shows Toray Group's contribution to achieve carbon neutrality for the society. we will increase our contribution to GHG reduction for society by increasing revenue for various sustainability innovation products. On the right-hand scenario, to realize carbon neutrality in the Toray Group, we will realize carbon neutrality for the group in 2050 by introducing technologies that contribute to reduction of GHG emissions in production on taking on the challenge of the CO2 recycling on carbon capture. On this page is the target for CO2 emissions avoided in the value chain, which is a unique KPI by Toray. As shown in the examples on the right, through further expansion on sustainability innovation businesses, such as carbon fibers that contribute to weight and reduction of aircraft on water treatment membranes that produces CO2 emissions from CO2 desalination point, we aim to increase the CO2 emissions avoided from 8-fold to 25-fold in comparison to fiscal year 2030. Next, I will explain about the emission reductions in production in order to achieve carbon neutrality of Toray Group. Toray Group has proceeded with measures that leverage the Toray Group's proprietary knowledge on the technologies and promoted fuel conversion and promoted challenged study project, which works on the reduction of GHG in production and reduction of water usage. In AP-G 2025, we will promote various emission-reduction initiatives ahead of schedule and implement the challenge 50-plus product, which has a higher emission reduction target for 2030. The new target for GHG emissions reduction per unit of revenue for the entire Toray Group has been pushed up from reduction of 30% to a reduction of 50% or more reduction. In addition, that the target absolute value for reduction of GHG emissions has been pushed up from 7% reduction to 40% or more reduction. As for water usage reduction for Toray Group, the target has been pushed up from a reduction of 30% to 50% or more reduction. Next are the Toray Group's initiatives to build a circular economy. As shown on this slide, Toray Group will contribute to the realization of the circular economy without relying on fossil fuels through material recycling on chemical recycling of used plastic products, use of biomass-based raw materials, which are renewable resources and through carbon recycling of CO2 which [indiscernible] from the air and emission gas. On this slide are some examples of recycling-oriented use of resources. Through products such as recycled PET films, Ecouse Lumirror, fiber made from recycled PET bottles and costs, we are promoting the establishment of a unique recycling system in which surplus materials and used products are collected and processed into recycled raw materials. Also, we are making a switch to biomass-based materials and have already started the sales of water bio-based to PET fiber and 100% bio-based PET fibers as well as 100% bio-based nylon fibers in fiscal year 2022. Furthermore, we have set a new KPI in relation to recycle of resources in order to accelerate our contribution to realize the circular economy. The fiscal year 2030 revenue target for products that facilitates sustainable recycling based the use of resources and the production in the SI business is JPY 400 billion, and the target percentage of raw materials, sourced from recycling directly from biomass were produced with CO2 recycling used in Toray core polymers is 20%. Lastly, I will summarize, what I have explained today. In the new medium-term management program, AP-G 2025, placing a Toray fiercely as a basis. We will aim to realize the Toray Group's sustainability vision, which shows a contribution to sustainable growth by delivering innovative technologies and advanced materials that provide the real solutions to the challenge the world faces with balancing development and sustainability. We will focus on value creation that makes the growth strategy possible and the human resources to support them. In addition, we will work on strengthening management foundation in the areas of invested capital accuracy, financial structures and Human Resources. This concludes my presentation. Thanks. [Statements in English on this transcript were spoken by an interpreter present on the live call.]