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'd like to take this opportunity to extend my gratitude towards your continued understanding on your interest in our management on the business activities. Now I would like to report Toray's business results for the first quarter ended June 30, 2025. Now I would like to follow the table of contents shown on Page 1. This is a summary of the business performance and forecast. In the first quarter, while gradual recovery of Japanese economy continued, sluggishness in the flow of goods and holding back on purchases were also seen in some area against the backdrop of growing uncertainties triggered by U.S. policies shift by the Trump administration. Under such business environment, the core operating income for the first quarter decreased compared with the same period a year earlier to JPY 29.1 billion due to weak market conditions and inventory adjustments, although the company promoted business structure reform and strategic pricing. The consolidated business forecast for the fiscal year ending March 2026 is the same as the initial forecast announced on May 14, 2025. In terms of annual dividend for the fiscal year ending March 2026, the company anticipates paying JPY 20 per share of common stock, a JPY 2 increase compared with the previous fiscal year. Furthermore, the company is proceeding with share buybacks in line with the resolution of the Board of Directors meeting ending November 2024. As of the end of July 2025, the total repurchase price of shares has reached JPY 80 billion equivalent to 82 million shares. I'll explain the details starting from the next page. I'd like to begin with an overview of business results for the first quarter ended in June 30, 2025. Please turn to Page 4. Consolidated revenue for the first quarter decreased 6.6% compared with the same period a year earlier to JPY 595.8 billion. Core operating income decreased 20.9% to JPY 29.1 billion and profit decreased 36.1% to JPY 17.2 billion. Special items for the first quarter worsened by JPY 2.9 billion to negative JPY 1.6 billion. Page 5 is about assets, liabilities, equity and free cash flow. Total assets stood at JPY 3,299.1 billion, up JPY 6.5 billion from the end of the previous fiscal year due primarily to an increase in inventories on the tangible fixed assets in spite of a decrease in trade and other receivables. Total liabilities increased JPY 37.6 billion from the end of the previous fiscal year to JPY 1,509.6 billion, owing mainly to increases in borrowing. Total equity decreased by JPY 31.1 billion from the end of the previous fiscal year to JPY 1,789.5 billion, mainly due to share buybacks. Owner's equity was JPY 1,674.5 billion. Interest-bearing liabilities was JPY 904.3 billion, and the D/E ratio was 0.54. Free cash flow was negative at JPY 0.8 billion. Page 6 explains about capital expenditures, depreciation and amortization and R&D expenditures. Capital expenditures for the first quarter decreased by JPY 1 billion to JPY 35 billion on a year-to-year comparison. Depreciation and amortization decreased by JPY 0.7 billion to JPY 32.7 billion. R&D expenditure increased by JPY 0.6 billion to JPY 18.1 billion compared with the same period of the previous fiscal year. The table on Page 7 describes revenue and core operating income by segment. In addition, the graph on this page shows the factor analysis of JPY 7.7 billion decrease in core operating income for the current first quarter on a year-to-year comparison. As we promoted business structure reform and strategic pricing, the Fibers & Textile segment remains strong. On the other hand, the Performance Chemicals decreased in core operating income due to stagnant sales of battery separator films and the lack of temporary factors, including reversal of allowance that increased profit in the first quarter of the previous fiscal year. In the Environment & Engineering segment, core operating income decreased due mainly to the shift in project timing of the Japanese subsidiary. Carbon Fiber Composite Materials and the Environment & Engineering segments were impacted by the weak market conditions and the inventory adjustment. Core operating income for the first quarter decreased 20.9% while core operating margin decreased 0.9 points. Using Page 8 and after, I would like to explain the results of each segment, plus Fibers & Textiles. Revenue on the Fibers & Textiles segments decreased to 2% to JPY 239.9 billion compared with the same period a year earlier, and the core operating income increased to 2.5% to JPY 15.2 billion. The Apparel was strong overall, a sales momentum of the spring/summer clothing in Japan and shipment from overseas trading subsidiaries was strong. The industrial applications fell short over a full recovery of the market conditions, especially in the automotive applications, but the group strives to reduce costs. Page 9 is the Performance Chemicals segment. Revenue decreased 9% to JPY 220.1 billion compared with the same period a year earlier. Core operating income decreased 25.7% to JPY 13.6 billion. In the Resins under the Chemicals business, demand was on a recovery trend in the Resins business as the effect of last fiscal year's production declined by the automotive manufacturers in Japan has resolved. However, the Chemicals business was affected by the worsening market conditions. The Films business saw increase in electronic costs related to demand, but sales of battery separator films were stagnant. In the Electronic & Information Materials Business, OLED-related materials and circuit materials were affected by the weak display panel demand in China. Page 10 is the Carbon Fiber Composite Materials segment. Revenue decreased 13.9% to JPY 66.9 billion compared with the same period a year earlier, and this segment posted core operating profit of JPY 4.6 billion, 9.9% decrease from the same period a year earlier. The aerospace applications were affected by the inventory adjustment in the supply chain and the appreciation of the yen, although user demand was on the recovery trend. In the sports applications, inventory adjustments in general purpose products for outdoor ratio continued, but sales of high-end products was strong. In the industrial applications, wind turbines blade applications for gradual recovery. However, other applications entered an adjustment phase. Page 11 in the Environment & Engineering segment, revenue decreased 7.9% to JPY 53 billion compared with the same period a year earlier and the core operating income decreased 38% to JPY 3.1 billion. The Water Treatment business was affected by the delay of shipments for large projects in the Middle East and the stagnant market condition in China. As for subsidiaries in Japan, revenue of Japanese engineering subsidiaries decreased due to shifting project timing. Page 12 is the Life Science segment. Revenue decreased 3.4% to JPY 11.7 billion compared with the same period a year earlier and core operating income decreased by JPY 0.2 billion to negative JPY 1 billion. The Pharmaceutical business was affected by the impact of the penetration of generic versions of the drug. In the Medical Devices business, shipment of the mainstay products dialyzer for hemodiafiltration was steady but affected by persistently high prices raw materials. Page 13 shows the business results of major subsidiaries and the regions. At Toray International sales were strong mainly in the Fibers & Textiles. And subsidiaries in Southeast Asia, in the Fibers & Textiles business, demand for other applications and automotive applications in the industrial applications was slow. In the Performance Chemicals business, spreads of ABS resins improved. As of subsidiaries in China, in the Fibers & Textiles business, the other applications was strong. In the Performance Chemicals business, the Chemicals business was impacted by the worsening market conditions. As for subsidiaries in the Republic of Korea, sales of the Fibers & Textiles business decreased stemming from the sell-down of low profitability applications. However, spread has improved. In the Performance Chemicals business, sales of battery separator films was stagnant. Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2026. Please turn to Page 15. The global economy, which was in a gradual recovery phase is expected to slow down triggered by the imposition of reciprocal tariffs by the U.S. under the Trump administration. The Japanese economy also faces concerns over a decline in exports following the imposition of U.S. tariffs and intensifying competition with China and there is growing uncertainty over the sustainability of the economic recovery trend. Other causes of concern include the trends in oil price as well as the financial and foreign exchange market centered on the U.S. against the backdrop of the imposition of tariffs and the situation in the Middle East. The direction of the trade policies of the U.S. under the Trump administration as well as its negotiations with various countries will likely affect the prevailing economic trends which in the medium- to long-term may significantly alter supply chains and trade structure. For the fiscal year ending March 2026, forecast for revenue, core operating income and the profit attributable to owners of parents remain the same as announcement on May 14, given the current business performance and the environment. Assuming exchange rate from July onwards is JPY 145 for USD 1. Page 16 shows the consolidated business forecast for the fiscal year ending March 2026 per segment. The impact from the U.S. tariff measures remains the same as an announcement on May 14, a trend of tariff measures and company measures to it by customers are still uncertain. Although direct and indirect effects are expected including increases in procurement costs at the U.S. production basis and the global demand decreased. This concludes my presentation. Thank you very much.