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

Thank you very much for joining us despite your busy schedule. Today, I'd like to explain about Toray's vision from the medium- to long-term perspective and the Medium-Term Management Program, IGNITION 2028, our initiatives to realize our vision. Now I would like to follow the index shown on this page. I'll begin by sharing our overall view of the key issues, then explain our long-term vision and management strategy as well as our medium-term management program. First, reviewing the current Medium-term Management Program, AP-G 2025. I'd like to summarize the achievements over the past 3 years and clarify the challenges that have emerged for the next stage. This slide presents the consolidated progress on AP-G 2025 target. The left side shows the trends in Revenue and Core Operating Income, on the right side, ROIC and ROE. Revenue and Core Operating Income are forecasted to increase significantly compared with FY 2022, reflecting Strategic Pricing and Structural Reform. Compared with AP-G 2025, however, we fell short of the target as lower sales volumes caused by delays in business expansion, particularly in Performance Chemicals and Carbon Fiber Composite Materials. By advancing Management with ROIC as our Core Management Principle, we expect to reach the ROIC Target of around 5%. Meanwhile, ROE is expected to be below the target. Next, the progress on target by segment. This slide shows the trends in each segment's Revenue growth rate, Core Operating Income growth rate and ROIC. Core Operating Income increased and ROIC improved across all segments, except for the Life Science segment under Structural Reform. The graph on the right shows trends of Core Operating Income by segment. The segment with the largest increase in Core Operating Income was Performance Chemicals, while the utilization rate increased in the Resins and Films businesses supplying related materials due to the recovery of the automobile market, effects of Structural Reform were also seen. While profit improvement progressed across the Group, increase in Core Operating Income of the Carbon Fiber Composite Materials segment was limited to JPY 4.1 billion. In terms of harvesting returns on invested capital, challenges remain going forward. This slide analyzes improvements in Core Operating Income by initiative. Under AP-G 2025, in response to changes in the Business Environment and rising Geopolitical Risks, we have pursued Profit-Improvement Initiatives through Darwin Project, targeting businesses and companies with the greatest impact. Specifically at Soltec, we reduced fixed costs by reviewing the Production Structure and achieved significant improvement in Profitability. In the PET Film business in the U.S. and Europe, we promoted a review of the Production Structure and Strategic Pricing. We are also proceeding to review the product mix and to reduce Fixed Costs in the PP spunbond, ABS Resin and Polyester Staple Fiber businesses. Through these initiatives, we expect JPY 27 billion of improvement in Core Operating Income compared with FY 2023. In addition, Strategic Pricing has delivered about JPY 30 billion of effect as we expected. Next is an overview of progress towards Sustainability Targets. We are seeing steady progress across key indicators, including revenue growth of Sustainability-Related Products, CO2 emissions avoided in value chain and water usage per unit of revenue in production activities. Next, we will summarize the achievement and the challenges of the current Medium-Term Management Program, AP-G 2025. After I became the President, in response to changes in the business environment, I defined Toray's vision for the future, identified issues, and steps to take towards the vision. Furthermore, we set out 7 Management Initiatives and 18 Priority Issues by structuring them along the time-axis. This page summarizes the achievement and the remaining challenges of the 7 Key Management Measures. Through the internal penetration of Toray-style ROIC Management, Strategic Pricing and Darwin Project, we have gained a certain level of confidence in improving our Structure of Profitability. In addition, we implemented several Business Divestments and Asset Optimization by reducing cross-shareholdings by JPY 150 billion while acquiring Treasury Stock of the same amount. On the other hand, further improvements are still required in Profitability and Asset Efficiency, and there remain areas where our efforts in Business Growth Capability, creation of Next-generation Businesses, Sustainability and Human Capital Management have yet to be fully translated into competitive strength. As shown on the right, we recognize the remaining challenges as follows: further improvement of Profitability and Asset Efficiency, promoting and accelerating Structural Reform, creating a Next-generation Business, Sustainability Measures, enhancing Management Foundation and Dialogue with Capital Market. From the next slide, while taking these challenges into account, I will explain our Long-Term Management Strategy defined from a long-term perspective, as well as Toray's vision. Using this page and after, I will explain the direction of Toray's long-term management. First, I'd like to explain Toray's Philosophy and its vision. Toray has an unwavering Philosophy Framework anchored by our Corporate Philosophy positioned at the highest level, contributing to society through the creation of new value with innovative ideas, technologies, and products. We newly defined the world we aim to achieve by 2050 as TORAY VISION 2050, evolving from the Toray Group Sustainability Vision and systematically clarified its relationship with our Philosophy. We aspire to realize the following Worlds: a world where people live in harmony with planet, resources are recycled and nature regenerates. A world where prosperity is created and shared in safe and secure societies, a world where everyone lives in health and comfort. To realize this vision, we have positioned TORAY Challenges 2035 as a long-term management strategy and IGNITION 2028 as a medium-term management program. These strategies are summed up in the phrase Weaving Science into Society, which reflects our commitment to Weaving Science into the future of Society. As a material manufacturer, we can create value for Society only by implementing our technologies in real-world applications. Science is used as a comprehensive concept that encompasses not only Materials, but also Chemistry, Physics, Engineering, Expertise, Processes, Data and Marketing. Into Society reflects our determination to deliver Toray's products and technologies in diverse forms amid an increasingly uncertain world. This slide outlines Toray's vision for the future from the perspective of Business and Value Creation. We will drive our growth by leveraging the Toray Group's strengths, including Advanced Material Development capabilities, High Quality and Stable Supply, and capabilities to build Global Value Chains, and Solution Proposal capabilities based on materials. Through these efforts, we aim to create Economic Value and Social Value simultaneously and achieve sustainable growth in corporate value. Next, we turn to our Business Portfolio. In pursuit of realizing the 3 worlds envisioned in TORAY VISION 2050, the Toray Group operates a diverse range of products and business fields. We address a wide range of social challenges through a broad portfolio of businesses, including Fibers & Textiles, Resins & Chemicals, Films, Electronic & Information Materials, Carbon Fiber Composite Materials, Water Treatment, Pharmaceuticals and Medical Products and Comfortable Materials. This slide presents our Management Materiality. We have redefined our previous CSR Materiality as Materiality fully integrated with our Management Strategy. In the environmental field, our focus areas are decarbonization, recycling and air. In the social field, they include Semiconductors, Space and Defense and Mobility. In the human field, our priorities center on health care and comfort. By combining the strengths of Toray's businesses with data and engineering, we aim to turn risks into opportunities and create both Economic and Social Value in addressing these social issues. This page presents our Long-Term Management Policy. The left side shows the major changes in the Business Environment and Business Trends anticipated over the next decade, as well as the long-term impact on the Toray Group. The right side outlines 5 long-term management policies in response to these changes. While uncertainty is increasing, it is essential to transform these risks into opportunities through Business Transformation and to create value by fully leveraging the global assets that the Toray Group has built up for years. This mindset is embodied in the phrase Weaving Science into Society, which I mentioned earlier. We bring the products we create into widespread use in society. This slide shows our targets toward around 2035. As its long-term vision toward around 2035, the Toray Group targets about a 10% ROIC. As a milestone towards this goal under the next medium-term management program, we will pursue the Growth Strategy and Structural Reform as 2 wheels aiming to achieve a 7% ROIC. We aim to deliver Toray's value in society by integrating non-financial initiatives, Profitability Improvement, Strategic Pricing, Darwin Project and so on. From this page, I will explain our next 3-year Medium-Term Management Program, IGNITION 2028. Based on the achievements and challenges of our current program, AP-G 2025, as well as our long-term management policies, we have positioned IGNITION 2028 as the first execution phase. The name IGNITION reflects our intention to reignite growth and step into the next stage. This slide explains a review of our business segments as IGNITION 2028 begins. This segment realignment is not merely a change in categories. It is intended to reflect the approach to value creation articulated in a Long-Term Management Strategy and TORAY VISION 2050 at Business Unit Management. Specifically, we will integrate the Water Treatment business and the Pharmaceuticals and Medical Products business, which have previously been managed as separate segments and reorganize them into a single Water Treatment and Health care segment. This decision reflects our view that it is more effective to consider technologies, customers, and business opportunities in an integrated manner, and shared Value Axis of Healthy Lives for people and a Safe and Secure Society, thereby enabling us to more clearly define our medium- to long-term growth strategy. In addition, the Engineering business plays an indispensable role in delivering materials in Society. Moreover, inspection equipment for the Semiconductor and Data Center fields, as well as Data Analysis, has become increasingly important, both directly and indirectly in realizing the Toray's vision. Going forward, we'll leverage the technical capabilities we have cultivated through internal-production process improvements to create new value. Through this Segment Realignment, we further enhance Strategy Formulation in line with the actual scale of our businesses, as well as advance the sophistication Resource Allocation and Growth Management. In this slide, I will explain the Basic Policy of IGNITION 2028, our Medium-Term Management Program for the next 3 years. Through the current Medium-Term Management Program, AP-G 2025, we have achieved results such as improvements in our Profit Structure and the penetration of ROIC-based Management. However, while progress has been made, the recovery of our underlying Growth Capability and the transformation of our Business Portfolio remain ongoing. Against this backdrop and in light of the Future Vision set out in our Long-Term Management Strategy, we have set IGNITION 2028 for the next 3 years with a primary focus on reigniting growth. The core of IGNITION 2028 is to reignite growth and to enhance the certainty of achieving it. We will further improve the quality and certainty of the Growth Strategy and Structural Reform pursued to date, while proceeding the transformation of our Business Structure and strengthening our Management Foundation. Through a review of our Business Portfolio and Segment Realignment, we will pursue Business Management with a clear focus on Growth Potential and Strategic Relevance, while further prioritizing the allocation of Management Resources to business fields that contribute to medium- to long-term growth. At the same time, rather than pursuing growth through volume expansion alone, we will place emphasis on improving the quality and certainty of growth by simultaneously advancing Value Creation, strengthening Competitiveness and driving Business Reform through Human Resource and Digital Transformation. IGNITION 2028 is positioned as a 3-year period for stepping into the next stage of growth towards 2035 and beyond, looking ahead to 2050. In this slide, we explain the Quantitative Targets for FY 2028 and IGNITION 2028. First, we aim to raise ROIC from about 5% in the FY 2025 Forecast to about 7% in FY 2028. ROE is also targeted to increase from about 5% to 8%. As the basis for these ROIC and ROE targets, we plan to increase revenue from JPY 2.6 trillion to JPY 3 trillion and Core Operating Income from JPY 150 billion to JPY 230 billion, pursuing both growth and Profitability Improvement. The Core Operating Margin is also targeted to improve from about 5.8% to 8%. As for D/E Ratio, we will continue to maintain a Guideline of 0.7 or lower, although rising tensions in the Middle East could lead to significant changes in the Business Environment. IGNITION 2028 is formulated based on the Business Environment assumed as of the second half of FY 2025. Next, I will explain our Business Portfolio Strategy. As we have already presented at the Management Briefing, we will further clarify the positioning of each business based on perspectives that include Growth Potential, Profitability, Competitiveness and time-axis. We will organize our businesses into 4 categories: Core Growth Businesses with high growth and high profit, Stable Profit Businesses, Structural Reform Businesses and Next-generation Businesses with investment in advance, and allocate Management Resources appropriately across our businesses. Based on this approach, we will continue to advance the evolution of our Business Portfolio. This slide outlines the specific direction of our Business Portfolio Review. In addition to the Structural Reforms currently underway, we will reassess each business from the perspectives of whether it can fully fit into our Value Creation Model and whether we are the Best Owner. Comparing the FY 2025 Forecast with the FY 2028 Targets, we plan to increase the proportion of Core Growth Businesses and Stable Profit Businesses while gradually reducing the share of Structural Reform Businesses and Next-generation Businesses with investment in advance. Through these measures, we aim to achieve a balance between growth and profitability. Next, I will explain our approach to improve Core Operating Income. Under IGNITION 2028, we aim to achieve high-quality business expansion, centering on Innovation Creation and Strategic Pricing. We will build effective mechanisms for profit-improvement by enhancing genba-ryoku or workplace competency of pricing, establishing Data Infrastructure and strengthening collaboration across the Group. In addition, we will review and replace businesses subject to Structural Reform to accelerate the pace of Profit Improvement. This slide shows the Key Initiatives for continuous creation of High-profit Businesses. We focus on proactive engagement with markets, customers, and partners, the integrated implementation of R&D and business strategies, and expansion of Contribution Margins through the creation of new products and new value. We will strengthen our overall Value-creation Capability through close collaboration across Production, Quality Assurance, Sales, and R&D. Next, I will explain the continued promotion of Structural Reform. Under IGNITION 2028, we will maintain our Structural Reform Framework and, for businesses with large invested capital and low ROIC, advance reforms from a company-wide perspective and a strong Top Management leadership. Through these efforts, we will steadily enhance the stability of our earnings base and reallocate resources to growth business fields. Next slide outlines our initiatives for Next-generation Markets. To achieve Sustainable Growth, we will continue to broaden our product portfolio and invest in facilities and R&D in growth business fields such as AI Data Centers and AI Semiconductors, Separation Membranes, Space and Hydrogen. In particular, for AI Data Centers and AI Semiconductors, we will strengthen the development of next-generation technologies, including optoelectronic-integration technologies such as multicore optical fiber, and nurture these fields as new business clusters that will support our growth over the medium- to long-term. By leveraging our comprehensive material capabilities, we will steadily capture growth opportunities in next-generation markets. From this page, I'll explain the specific initiatives by business under IGNITION 2028. I'd like to describe how the Quantitative Targets and Portfolio Strategy outlined in the previous slides will be executed in each business. Under IGNITION 2028, based on the characteristics of each business, we will seek to maximize business value under a company-wide, consistent strategic framework. Revenue and Core Operating Income are expected to grow across all segments under IGNITION 2028. Among them, we anticipate particularly strong growth in 3 segments: Performance Chemicals, Carbon Fiber Composite Materials, and Water Treatment and Health care. In the Performance Chemicals segment, driven by expanding demand in growth markets such as xEVs and Semiconductors, together with a shift toward high-added-value products, we plan significant growth not only in Revenue, but also in Core Operating Income. In the Carbon Fiber Composite Materials segment, supported by a recovery in demand, mainly in the Aircraft, Space, and Defense as well as expansion into Industrial and new applications. We expect strong growth in both Revenue and Profit. For the newly established Water Treatment and Health care segment, we expect it to play a key role as a high-growth segment, driven by expansion in water-related fields such as seawater desalination and wastewater reuse, as well as growth of high-added-value products in the Pharmaceuticals and Medical Products fields. In the Fibers & Textiles segment, we aim to maintain stable growth and position the segment as a Foundation supporting overall performance, focusing on growth business fields such as Airbags Textiles as well as integrated businesses from Fibers & Textiles to garments. Under IGNITION 2028, we will execute strategies tailored to the characteristics of each segment. Page 29 and 30 describe Business Plans and Strategies for the major businesses within each segment. Further details are provided in the Reference. In the Fibers & Textiles business, enhancement in Core Operating Income will be driven by Profit Improvement in the Industrial Applications and sales expansion in the Apparel Applications. In the Performance Chemicals segment, increase of Capacity Utilization in the Films business and the Electronic & Information Materials business will contribute to Profit Improvement. In the Carbon Fiber Composite Materials business, increase in Sales Volume in each application will drive higher earnings. Meanwhile, in the Water Treatment and Health care business, business expansion in Water Treatment is expected. These factors will be a key contributor to profit growth and the Medium-Term Management Program. From Page 31 and after, I will explain our Capital Allocation at IGNITION 2028. This slide explains our Capital Allocation under IGNITION 2028 with ROIC Improvement positioned as the highest priority, we will advance business investment for deeper growth and structural reform as 2 wheels. Over the 3-year period from FY 2026 to FY 2028, we expect for cash-in about JPY 920 billion in Operating Cash Flow before deduction of R&D expenditure. Using this as a funding source, we plan to allocate JPY 400 billion to JPY 500 billion to Capital Expenditures and about JPY 250 billion to R&D, thereby advancing investment in growth fields and strengthening competitiveness. In addition, to accelerate future growth, we will flexibly consider Strategic Investments, including M&A. At the same time, we will enhance our cash-generation capacity through measures such as Structural Reform and Asset Divestment, and continue to deliver Shareholder Returns on a consistent basis underpinned by profit growth. We aim to further enhance Capital Efficiency by maintaining an appropriate balance among Growth Investment, Financial Soundness, and Shareholder Returns. Next, I will explain Capital Expenditures by Segment. During the IGNITION 2028 period, we plan JPY 400 billion to JPY 500 billion of Capital Investment. The large-scale capital investments in Carbon Fiber Composite Materials business implemented under AP-G 2025 have largely long their course, and the next medium-term management program is positioned as the phase in which the effects will be seen. IGNITION 2028 represents Capital Investments for the subsequent 3-year period, with investments to be made in business fields and regions such as AI-data-center-related, Digital Transformation, Environmental Initiatives, and India in the Fibers & Textiles segment. Next, this slide shows our Shareholder Return Policy. Under our previous Medium-Term Management Program, we have maintained a basic policy of stable and continuous dividends while providing Shareholders Return in line with business performance. Under IGNITION 2028, we will maintain this approach as a foundation while pursuing Progressive Dividends driven by profit growth, as well as flexible Share Buybacks, taking into account our financial position and capital structure. Specifically, we aim to achieve a DOE of 3% or higher by FY 2028. While maintaining a balance with Growth Investments, we will enhance capital efficiency and steadily strengthen Shareholder Returns over the next 3 years. From this page, I will explain how the Toray Group is addressing Sustainability Challenges. At Toray, we position Sustainability as a foundation for Sustainable Growth and the enhancement of Corporate Value. From the 3 perspectives of Environment, Society and People, we strive to achieve both Economic Value and Social Value by addressing these challenges through our business activities. This slide outlines the Basic Policy of our Sustainability Initiatives to realize TORAY VISION 2050. We will promote sustainability through our business activities with a focus on the 2 pillars: Environment and People. We aim to increase both Economic and Social Value through the expansion of Environmental and Human Contribution Businesses by balancing environmental contributions, such as the reduction of greenhouse gas emissions, with the enhancement of Human Value through the people-centric management approach. This slide shows non-financial targets. In terms of KPIs for greenhouse gas emissions reduction, we will shift from revenue-based intensity metrics to absolute reduction amounts. In addition, from the perspective of Human Capital Management, employee engagement has been adopted as our KPI. Although Sustainability Innovation businesses have been positioned as a KPI to date, our products fundamentally contribute to society by delivering value to the environment, society and people, based on a belief that such value should be implemented across society. As this concept, therefore, applies across our entire Business Portfolio, we have decided from a beyond-sustainability perspective to shift away from the Sustainability Innovation Business categorization and instead explain our strategy through Business Clusters. Even for items such as water usage that are no longer set as KPIs, we will continue to monitor them, set internal targets, and pursue ongoing reductions. On this slide, I'd like to explain about our initiatives to reduce Greenhouse Gas Emissions. We aim to achieve our reduction targets for FY 2030 and FY 2035 by implementing steady and practical measures such as Energy Conservation and Fuel Conversion. At the same time, we will continue our efforts to reduce waste, water usage and Volatile Organic Compound or VOC emissions, and fulfill our social responsibilities as a manufacturer. This slide focuses on our People-centric Management. At Toray, we define the following as the core pillars of our Human Capital Management, inclusion of diverse human resources and values, creating human resources and organization that adapt to change, empathy with Toray Philosophy and career development with rewarding and engaging work. We aim to achieve sustainable growth through encouraging employee autonomy, challenge, and co-creation, as well as by enhancing engagement. This slide presents a clear picture of how we address social issues through our businesses. We leverage advanced materials and technologies to convert Social Value into Economic Value in areas such as Climate Change, Circular Economy, Water Resources, and Well and Comfort life. Next, I'll explain our initiatives related to the Circular Economy. Through initiatives such as promotions of fiber and film products made from recycled materials and the use of bio-based materials, we are expanding the share of used recycled and renewable resources. We will contribute to the realization of a Circular Economy by achieving targets of 20% by FY 2030 and 30% by FY 2035. Lastly, I'd like to give you a summary of initiatives under IGNITION 2028. This slide summarizes how the discussed ideas are translated into concrete challenges within Toray, and how those challenges are addressed through specific initiatives under IGNITION 2028. Over the next 3 years, we will enhance the quality and certainty of our Growth Strategy and Structural Reforms, shift to a Business Structure that consistently delivers 7% ROIC, strengthen our Management Foundation, and ultimately become a truly Sustainable Enterprise. From this page and after, detailed data by segment is provided as a Reference Material. In today's presentation, I have focused on the Overall Picture of IGNITION 2028, as well as its underlying thinking and direction. Therefore, I do not go into Detailed Strategies or Quantitative Targets for each segment. They will be covered in greater detail at our IR Day scheduled for June, where persons in charge of each business will present their respective Business Strategies and Growth Scenarios. I hope this material will serve as advanced information and Reference Data to help deepen your understanding ahead of those discussions. I'd like you to have a clear understanding of IGNITION 2028, the Toray Group's long-term objectives, and our plans for execution over the next 3 years. This concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]