UACJ Corporation (5741) Earnings Call Transcript & Summary

[Interpreted] I would like to thank everyone for taking time to attend this briefing session today, especially now that the country is under a state of emergency. I am pleased to report on UACJ Corporation's financial results for fiscal 2019. The company's fiscal year ended March 31, 2020. My presentation will cover these topics in the order shown here. First of all, I will provide an overview of the company's consolidated financial results in fiscal 2019. Ordinary income amounted to JPY 3.8 billion in fiscal 2019, a decrease of JPY 2.4 billion year-on-year. Before talking about that, however, I would like to point to the sales volume of the UACJ group's mainstay products during the fiscal year. The company's subsidiaries in Thailand and the United States, UACJ Thailand Company Limited and Tri-Arrows Aluminum, Inc., respectively, both boosted output and sales volume of flat-rolled aluminum for can stock. Sales volume of automotive parts was also up, especially in Japan. As a result, overall sales volume increased compared with the previous fiscal year. I will discuss this in more detail later on. The main factors underlying the big decrease in ordinary income are listed on the slide. Beginning with positive factors. Results benefited from the absence of any losses from equity method affiliates following such a loss in fiscal 2018, which resulted from the dissolution of joint venture company, Constellium-UACJ ABS LLC. In addition, Tri-Arrows Aluminum and UACJ Thailand contributed by improving their performance. Among the main negative factors, however, inventory valuation substantially worsened, reflecting a decline in the aluminum market, and sales volume of products in Japan decreased amid the prolonged trade war between the United States and China which began in 2018. Finally, the company plans to pay an annual dividend of JPY 20 per share, comprised of a single year-end dividend. Now I would like to discuss the fiscal 2019 consolidated financial results in more detail. Net sales totaled JPY 615.1 billion, down JPY 46.2 billion year-on-year. Despite higher sales volume, this decrease was primarily due to a decline in the aluminum ingot market price and a smaller contribution from the Wrought copper products business, which was sold off in fiscal 2019. As you can see on the slide, operating income and ordinary income also decreased. On the other hand, ordinary income before inventory valuation increased by JPY 6.8 billion to JPY 9.8 billion. And net income attributable to owners of the parent rose JPY 0.9 billion to JPY 2.0 billion. Likewise, adjusted earnings before interest, taxes, depreciation and amortization amounted to JPY 47.3 billion, an increase of JPY 4.7 billion compared with the previous fiscal year. This slide shows the breakdown of extraordinary loss net. In fiscal 2019, the company posted a structural reform loss of JPY 1.0 billion, mainly due to the sell-off of the Wrought copper products business. It also posted a loss on valuation of shares of subsidiaries and associates of JPY 5.3 billion, specifically shares of Boyne Smelters Limited, held by the company's wholly owned smelting subsidiary, UACJ Australia Party Ltd. as well as loans owed to UACJ Australia by Boyne Smelters. Meanwhile, a gain on sale of investment securities of JPY 2.0 billion contributed to extraordinary income. Taken together, extraordinary loss exceeded extraordinary income by a total of JPY 5.4 billion shown on the slide. In connection with the loss on valuation of shares of subsidiaries and associates, the company recorded deferred tax assets, allowing it to post total income taxes receivable of JPY 4.6 billion. Next, this slide shows financial results by business segment. As the company's main segment, the Flat-Rolled products segment greatly affects overall results, so I will talk more about it in a moment. For now, I just want to mention that sales volume of flat-rolled aluminum amounted to 1,153,000 tons in fiscal 2019, an increase of 59,000 tons year-on-year. Results for the Wrought copper products segment were posted only in the first half of fiscal 2019 because the business was sold to Toyokawa Holdings Inc., effective from September 30, 2019. The Precision machined components and related businesses segment benefited from robust demand for battery materials and air conditioner parts, but sales of Precision Machined Components declined. As a result, segment sales decreased somewhat, while operating income remained flat. Now I would like to return to the Flat-Rolled Products segment. This slide shows sales volume results for the segment's main product categories. Sales volume of flat-rolled aluminum for can stock decreased slightly in Japan, but increased in Thailand and the United States. Group wide, the amount was up by 37,000 tons. On the other hand, sales volume of aluminum foil decreased by 6,000 tons year-on-year, mainly attributable to a moderate decrease in shipments to the machine industry. Sales volume of aluminum materials for IT-related devices and equipment remained on par with the previous fiscal year as manufacturers continue to adjust their inventories. Nevertheless, a growing number of personal computers are being fitted with aluminum materials, contributing to the year-on-year increase of 1,000 tons. Meanwhile, sales volume of aluminum automotive parts rose 4,000 tons year-on-year, reflecting growing demand for automotive aluminum and strong sales of automotive body panels in Japan. Turning to aluminum thick plates. Sales volume fell by 1,000 tons. On a positive note, however, the volume of thick plates for liquid crystal and semiconductor manufacturing equipment began increasing in the fourth quarter following a period of sluggish demand. Finally, sales volume of other general purpose materials increased by 22,000 tons year-on-year, largely as a result of aluminum slab sales by Tri-Arrows Aluminum in the U.S. This slide shows the main factors underlying the decrease in consolidated ordinary income. As I mentioned earlier, ordinary income fell by JPY 2.4 billion year-on-year to JPY 3.8 billion in fiscal 2019. The chart shows the positive and negative factors that contributed to this result, starting with the negative impact of inventory valuation totaling JPY 9.2 billion, which reflected the declining market price of aluminum ingots after they were procured. This factor alone was JPY 3.0 million greater than the total amount of ordinary income in fiscal 2018. Sales volume of products in Japan fell year-on-year, but we were able to limit the negative impact on income in proportion to this decrease. I believe this indicates how all of the UACJ group's businesses have grown more robust and resilient. This chart shows the main factors behind the difference between the ordinary income result and our prior forecast announced on February 2, 2020. At that time, our forecast was JPY 2.0 billion. The biggest factor was inventory valuation. Rather than decreasing as expected, it increased by JPY 0.8 billion. Other contributing factors were cost reductions and favorable differences related to sales, which refers to the difference between aluminum ingot prices at the time of original purchase and the time processed products are sold. All of the factors shown added up to JPY 1.8 billion more than the original forecast made in February. While the increased amount for each factor may appear relatively small, I think the overall result reflects the urgency felt by employees in each business and their hard work to cut costs and implement various additional measures. Now I would like to talk about capital and asset efficiency. In fiscal 2019, as a result of improving working capital, cash flow from operating activities came to JPY 58.1 billion, a marked increase over the previous fiscal year. Meanwhile, cash flow used in investing activities totaled JPY 30.0 billion. Accordingly, free cash flow amounted to JPY 28.0 billion, a substantial improvement compared with the previous fiscal year. Indeed, free cash flow would still be positive, excluding a one-off cash inflow of JPY 21.3 billion from the sale of the Wrought copper products business which was concluded as part of structural reforms. We used free cash flow to pay down interest-bearing debt. As of March 31, 2020, interest-bearing debt amounted to JPY 344.0 billion, down JPY 31.1 billion year-on-year, and the debt-to-equity ratio came down to 1.56. This slide shows figures for capital investment as well as depreciation and amortization. Capital investment totaled JPY 48.9 billion in fiscal 2019, comprised of JPY 14.3 billion in general investment and JPY 34.7 billion in strategic investment. I will talk about how the company's strategic investment in UACJ Thailand and Tri-Arrows Aluminum has been progressing a little later. First, however, I would like to mention 2 exemplary cases of our strategic investment here in Japan. We began operating new production lines for making finished automotive parts at Fukui Works and a new extrusion press at Nagoya Works. As of May, the new press was used to produce samples for customers to evaluate, so I expect production to go ahead as planned. This slide shows results for our key performance indicators. Return on equity improved to 1.1%, reflecting the year-on-year increase in net income attributable to owners of the parent. Now I would like to mention a few things about shareholder returns. We set the annual dividend for fiscal 2019 at JPY 20 per share based on the year's financial results. We also revamped our remuneration system for corporate officers, newly adopting total shareholder return as an indicator for determining compensation. Next, I would like to summarize UACJ Thailand's performance and results in fiscal 2019. In July 2019, the subsidiary started operations of production facilities that had been installed as part of a third phase of capital investment. Consequently, its monthly production volume of flat-rolled aluminum for can stock increased from 18,000 tons in July to 23,000 tons in October, and has remained at that level since then. This expansion will lead to higher sales going forward. Moreover, UACJ Thailand posted a profit in its fourth quarter, which spans from October 1 to December 31. This subsidiary has made progress in operating independently in Thailand, and many Thai nationals have been trained and appointed as managers. I think these accomplishments are very important. Market conditions, of course, are being greatly impacted by the COVID-19 pandemic. Despite this impact, which I will discuss later, demand for can stock is projected to grow over the long term, especially in Asia. We intend to take full advantage of this growing demand by ramping up production after the pandemic has passed. In fiscal 2020, UACJ Thailand will aim to secure stable operating income and continue to keep ordinary income in the black. Now I would like to move to part 2 of my presentation. First, I want to talk about UACJ's operating environment. The prolonged trade war between the United States and China, which began in July 2018, and the slowdown of China's economy have seriously affected the economies of countries all around the world. Now with the added impact of the COVID-19 pandemic, the global economy is decelerating rapidly. In Japan, economic activity has contracted sharply and demand for automobiles and industrial machinery is projected to remain sluggish for some time. In North America, production and sales of flat-rolled aluminum for can stock are expected to be solid since canned products are daily necessities. Production and sales of aluminum automotive parts, however, is being affected somewhat as factories in the United States deal with COVID-19-related restrictions. In many Asian countries, demand for can stock has been negatively affected due to the closure of restaurants and retail stores in response to COVID-19 outbreaks. Differentiation of the can stock market, in particular, is expected in the future. The UACJ group's production plants in Japan, the United States and Thailand have been operating while fully complying with government directives in each respective country. Although they have continued to manufacture products as required since May, we have been concerned that production and sales could be affected by the global economic slowdown. Indeed, we decided in May that forecasting financial results was impractical due to the uncertainty currently surrounding the global COVID-19 pandemic. Therefore, we have yet to finalize our forecast of fiscal 2020 financial results and to set the annual dividend. This brings us to part three, the impact of the COVID-19 pandemic and our response. While it is increasingly difficult to predict orders from customers, UACJ's main subsidiaries around the world have continued to operate while taking measures to deal with outbreaks of COVID-19. Our sales activities are limited when we cannot directly meet with customers, but employees have continued to assist customers and try to stay updated while teleworking. Orders of flat-rolled aluminum for can stock were only slightly affected by the pandemic in April, but we expect the impact to be felt from May onward. Nevertheless, we do not expect a major impact. Since May, orders of aluminum automotive parts appear to be on the decline following the suspension of operations at many automobile factories. In response, we have been making adjustments to production output accordingly. We expect to temporarily ramp up production of products for the electronics industry from May onward, following the suspension of operations by customers in China. We also plan to initiate changes at production plants, including initiatives related to business continuity planning. Meanwhile, we are responding in earnest to our customers in the medical equipment industry while giving priority to preventing the spread of COVID-19 and supplying packaging materials for pharmaceutical products. Next, I would like to talk about our business continuity plans and measures for preventing COVID-19 infections in our workplaces. Financially, in addition to the company's cash on hand, we have procured additional funds for responding to outbreaks and established committed credit lines with financial institutions. Combined, these funds total about JPY 100 billion. Therefore, I believe we are well prepared financially to deal with the situation at hand. And depending on what happens in the future, we are ready to respond flexibly by procuring more funds if necessary. To prevent infections and help stop the spread of the virus, the group's production plants have set UACJ group policies and are cooperating and complying with government directives in each country where they operate. So far, they have not been affected in any major way. While giving first priority to the safety of employees, we are doing everything we can to ensure that their employment continues. Now I would like to discuss our progress in restructuring during fiscal 2019. This slide shows our restructuring road map and the progress we have made up until now. The red line running through each item indicates our current position in the first quarter of fiscal 2020. We have been taking steps to centralize production, implement and increase returns on large-scale investments, withdraw from unprofitable and noncore businesses, and enhance corporate governance and management. Overall, these measures have been proceeding as planned. In the United States, the start-up of a new cold rolling line at Tri-Arrows Aluminum has been slightly delayed due to the COVID-19 situation, but this will have no impact on sales. The company will enter the next phase from now, starting production in a stepwise manner in cooperation with customers. In Japan, we have been taking steps to centralize production. Specifically, we are ending some manufacturing operations at Fukaya Works and closing down Nikko Works. Furthermore, now that a new extrusion press has started up at Nagoya Works, we are preparing to shut down our older presses at other facilities. Through all of these measures, we will continue raising productivity going forward. In Thailand, large-scale investment in UACJ Thailand has led to improved profitability. In fiscal 2019, UACJ Thailand posted an ordinary loss before inventory valuation of JPY 4.8 billion. Nevertheless, after new equipment began fully operating in the third quarter, it boosted production and sales volume in line with plans. Looking ahead, we expect its annual sales volume to increase from 196,000 tons in fiscal 2019 to over 320,000 tons by fiscal 2022. The company is working very hard to achieve its ordinary income target of JPY 2.5 billion by fiscal 2022. In the United States, Tri-Arrows Aluminum is also improving profitability. It has boosted sales volume on the back of robust demand for aluminum can stock and greatly reduced costs by making use of scrap aluminum. Consequently, ordinary income has been growing, and the company is on track to reaching its fiscal 2022 target. Meanwhile, we have been withdrawing from unprofitable and noncore businesses, and we'll continue with such measures in the future. More information about the items shown here is available in our news releases issued this year. As you can see on this slide, the company has reduced the number of executive officers and internal directors as a means to speed up decision-making and create a leaner and more efficient management team. Next, I would like to explain how we have reorganized our corporate structure. We overhauled UACJ's corporate departmental structure with a view to strengthen corporate governance across the group's global operations. Under our new structure, corporate departments will be integrally involved in group-wide management, not only of the flat-rolled products business, but also other businesses. They will also work to enhance corporate governance. Moreover, with the establishment of our new sustainability promotion department and the management strategy headquarters, I believe this new system will step up environmental initiatives and social contributions in the future. Finally, I would like to tell you how we have redefined our corporate philosophy. For UACJ to continue restructuring in the future, it will be important for all members of the group to share the same vision. We redefined our corporate philosophy with that in mind. When we set out to define it, 6 years had passed since the establishment of UACJ through the merger of 2 companies with very long histories. We studied the management principles and credos of our predecessors of those founding companies, and gained feedback from around 400 employees about what principles should guide our work going forward. We then took all of those things into account and expressed them as 3 values. Based on these 3 values, we established the UACJ Way. While reaffirming that safety and compliance are our foundations as a manufacturer, we promoted the UACJ Way across the entire group, including through our midterm management plan. In doing so, we can depend on it to provide guidance when we experience new challenges or difficulties in the years ahead. By practicing our new corporate philosophy, we hope to contribute to the sustainability of communities around the world as we work toward accomplishing various related goals, including the UN's Sustainable Development Goals, as a corporate group that conducts business with a long-term outlook. We also want to foster our own unique corporate culture so that we can meet the expectations of the group's stakeholders. The remaining slides provide reference data, but I will skip them and end my presentation here. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]