UACJ Corporation (5741) Earnings Call Transcript & Summary

It is time, so we would like to begin the call. Thank you very much for taking time out of your busy schedule to attend UACJ briefing on fiscal year 2020 results and third midterm management plan. We will use the material posted on our website during this briefing. Please look at our website if you have not prepared the material in front of you. Information, including future projections, may be referred to during the briefing, but they are only our own projections at this point. Please note that the actual results may materially differ from these projections due to various factors. Let me introduce the participants today: Miyuki Ishihara, representative director and President; Teruo Kawashima, director and Managing Executive Officer and Chief Executive of Finance and Accounting Division; Shinji Tanaka, Executive Officer and Chief Executive of Corporate Strategic Restructuring Officer; [ Joji Kumamoto ], Chief Executive of Corporate Strategy Division. I am Kozo Okada, General Manager of IR Department, Finance and Accounting Division; and will serve as moderator. Now Kawashima will explain the results for fiscal year 2020 and full year forecast for fiscal year 2021 announced today, followed by Ishihara, who will explain our third midterm management plan. Please take a look at the financial results material projected on the screen as you listen. [Operator Instructions] We will answer your questions one by one in the Q&A session in the second half of this briefing. Now Mr. Kawashima, please.

Let me explain our financial results. Thank you very much for attending our results briefing today. I will explain the results for fiscal year 2020 and the forecasts for fiscal year 2021. Please turn to Page 4. This shows the results for fiscal year 2020. Net sales was JPY 569.8 billion, down JPY 45.3 billion year-on-year. And operating income was JPY 11.1 billion, up by JPY 1 billion year-on-year. Ordinary income before inventory valuation impact was JPY 6.2 billion, down JPY 3.6 billion, but ordinary income was JPY 6 billion, up JPY 2.2 billion year-on-year. Net loss was JPY 3.3 billion, and adjusted EBITDA was JPY 44.7 billion. The main factors behind lower income were the decline in aluminum ingot price and foreign exchange rate, which were about JPY 18 billion. On the other hand, negative impact on volume from COVID-19 was JPY 11.6 billion. The impact from the sale of our copper tube business at the end of September 2019 was JPY 16 billion. In total, our income declined by approximately JPY 45 billion. Profit and loss will be explained later. Please turn to Page 6. This shows the status of our flat-rolled products. The total volume, shown at the bottom, is 1,113,000 tons, an increase of 3,000 tons or basically flat year-on-year. The breakdown is can stock 693,000 tons, up 34,000 tons. On the other hand, automotive materials is down by 29,000 tons. Can stock in Japan slightly declined due to COVID-19. On the other hand, UATH, which I will explain later, was positive year-on-year despite COVID-19. And TAA grew significantly. Therefore, can stock increased by 34,000 tons in total. IT increased, thanks to the strong PC demand with remote working. And automotive materials decreased by 29,000 tons due to the COVID-19 impact in the first half, although the automobile demand recovered in the second half. That is the overview of our flat-rolled products. Please turn to Page 7. This shows our consolidated ordinary income. It increased by JPY 2.2 billion from JPY 3.8 billion to JPY 6 billion. Let me explain the main factors. Inventory valuation was plus JPY 5.8 billion. It was negative JPY 6 billion last year and JPY 2 billion this year, so profit and loss improved by JPY 5.8 billion. Other big positive factors were UATH performance improvement excluding COVID-19 and inventory valuation. Third phase construction was completed in fall of 2019, and the operations started. Strong performance of TAA and decline in energy costs also contributed. On the other hand, COVID-19 impact was JPY 12.1 billion. As shown in the right box, domestic sales and utilization ratio combined was JPY 7.2 billion. And UATH hit the bottom due to COVID-19 in June, July and August. Whitehall, UWH, declined due to the plant lockdown in the U.S. in April and May. Therefore, the negative impact was JPY 12.1 billion. Please turn to Page 8. In February, the forecast of the ordinary income was JPY 1 billion, but it turned out to be JPY 6 billion, which was JPY 5 billion or so favorable. And this is the analysis of that. There are 2 points. First, inventory valuation was positive with an increase in ingot price. And the second is TAA performance improvement which is positive by JPY 1.8 billion. So the ordinary income went up to JPY 6 billion at full year. Page 10, cash flow. Cash flow is shown on the left. Cash flow from operations was JPY 38.6 billion, while capital expenditures in cash base was JPY 23.1 billion. The balance will be free cash flow of JPY 17.6 billion. There are dividends and other financing cash flows, so as a result, interest-bearing debt was reduced by JPY 8.2 billion, which is shown on the very right bar graphs. 2 years ago, it was JPY 375.1 billion, and last year, it was JPY 344 billion. This year, despite the COVID-19 impact, interest-bearing debt was reduced by JPY 8.2 billion. In the past 3 years, about JPY 40 billion debt was reduced. Page 11 describes the situation in Thailand, as I mentioned. Monthly development is shown in bar graphs. Between June to September, production volume decline, impacted by COVID-19, hit the bottom. It started to recover gradually, and from January to March, we reached full production. Currently, over 320,000 tons plus alpha per year is our full production capacity. And at the end of the first quarter, the full capacity production continues. Page 12 is about the situation of TAA. Demand for can stock in the U.S. remained robust, so high-level sales has been maintained. Ordinary income was JPY 10.8 billion. The impact of inventory valuation is significant, but ordinary income even before inventory valuation impact was JPY 8.9 billion, so in comparison to fiscal year 2019, as a new cold rolling mill started its operation last April, we were able to book particularly good numbers. So far, I have covered the term which ended. Now full year forecasts for fiscal year 2021. Please turn to Page 14. Net sales is expected to be JPY 660 billion, up by JPY 90 billion year-on-year. Consolidated operating income, JPY 22 billion, which is up by about JPY 10.9 billion year-over-year. Ordinary income before inventory valuation impact is expected to be JPY 9.9 billion, up by JPY 3.7 billion. Ordinary income, JPY 16 billion, up by JPY 10 billion. Net income of JPY 8 billion is forecasted. We caused inconveniences in fiscal year 2020, as there was no dividend, but for fiscal year 2021, we plan to resume dividend payment of JPY 40 per share. Now please turn to Page 16 to talk about flat-rolled products. Assumption for sales for fiscal year 2021 forecast is described. In total, it is forecasted to be 1,328,000, which significantly increased by 215,000. The big increase is expected in can stock, up by 153,000 -- 152,000. As I mentioned, in Thailand work, it reached full production. And full production will continue, thanks to robust demand in can, so mainly in UATH in Thailand and in the U.S. sales volume is expected to increase by around 150,000 tons. Most of contracts with customers for the increase has been given, so the accuracy of the number is high. In addition, demand for automotive materials is recovering, so the volume is expected to grow by 32,000 tons, while demand for IT in 2020 was very brisk, which will go back to normal. And so the volume will go down by 6,000 tons. In total, we expect the volume will grow by 215,000 tons, mainly in overseas. To highlight the analysis of consolidated ordinary income, please turn to Page 17. The actual of fiscal year 2020 was JPY 6 billion, while fiscal year 2021 forecast stands at JPY 16 billion, which is up by JPY 10 billion. Big impact is derived from inventory valuation that is JPY 6.3 billion. Assumption for LME is $2,100. Based on this, inventory valuation will go up by about JPY 6 billion. Biggest portion comprising this valuation is due to UATH, [ where ] roughly 320,000 tons sales contract per year has been awarded, so the impact is an increase of JPY 4.9 billion. Sales in Japan, in particular flat-rolled product sales, will come back as a result of recovery from COVID-19, so we forecast JPY 3.7 billion as a difference related to sales. On the other hand, minus JPY 2.2 billion is a change in TAA performances. While crude oil price was assumed at $63, the oil price is expected to increase, generating the difference in unit energy costs of minus JPY 2.2 billion. TAA's business is risked, but raw material supply price in fiscal year 2020 was very favorable or too good versus usual years, which will return to normal in fiscal year 2021. That is why we foresee minus JPY 2.2 billion impact in fiscal year 2021. As a result, the consolidated ordinary income is expected to be JPY 16 billion. Now please turn to Page 18 for CapEx. Capital investment for fiscal year 2021 is forecasted at JPY 29.8 billion, and depreciation and amortization are JPY 34.9 billion, so we will be generating about JPY 5 billion funds. That's all for the financial results.

Next, President Ishihara will explain the third midterm management plan. President Ishihara, please.

I would like to explain the third midterm management plan. Page 1 shows the contents. I will explain our long-term management vision, UACJ vision 2030, followed by the look back on the previous midterm management plan and third midterm management plan. Page 2, please. I will explain our long-term management plan one by one. Page 3, please. This is our group philosophy we announced as part of our structural reform in 2020, and we redefined it this time. It expresses our commitment to contribute to a richer society, leveraging our technology; the society and the world that can be created, particularly with aluminum; and respect for diversity and values that all our executives and staffs have embraced and will cherish going forward. The code of conduct that must be followed by all employees is established as UACJ Way. Please turn to Page 4. The values we uphold is expanding the possibilities of aluminum with skills and techniques honed by UACJ over the last 100 years. We considered what we must do going forward based on our pride and confidence in the track record demonstrated throughout our history. We came up with the tagline "aluminum lightens the world" in order to express our aspiration, to articulate our goal along with this new philosophy. Next page shows the extent of our contribution under this vision, how UACJ wants to contribute to the society in 2030 anticipated from the external environment as we aim to realize our corporate philosophy, contribution through the growth sectors and growth markets, contribution with materials plus alpha, contribution through new business domains and business models and contribution through CO2 reduction. We set up these 4 areas of contribution as UACJ. Next page shows the image of our contribution to solve social issues by pursuing added value through wide variety of aluminum machining capabilities of UACJ Group based on the supporting foundations, including technology and human resources, as our long-term management vision. We examined by 3 years, starting from 2021, by back casting from our vision in 2030. In order to tap into new business domains, we launched vision committee, consisting of 25 mid-level employees who will be playing major roles in the group in 10 years; and decided on our contribution in 3 domains, namely mobility, lifestyle/health care and environment/energy. We will ascertain the specific businesses where we can contribute going forward. The executives and staffs in our group companies in Japan and abroad launched workshops, listened to external experts' views and selected 6 materialities as UACJ Group's key priorities to solve social issues. We selected 4 from SDGs and linked them to our goal for 2030. Please turn to Page 7. We expressed where and when we will make the 4 contributions -- business domain and value creation by 2030. We will expand our added-value domain, including recycling and machining in automotive components business during this midterm management plan period; and work to realize plus-alpha domains by 2030 that is possible because we are a unique company with business domains including flat-rolled products, foil, extrusion, casting and forging and automotive components. In addition, we will demonstrate synergies between business departments, for example, automotive components business realized through extrusion and precision machine components, to expand our business domains through new combinations. Please turn to Page 8. This shows the relationship of the new business domains based on the profile of aluminum as raw material and our seeds to expand the possibilities of aluminum to the fullest. My message here is that we will fully leverage our seeds and examine new business domains. Page 9 shows how we will utilize our strengths to create the value of materials plus alpha more specifically. We will utilize our abundant expertise and manufacturing know-how on aluminum as well as our business foundations cultivated over the years to realize added values, including materials and processing, data utilization and recycling. Page 10 shows our financial targets. Fiscal year 2030 target is net sales of JPY 800 billion or over and operating margin of 6% or above. We will aim to enhance profit margins and capital efficiency by capturing demand in growth markets and sectors as well as scaling and plus-alpha added value through new business creation. Page 11 shows our nonfinancial targets. In 6 materiality areas, we came up with evaluation indices and targets. In response to climate change in particular, we established fiscal year 2030 targets to achieve carbon neutral by 2050. Please turn to Page 12. We will build a road map for the 4 areas shown here as the supporting foundation to realize vision 2030, and we'll develop the foundation. Next is the look back on the previous midterm management plan. Please turn to Page 14. The underlying basis of this look back is the characteristic of our business. Rolled aluminum business is a massive, equipment-intensive industry which takes a very long time, at least 5 years, to go from the initial investment planning, construction, start of production to maximization of production capacity. It took 10 years even at our Fukui Works, which is the state-of-the-art aluminum rolling plant in Japan. Securing long-term investment capacity and human resources to achieve such growth was the purpose and significance of the merger and establishment of UACJ in October 2013. Starting from the UATH first phase, we have completed making major upfront investment in 2019 such as enhancement of TAA, establishment of line for automotive materials in Fukui work. It was good that we were able to smoothly launch them under COVID-19 pandemic, and currently we are recouping our investment. Page 15 describes our achievement of financial targets. Unfortunately, in fiscal year 2020, the final year of the previous midterm plan, we were not able to achieve the financial targets. Main reasons for the difference between targets and the results were U.S.-China trade friction and COVID-19 and so on, but at the same time, internal management reform and profitability structural reform we undertook improved our numbers closer to our target. Next, I will talk about the third midterm management plan, on Page 17. As mentioned in vision 2030, this page shows the relationship between vision 2030 and the third midterm management plan. The 3 years is spent for realizing and strengthening the foundations for growth. The concept here is to complete structural reform and establish the foundation for achieving vision 2030. On Page 18, you see major policies in the vision 2030. They are to complete structural reforms, strengthen foundations for growth and contribute to achieve a lighter world. The time is limited today, so the details will be shared with you at the IR day meeting slated for June 8. I will run through them quickly. Page 19 describes third midterm management plan targets. Fiscal year 2023 financial indicators are shown here. Current ROE and ROIC are not at satisfactory levels. In the third midterm plan, we will lay foundation to realize the vision and aim to improve capital efficiency further. Nonfinancial targets are also described here. Page 20 is waterfall chart describing development of ordinary income target from fiscal year 2020 to fiscal year 2023. We aim to achieve JPY 25 billion through following measures: recover from COVID-19 pandemic, lower break-even point of domestic business and monetize past investment overseas. Impact of structural reform is expected to be JPY 18.5 billion, in comparison to the base year of fiscal year 2019. Next, please jump to Page 25. I will talk about the gap between JPY 21 billion and JPY 18.5 billion. The main theme of structural reform is enhancing earnings power. This shows a comparison between when the structural reforms were announced and the MMP. Almost all measures have been taken according to the plan. The underachievement of domestic performance number has been partly impacted by COVID-19. Especially for automotive materials, there was delay in the shift to aluminum. Or it was reverted to iron for flat-rolled products and extrusion products, including metal processing, partly due to COVID-19. It may take a little bit more time for them to shift to aluminum. Therefore, in order to fill this gap, we would like to take additional measures shown here. We would like to achieve these additional measures without fail and continue our effort to achieve our goals targeting fiscal year 2023, when we will be able to recover from COVID-19. Next, Page 29 explains expansion of added-value business against the backdrop of strengthening our foundations for growth. We will provide materials, plus something extra, to our existing and new customers in our current business and beyond. The challenge for us is providing environmental materials. Page 30 summarizes demand for can stock per region as foundations for growth. Thanks to the tailwind of plastic-free or PET-free movement, demand for can stock is expected to grow mainly in North America. Page 31 shows collaboration in flat-rolled products per region as foundations for growth. As global can stock demand grows, we can leverage our strength of being able to supply from 3 bases, including Japan, Thailand and North America. While North America market demand-supply situation is tight, our edge is that products can be supplied from multiple locations of Japan and Thailand. We will make maximum use of enhanced production capacity achieved through large investment to capture booming demand. The details of each business will be shared during the IR day presentation. Next, Page 38 is on the third major policy contributing to achieving a lighter world. Our new corporate philosophy describes aluminum is our passion. It inspires our work in building a better world. To realize this, we will engage in sustainable activities. As a major challenge, we will work on reducing carbon dioxide emissions from our entire product life cycle and whole supply chain, as mentioned earlier, in order to aspire for carbon neutral in 2050. The midterm plan period is a term for us to lay our foundation for this. Page 39 shows an example of a model of can stock recycling which we pursue globally. We plan to achieve similar cyclic closed recycling process in Japan, Thailand and the U.S. Through technology development and co-creation with stakeholders, including customers, recycling loop will be created not only for can stock but also for other areas. By so doing, we will make contribution to the world. Initiatives on ESG and enhancement of financial strength will be shared on IR day. Lastly, I will talk about shareholder returns policy on Page 45. Targeting the long-term total return ratio of 30% or more, we aim to pay a stable and continuous dividend with a target of 20% to 30% for the consolidated payout ratio. We aim to enhance value by securing certain profits and cash flows and engaging in dialogue with capital market to enhance shareholder value. That concludes my presentation explanation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]