UACJ Corporation (5741) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for waiting, and thank you very much for taking time out of your business schedule to participate in the financial results briefing for FY 2022 of UACJ Corporation. This briefing will be conducted using the briefing materials available on the UACJ Corporation website. If you do not have the materials at hand, please visit our website. This presentation may contain forward-looking statements, and such statements are based on our current expectations only. Please note that actual results may differ materially from these future projections due to a variety of factors. [Operator Instructions] Now let me introduce our company's attendees today. Miyuki Ishihara, Representative Director, President. Miyuki Ishihara.

This is Ishihara. Thank you for joining us today.

Teruo Kawashima, Director and Executive Vice President.

This is Kawashima. Thank you.

Shinji Tanaka, Director and Managing Executive Officer.

Here is Tanaka. Thank you.

Joji Kumamoto, Executive Officer, Chief Executive Corporate Strategy Division.

Here is Kumamoto. Thank you.

Haruhiro Iida, Executive Officer, Chief Executive, Finance and Accounting Division.

Here is Iida, thank you.

And I am Kaoru Ueda, General Manager, IR Finance Department. I will be the moderator today. Now President Ishihara would like to explain our business results for FY 2022 and our forecast for FY 2023. Please refer to the presentation materials. President Ishihara, please.

I will now explain our financial results based on the presentation materials. In FY 2022, net sales increased from the previous year, but ordinary income before inventory effect, which is our actual profit, decreased. In FY '23, we expect improvement coming from energy surcharge effect and auto-related demand recovery. In FY 2022, profit decreased compared to the previous year, mainly due to the significant impact of automobile production on all businesses, including plates and extrusion. As the domestic market, automotive-related businesses have been affected by the market to a large extent. Among them, volume of general purpose materials increased due to strong sales of air conditioner fin materials, et cetera. Overseas, sales of global can stock was strong. Overseas, both TAA in North America and UATH in Thailand increased their profits due to strong global demand for can stock. As to the effect of structural reform we worked on through FY '22, I will explain details. We believe that as a result of the reform, we have become more resilient and capable of quickly responding to changes in the external environment. Looking at our full year forecast for 2023, we expect that domestic automobile production will recover from the second half of the year. The disruption in automobile materials production in North America will be resolved, and we expect UWH, UACJ Automotive Whitehall Industries Inc. production in North America to return to profitability for the full year. We will implement the pricing scheme linked to the energy and additive metals markets on a global basis, as planned. And we expect the effects of this scheme to be manifested throughout the year in FY 2023. We will continue a review as new additional electricity and other cost will incur. The next section on how we will respond to changes in the external environment is about the details of the pricing scheme that I had just mentioned. There are no major changes. I will now start to present our business results for FY 2022. On Page 5, you will find a summary of our performance in FY 2022. Volume increased by 37,000 tons compared to the previous year. This was due to very strong sales of can stock in Thailand and North America. In general purpose materials, production of air conditioner fins for UATH in Thailand and for air conditioners in Japan grew as demand for air conditioners has been increasing worldwide. With some products, domestic demand has returned. Demand for printing plate materials in particular has been growing significantly. The automotive-related business, which includes automotive body panel materials, foil battery materials, extruded materials and processed products, has been a large decrease in demand due to supply chain disruptions in automotive, IT and semiconductor-related materials. Ordinary income before inventory effect was minus JPY 5.2 billion year-on-year. The factors for the profit decrease are as shown here. Performance figures are summarized on Page 6. Consolidated net sales were JPY 180 billion, an increase over the previous year. However, ordinary income before inventory valuation effect, which is the actual profit loss was JPY 16.1 billion, lower than the previous year. The rest of the figures are as indicated here. Page 7 shows net sales and operating income by segment. I will discuss flat-rolled products in detail later. And here, I would like to touch upon the precision-machined components and related business. Sales increased due to strong sales of air conditioning-related products and new launches of automotive-related products as well as the effect of the weaker yen against U.S. dollar. However, operating income fell short of the previous year's level due to an increase in labor costs associated with inflation in North America and higher energy costs. Page 8 shows sales of flat-rolled products by product type. As mentioned earlier, demand for can stock has been increasing due in part to the global increase in demand for aluminum can stock. However, the demand for foil, IT materials and automotive materials, which are largely included in automotive-related materials, has been significantly decreasing. That said, total volume increased by 37,000 tons with overseas ratio edging up. Page 9 is the waterfall chart showing the change between 2021 and 2022. This section mainly explains the situation how the actual profit of JPY 21.3 billion turned to be JPY 16.1 billion in FY '22. Inventory impact deteriorated by JPY 38.4 billion due to the decline in ingot prices while the increase was due to the improved performance of UATH Thailand, improved performance of TAA and increases related to domestic sales, excluding automobile-related business. Price increase in energy and additive metals added JPY 5.4 billion to the total. This is mainly due to domestic sales-related differences. Other is JPY 1.3 billion. The factors behind the decrease in profit include a JPY 2.6 billion decrease in UWH in automotive parts, JPY 3.1 billion decrease in domestic capacity utilization and JPY 15.2 billion decrease due to energy and additive metal price hikes. As shown here, the JPY 15.2 billion increase in the price of energy and metal additives was partly recovered through negotiations on energy surcharges and other measures, which started in the first half, resulting in a pass-through of increased cost of JPY 5.4 billion in the second half. This means that we were able to recover about a half year worth cost hikes. As I mentioned earlier, in FY '23 the effect will be realized from the beginning of the year. There were very sharp price fluctuations caused by the Russian-Ukraine issue in February 2022. The impact was felt in FY '22. The impact of the JPY 10 billion was significant, if I may say so. Page 10 shows the change in the forecast from February. And as we are a make-to-order company, we start production after receiving an official orders from our customers, but there is a large difference between what was produced and what was actually delivered. Due to large gaps in February and March, the actual ordinary income turned out to be JPY 16.1 billion against the forecast of JPY 20 billion. Page 11 shows the consolidated balance sheet and fund statement. In particular, interest-bearing debt was reduced by a total of JPY 2.8 billion as an increase in short-term debt was offset by a decrease in long-term debt. For the period of December 2020 to March 2023, interest-bearing debt was reduced by a total of JPY 35 billion. As shown in the funds statement, free cash flow resulted in a positive JPY 25.7 billion. More details are on Page 12. Please look at consolidated cash flow trend or interest-bearing debt, D/E ratio graphs. In 2022, cash flow improved, interest-bearing debt decreased and D/E ratio improved to 1.3x. The status of each region is explained, starting on Page 13. As for Thailand, we have been able to provide can stock to various regions, as shown in the picture on the left, in order to meet a very strong global demand for can stock. Although the current situation is sluggish due to supply chain disruptions, global can materials are expected to grow in mid- to long term. We have completed material certifications with new customers, and we expect growth to continue in FY 2023 and beyond. In the U.S., as shown on Page 15, TAA is also affected by inventory adjustment at the moment, but we expect this to be resolved in FY 2023 and thereafter. And we anticipate stronger demand in the long term. Page 15 shows the situation of UWH in North America. Although automobile production is currently in turmoil due to the shortage of chips and so on, the automobile production is very strong, and we expect our North America business to grow in FY '23. As for UWH activities, we are negotiating with existing customers for guarantees to compensate for sales fluctuations, and we are also steadily working on automation and productivity improvement to reduce costs. From Page 16, I will explain about structural reform. Page 17 shows objectives and measures since the start of the structural reform. The results are shown in the Gantt chart on Page 18. Progress was made almost as planned. As a result of the structural reform, we are now in a position to respond quickly to changes in the external environment. In response to the sharp price hikes in energy and additive metals that occurred in the first half of 2022, we introduced a surcharge system to quickly reform our pricing structure. As this example shows, we have improved our ability to make necessary actions. Page 19 describes the breakeven point for flat-rolled product business. It can be seen that the foundation for improving earning capacity has been further advanced through cost reductions. Page 20 shows the numerical effect of JPY 21 billion. There were pluses and minuses by item. But all in all, we believe we have achieved JPY 21 billion. Page 21 is a summary of the results of the structural reforms. We will explain more in detail on the IR Day, so please refer to them. I would now like to explain our full year business forecast for FY 2023. First, this page shows the consolidated ordinary income before metal price lag for FY 2023, which is JPY 23 billion. In response to this JPY 23 billion, I would like to present our perception of the business environment once again. This slide shows the changes in sales and our actual profit ordinary income before metal price lag since FY 2018. When I assumed the position of President, in 2018, trade friction between the U.S. and China and the slowdown of the Chinese economy led to a significant decrease in demand in the main flat-rolled product, such as IT materials and thick plates. In conjunction with this, our earning power was at a low level, partly due to the upfront investment in domestic and overseas subsidiaries and facilities. However, with the structural reforms that we began in the second half of 2019 and completed in FY 2022, we believe that our earning power has greatly improved over the following 3 years, as indicated by the red arrows, by implementing the structural reforms and making changes ourselves. We are also feeling a strong response to our long-standing challenge of establishing a corporate structure that can respond quickly to the external environment. As mentioned earlier, we were able to respond quickly to the sharp rise in energy prices that began in FY '22, which demonstrates our ability. On Page 24, we have once again reviewed the concept in this mid-term plan as FY '23 is the final year of third mid-term plan. In terms of establishing a foundation for future growth after completing structural reform and realization of our vision for 2030, we believe that we can increase our corporate value by expanding the circular economy and increasing customer value, as shown in the picture on the left, and combining these with UACJ's strength. We are working to solve the problems of our customers and society through the creation of a circular economy for aluminum by expanding the scope of aluminum material utilization and at the same time, through aluminum as material that can be used to build a recycling-oriented supply chain. We intend to successfully seize the opportunity of building a circular economy to expand materials plus alternative business model, while at the same time, enhancing our corporate value. Regarding the market environment, as shown on Page 25, we expect that the situation from FY '22 will continue through the first half of FY '23 for the company as a whole. However, we expect that the supply chain disruptions in automotive-related materials and the inventory impact of North America can stock will be eliminated, and the market environment will recover. In addition, demand for general purpose materials such as thick plate, air conditioner fin materials and printing plate materials will be strong in the medium to long term, and there is a certain increase in air conditioner fin materials in the near future. We would like to take advantage of our strength in these areas. You can see this assumption in numbers on Page 26. So consolidated net sales are expected JPY 970 billion. Ordinary income before price lag is expected to be JPY 23 billion. Both of them are projected to increase from the FY '22 actual results to the FY '23 forecast. Although it says a Japanese GAAP here, I will discuss IFRS international standards later. So I will talk about results based on J-GAAP here. Page 27 shows net sales and operating income by segment. As you can see, we expect demand for flat-rolled products to grow significantly. This also indicates that the recovery in demand for automotive-related products I mentioned earlier will emerge, and we believe that this is highly profitable for the full year performance figure on Page 26. Page 28 is for your reference. Page 29 shows a comparison of ordinary income before metal price lag between FY '22 and FY '23 using Japanese GAAP. This metal price lag is expected to increase JPY 5.4 billion. The increase is mainly due to an improvement in UATH and improvement in UWH Whitehall's profitability and improvement in differences related to domestic sales and an improvement in the price pass-through of energy and additive materials. The decrease in income was due to lower metal benefits and other factors in TAA's results. The impact of energy and additive metal costs includes the new rise in electricity prices we were requested. We plan to take actions so that this can be steadily reflected [ in all margins ], et cetera. But the real negative amount is about this much. There are other factors for decrease. In each of these factors, there are delays over the settlement period or additional expenses, et cetera. But we are working to firmly pass through these cost to prices or improve them, and we are projecting an actual profit of JPY 23 billion against FY '22 profit of JPY 16.1 billion. Page 30 is a comparison for -- after the transition to IFRS, which I will discuss later on. As shown in the chart, capital investment is limited to approximately 80% of depreciation over a 3-year period. On Page 32, we show the shareholder returns. The annual dividend of JPY 85 per share will remain unchanged. In addition, we plan to pay 2 dividends, an interim and year-end dividend starting in FY 2023. In order to enhance the value of our shareholders, we will continue to maintain a dialogue with the capital market, along with securing reliable profit and cash flow. I will be discussing international financial reporting standards, IFRS, starting on Page 33. In response to the globalization of our group's business, we have decided to adopt IFRS as our accounting standard. As shown in the graph, the ratio of overseas net sales and invested capital to total sales and invested capital of our group has been increasing every year. The number is expected to increase further in the future. Therefore, we will improve our accounting and information disclosure systems with a further expansion of our global corporate activities in mind. By adopting IFRS, we hope that more investors will have a better understanding of our company. On Page 35, we compare what changes will occur in transitioning from Japanese GAAP to IFRS. This section shows the change in figures for operating income before metal price lag from Japanese GAAP to IFRS. This is for your reference. From Page 36 onwards, I will show you our sustainability initiatives. As for the relationship between our corporate philosophy and sustainability, we will develop a variety of activities with the aim of passing down a better world over the next century. On Page 38, it's Vision 2030, which describes how UACJ Group will contribute to the world in 2030 while considering by backcasting what kind of activities will be performed in 3 domains of mobility, lifestyle, health care and environment energy. As a result, as you can see on Page 39, the UACJ Group is committed to building a circular economy for aluminum by taking advantage of the fact that aluminum can be recycled, which is one of the social issues and to becoming the heart of such a circular economy. As shown in the figure, the solid red line indicates that we are entering the area from flat-rolled products to the manufacturing of aluminum cans, which is a subprocess of flat-rolled products through joint development with our customers. We will also collaborate with other companies to collect and reprocess used aluminum cans, or UBCs, which are returned for reuse, and we will incorporate the so-called upper process of materials, Scope 3 area into our area while collaborating with other companies, converting both upper and lower processes. Please see Page 40 for concrete examples. I will show you 3 specific examples. Page 41 describes our closed-loop recycling promotion, which we collaborate with Toyo Seikan Group Holdings in our lower process. In order to promote closed-loop recycling of used aluminum cans, we will develop cans that are easy to recycle by organically utilizing the technologies and know-how of both companies in the areas of materials and processing. As a result, we expect that the areas in which aluminum is used to expand more and increase in volume. Page 42 is the area of raw materials, the upper process of materials. We will contribute to the realization of recycling-oriented society by collaborating with Yamaichi Metal Corp. on a melting and recycling system for used cans or so-called UBCs. More than 90% of the aluminum cans consumed in Japan are recovered as raw materials, but unfortunately, the percentage of closed loop recycling as a can-to-can is still less than 70%. In addition, those that are not used domestically are exported overseas. The creation of this dissolving and recycling system will increase the amount of UBCs used and the can-to-can ratio, but we can increase the ratio of aluminum cans that are converted to aluminum cans. And if UBCs can stay in the domestic realm and mitigate exports overseas, they will make a significant contribution to the establishment of a recycling chain in Japan. Page 43 shows the projects to make the majority of manufacturing sites in Japan or 17 sites become factories using 100% renewable electricity. This is a domain in the so-called Scope 2 area. But by making our factory base, which were close to the final products, low CO2 emission factories, our customers can easily choose our product. This will lead to the contribution that we can reduce carbon dioxide emissions of customers and make the factory an easy choice for our customers. By reducing carbon dioxide emissions at our 17 sites to 0 on Scope 2, the UACJ Group as a whole will reduce carbon dioxide emissions by approximately 20% on Scope 2. Next and last page is Page 44. I will discuss our response to capital efficiency as a management indicator and how to achieve stock price conscious management. In addition to strengthening capital efficiency management, we will strive to improve corporate value by enhancing dialogue with the capital market. Since 2020, we have incorporated capital efficiency as an indicator for business management and have actively engaged in dialogue with our shareholders and investors. The KPIs for financial indicators in our third mid-term management plan and long-term vision, UACJ Vision 2030, as shown in this chart, namely ROC, ROIC and D/E ratio. As an example of our most recent efforts in capital efficiency management, we have launched the project to improve our cash conversion cycle, CCC. We will continue to enhance capital efficiency management, bearing mind of the cost of capital. And at the same time, we will work to improve our corporate value by building a circular supply chain for aluminum materials or a circular economy in aluminum, coupled with the expansion of the areas where aluminum materials are used. Our future schedule is shown on Page 45. IR Day will be held on June 7 from 9 a.m. to 12 p.m. This will be an online format. As in the last year, we will have our key managers from our major divisions presenting on the progress of the mid-term management plan. The heads of TAA North America and UWH Whitehall North America will also participate and explain business growth. Both are planning to attend from Tokyo. We will send our invitation and hope you will join us. And this concludes my presentation.

That concludes our explanation. We are now ready to take your questions.

[Operator Instructions] First question. Mr. Yamaguchi from SMBC Nikko Securities, please.

I am Yamaguchi. Please allow me to ask you a few questions. I understand that you are switching to IFRS. I would like to ask you to disclose the adjusted operating income, excluding extraordinary profit loss items, et cetera, as Hitachi does, in terms of total profit and segment profit. Also in the case of your company, the impact of inventory is very large. So it will be very easy to understand if you could explain that separately as well. This is a request. That's my first point. Secondly, I'm very sorry to ask always the same question. Since the GAAP figures are shown this time, I would like you to explain how you are forecasting the profit of TAA, UATH and UWH for this fiscal year, including the impact of inventory, if possible. As this is the final year of the mid-term plan, you are targeting a few more billions of yen as of September 2019. At this stage, it appears that you may have fallen a little short of that target. Is it correct to say that this is because adjustments centered on can stock continuing, electricity rates are rising further, and the recovery of automobile production is lagging behind? And also investors are looking at UWH with a somewhat skeptical eye, but it seems that you expect to see some improvements. Could you please talk about how probable it is that you actually improve UWH? What will be the catalyst to make that happen? Please answer these 3 questions.

Kawashima-san takes up your first comment on the IFRS.

Here is Kawashima. Actually, we have been thinking about what you have requested as well, and we will disclose the breakdown in a way that facilitates understanding. As to profit forecast. Iida-san, please.

On IFRS basis, I would prefer that basis, if possible. Let's start with UATH. Net sales, JPY 187.5 billion; operating income, JPY 5.5 billion; ordinary income before inventory effect, JPY 3.3 billion; and ordinary income is also JPY 3.3 billion.

You mean 0?

It means that inventory effect is 0. Now TAA, net sales, JPY 286.7 billion; operating income, JPY 16.3 billion; ordinary income before inventory effect, JPY 9.7 billion; ordinary income here is also JPY 9.7 billion since we expect 0 inventory effect. And finally, UWH, net sales, JPY 43.5 billion; operating income, JPY 2.2 billion; ordinary income before inventory effect is plus JPY 0.6 billion. Ordinary income is plus JPY 2.7 billion, and that is all. Thank you very much.

Moving on to your third point, you mentioned that we might be short by about JPY 1 billion in the final year of the mid-term plan. I think you have covered almost all the factors we find shortfall. It is mainly the impact during the second half of 2022, continuing into the first half of 2023. The primary reason for this is that the automobile related impact is expected to continue in the first half of '23. And I think this is the reason why we are forecasting a little conservatively. The situation for can stock will recover. However, although automobile-related materials as well as thick plates were originally expected to recover in FY '23, demand for thick plates is now expected to be sluggish or decrease until around FY '24. This is the background as Mr. Yamaguchi was referring to. As for UWH, which you said you were looking at retrospectively, we are discussing this internally actually. As I mentioned earlier, our company is based on make-to-order production. So we start various types of production according to our customers and official orders. UWH is centering around automobile materials and parts, and there are impacts coming from the gap between customers and official orders and actual deliveries. In the second half of FY 2022, there was a considerable gap between the quantity of customers and official orders and the quantity of parts they took in. However, since around the end of FY 2022, the gap between the customers and official orders and actual taking volume has been decreasing. And we expect that customers' production forecast for the future will also be firm from the first half of FY 2023. For those customers who do not have good track record, we are negotiating with them to pass on the cost of production to our prices as a kind of guarantee since we have invested to produce products for them. As for UWH, we have had 2 bad performance so far, but I think we are on track to achieve a solid figure in terms of the plan. And that is all.