UACJ Corporation (5741) Earnings Call Transcript & Summary

Let me now introduce our company's attendees today. This is Miyuki Ishihara, Chairman of the Board. Mr. Ishihara, thank you. This is Representative Director, President, Shinji Tanaka.

My name is Tanaka. Thank you for your cooperation.

This is Teruo Kawashima, Director, Executive Vice President.

My name is Kawashima. Thank you.

This is Joji Kumamoto, Executive Officer, Director, Managing Executive Officer.

I'm Kumamoto. Thank you.

This is Kozo Okada, Executive Officer, Chief Executive, Finance and Accounting Division. This is Midori Narita, Executive Officer, Chief Executive, Corporate Sustainability Division. Hello. I am Kaoru Ueda, General Manager, IR Finance Department, and I will be your moderator today. Thank you for your cooperation. So Ishihara will explain the results of FY 2023, which we announced today, and Kawashima will explain the forecast for FY 2024. Please take a look at the presentation materials. Mr. Ishihara, please.

So I will start from Page 1. Before I explain the financial results, I'd like to start with some general points. We were able to end FY 2023 with a significant JPY 22.1 billion increase in operating income over the previous year. I would like to thank everyone for their support. In Japan, the surcharge pricing system introduced in the second half of FY 2022 to reflect searching energy and additive metal prices in product prices contributed throughout the year, while structural reforms implemented until March 2023 improved the management structure. As a result, business profit increased despite a difficult business environment. TAA also posted an increase in earnings by increasing margins and reducing costs despite very difficult market conditions. And at the same time, UWH also achieved a recovery in order volumes, resulting in an improvement in profitability. For FY 2024, we have projected a full year business profit of JPY 43.5 billion, anticipating an increase in sales in light of a gradual turnaround in the business environment in Japan. With payout ratio of at least 30% of net income, we are planning to pay JPY 100 per share annual dividend for FY 2024. Kawashima will later provide a detailed report on our plans for FY 2024. On Page 4, you will see the business profit, volume and factors behind the increase in profit. The major factors contributing to the increase in profit were the effect of price revisions and improvement in manufacturing costs, which led to a significant increase in the profit margin for Japan and TAA. In addition to a recovery in order volumes, UWH benefited greatly from cost reductions. The figures are shown on Page 5. Compared to FY 2022, the results for FY '23 show an increase of JPY 22.1 billion in business profit, an increase of JPY 15.2 billion in net income. Please refer to Page 6, which shows the change in volume. Page 7 shows a waterfall analysis of business profit comparing FY '22 and FY '23. The increase in profit was due in particular to a large increase in profit from TAA, which was greatly influenced by a temporary change in supply and demand and other factors include the profit from UWH, domestic sales and the impact of energy and additive metal prices. Page 8 shows a comparison with the February forecast. Temporary demand increased for TAA, which lasted for 3 months contributed. Page 9 shows the consolidated balance sheet in which we have reduced inventories by JPY 40.8 billion toward the end of the period, which I believe is a major achievement. The consolidated cash flow on Page 10 shows a JPY 58.7 billion increase in free cash flow and the ratio of 1.2x, which is lower than the target of 1.2x as set in the third medium-term management plan. The individual business conditions are shown from Page 11 onwards. When UATH was established, our targets were the Southeast ASEAN region, the Middle East, India and Africa. Sales activities in these regions are progressing smoothly. And as a result, business profit is increasing. In TAA, as shown on Page 12, the inventory volume for the entire supply chain of beverage cans and can stock began to show some signs of optimization. TAA was able to respond quickly to temporary fluctuations in demand. And in the fourth quarter of 2024, we were able to achieve a significant increase over the previous year. Page 13. In the UWH business, the automotive industry itself has been suffering from a severe production disruption due to the shortage of semiconductors in North America, but this has been resolved and sales are on the way to a significant recovery. In addition to the improvement in sales, cost reduction measures contributed to the improvement in profitability. And we also made efforts to improve profitability by negotiating prices with customers who had reduced volumes. In the following pages, we will also introduce our sustainability initiatives. I would like to report on our achievements in FY '23. Page 15 shows our corporate philosophy and basic sustainability policy. As you can see here, on the new size of the compass, we are committed to a beautiful and prosperous planet for a long-lasting future carbon-neutral, nature-positive, and circular economy initiatives. And on the south side of the compass toward a healthy and harmonial society where everyone can feel happy. We will work toward well-being and develop UACJ for aluminum and tomorrow. On Page 16, you will find the list of our activities in FY 2023. If you take a look at the details, you will see that we received very high external evaluations. We are very pleased that our activities have been evaluated not only internally but also externally. UACJ has become to be known as an aluminum company or a company with high social values. On Page 17 and 18, I would like to report on some specific examples. One is horizontal recycling of aluminum cans and strengthening of supply chain. This is to further promote recycling by making friends and collaborators. In addition, on Page 18, we were selected for the first time as a name for healthy management in FY 2024 and the only company in the non-ferrous metals sector to be so selected. Through these activities, we will continue to strive to be a company that is valuable to the society. That's all I have. Thank you.

Now Kawashima explains FY 2024 forecast.

On Page 20, we have written the market reasons for Japan, the U.S. and Southeast Asia. In the main can stock market, we expect the Japanese market to remain mostly flattish. We also expect the market for thick plates and semiconductors will recover from the second half of the current fiscal year. In North America, as mentioned earlier, inventory adjustment has been going on for about 1.5 years, but it has finally been completed this year, and we believe that we are now at cruising speed. On Page 21 is the forecast of profit and loss for FY 2024. First of all, as an assumption, the fulmaking business is still under discussion among the parties concerned. So we have included the figures for 2024 as a consolidated subsidiary. The forecast is based on the assumptions of LME $2,300 and JPY 145 per dollar exchange rate. As you can see on Page 21, we are projecting net sales of JPY 900 billion and business profit of JPY 43.5 billion for FY 2024, about the same part as the previous year and net income attributable to owners of the parent of JPY 15.5 billion, an increase of about JPY 2 billion. As mentioned earlier, we plan to pay a dividend of JPY 100 per share, an increase of JPY 10 per share over the current fiscal year. Page 22 for the volume assumptions. As you can see, the volume of can stock is up by 70,000 tons to 1 million 267,000 tons compared to 1,195,000 tons in the previous fiscal year. As you can see, all types of materials, including cans, are expected to increase slightly compared to the previous year and cans are expected to increase by about 6%. Volume is expected to increase year-on-year, both at home and abroad. Now Page 23 about analysis of profit and loss. We expect business profit for FY '24 to be almost the same as the previous year. On Page 8, we show the change from the forecast as of the third quarter to the actual results for FY 2023. The factor behind TAA's good results was temporarily demand increase, namely onetime orders in the fourth quarter, which accounted for about the half of JPY 2.9 billion increase. In FY 2024, this onetime factor is gone, so the business profit will decrease accordingly. Of the JPY 5 billion negative profit in TAA for 2024, approximately JPY 1.5 billion is due to onetime factors, and the remainder is due to the volume mix and prices. The energy price impact will be recovered under the surcharge system, but the amount to be recovered will fluctuate more compared to the previous year. As a result, business profit for FY 2024 is expected to remain flattish year-on-year with a slight increase. Page 24, capital expenditures. President Tanaka will talk about the Fourth Mid-Term Management Plan. Under the Fourth Mid-Term Management Plan, we are considering the capital investment within the scope of depreciation. For FY 2024, it comes to JPY 36.5 billion, in line with depreciation. However, as you can see, strategic investment will be JPY 20 billion, of which the largest portion, as already announced, will be for the construction of a hot rolling mill for TAA in the U.S. and the UBC processing facility in Fukui, which will account for about half of the total strategic investment. Regarding dividend payments, as we mentioned earlier, we regard the 30% dividend payout ratio is our minimum target. We would like to adhere to this target throughout the period of the Fourth MTP, Mid-Term Management Plan. Therefore, the dividend to be paid during FY 2024 will be up JPY 10 compared to FY 2023. Interim dividend will be JPY 50 and the year-end dividend will be JPY 50, bringing the annual dividend to JPY 100 per share. Page 26 describes the future schedule. From now on, we'd like to invite our CEO, Tanaka, to outline the Fourth MTP at this forum. We'd like to give you more details at the conference, starting from 9:00 a.m. on May 28 on the IR Day. CEO and other executives will be presenting more information on the MTP. That concludes my presentation.

Thank you very much. We'd like to conclude our presentation on financial results. And from now on, we'd like to invite our CEO, Tanaka, to present the outline of the Fourth MTP. Please refer to the abstract version of the planned for your reference. Mr. Tanaka, floor is yours.

This is Tanaka speaking. Let me outline the Fourth MTP, which starts from FY 2024 and column 8 in FY 2027. The subtitle reads building and connecting for lighter world. And we hope to report you more details of what it means by the subtitle on the IR Day. This shows the agenda for the MTP presentation today. #1, the review of the previous MTP; #2, Vision 2030; #3, the Fourth MTP, and #4, shareholder return policy. First, let us review the Third MTP in brief. Please refer to Page 3. The Third MTP proceeded around the 3 pillars shown on the slide. First, completion of the structural reform; second, enhancement of growth foundation; third, contribution to a lighter world. Under these 3 pillars, progress was made. Each item has been rated as you can see in the diagram. Pertaining to the structural reform, both revenue increase and breakeven point improvement, we're able to hit and surpass the targets. So we gave it a double circle. On growth foundation enhancements, although we must admit that there is still room for improvement in terms of entering into new business areas, everything else was in line with the plan. That is why we gave a circle. Regarding contribution to a lighter world, recycled promotion was made progress and materialities were redefined in response to the changing environment, which laid the groundwork for sustainability activities. The table on the right compares the targets and the actual results for the final year of the Third MTP. ROE was slightly below the target because of the inventory asset evaluation. However, we were able to hit the other major financial KPIs. Next page describes the highlights of the Third MTP review. These include a completion of structural reform, price-setting structural reform,, and more revenue contribution from overseas and businesses. Through these activities, the business profit, which stood a little south of JPY 20 billion during the Second MTP starting in 2018, topped JPY 40 billion in the final year of the Third MTP. Page 6 outlines Vision 2030, which pleases 4 contributions listed on the slide. Broadcasting from these 4 contributions, we formulated the Fourth MTP and progress was -- will be made according to the plan. Please refer to the next page. This shows Vision 2030 financial targets. The right-hand side describes the targets that we initially announced. LME and forex assumptions have since been changed. Thus, the net sales target was changed from JPY 800 billion to JPY 1.1 trillion, but other targets such as the ratio of business profit on net sales, ROIC, and ROE remain the same as Vision 2030 targets. Page 8 describes nonfinancial targets. Materialities in the environment as well as materialities pertaining to human and society were defined and respective targets have been set. Let me proceed to the outline of the Fourth MTP. Page 10 encapsulates market environment and corresponding business opportunities surrounding our company. Market environment is shown on the left, and business opportunities are shown on the right, where it says value-added materials. We live in a rapidly changing world, and this slide captures business opportunities by ahead of us. First, our business opportunity expansion stems from existing business expansion, including cans and automotive materials shown at the top. Consumers are becoming more environmentally conscious and are moving away from plastics. This is driving global demand for cans. In the automobile sector, demands are expected to grow with the advancement of EVs and self-driving cars. Currently, the need for lighter materials is on the rise as well. Next, expansion of a circular economy centered around aluminum. As environmental consciousness is becoming more relevant in our lives, we expect that a circular economy centered around aluminum needs to be expanded. In tandem, recycled promotion will lead to reducing material usage. Finally, we'd like to offer value-added products because we expect the demand for aluminum will grow by the adoption of high-performance materials for aerospace and defense industries as well as in the fields of heat management and semiconductor industries. By responding to and capturing these demands, we'd like to seize future business opportunities. Next page shows our major policies aiming to transform ourselves from a company that simply supplies materials into an organization that can provide value-added materials under the Fourth Mid-Term Management Plan by capturing changing environment. There are 3 major policies. First, growth and value-added strategies, which include maximizing revenue and enhancing profitability by adding more value. To be more specific, the strategy starts with the recycled promotion and culminates at new domain expansion. Those will be delved into later. Second, to make our business structure more robust, lean and flexible. These include further enhancement of management speed, which was initially cultivated by the structural reform, more flexible response to changing environment, and asset efficiency from the perspective of ROIC, which has been promoted under the Third MTP. Third, foundation enhancement. For us to stably generate added value and operate businesses, we need a robust business foundation. More specifically, we'd like to enhance intangible asset value, including talent and our brand. Next, details of value-added materials. The left is perceived image of our business under Vision 2030. By harnessing UACJ's strengths, we'd like to add values to our materials. Especially with the Fourth MTP, as shown on the right, we defined 4 added value focus areas in order to realize Vision 2030. Pertaining to recycled promotion, we'd like to expand recycling to various products, including beverage cans. Second, materials plus processing businesses, we'd like to continue working on the areas of automobile, air conditioning, and heat management. Third, contribution to our stable supply chain in frontier domains or advanced fields. We'd like to target batteries, semiconductor manufacturing equipment, aerospace, and defense industries, which require a stable domestic supply of high-performance value-added products. On new domain expansion, we'd like to further enhance in the fields of selected -- in the fields selected under Vision 2030, namely mobility, lifestyles and healthcare, and environment and energy. Next page shows the recycled loop of aluminum. The left-hand side is the current image whereas the right-hand side shows our vision. At a glance, I think you'll probably notice that the left side requires more virgin aluminum inputs compared to the right-hand side. Another difference is that the size of the loop is enlarged on the right-hand side. In particular, by utilizing our casting technology and facilities, as well as R&D capability to develop alloys and customer relationship, we'd like to thicken the loop of this circular economy. We are planning to play the role of the heart to pump the circular economy so that we can expand our businesses, both upstream and downstream, in order to further expand our revenue base. Next page indicates how much profit contribution can be generated in each field. This shows an image of business profit to be generated. FY 2027 business profit target is set at JPY 60 billion. The breakdown is as follows: Volume growth in existing business JPY 5 billion; recycle promotion JPY 8.5 billion; materials and processing business JPY 10.5 billion; advanced field supply chain stabilization JPY 5.5 billion. By factoring in inflation and cost increase, we'd like to aim to top JPY 60 billion in business profit in the final year. This is a detailed breakdown. Next page summarizes the financial targets for FY 2027. Net sales JPY 1.05 trillion; business profit JPY 60 billion; adjusted EBITDA JPY 100 billion; 9% or more ROE and ROIC; as well as less than 1.0 DE ratio. These are the FY 2027 targets. Next page. We have been able to grow profits so far, and we'd like to build on the increase in order to achieve Vision 2030. That is our objective. Finally, on shareholder return policy. As we mentioned earlier, we used to target 20% to 30% dividend payout ratio in the past. Under the Fourth MTP, however, we'd like to set that ratio to be 30% or more. That was a quick overview of the Fourth MTP. We'd like to give you more information on the IR Day on May 28, where the head of each business unit will be presenting their details. We'd like to solicit your participation in the event, and that concludes my presentation. Thank you very much.

Thank you very much. That concludes our presentations. Today, we presented the outline of the Fourth MTP in this forum. We posted the full version of the MTP on the website for your perusal. We hope to provide a better image of the MTP on the IR Day on May 28. We truly look forward to speaking to you all in the event. Thank you.

We will now take your questions. First question. First question is by Mr. Yamaguchi, SMBC Nikko Securities.

Yes. Thank you. My name is Yamaguchi from SMBC Nikko. As usual, please give us net sales and profit figures for the new fiscal year of each business. And what the situation is like and how you are thinking about it? I was especially interested in the TAA section, which was difficult to understand earlier. I would also like to ask you to explain how you see the market environment and the figures, including the domestic basis? This is the first point. And secondly, please explain the market environment in North America, where EV makers seem to be experiencing a slump in sales. Could you please talk about auto market in UWH in that context? Third, please explain whether you are expecting a recovery in the semiconductor thick plate market, which is yet to be seen or whether you are already getting a positive response that the market is coming back.

We have received 3 questions. The first question is about the relationship between sales and profits for each business in the new fiscal year. Okada will explain the figures first, and then I will explain about the environment and so on.

So here is Okada. Please go to Page 30 of the presentation materials. From this time, there are references to UATH, UWH, and TAA, which are the major overseas subsidiaries and their business performance trends.

Could you please explain about it?

Here is Kawashima. I'd like to give an overview of TAA, which ended the fiscal year with very good figures. As I mentioned earlier, we captured unexpected orders in January, February and March due to the market environment, resulting in an even better performance. Compared to the previous fiscal year, scrap prices have risen slightly and the volume of the scrap has increased, but the figure reflecting inflation change slightly. So compared to the previous year, FY 2024 full year forecast will be negative at around minus JPY 5 billion. And of the JPY 5 billion, JPY 1.5 billion is due to the absence of the onetime orders. So in real terms, we estimate a deterioration of about JPY 3.5 billion. However, the market itself has been doing quite well since January after the inventory adjustment in North America was completed. In this sense, we believe that we will be able to meet the volume target as planned. As for UWH, as you mentioned, EVs are somewhat plateaued. And this may have a slight impact on our business. However, the sales of UWH are not only about EVs. But about half of them are hybrid. So UWH does not necessarily mean EVs. Of course, there will be some impact, but we have still 1 year to go to absorb that part of the impact and achieve the planned figures. We have answered your first and second questions. And the third question is about the future of semiconductor production equipment. The semiconductor market has yet reached the point of full-fledged recovery. But it has been gradually recovering since the fourth quarter. Although it is still too early to say anything definite at this point, we believe that from the second half of the year the market will recover so that we can aim for a higher level of performance.

Here is Ishihara. Since the thick plate has a long supply chain, its material inventory is already being built. Therefore, since we have been able to see the volume from the early stage of the first quarter, I think that recovery toward the second half of the fiscal year is highly probable. Of course, this is just a story for the supply chain as a whole. So I think it is just for your reference.

For TAA, there are settlements in 1 year to adjust for inflation. As prices were still rising early 2024, I didn't quite understand the mechanism of adjustment. Also, please elaborate on Thai business as well.

As you said, for TAA, the entire increase in prices can be passed on. However, it is after 1 year. As you said, prices are rising in 2024, but the way they are rising, it's slowing down. So the amount of this recovery is changing. As for UATH, the U.S. is actually a large market. As I mentioned earlier, in the U.S., can demand has recovered well. Therefore, we are considering the possibility that cans for the U.S. market will come from Thailand again, just as they did the year before last. In the rest of Southeast Asia, there are certainly some tough spots due to the emergence of Chinese players, but we are able to obtain a certain volume because of the appreciation of our long-term contracts and stable supply. In addition, the U.S. market is recovering. And as you could see earlier, UATH is expected to increase its profit compared to the current term.

Understood. Thank you very much.

Thank you for your questions. Our next question comes from Mr. Shirakawa, Morgan Stanley MUFG Securities.

I am Shirakawa. I have 2 questions. The first question is about the sales volume trend by product on Page 22, where you mentioned that can stock will be increasing. You mentioned that the inventory adjustment in the U.S. has been completed. But what do you think about the breakdown of the 45,000-ton increase in can stock among Japan, U.S. and Thailand? That is my first question. My second question is that on Page 23, in the analysis of business profit, you mentioned the energy and additive metal prices effect, which is JPY 2.8 billion minus effect for profit this year. I imagine this is a netted figure. Please let us know if you have any gross figures, for example, if the energy additive metal price effect has worsened caused by dismatch amount, and if you have passed on this amount this year, et cetera. Thank you.

Yes. The first question is about the breakdown of 45,000 tons for can stock. Kawashima answers your question.

In terms of markets, most of them are in the United States. As I mentioned earlier, the U.S. market is doing well, and we are also considering bringing in some products from Thailand. Therefore, of the 45,000 tons, about 2,000 tons to 3,000 tons of for Japan and the rest is for the U.S. market. And we are now thinking that the portion of this could come from UATH Thailand. As to your second question, as you know, changes in energy prices have become milder. So the amount to be recovered is to change compared to the amount in 2023. So on a year-on-year basis, the amount is smaller vis-a-vis 2023. In short, the amount to be recovered is changing.

Regarding the first point, you sounded quite confident about the recovery in the U.S. But looking at the statistics for Thailand, I don't think that U.S. market has recovered to that extent. But is it correct to say that compared to the January, March period, orders and inquiries have actually returned?

Well, the actual results are yet to be seen. We have received many inquiries from customers. However, in terms of the fiscal year when the results will be available, it will be after April. They will appear in the first quarter, second quarter, and the third quarter. So they have not yet appeared in the current statistics.

Thank you for your questions. Now the next question is from Mr. Matsumoto, Nomura Securities.

I am Matsumoto from Nomura Securities. First of all, I would like to know why you consider the temporary orders for TAA for the period from January to March as temporarily. Could you give us some more background? And the second question. There might be figured somewhere in the presentation materials, but please let us know the volume forecast for TAA and UATH for FY 2024. The third question. In your forecast for the new fiscal year, it seems that net income does not grow that much in comparison with the level of operating income. Are there any factors behind it? That's all.