UACJ Corporation (5741) Earnings Call Transcript & Summary

Let me introduce to you the company attendees to this briefing. Representative Director and President, Shinji Tanaka.

I am Tanaka. Thank you.

Director and Executive Vice President, Teruo Kawashima.

I am Kawashima. Thank you for coming today.

Director and Managing Executive officer, Joji Kumamoto.

I am Kumamoto. Thank you.

Executive Officer and Chief Executive of Finance and Accounting Division, Kozo Okada.

I am Okada, thank you.

I am Kaoru Ueda, General Manager of IR in the Finance Department. Thank you for being here today. I will invite President Tanaka to present to you the financial results for the Second Quarter of Fiscal Year 2024 that we announced today. We have 45 minutes until 4:45. The presentation will be 20 minutes, and it will be followed by Q&A for 25 minutes. Please refer to the presentation materials. President, Tanaka, the floor is yours.

Let me give you the financial results for the second quarter of fiscal year 2024. Before the detailed explanation, I would like to give you the overall summary. In the first half of fiscal year 2024, the business profit was up JPY 9 billion year-on-year at JPY 30 billion. There was a significant increase in profit. You see the highlights below that. In the domestic market, can stock and thick plates sold well, enabling us to secure profit. In the overseas market, including North American market, demand continued to be very robust globally from the first quarter for can stocks. Because we succeeded in capturing that opportunity, both revenue and profit increased. There is no change from the plan for the full year performance forecast for fiscal year 2024 on a consolidated basis. In the second half, it is expected that the global can stock demand will continue to grow steadily as was expected at the beginning of the year. At this point in time, we will not revise the forecast or change the dividend amount. We will continue to monitor the external environment closely. On the next page, you see that, as I have already said, multiple products sold well, both domestic and abroad. Because of that, the first half did better than we expected at the beginning of the year. Against the backdrop of steady progress, we expect the business profit to be JPY 45.5 billion. I believe that the probability of achieving this full year target has gone up. We would like to continue to monitor foreign exchange, raw material prices and demand trend, et cetera. Let me talk about the first half results in fiscal year 2024, followed by performance forecast and initiatives to enhance corporate value. On Page 5, you see the first half results. The first half results for fiscal year 2024 is revenue of JPY 487.1 billion, up JPY 52.2 billion year-on-year. The business profit rose by JPY 9 billion to JPY 30 billion, and the company's net profit increased by JPY 12.2 billion to JPY 16.7 billion. The adjusted EBITDA increased by JPY 9.7 billion to JPY 48.7 billion. Next, you see sales volume of flat-rolled products by product type, which is our main product. In the first half of fiscal year 2024, the amount was 633,000 tons. It was an increase by 55,000 tons year-on-year. The biggest contributing factor is the can stock that you see at the top. The can stock increased by 43,000 tons to 428,000 tons. Thick plate increased by 5,000 tons, general materials by 7,000 tons. Other general materials increased due to gradual recovery in printing matrix and air conditioners. This is the waterfall chart showing the change in business profit. In the first half of fiscal year 2023, the business profit was JPY 21 billion. In the first half of fiscal year '24, it increased by JPY 30 billion. As you can see in the waterfall chart, JPY 2.9 billion increase in UATH, JPY 1.4 billion increase in TAA, JPY 1.1 billion increase in UWH, JPY 3.2 billion increase due to differences related to domestic sales and JPY 1 billion increase due to cost and utilization ratio, which led to JPY 9 billion increase in the business profit year-on-year. Differences related to sales was significantly positive. It is because of the contribution from volume mix at JPY 3.2 billion. It is exceptionally large amount. As shown in the pink, there is a mention of impact from remaining inventory. Impact to inventory assets for 2023 was negative JPY 8.1 billion in the first half of '23 and positive JPY 5.7 billion in the first half of fiscal '24. First half was JPY 13.8 billion year-on-year, and the operating profit was JPY 35.7 billion. Next, I would like to talk about the consolidated balance sheet. The total assets increased by JPY 29.1 billion to JPY 943.6 billion. You see the breakdown in the upper portion. Especially to note is inventory assets, which grew by JPY 27.8 billion to JPY 215.7 billion. Trade and receivables grew by JPY 14.9 billion at JPY 194.6 billion. In total, liabilities and equity, borrowings increased by JPY 15.5 billion to JPY 326.4 billion. On the right, you see application of fund statement. Surplus of long-term funds is JPY 20.5 billion and the short-term funds, JPY 48.4 billion in shortage. In total, there is a negative cash flow of JPY 27.8 billion. On the next slide, we are showing consolidated cash flow statement. The operating cash flow was negative JPY 8 billion. When CapEx and other investments are accounted for, the free cash flow is negative JPY 27.8 billion. Adding other financing schemes and dividends as well as decrease or increase in the cash and deposits, the interest-bearing debt had increased by JPY 15.5 billion. On the right, you see a chart of interest-bearing debt and D/E ratio. Interest-bearing debt was JPY 310.9 billion at the end of fiscal year 2023. As of the end of the second quarter, it rose to JPY 326.4 billion. On the other hand, D/E ratio was maintained at 1.0. Let me explain about the capital expenditure and depreciation cost. The actual performance for the first half of fiscal year 2024 was JPY 10 billion in general investment and JPY 4.7 billion in strategic investment totaling JPY 14.7 billion. The full year forecast of fiscal year 2024 is JPY 16 billion in general investment and strategic investment of JPY 20.5 billion, which amounts to a total of JPY 36.5 billion. There is no change. This means we were able to hold it within our depreciation target. Strategic investment is slightly lower than the full year forecast. Currently, in the domestic market, investment in melting recycled furnace is progressing. And in overseas market, we are adding capacity to hot-rolled products. These investments are going as planned, and the company expects it to go in line with the plan in the second half. Next, I will explain the progress in our business one by one in order of Thailand, TAA and UWH. First, the situation in Thailand and UATH. In Thailand, both sales and profits increased as we captured global demand for can stock. As mentioned in the overview, global can stock demand has recovered and is expected to grow at 3% to 4% until FY 2030. In sales to North America, the volume of product shipment is increasing in response to the recovery in demand for can stock. In ASEAN and other regions, we have continued to expand our sales areas by cultivating new customers. In terms of profit and loss, the first half sales volume totaled 149,000 tons, up 23,000 tons from the previous year. Business profit increased by JPY 2.9 billion year-on-year to a total of JPY 3 billion. As for the outlook for the second half of the year, the sales and production will continue to be favorable, but the appreciation of the baht has continued, so we will carefully assess the situation. Next is the situation in the U.S. or TAA. Demand for can stock in the entire supply chain is growing steadily and sales volume is expanding, resulting in an increase in both sales and profits. As shown in the overview, we believe that the long-term trend of expanding demand for can stock in North America will not change. The current demand for can stock has shifted from restocking phase to a stable phase and the volume is expected to expand in the second half as well. As mentioned in the production section, facility expansion is progressing as planned. The sales volume for the first half of FY 2024 is 227,000 tons, up 19,000 tons from the same period last year. And business profit is expected to increase by JPY 1.4 billion to JPY 16 billion. Regarding the facility enhancement in North America, we have been enhancing hot rolling logistics, et cetera, as planned, and we expect the volume in the second half to remain almost the same as in the first half. I will continue with an explanation of the situation in the U.S. UWH. We secured profitability through strong sales to Japanese OEMs and through implementation of cost reduction initiatives. Regarding the business environment, the need to reduce vehicle weight continues to increase due to environmental regulations and other factors, and the use of aluminum is continued to advance. The EV market is currently experiencing temporarily weak demand. But over the mid- to long-term, we expect the overall automobile market to grow and EVs will continue to grow steadily. In sales, Japanese affiliated OEMs continue to enjoy stable sales, aiming for faster expansion, and we are continuing activities to acquire new projects. Below that topic, the sales and business profit are shown. Revenue declined by JPY 1.5 billion to JPY 19.5 billion, while business profit increased by JPY 1.1 billion to JPY 0.8 billion. In particular, cost reduction, manufacturing improvement, automation, labor saving and other measures were implemented to ensure profitability. As the U.S. presidential election results have been completed, and we will continue to closely monitor and assess how the EV business will develop in the future. Continuing to the full year forecast for FY 2024. We are on track to achieve our full year forecast for FY 2024, which remains unchanged from the forecast announced in August. For the FY 2024 forecast, the outlook is a JPY 37.2 billion increase in revenue to JPY 930 billion, a JPY 2.1 billion increase in business profit to JPY 45.5 billion and a JPY 6.6 billion increase in profit to JPY 20.5 billion. Adjusted EBITDA is JPY 82 billion, up by JPY 2.2 billion. The annual dividend remains unchanged at JPY 140, an increase of JPY 50. Next, the sales volume by product type is shown. The forecast for the full year of fiscal 2024 is 1,262,000 tons, which is expected to expand. The same trend as in the first half is expected for can stock, up 63,000 tons to 854,000 tons, other automotive materials at almost the same level of 139,000 tons and general-purpose materials at 175,000 tons. Overall, we expect an increase of 67,000 tons. Next is shareholder returns policy. As we have already announced, the annual dividend will remain unchanged at JPY 140 per share, and we will maintain our shareholder return policy. The annual dividend will be JPY 140 per share on a final profit of JPY 20.5 billion for a payout ratio of 32.9%. Next, we describe our initiatives for corporate value. Here is a summary of our ideas for maximizing shareholder value to realize management conscious of capital cost and share price. We have already explained our approach in the current medium-term management plan, so I will skip the details. But we intend to improve ROE, reduce capital costs and take other actions to achieve an equity spread of 1% or more, and a PBR of 1.0x or more as soon as possible. The graph on the lower right shows' development in PBR. In April 2022, PBR were in the low 0.4x range, but in October, they have risen to the 0.8x range. Next, here is our initiatives to help achieve a circular economy. As already announced in press releases and other media, we are working on the development of upgrade recycling technology and high upgrade recycling to rebuild or build a circular economy. These are projects subsidized by NEDO and our pioneering research. Through these R&D activities, we hope to expand domestic recycling of aluminum resources and significantly reduce carbon dioxide emissions. We plan to hold a sustainability briefing on November 27, and we'll explain the details at that time. Furthermore, this is about dialogue with the capital markets. For the first time, we won #1 award for excellence in corporate disclosure in steel nonferrous metal by the Securities Analyst Association of Japan. I would like to thank all the analysts and institutional investors, including all of you present here today for your continued support. We will continue to improve the quantity and quality of our disclosure, while placing importance on dialogue with our stakeholders. Thank you for your continued support. Finally, I would like to announce our upcoming events. Briefing for sustainability is scheduled for November 27 on Zoom. This year, we hope to have a roundtable discussion on our governance initiatives by our outside directors facilitated by a third-party evaluator of our Board of Directors. On December 10, we would like to introduce our sustainability and recycling initiatives at Nagoya Works to help further deepen understanding of these initiatives. We will be sending out further invitations, so we hope that you will consider participating. We have rushed a bit today, but this is the end of our presentation. Thank you for your attention. This concludes the company's explanation. We will now take your questions.

The first to ask the question is Mr. Yamaguchi from SMBC Nikko Securities.

I have 2 questions. My question is regarding the evolution of performance in the domestic TAA, UATH and UWH businesses from the first to the second quarter. I would like to know why the performance is evolving like we have seen. My second question is simple. It seems like that when I calculate the balance, the second half performance will be quite bad. Do you believe it would be this bad? If it's going to worsen, I would like to know why. I'm assuming that the reason is because you have not changed all of the parameters. If it's that simple in that case, then it is okay, but I would like to get your insight on what would actually happen? That's all.

Mr. Kawashima will provide you a response.

Your question is on the changes from the first to second quarter as well as the first to the second half. The evolution of performance from the first to second quarter shows a decline.

If I consider this and if I calculate the difference between the first and the second half, there will be a significant profit reduction. If I simply double the numbers for the second half, the profit for next fiscal year will be an eye-catching figure. I was wondering, how I should think about it?

All right. I, Kawashima will give you the outline. First is to your question about the change from the first to the second quarter. In the domestic market, the first quarter always tended to have higher demand for cans. The second quarter usually goes slightly down in profit due to summer vacations that reduce the number of operating days. That's one reason. In terms of the foreign currency-denominated P&L, it has not changed so much. The yen conversion rate was JPY 156 to $1 in the first quarter and around JPY 140 in the second quarter. Because of that, on its face, the second quarter numbers look worse. If we look at the business environment, we do not see sluggishness worsening in the second quarter compared to the first. Regarding the full year forecast, it is true that if you do the math, we would only have JPY 15.5 billion in business profit in the second half. However, as you have rightly pointed out, we have not changed various parameters because we don't have the accurate grasp of the situation. For example, the LME is hovering around $2,600 currently. In August, we consider it to be $2,300. The exchange rate between the yen and dollar is currently JPY 155 to $1, and our assumption was JPY 145. This had a huge impact. On the other hand, the situation in sales has not changed so much since August. One change to speak of is the material prices. There are increases to some materials. There was some increase. However, LME prices is on the rise as well. Because of this, it was hard to see where it would go. LME price was once $2,400 and now hovering around $2,600. The forex was JPY 140 to $1, but now it's JPY 150 to dollar. That is why we decided to maintain our assumptions to the August levels and created a forecast accordingly.

If the forex was JPY 150 or if the aluminum market hovered higher, you may go slightly higher?

Yes, putting whether it would be higher aside, the number will change.

I understand. You would not be able to say yet. I will let other analysts figure that out.

This is Tanaka. I would like to make a supplementary comment. As Kawashima has explained, the change from the first to second quarter, especially in the domestic market was biggest in cans. There was an adoption of our offering in a new product, and we sold many products there. That significantly contributed to the first quarter. In the second half, after the U.S. presidential election that happened yesterday, we need to closely monitor how forex and other indices will change in the third to fourth quarters.

Another point, I would like to thank you for adjusting the briefing time, Shirakawa-san from Morgan Stanley. We will go to the next question, from Nomura Securities, Mr. Matsumoto.

My name is Matsumoto from Nomura Securities. I would like to congratulate you, your disclosure committee to be selected as a company with best disclosure. My first question is related to the TAA business in North America. A competitor of your company said that the aluminum scrap prices are going up and that the metal benefit is shrinking. I don't see that happening to your company, but how do you see the current situation? I know that there would be a new factory coming online next year in other companies. And I would like to know the situation related to aluminum scrap considering the current circumstances. The second question is related to aluminum foil. How do you plan to invest business resources in this field? I would like to know your view.

This is Kawashima. The situation of scraps in the United States is the same. Scrap prices are gradually going up. That price is affecting the profitability in one way or the other. However, the demand itself is very strong. So the company is working on to increase the prices in some new transactions so that we can absorb the increase in the scrap prices to improve our profitability. We are working hard on this. In addition, at TAA, even though the prices will rise, we have promoted more use of scraps. In this round of investments, we are investing to increase the usage of UBC. We believe we can offset the price increase with increase in volume. On your second point about aluminum foil, Mr. Kumamoto will respond. To your question about how we would use our business resources, I would like to mention that we are strong in the area of lithium-ion battery, especially electrode materials. The company has already said that it would concentrate business resources in this area in our fourth midterm plan. In the past, we will focus more on fields related to plates or foil stocks. However, we will work in a more integrated manner from foil stocks to final foil products. This means slightly expanding our scope of where to focus. There is no significant change in the fact that we will focus on this growing area. Lithium-ion battery foil and other battery-related areas are our main focus in the midterm plan. It is one of the critical things in growth and value-added strategies. We will work to enhance our capabilities in this area, including supply of foil stocks.

Understood.

I would like to go to the next questioner, from Morgan Stanley MUFG Securities, Mr. Shirakawa.

My name is Shirakawa from Morgan Stanley Securities. I have 2 questions. My first question is related to the performance of this fiscal year. With regards to thick plates for semiconductor manufacturing equipment, based on statistics or reports on industry papers, it seems that the shipment volume is solid. Also, some reports have said that the demand seems to be on the recovery path even before the start of the second half. I would like to know whether in the second quarter, you have seen increase in the demand? Also, I would like to know how you foresee the second half. This is my first question. My second question goes a little bit off the topic of financial results. On Slide 19 of your presentation materials, you talk about initiatives to improve corporate value. The share prices are going significantly up and your financial results were favorable. I think there will be hopes for a further lift in the performance. However, there is the issue of selling by Furukawa Electric. Even if the share prices go up, the sales by Furukawa may be a burden. I believe that is a concern of the stock market participants. When that happens, even though cash flow was not much affected this time, when the impact is considered for the full year, working capital would probably be shrunk. Considering this, because there will be positive cash flow when you have this level of profit, maybe you should consider directly purchasing your shares from Furukawa Electric. I think this option was brought up as a possibility in the first quarter, but could you elaborate your thoughts about this, including any discussions going on within the company? Those are my 2 questions.

I will start out with the first point on thick plate. From the first quarter to the second quarter, we have seen clear trend of recovery in areas, including semiconductors. However, our assumptions for the second half at this point is that it would remain flat compared to the second quarter or the first half, though it may go slightly up. At certain timing in the second half or towards next fiscal year, the company believes that there will be a definite recovery.

Mr. Kawashima will answer your second question about improvement initiatives.

This is Kawashima. Regarding our stocks being held by Furukawa Electric, it goes without saying that it is primarily Furukawa Electric who decides what to do with it. We are not in a position to take the lead. Overall, decrease in Furukawa Electric's holding of stock means that there will be more of our stocks circulating in the market. I believe this will be a good thing for our company. Based on these circumstances, we are considering many ways on what we can do. As we gain deeper understanding of our options, we will always be thinking what actions we can take. However, we must not forget that it is Furukawa Electric who has the decision-making power. If we can have regular conversation with Furukawa Electric, then we will hear from them their intentions.

Understood. I have a follow-up question on the first question. You said that there is a definite recovery in the field. Does that mean that there has been more progress or what you see in the market is better than the company's plan at the first quarter?

Well, the numbers are still hovering lower than the plan. However, from the first to second quarter, we have seen signs of recovery based on the conversation we had with our customers as well as order intake.

Daiwa Securities, Mr. Ozaki.

This is Ozaki of Daiwa Securities. As for sales destinations for Thai base, I think it will be ideal for the Thai base to become independent and expand sales to Southeast Asia and other regions rather than taking the products to the United States. What is the current assessment of Thai base in terms of its sales structure and whether it will become independent or not? Looking at the statistics, it seems that you have been able to develop new customers, but could you tell us about your evaluation in this point? The second point is the sales relationship difference. I believe JPY 3.2 billion was in the first half. Could you tell me the breakdown, please?

Yes. Sales by area in Thailand. As shown in the figure, sales in Thailand are steadily expanding. However, on an area-by-area basis, Thailand and Southeast Asia are areas where competition is quite fierce. The choice is whether to increase our profits in these areas or in other areas where profit levels are considerably higher, such as North America, the Middle East and Africa. We will change our tactics by keeping an eye on sales prices and other factors constantly. The second point, the sales-related difference, Okada-san, can you please explain?

The main breakdown of the JPY 3.2 billion sales-related difference is JPY 2.5 billion for UACJ board or sheet, the difference in volume mix and overall margins were positive compared to the previous year. The other JPY 0.7 billion is mainly due to the exclusion of fall manufacturing and other group companies.

Thank you very much for your question. Then let me introduce next questioner. UBS Securities, Mr. Goroh.

Goroh from UBS Securities. I have 2 questions, both of which are related to the idea of business performance. As you answered in Mr. Ozaki's question about the breakdown of sales-related differences, in the past, especially when it came to margin improvement, you prepared a table for each region and explained in detail how you had made progresses. So it was very easy for us to understand, and we felt very assured. I'm concerned about whether you can secure margin without a time lag and without emissions given the current cost increase and exchange rate fluctuation after the margin improvement that -- you said that you have not revised the second half of the fiscal year. But could you please explain a little more about the first half of the fiscal year, including cost increase and progress of price pass-through by region, even if it is qualitative to some extent, I would appreciate more detailed explanation, including regional differences as to whether the margins are improving or not. That's the first point. The second point that you have not revised the full year results, but in the latter half of the presentation material, you mentioned that the shipment in the U.S. and Thailand exceeded the previous year's level during July through September. You mentioned earlier that the demand is growing, but if you could explain what is happening on a factual basis, including the direction of its operations, seasonal factors and movements from April to June, July to September, October to December and January to March, and how the volume effect is being captured? I mean the areas that you have not been revised yet. Would you please explain what is happening? I would appreciate it if you could explain a little bit more about what's happening on a factual basis.

Kawashima will explain first.

First, domestic margin. We have asked our customers, which have largely been completed and are now being applied. The status of margin is written at the back of the reference page. So it was explained in a manner that it has been introduced up to now. In the past, it was in the middle of the process. So it was put in the front page, but now it is done. I have put in the back. However, if situation changes, we will have to revisit the situation. For example, in Thailand, where we are reviewing our contract, we are seeing JPY 2.9 billion turnaround. This includes some positive role margins. So please understand that we have achieved this. Then the United States, in addition to improvement in margins, we are now reviewing and concluding contracts for 2026 and beyond. We are asking for further price increases. There will be a tight supply/demand situation with the change of president and development of demand -- domestic supply and demand, we are asking for a further price increase and are considering raising the roll margin. We are aware that the issue of how to further improve the price structure in the future, but rather than thinking that the current price base generates best margin, we are thinking of taking action to make our products of good quality and have them recognized for their quality and value in the market. Regarding the situation overseas, demand trends have not changed since we originally looked at the situation in August. The U.S. cans are still as good as ever. You mentioned earlier in your question about UATH sales destination as the U.S. The U.S. is in a good situation because demand there is very strong, generating a very good profit. Therefore, operation in Thailand are also doing well. And our initial forecast was 260,000 tons, but now we are up to 300,000 tons, which indicates that demand is very good. As for domestic market, we are thinking in May that demand would pick up a little more in the second half of the year. However, as of August, the demand was not as strong as we had expected for the second half. And although we did not reduce the volume, we adjusted it to the actual situation. We believe that we have a very good outlook for demand trend in general.

Understood very well.

In addition, demand for can stock continues to be strong. But as Kawashima mentioned in his explanation, demand for automobile and thick plate other than can stock is still a little weak. We believe that the demand will pick up sharply close to the budgeted plan and that we had initially set at some point in the second half of the fiscal year.

Understood.

Next, Millennium Capital Management, [indiscernible], please.

Millennium Capital, [indiscernible]. I just want to ask one last question that Yamaguchi-san might want to ask. That's the only part I want to ask. Looking at the assumption for the second half of the year, I don't think that the profit will be cut in half in the second half, given the progress in the first half. I understand that you have not changed your plan. But looking at the various assumptions, crude oil and Dubai are below the plan and aluminum is above the plan. So I think there are more factors that would normally lead to an upside against the plan. I was a little concerned about seasonality. For example, you mentioned earlier in the Q2 about the summer vacation in Japan, and I was wondering if the capacity utilization will be slightly lower in the second half due to such factors or if various costs will be incurred toward the end of the fiscal year. If there are any such factors, would you please give a supplementary comment lastly?

Kawashima will answer.

First, as for operation as a company that manufactures products, the number of days is involved. In the second half of the year, there is the year-end and New Year holidays, and February is a little shorter than usual month. So there are subtle differences. However, since this is unchanged from our original assumptions, we do not expect any major changes considering demand trend. The major issue is what assumptions do we make. We are not sure whether the exchange rate would be JPY 150, JPY 140 or JPY 155. So we use JPY 145 for now. The current LME price is $2,600, but we have set it at $2,300. Rather than forecasting an upside, we will be able to achieve JPY 45.5 billion target with more certainty than ever before.

I see. So considering various conditions and conservative assumptions and the difference in number of operation days between first half and second half, you can achieve JPY 45.5 billion. That's what you keep the number as is. Is this my understanding. And is it correct?

Yes. You have expressed the probability of achieving JPY 45.5 billion is increasing, and that's how we see the situation.

And just last one point regarding shareholder returns, if there were to be slight upside in future, would it be correct that the payout will be based on a payout ratio of 30%?

We are thinking and we must think about it. However, we need to consider whether the amount should be considered for a single year, 2 years or 3 years, and whether it will be good to change the amount frequently. And this is a point we need to think about depending on the actual figures.

Understood.

We will continue to examine this issue as we monitor the company's performance.

Thank you for your question. The scheduled time has come, so we will conclude today's briefing. Please direct any further inquiries and questions to the Investor Relations department. This concludes UACJ results briefing for Q2 fiscal 2024. Thank you for joining us today. We will continue to strive to meet the expectations of our shareholders and our stakeholders, and we ask your continued support and encouragement of our company. Thank you very much for taking time out of your busy schedule to join us today. Thank you.