Ultrafabrics Holdings Co.,Ltd. (4235) Earnings Call Transcript & Summary

This is Noboru Yoshimura, the President of Ultrafabrics. I would like to talk about the financial results of second quarter 2024. I will start with the business environment during the second quarter. One thing is that yen kept on depreciating, and the price is moving in the range of JPY 140 to JPY 160 per dollar. As our sales is mostly dominated by -- in U.S. dollars, weaker yen pushes up our sales in yen; and consequently, that will increase our profit as well. Also, regarding as business segment, aviation performed very well during the second quarter due to the -- that aviation industry is very keen on sustainability right now, and that is one of the main reasons why they are considering using our material for their aircraft interior and that during second quarter, that pushed up our sales. On the negative side, there is a kind of stall in the EV industry. Some EV manufacturers started to show some slowdown in their sales. Secondly, on a macroeconomic basis, U.S. in -- especially U.S. economy is -- has been -- suffered from a high interest rate and inflation. Also, commercial real estate market didn't perform very well or basically in travel. That will work against our contract furniture business as well as RV and marine business. Also, I have already mentioned the depreciation of yen during the second quarter, but at the same, that will increase our sales and profit. But at the same time, that will push up our SG&A in the United States. So weaker yen works for us and works against us as well. So there is a lot of discussion about the EV market, and some people are talking about the slowdown of EV sales. But we believe that this is temporary. And for the mid and long term, the sales of EV continues to grow as you can see the graph with the forecast by a third party. As far as for contract furniture market, we believe that the problem with commercial real estate market continues at least for some time. That will work against our existing contractual furniture business; but at the same time, some companies are considering to improve their interiors in the office. That can work -- we can get some benefit out of that kind of move as well. So for the second quarter, there are several factors worked against our business during the second quarter. But for the mid to long term, we don't think we need to change our view about the market. In '22 and '23, especially in 2022, our capacity is fully occupied by existing business, and there was no room for us to looking for new business area. And that somewhat continued throughout 2023. But for 2024, we have expanded -- we have increased our production capacity, utilizing the capacity of our production partners. So there is room for new business for us. So we started some new initiatives to grow our business in new area, and the main one is residential outdoor. We started a new team in April, hiring a director for the -- in charge of residential outdoor. And we also participated in a trade show in Atlanta, and we had more than 40 meetings with potential customers. Also, we are awarded a program with outdoor residential retailers in the states. But our material is pretty new to this market. This market, especially for the premium area, this market is basically -- laser is the main material used for premium furniture in this market and the synthetic product like ourselves, especially our material, is pretty new to most of our potential customers. So there will be a lot of educating process to our customers, and it will take some time to reach -- to grow this business to a substantial volume. We have been talking about the diversification of our revenue source. And automotive is one of the areas of growing, and we are trying to diversify our customer base in automotive area by getting a new EV program from European OEMs. Also, we have been expanding our customer base in the aviation market; and our customer include United Airlines, American Airlines, Southwest, WestJet and so on and so forth. So as you can see, these are the North American airlines, and we are trying to expand our customer base to Europe as well as Asia. Sustainability is a very important part of our brand management as a premium brand, and we are trying to have Ultrafabrics as a sustainable premium brand. And we are in the process of constructing a new plant in Chiyoda, and we will introduce a lot of sustainable technologies, including a water recycling system and hydrogen -- use of hydrogen as a source of energy system. These systems are pretty expensive, but we believe that these new technologies will contribute to the brand -- contribute to the value of our brand. So what it means to be a premium brand? Especially this year, a lot of premium hotels, including Ritz-Carlton or the Hilton, used our material for their interiors. And to get this kind of program, it is important that our product be considered as sustainable as well as premium. In the RV market, existing business, as I mentioned, is not performing very well. So we are trying to get a new program, and we had a first program with a grand design in a category of what we call Fifth Wheel category. This is fairly a big one, as you can see in the picture. But this is a new business for us, and we are very excited to expand our RV business into a new area. Next, I would like to talk about the financial results of first half and from January to June 2024. As I mentioned, the furniture market is not doing -- didn't perform very well. They were doing okay, but they didn't perform as we have expected. We have some growth in the residential area and hospitality area, as I mentioned, but our existing business especially in the contractual furniture as well as health care have been -- suffered from a weak macroeconomic situation in the space -- in the States. So our sales in furniture during the first quarter is JPY 2.7 billion, and that is a 9.5% increase from the same period of last year, but most of the growth came from depreciation with yen. For automotive, this one, I mentioned in the explanation before that for the seat application, some of our customers are in a process of model change, and it took more time than we have expected. Then that decreased our sales of our product in seat application during the first half. Other business for the -- especially for the small parts remained strong. As a result, our sales in automotive area is JPY 4.28 billion, 6% down from the same period in last year. Aviation was good both in the corporate VIP and commercial, and the result is JPY 1.656 billion, almost 44% increase from last year. For other areas, across the board, they didn't perform well. I mentioned RV and marine, but in other applications like apparel and sports [ graph ] didn't perform well, other. So the sales for other applications is JPY 1.768 billion, down about 26% from last year. So overall, our sales during the first quarter is JPY 10.41 billion compared to the forecast or budget at the end of this -- at the beginning of this year, which was JPY 11.5 billion, down by 1.5%. Gross profit was better than the last year, thanks to the weaker yen. And operating profit is JPY 1.628 billion, which is about 90% of the budget we issued in last February. And net income is JPY 1.151 billion, fairly even to our budget and increase from 12.7% increase from the last year, also benefited from a weaker yen. EBITDA was JPY 2.651 billion. So as you can see in the chart, our budget foreign exchange rate is JPY 140 per dollar. And the result, the average foreign exchange rate during the first half is JPY 152.3. And as I mentioned, again, that pushed up our sales in yen and profit. Regarding our balance sheet and cash flow, as I mentioned, we are in the process of constructing a new plant in Chiyoda. That will increase the fixed asset. And because our goodwill are all denominated in U.S. dollars, so that was pushed up by the depreciation of yen. And we kind of do like some cash management, reducing our cash balance and repaid some debt. So overall, net debt ratio stayed the same level at 0.8 compared to the end of last year. Regarding cash flow, we had a tax redemption of JPY 1.5 billion. That mostly covered our expense in -- for the -- for our new plant. And again, we use our reduced cash balance to reduce our debt. So our revised forecast for 2024 as of the end of first half or second quarter, our revised forecast of sales is JPY 20.4 billion, which is a little more than 10% less than the original budget. For the operating profit, our revised forecast is JPY 2.5 billion, down almost by 40% compared to original budget and down almost 30% by the 2023 result. For this revised -- and for the net income, revised forecast is JPY 1.6 billion, which is over 2/3 of original budget and more than 30% down from the net income in 2023. So the assumption for this revised forecast is that there are several factors that I discussed that pushed down our numbers during the first half. And we assume that all these factors remain -- will remain the same during the second quarter. And one thing that will be different is that we revised up the foreign exchange budget from JPY 140 per dollar to JPY 145 to dollar. And the actual average forecast foreign exchange rate during the first half is JPY 152.3 per dollar. But in July, yen bounced back at the level from the level of JPY 160 to JPY 140. So it is very difficult to forecast the average foreign exchange rate during the second quarter, but we change the foreign exchange rate from JPY 140 to JPY 145, which will increase our sales number in yen and also that will contribute to the increase of profit. But the sales volume will remain fairly weak for the same reasons that worked against us during the first quarter. So we are not expecting the sales in furniture picking up during the second half. Sales for the -- in the aviation area will a little bit slow down during the second half because first half of this year was too good. So throughout the year, the sales of aviation will be as we originally forecasted. And for the automotive area, slowdown of usage of our product for seat interior will remain low due to the model change process of our customer, and that may not change up until the beginning of fourth quarter, which means that even if our customer successfully completed -- completes the model change, that won't contribute to our sales during this year. So as you can see, sales will be down about 10%, whereas operating profit will be down almost 40%, and net income will be down by 33% because we still are bullish about the view of our business in the midterm and long term. So we continue to make investment for the future, including our investment in a new plant in Chiyoda and sustainability and the people and the product development. And also during this first half, we spent a lot of money for the quality control and the various testing to maintain the high quality of our product. And these are the investments we need to make for our future. So I'm not very happy about revising down our numbers, but I appreciate if you understand this happens because of our investment for the future when the sales is not going well. So our strategy for the second half remains the same. Again, we believe that our business will grow midterm and long term. So we keep on expanding our partnership with production partner and product development partner. And we started with business partners here in Japan, but we are planning to expand that to our partners overseas. But we understand and we know that our stock price has not been performing well during the first half of this year. And as a result of revising down our net income for this year, our forecasted ROE will go down to 9.4%, which is satisfactory to me and also 9.4% is lower than our capital cost. And that resulted in our PBR is lower than 1.0 right now. So we will consider to change the situation by improving -- not just improving the business and business profitability, but we will consider what is our optimal capital structure given the current business numbers. And also, we would like to increase and improve the communication with the investor community so that we can reduce the volatility of our stock price. So this is it for today. Thank you for your time, and I really appreciate your attention to our company. Thank you.