Earnings Call: Q3 2021

Feb 9, 2021

Thank you very much for joining us today despite your busy schedule. On behalf of Store Group, I like to take this opportunity to extend my gratitude towards your continued understanding and interest in our management and business activities. Now, I would like to follow the table of contents shown on page 1. I would like begin with a brief summary of business results for the Q3 ended December 31, 2020. Please turn to Page 3. Consolidated revenue for the 9 months period declined 14% compared with the same period a year earlier to 1364,200,000,000 yen Core operating income fell 30 5.7 percent to 67,000,000,000 yen and profit declined by 62.8% to 27,900,000,000 yen Meanwhile, core operating income for the 3 months of the third quarter increased slightly from the same period of the previous fiscal year. Page 4 is about special items. Special items for the 9 months period worsened by 25,900,000,000 yen to minus 30,800,000,000 yen compared with the same period of the previous fiscal year, mainly due to our U. S. Carbon fiber related subsidiary recording impairment losses. Page 5 is about assets, liabilities, equity and free cash flow. As of end of December 2020, total assets stood at 2773,100,000,000 yen up 39,600,000,000 yen from the end of the previous fiscal year, mainly due to increases in cash and deposits. Owner's equity was JPY 1150,700,000,000 interest bearing liabilities was JPY 1015,700,000,000 and DE ratio was 0.88. Free cash flow was 52,500,000,000 yen Page 6 explains about capital expenditures, depreciation and amortization and R and D expenditures. Capital expenditures for the 9 months period was 93,800,000,000 yen depreciation and amortization was 88,700,000,000 yen and R and D expenditures was 44,900,000,000 yen This graph on page 7 describes the factor analysis of 37,200,000,000 yen decrease in core operating income for the 9 months period on a year to year comparison. The difference in quantity was a minus 73,900,000,000 yen due to decrease in sales and production impact of COVID-nineteen. The net change in price was a +7,400,000,000 yen This was due to the decline in raw material prices compared with the same period of the previous fiscal year. Cost variance, etcetera, was plus 30,300,000,000 yen as a result of efforts to reduce operating expenses, production and other expenses. The chart on page 8 shows the revenue and core operating income results by segment. Using page 9 and after, I would like to explain the results of each segment. First, Fibers and Textiles. Revenue of the overall segment declined 16.4 percent to 536,300,000,000 yen compared with the same period of the previous fiscal year. And core operating income fell 41.7 percent to 28,000,000,000 yen The net change in price was positive, reflecting the decline in raw materials prices and the company has been working on cost reduction. However, difference in quantity was significantly negative due to the impact of the stagnation of production activities and consumption behavior caused by the COVID-nineteen in Japan and overseas. In apparel applications, demand declined due to lockdown and excessive channel inventory in various countries. While in industrial applications, general purpose materials remained weak and sales volume declined. Demand for nonwoven fabrics increased for the applications of medical gowns and masks and there were signs of recovery in the automotive applications. But these factors fell short of offsetting the decline in the overall sales volume in the segment. Page 10 is the Performance Chemicals segment. Revenue declined 10.7 percent to 519,900,000,000 yen compared with the same period of the previous fiscal year and core operating income increased 1.4% to 47,600,000,000 yen. Difference in quantity was negative due to the impact of the stagnation of production activities caused by the COVID-nineteen. Meanwhile, cost variance, etcetera, was positive because of the cost reduction efforts and the net change in price also turned positive reflecting the decline in raw materials prices. I would like to explain the conditions of each business on the next page 11. The resins business was affected by the stagnation in production activities caused by the COVID-nineteen, but demand was strong in the 3rd quarter with automobile manufacturers operating and the recovery of the Chinese economy. The chemicals business was affected by the deteriorating market conditions in first half of the fiscal year, but saw a recovery trend in the basic chemicals market in the Q3. In the films business, battery separated films for Lithium Mine secondary batteries were affected by lower market prices, while polyester films for optical applications and electronic components performed strongly. In the electronic and information materials business, electronic circuit materials were weak, but OLED related demand increased in the 3rd quarter. Page 12 is the Carbon Fiber Composite Materials segment. Revenue declined 24.8 percent to 900,900,000,000 yen compared with the same period of the previous fiscal year and posted core operating loss of 3,700,000,000 yen a decline of 21,800,000,000 yen from a year earlier. Torii Group worked toward drastic cost reductions and sales of wind turbine blades in the industrial applications remained strong, while aerospace applications were affected by the decline in the production rate of commercial aircraft. I would like to explain the status of each application on the next page 13. Aerospace applications were affected by the decline in the production rate at major customers due to the impact of COVID-nineteen as well as shutdown of plants. Although sports applications were affected by COVID-nineteen, demand for bicycles, fishing rods and golf shaft applications for outdoor leisure showed a recovery trend in the 3rd quarter. In terms of regulatory products among the industrial applications, demand environment and energy related fuels led by compressed natural gas tank applications and the automotive applications for luxury cars in Europe were weak due to the impact of COVID-nineteen. As for large tow products, shipment of wind turbine blade applications remains strong. As for composite business, shipments of materials of medical devices for the diagnosis of COVID-nineteen pneumonia expanded. Meanwhile, sales at an overseas composites related subsidiary decreased due to the lower demand for automotive applications with the impact of COVID-nineteen. Page 14, in the environment and engineering segment, revenue declined 4 point 4 percent to 100 and 24,600,000,000 yen compared with the same period of the previous fiscal year, while core operating income rose 44.9 percent to 8,000,000,000 yen In the water treatment business, demand for reverse osmosis membranes and other products remained strong on the whole despite shipment to some regions being affected by the COVID-nineteen. Among domestic subsidiaries in the segment, an engineering subsidiary subsidiary posted profits from progress in a large scale construction project and completion of a real estate project. Page 15 is the Life Science segment. Revenue declined 4.8 percent to 38,400,000,000 yen compared with the same period of the previous fiscal year, while core operating income rose 9 point 3 percent to 1,800,000,000 yen In the pharmaceutical business, sales of pyrrhizus treatment, RENIC, were influenced by the introduction of its generic versions and there was an impact of a major NHI drug price revision in April last year. In the medical devices business, shipment of dialysis grew strongly in Japan and overseas despite the impact of medical institutions postponing non urgent operations due to the spread of the COVID-nineteen. The company implemented cost reductions including operating expenses. Page 16 shows the business results of major subsidiaries and regions. At our subsidiaries in Southeast Asia, the fibers and textiles business remained sluggish in both apparel and industrial applications due to the impact of COVID-nineteen. In the Performance Chemicals business, sales of ABS regions were strong due to a recovery in demand in the Chinese market mainly for use in home appliances as well as the improved spread. As for subsidiaries in China, sales for nonwoven fabrics in the fibers and textiles business remained strong on the back of increased demand for masks due to the impact of COVID-nineteen. However, sales for apparel applications remained sluggish. As regards to subsidiaries in the Republic of Korea, the fibers and textiles business were affected by worsening market conditions. However, sales for nonwoven fabric applications remained strong on the back of increased demand for masks due to the impact of COVID-nineteen. The spread improved with the decline in raw material prices. In the Performance Chemicals business, polyester films performed strongly, but demand for battery separated films for lithium ion secondary batteries were affected by the decline in market prices. Next, I would like to explain the consolidated business forecast for the fiscal year ending March 2021. Please turn to page 18. Forecast for the fiscal year ending March 2021 are based on the assumptions that the spread of COVID-nineteen will repeat the cycle of slowing down and re spreading, but eventually subside. And the economy in Japan and overseas would follow a gradual recovery trend. Toray revised its consolidated business forecast announced on the 6th November last year, taking into consideration its business performance of the 9 months period of the fiscal year and the changes in the business environment. The company now expects revenue at 1870,000,000,000 yen core operating income at 90,000,000,000 yen and profit at 39,000,000,000 yen This forecast from January onwards is based on an assumed foreign currency exchange rate of 105 yen to the U. S. Dollar. Page 19 indicates the consolidated business forecast for the fiscal year ending March 2021 by segment. Next page 20 shows the comparison of core operating income between the previous forecast and the new forecast with breakdowns into segments.