Earnings Call: Q1 2021

Aug 11, 2020

Thank you very much for joining the teleconference today despite your busy schedule. On behalf of Tori Group, I would 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 report Toray's business results for the Q1 ended June 30, 2020 and the business forecast for the fiscal year ending March 2021. Please be reminded that we have applied International Financial Reporting Standards or IFRS from this fiscal year and the figures on the following pages are in accordance with IFRS. Now, I would like to follow the table of contents shown on Page 1. I would like to begin with a brief summary of business results for the Q1 ended June 30, 2020. Please turn to Page 3. Consolidated revenue for the Q1 declined 22.5% compared with the same period earlier to 397,600,000,000 yen. Core operating income decreased 63.7% to 12,500,000,000 yen, while profit declined by 63% to 9,500,000,000 yen. Page 4 is about special items. Special items for the Q1 worsened by 2,100,000,000 yen to minus 3,000,000,000 yen compared with the same period of the previous fiscal year. Moving on to page 5, here shows the summary of the balance sheet and free cash flow. As of end of June, total assets stood at 2724,300,000,000 yen, a decrease of 9,300,000,000 yen from the end of the previous fiscal year, mainly due to declines in trade receivables. Total liabilities decreased by 12,100,000,000 yen to 1520.5 billion yen compared with the end of the previous fiscal year, owing mainly to declines in trade payables. Total equity increased by 2,900,000,000 yen compared with the end of the previous fiscal year to 1,203,700,000,000 yen. Owners' equity was 1,120,600,000,000 yen, interest bearing liabilities was 1025,800,000,000 yen and DE ratio was 0.92 points. Free cash flow was positive at 25,200,000,000 yen. Page 6 explains about capital expenditures, depreciation and amortization and R and D expenditures. Capital expenditures for the Q1 increased by 2,400,000,000 yen to 29,200,000,000 yen on a year to year comparison. Meanwhile, depreciation and amortization decreased by 100,000,000 yen to 29,300,000,000 yen and R and D expenditures decreased by 1,300,000,000 yen to 15,000,000 yen compared with the same period of the previous fiscal year. The forecast for capital expenditures for the current fiscal year has been revised from the initial forecast of 163,000,000,000 yen to 143,000,000,000 yen, reflecting changes in the business environment, including decrease in demand due to the spread of COVID-nineteen and other factors, as well as delays in the progress of construction works. Forecast for depreciation and amortization has also been revised from the initial forecast of 120,000,000,000 yen to 117,000,000,000 yen. Meanwhile, there are no changes to the initial forecast for R and D expenditures. Next, this graph on page 7 describes the factor analysis of 22,000,000,000 yen decrease in core operating income for the current Q1 on a year to year comparison. The difference in quantity was a minus 34,400,000,000 yen due to decrease in sales and production with the impact of COVID-nineteen. The net change in price was a +4.9000000000 yen. This was due to the decline in raw materials prices compared with the previous fiscal year. Cost variance, etcetera, was plus 8,300,000,000 yen as a result of efforts to reduce operating expenses and other costs. 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. 1st, Fibers and Textiles. Revenue of the overall segment declined 25.9 percent to JPY145.0 billion compared with the same period of the previous fiscal year and core operating income fell 50.3% to JPY7.2 billion. The net change in price was positive, reflecting the decline in raw materials prices. 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, both in Japan and overseas. In the apparel applications, demand declined due to lockdown and closure of retail stores in various countries. While in the industrial applications, sales volume for the mainstay automotive applications decreased as automobile manufacturers suspended operations and decreased production volume. Demand for nonwoven fabrics increased for the applications of medical gowns and masks that fell short of offsetting the decline in overall sales volume in the segment. Page 10 is the Performance Chemicals segment. Revenue declined 21.2 percent to JPY154.6 billion compared with the same period of the previous fiscal year And core operating income fell 51.9 percent to 8,100,000,000 yen. The net change in price significantly turned negative being affected by the stagnation of production activities caused by the COVID-nineteen. Among Japanese subsidiaries, a trading subsidiary recorded an allowance for doubtful accounts, which has been reflected in the company's results. I would like to explain the conditions of each business on the next page. First, in the resins business, demand from the automotive and industrial applications declined in Japan and overseas. The chemicals business was affected by the decline in the basic chemicals market. In the films business, wall sales of packaging materials was strong, reflecting the growing demand for whole meal, demand for battery separator films for lithium ion secondary batteries and polyester films remained low. The Electronic and Information Materials business was affected by decline in the production of OLED related materials. Page 12 is the Carbon Fiber Compress Materials segment. Revenue declined 26.2 percent to 45,400,000,000 yen compared with the same period of the previous fiscal year and core operating income fell 73.4 percent to 1,700,000,000 yen. The entire group worked towards cost reduction and applications including wind turbine blades and casings remained strong, while aircraft applications were affected by the decline in the production rate of large sized passenger aircraft. I would like to explain the status of each application on the next page. Aerospace applications were affected by the decline in the production rate of aircraft at major customers due to the impact of COVID-nineteen as well as shutdown of plants. Sports applications were impacted by lower operating rates at production basis in Asia, particularly in China due to the spread of COVID-nineteen. In terms of regulatory products among the industrial applications, demand for environment and energy related fields 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 remained strong. As for composite business, materials for PC chassis remained strong and shipments of materials of medical devices for the diagnosis of COVID-nineteen pneumonia increased. Meanwhile, sales at an overseas composites related subsidiary decreased due to lower demand with the impact of COVID-nineteen. Page 14, in environment and engineering segment, revenue declined 11.2% to 37,200,000,000 yen compared with the same period of the previous fiscal year and core operating income declined 40% to 800,000,000 yen. In the water treatment business, demand for reverse osmosis membranes and other products grew strongly on the whole, while shipment to some regions were affected by the COVID-nineteen. Among domestic subsidiaries in the segment, a construction subsidiary was negatively affected by the suspension of works to prevent the spread of the COVID-nineteen and an engineering subsidiary experienced decreases in the shipment of some electronics related equipment. Page 15 is the Life Science segment. Revenue declined 7.5 percent to 11,600,000,000 yen compared with the same period of the previous fiscal year. And core operating income fell 87.5 percent to JPY0.1 billion. In the Pharmaceutical business, sales of pruritus treatment, REMAGE, were influenced by the introduction of its generic versions as well as by a major NHI drug press revision in April this year. In the Medical Devices business, shipments of dialysis grew strongly in Japan and overseas, though there was an impact of medical institutions postponing non urgent operations due to the spread of the COVID-nineteen. Page 16 shows the business results of major subsidiaries and regions. At Torii International, sales of fibers and textiles, resins, films and chemicals and carbon fiber composite materials remained weak. At Torii Engineering, shipment of electronics related equipment decreased. As for our subsidiaries in Southeast Asia, in the Fibers and Textiles business, sales for both apparel and industrial applications remained sluggish due to the impact of COVID-nineteen. The Performance Chemicals business was also impacted by sluggish demand for resins and films due to the spread of COVID-nineteen. As the subsidiaries in China, the Fibers and Textiles business were also impacted by COVID-nineteen and sales for both apparel and industrial 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, demand for battery separator films for lithium ion secondary batteries remained weak. 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 world would pass the peak of COVID-nineteen pandemic in the Q2 and economy in Japan and abroad would be on a gradual recovery track from the Q3 through the end of the fiscal year. Tore revised its consolidated revenue forecast announced on the 28th May this year to JPY1840 1,000,000,000 taking into consideration its business performance of the Q1 and changes in the business environment. The company has kept its consolidated forecast of core operation income and profit unchanged at JPY70,000,000,000 and JPY40,000,000,000, respectively. These forecasts from July 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. Page 20 shows comparison of core operating income between the initial forecast and the new forecast with breakdowns into segments. Despite the impact of the spread of COVID-nineteen, we will expand sales in markets where demand is growing and promote thorough cost reductions. This concludes my presentation. Thank you very much.