Earnings Call: Q2 2025

Nov 7, 2024

Summary

H1 revenue rose 7.9% and operating income reached a six-month record, up 62.6% YoY. The FY2025 forecast was raised, with demand recovery, pricing and higher utilization supporting results.

Thank you very much for joining us today despite your busy schedule. On behalf of Toray Group, I would like to take this opportunity to extend my gratitude towards your continued understanding and your interest in our management and business activities. Now, I would like to report Toray's business results for the second quarter ending September 30, 2024, and the business forecast for the fiscal year ending March 2025. Now, I would like to follow the table of contents shown on page one. This is a summary of the business performance and forecast. Operating income over the first six months was JPY 79.1 billion, a significant increase compared with the same period of the previous year. It is a record high as for business results for the six months. Based on the business operation for the first six months and other factors, we revised upward the business forecast for the fiscal year ending March 2025, which was announced on May 13. Furthermore, the company resolved to repurchase shares of its common stocks at the Board of Directors meeting held on November 7. in May 2024, the company announced a policy for accelerating capital efficiency improvements by reducing cross-shareholdings by half over three years from FY 2024 to 2026, also stating that all proceeds from sales of cross-shareholdings would be used for share buybacks. This resolution for repurchased shares is pursuant to this policy for reduction of cross-shareholdings. I will explain the details starting from the next page. I would like to begin with a brief summary of business results for the second quarter ending September 30, 2024. Please turn to page four. Consolidated revenue for the six months increased 7.9% compared with the same period a year earlier to JPY 1,294.1 billion. Operating income increased 62.6% to JPY 79.1 billion, and profit increased 92.3% to JPY 55.5 billion. Page five is about special items. Special items for the six months improved by JPY 4.6 billion to positive JPY 0.4 billion compared with the same period of the previous fiscal year. Page six is about assets, liabilities, equity, and free cash flow. As for financial condition at the end of September 2024, both assets and liabilities were affected by the decrease in translated yen from its overseas subsidiaries due to appreciation of the currency. Total assets stood at JPY 3,365.9 billion, down JPY 100.7 billion from the end of the previous fiscal year due to decreases in trade and other receivables. Total liabilities decreased JPY 92.6 billion from the end of the previous fiscal year to JPY 1,527.6 billion, owing mainly to decreases in bonds and borrowings. Total equity decreased by JPY 8.1 billion compared with the end of the previous fiscal year to JPY 1,838.3 billion. Owner's equity was JPY 1,726.8 billion, interest-bearing liabilities was JPY 889 billion, and equity ratio was 0.51. Free cash flow was positive at JPY 65.4 billion. Page seven explains about capital expenditures, depreciation and amortization, and R&D expenditures. Capital expenditures for the six months increased by JPY 33.3 billion to JPY 88.4 billion on a year-to-year comparison. Meanwhile, depreciation and amortization increased by JPY 1.4 billion to JPY 66.4 billion. R&D expenditures increased by JPY 2.2 billion to JPY 35 billion compared with the same period of the previous fiscal year. The table on page eight describes revenue and operating income by segment. In addition, the graph on this page shows the factor analysis of JPY 30.5 billion increase in operating income for the six months on a year-to-year comparison. Production and sales in the Fibers & Textiles, Performance Chemicals, and Carbon Fiber Composite Materials segments have expanded, capturing a demand increase and recovery. As for the net change in price, strategic pricing has proceeded at a pace exceeding the plan and contributed to the increase in operating income. Operating income increased 62.6% compared with the same period of the previous fiscal year, and operating income margin rose 2.1 points as a result of capturing a strong demand and promotion of the structural reform. Using page 9 and after, I'd like to explain the results of each segment. First, Fibers & Textiles. Revenue of the overall segment increased 7.1% to JPY 515.5 billion compared with the same period a year earlier, and operating income increased 26.6% to JPY 34.4 billion. Apparel applications were robust overall as cargo movement of the summer clothing in Japan and shipment from overseas trading subsidiaries was strong. In the industrial applications, airbag textiles in the automobile applications were strong by capturing the increase in demand. Page 10 is the Performance Chemicals segment. Revenue increased 10.3% to JPY 477.5 billion compared with the same period a year earlier. Operating income significantly increased 134.2% to JPY 34 billion as demand recovery and improvement in the utilization rate in the Films business have contributed to improvements in profit. I'd like to explain the conditions of each business on the next page. Resins business affected by the production decline in some Japanese automobile manufacturers, but demand recovered in non-automobile applications for China and ASEAN. The Chemicals business remained strong. In the Films business, profit improved due to demand growth in electronic parts-related applications, owing to a rebound from inventory adjustments in the supply chain, as well as improvement in the utilization rate. In the Electronics and Information Materials business, demand for OLED-related materials and circuit materials saw some recovery. Breakdown of increase in operating income by segment is shown in the graph on the right. In addition to the demand recovery in the Resins and the Films business, effects of the profitability improvement project, also known as PIPRO, implemented at overseas subsidiaries contributed to the increase in core operating income. Page 12 is the Carbon Fiber Composite Materials segment. Revenue increased 8.3% to JPY 152.8 billion compared with the same period a year earlier, and the segment posted operating income of JPY 11.7 billion, 54.4% increase from the same period a year earlier. In addition to the recovery in sales volume of the airframe applications, decreases in utility costs from lower electricity and natural gas prices in Europe contributed to the increase in operating income. I'd like to explain the status of each application on the next page. In the aerospace applications, demand from a major customer recovered steadily. In the sports applications, inventory adjustments continued in the general-purpose products for outdoor leisure, but sales of high-end products was strong. In the industrial applications, the wind turbine blade applications saw a gradual recovery. Page 14, in the Environment & Engineering segment, revenue increased 2.6% to JPY 114.5 billion compared with the same period a year earlier, and operating income increased 15.9% to JPY 11.8 billion. In the water treatment business, demand remained strong, but shipments for a major product in the Middle East were strong. Furthermore, sales of an engineering subsidiary in Japan was strong. Page 15 is Life Science segment. Revenue increased 3.2% to JPY 25.6 billion compared with the same period a year earlier, and operating income decreased by JPY 0.1 billion to negative JPY 0.6 billion. The pharmaceutical business was impacted by the penetration of generic versions of our drugs and the NHI drug price revision. In addition, sales volume was stagnant overseas. In the medical devices business, shipments of dialyzers were strong in Japan and overseas, but were affected by the soaring prices of raw materials and fuels. Page 16 shows the business results of major subsidiaries and regions. At Toray International, sales of Resins, Films, and Electronics and Information Materials businesses was strong. At the subsidiaries in Southeast Asia, in the Fibers & Textiles business and automobile applications in the Industrial Applications was strong. In the Performance Chemicals business, demand for ABS resins in China and ASEAN was on a recovery trend. At the subsidiaries in China, in the Fibers & Textiles business, apparel applications and industrial applications, especially in the automobile applications, were strong. In the Performance Chemicals business, sales of resins were strong. As for our subsidiaries in the Republic of Korea, in the Fibers & Textiles business, supply and demand balance of nonwoven fabric worsened. However, the spread of filaments and staple fibers improved. In the Performance Chemicals business, sales of films and electronic and information materials were strong. Next, I'd like to explain the consolidated business forecast for the fiscal year ending March 2025. Please turn to page 18. The global economy is likely to gradually recover, along with the decline in inflation rate and monetary easing. The Japanese economy is also expecting a gradual recovery. However, the downward risks for the economy in Japan and overseas include potential changes in fiscal and trade policies in the U.S. following the presidential election, prolonged real estate recession in China, and the impact on consumption in the U.S. and Europe caused by their financial policies, as well as changes in the Bank of Japan's monetary policy and foreign exchange fluctuations. For the fiscal year ending March 31, 2025, Toray revised its full-year consolidated forecast announced on May 13, 2024, taking into consideration its business performance for the six months of the fiscal year and the changes of the business environment. It now expects revenue of JPY 2,590 billion, operating income of JPY 145 billion, and a profit of JPY 88 billion. This forecast from October onwards is based on an assumed foreign currency exchange rate of ¥140 to the US dollar. Page 19 shows the consolidated business forecast for the fiscal year ending March 2025 by segment. Page 20 shows a comparison of core operating income between the initial forecast and the new forecast, with breakdowns into segments. The factors behind the differences are shown on the right side of the table. Next, I would like to explain about the progress of medium-term management program, Project AP-G 2025. On page 22, I'd like to explain about the business structure reform based on the four categories of growth potential and profitability as a measure to improve each business field. The figure in the bottom right is the four categories of growth potential and profitability. The pink business fields in the left half of the figure are the low profitability businesses. Not only do we promote business structure reform for low growth and low profitability businesses for such business fields, but we also implement the projects to improve profits of specified businesses and companies. Lastly, I'll explain about improvement of governance and incentive program of the employee stock ownership association. As it takes a certain amount of time to develop and commercialize our materials, we value management from a long-term perspective and set a relatively high ratio of fixed portion in the remuneration system for the members of the Board of Directors to avoid short-sighted management. While we acknowledge that a long-term perspective is still important, in order to achieve sustainable growth, even in a rapidly changing business environment, we will set KPIs for medium to long-term management issues to clarify performance responsibility and encourage management from a medium to long-term perspective. We will also consider introduction of a restricted stock remuneration system, aiming for the management with an awareness of the stock price. As for stocks, we have improved the incentive program to promote the welfare of employees and increase their sense of participation in the company's management. This concludes my presentation. Thank you very much.