Earnings Call: Q2 2022

Aug 12, 2021

Thank you very much to all of you for joining us today in karate group's financial results briefing. I'm President and Representative Director of karate Hitoshi Kawahara. Due to the ongoing impact of the COVID-nineteen, please allow us to be holding this briefing again online. It has been over half a year since I assumed the post of President. And since then, I have had many dialogues and discussions with employees at each of our domestic and overseas bases through the use of web conferencing, which has become a new standard in the management of our company under this COVID-nineteen situation. And in that experience, I have been repeatedly reminded of the vitality and the potential of people working in this Kvaro group. I've been immensely encouraged by it leading the group. With that, I'm here determined and committed to gather all the strength that we have to create a career group that arrives with its full vitality and creativity. We very much appreciate your continuous interest and wealth awaits ahead of us. Now let me share with all of you a summary of our financial results for the Q2 of fiscal year 2021. This is Page 2. Here in this table are the results of the first half of fiscal year twenty twenty one. The economic recovery driven by the U. S. And the China market led to increased demand and sales in many of our businesses. As a result, as shown on this page, net sales increased by 40,300,000,000 yen year on year to 302,300,000,000 yen Operating income increased by 10,800,000,000 yen to 30,400,000,000 yen and net income increased by 2,500,000,000 yen to 11,700,000,000 yen resulting in a significant increase in both sales and profit. The actual numbers for foreign exchanges and raw fuel are shown in the table below. Page 3. This slide is representing a company wide operating income bridge, a breakdown of factors affected the change in operating income. The volume difference was the factor brought 18,100,000,000 yen increase in the profit as the sales increased and the capacity utilization improved in many businesses. As a result of all these, overall profit increased by 10,800,000,000 yen offsetting the increase in raw fuel costs and the logistic costs. This is Page 4. Fiscal year 2021 has a single year management plan, and it is a year that connects the previous midterm management plan, which run up to 2020 and the next midterm management plan starting 2022. This slide is highlighting the key management issues for 2021 and the progress we have made so far. As for the capital investment set in the previous midterm management plan, we're making steady progress toward its launch with thorough health and safety management, though having this difficult situation with COVID-nineteen. In the Environmental Solutions business, we integrated the Calgon Carbon Division and the Carbon Materials Division, a name product of both being activated carbon, and managed to establish a unified management system. Through the integrated management, we will further accelerate our initiatives to maximize the synergies. The decision on the new EVOL plant will be made at an early stage of the next midterm business plan formulation, which will start next year. The expansion of copper clad laminates, Baxter FCCL, will be carried out in line with the advancement of 5 gs market penetration. In promoting our digital strategy, we launched the Global Digital Transformation Promotion team on July 1. This team will be responsible for developing and driving a comprehensive global digital strategies to enhance the unification and execution speed of the company's digital strategies. Now we are moving on to Page 5. In light of the first half results and the current business environment, we have revised our full year earnings forecast for fiscal year 2021. Net sales are expected to increase by 40,000,000,000 yen from the previous forecast to 610,000,000,000 yen operating income by 11,000,000,000 yen to 66,000,000,000 yen and net income by 3,000,000,000 yen to 33,000,000,000 yen As reported in the results for the first half part, sales have been growing in many of our core businesses. Demand is expected to remain strong in the second half of the fiscal year, and we expect to increase both sales and profits to offset rising raw fuel costs and logistic costs. Page 6, please. This slide shows the trends in sales and operating income from fiscal year 2017 to 2021. Although the tough business environment continued throughout fiscal year 2019 2020, we expect both net sales and operating income to recover significantly into fiscal year 2021. And as a result of it, we expect net sales to exceed the 2018 level, 603,000,000,000 yen and operating income of 65,800,000,000 yen This means that the net sales beat the record high. Please see Page 7. For fiscal year 2021, we plan to pay an interim dividend of 20 yen per share and a year end dividend of 20 yen per share in line with the policy of the previous midterm plan, total return ratio of 35% or more and a dividend of 40 yen or more per share. Assuming the full year net income forecast of JPY 33,000,000,000 as mentioned earlier, the dividend payout ratio will be 41.7%. Now Page 8. In this slide, I would like to introduce some of our initiatives for the next midterm management plan, which is currently being formulated. In this section, innovation, sustainability and people are listed as important themes that the Kari Group should address from across organizational and global perspectives. With regard to innovation, we will build a system in which members with various skills and experiences in R and D, production and technology, marketing, etcetera, will work globally beyond the boundaries of their organizations to create new businesses on a continuous basis. In our sustainability efforts, the Kware Group aims to become carbon neutral by 2,050. Specific methods for reducing greenhouse gases and interim targets will be announced at a later date. At the same time, we'd like to enhance our products and services that contribute to the improvement of the natural and living environments and present them in an easy to understand form in the near future. Under the theme of people, we will utilize a diverse range of human resources on a global scale to create a company that is a great place to work. We will a corporate culture that boldly takes on challenges without fear of making a few failures on a way to progress. As a foundation to support our various measures, we're working to establish a competitive advantage through the use of digital technologies. With regard to digital transformation, the global digital transformation promotion team, which was launched on July 1, will take the lead in accelerating process reforms and innovation creation. And the initiatives and the initiatives to be incorporated into the next midterm management plan. From here, I, Keiji Taga, will explain the details of the financial results. This is Page 10. This slide shows the Q2 results for net sales and operating income for each segment compared to the same period last year. As explained by Mr. Kawahara earlier, as a result of growing demand and increased sales, many of our businesses achieved year on year increases in both sales and profit. Please see Page 11. The following is the description of the business situation by segment. The first is the Vinyl Acetate segment. Both sales and profit increased in this segment compared to the previous year. As for the sales status of each business, please refer to the comments at the top right of this page. Operating income increased by 7,700,000,000 yen from the previous year. The reason for this are as follows: volume brought 12,000,000,000 yen increase in profit with increase in sales in all businesses. As a result of price negotiations, selling price product mix brought 3,000,000,000 yen profit increase. In raw materials, fuel and exchange rates, raw fuel prices remained at high levels, resulting in a profit decline of 6,600,000,000 yen Others was a negative factor of 700,000,000 yen mainly due to an increase in logistic costs. This is Page 12. In the Isoprene segment, sales and profits increased in the 2nd quarter compared to the previous year. Please refer to the comments in the top right table for the sales status of each business. Operating income increased by 1,100,000,000 yen. Volume was a factor contributing to an increase of 2,100,000,000 yen due to an increase in the sales volume. Selling price product mix brought 300,000,000 yen increase. In raw materials, fuel and exchange rates, high raw material and fuel prices continued, hence resulting in the decline in profits of 1,100,000,000 yen As for others, though depreciation expenses dropped, an increase in the logistics expenses resulted in bringing the profit decrease of 200,000,000 yen Page 13. In the Functional Materials segment, sales and profits increased in the Q2 compared with the same period of the previous fiscal year. The status of sales for each business is as shown in the comments at the top right. Operating income increased by 2,000,000,000 yen Volume has given an increase in a profit of 2,800,000,000 yen with increased sales in each business segment. Selling price product mix has given an increase of 400,000,000 yen Raw materials, fuels and ForEx brought a negative impact of 600,000,000 yen in profit. In terms of others, there was a decrease in amortization of goodwill, but with the increase in logistics costs, there was an overall negative 700,000,000 yen impact to profit. Please see Page 14. In the Fibers and Textiles segment, sales and profits increased in the Q2 compared with the same period of the previous year. Please refer to the comments listed in the top table for the status of sales in each business. Operating net income increased by 0.3000000000 yen In terms of volume, there was a positive 1,300,000,000 yen impact as the sales of each business grew. Selling price product mix has contributed to be giving minus 400,000,000 yen impact to profit. This is with the product mix change that happened. Raw materials, fuels and ForEx gave a minus 200,000,000 yen impact. And as for others, a negative impact of 400,000,000 yen was given to profit with the increase in logistic costs. Please see Page 15. This slide shows the cash flow and key indicators for the first half of fiscal year twenty twenty one. Operating cash flow was 21,100,000,000. Investment cash flow was minus 37,800,000,000 and free cash flow was minus 16,700,000,000. On an acceptance basis, capital investment decreased by 6,000,000,000 yen year on year to 34,800,000,000 yen while having the construction of a new plant in Thailand. Depreciation and amortization expenses decreased by 2,200,000,000 yen to 28,800,000,000 yen Research and development expenses were 10,300,000,000 yen the same amount as the same period of the previous year. Please see Page 16. This slide shows the assets section of the balance sheet compared to the end of last year. Current assets decreased by 28,100,000,000 yen in total as trade receivables increased by approximately 12,000,000,000 yen due to the increase in sales, but cash and deposit decreased by approximately 42,000,000,000 yen due to the redemption of commercial paper. Fixed assets increased by 22,400,000,000 yen This was due to the increase coming from the capital investment plus the increase in the valuation of fixed assets of overseas subsidiaries due to the depreciation of the yen. This is Page 17. This slide shows the liabilities and the net asset section of the balance sheet. Total liabilities decreased by 36,100,000,000 yen. In addition to the redemption of commercial paper and corporate bonds, the main factor was the payment of a settlement for a fire incident at our U. S. Subsidiary. Net assets increased by 30,400,000,000 yen As a result, the capital adequacy ratio increased by 3 points from the end of the fiscal year 2020 to 50 point 5%. Page 18. In this slide, we will explain our full year earnings forecast for fiscal year 2021. Net sales and profits are, as Mr. Kawahara explained earlier, net income per share will be JPY 95.93 based on the JPY 33,000,000,000 The company plans to pay an annual dividend of 40 yen per share. The capital investment that's currently decided is 50,000,000,000 yen On an acceptance basis, we expect to receive 80,000,000,000 yen through the expansion of activated carbon production facilities at Calgon Carbon in the U. S. And the construction of a new isoprene plant in Thailand. Depreciation and amortization is expected to drop by 4,500,000,000 yen to 58,000,000,000 yen R and D expenses are expected to increase by JPY 400,000,000 to JPY 21,000,000,000 Please see Page 19. This slide shows the revised forecast that's compared with the previous year's results and the previous forecast. Since we did not revise our full year forecast when we announced our Q1 results in May, the previous forecast is the same as the initial forecast. Compared to the results of the previous fiscal year, we're expecting sales increase of more than 10% in most segments and we're expecting profits to increase in all segments. In comparison with the previous forecast too, sales and profits will be more in almost all segments. Now Page 20. This slide shows the breakdown of which factor is affecting how much the operating income when compared to fiscal year 2020. The volume will push up the operating income by 29,800,000,000 yen due to the sales continuing to stay strong from the first half and onwards. Selling price product mix factor will give another positive 15,900,000,000 yen impact where the price increase penetrates through the market more. These factors will compensate the negative impact, which will be given by the increases in raw fuel and logistics costs, resulting in an overall profit increase of 21,700,000,000 yen Page 21. This slide is for your reference. Operating income bridge analysis is provided for each segment. Page 22. This slide shows a comparison between the revised forecast for fiscal year 2021 and the actual result of fiscal year 2020. This is Page 23. Another page for your reference. Here, we are comparing the net sales revised forecast for 2021 and the 2020 actuals for each segment. The last page is this Page 24. Here, each segment's operating income revised forecast for 2021 is compared with the results of the previous year. Thank you very much for your attention. This concludes our presentation.