Earnings Call: Q3 2020

Jan 30, 2020

Hello. This is Kate Takato, representative director, senior managing executive officer, and head of business strategy department. Thank you for coming today despite your busy schedules. Without further ado, I'd like to go straight into the presentation. Foreign exchange rate assumptions for 3rd quarter results, as well as the full year forecast are as described here. For the third quarter, the yen was 109 yen against the dollar. The assumption for the fourth quarter is 190 against the dollar as well. Hit your review of profits and losses for the third quarter on a 9 month cumulative basis. Despite the prolonged slump in the global market, especially in the automobile market and the negative impact of a stronger yen compared to the previous year, domestic businesses like the housing business and the UIEP, urban infrastructure, and environmental products business per best firmly. As a result, sales and operating income were roughly unchanged from the previous year. On the other hand, ordinary income increased due to an improvement in nonoperating income from equity method investment income and miscellaneous income. Next, let's look at results by divisional company. The table on the left shows the results for the 3rd quarter. And the table on the right shows the results for 9 months. The HPP, High Performance Plastics Company in the 3rd quarter, recorded a sales in profit decline due to the impact from the sluggish global automobile market. As well as the impact from the consumption tax hike that led to a reactionary drop off in the domestic industrial businesses such as general purpose tapes. On the other hand, the housing company secured an increase in sales and profits by offsetting the impact from natural disasters as well as making progress on leveling out sales as we did in the 1st half too. Sales and profits have increased significantly even on a 9 month basis. Regarding the UIEP company, General purpose products for housing struggled as it was affected by the tax hike. Sales of prioritized products that contribute to natural disaster countermeasures and the facilitation of construction increased. And operating income reached the same level as the previous year. On a 9 month basis, profits increase. Next, let's look at the outlook for market conditions. The smartphone market performed in line with our October expectations. But we do not expect a rapid recovery going forward. As for automobiles, the global market for automobiles is trending lower than October expectations. We are still not seeing any signs of a recovery. In the upper right, regarding new housing orders, We achieved minus 7% year on year in third quarter. We continue to receive more orders compared to other companies. Domestic NAFTA prices are expected to be 41,000 yen for Q3 as originally anticipated. And the outlook is an increase to 45,000 yen in q 4. Let's look at the second half forecast for sales and operating income by divisional company. On the right side, the difference from the numbers announced in October is shown. On a total company basis, profits were revised down by 3,000,000,000 yen, as the global market is expected to remain sluggish for the HPP company. The forecast for total company's 2nd half operating profit is shown at the very bottom on the left side where it says total. We forecast total profit at 55,500,000,000, an increase of 2,000,000,000 year on year. By company, we aim to increase profits in all segments, including the medical business in the second half. And aim for the 2nd half record high profits. Next, let's look at the situation by quarter and by divisional company. The forecast for the fourth quarter by company are shown on the right hand side. I will go through them 1 by 1. In HPP, we will focus on the recovery of the electronics field, expansion of the building and infrastructure field, And in the automobiles and transportation field, we will focus on the expansion of high performance products, such as interlayer films, for head up displays. Additionally, by controlling fixed cost, we will aim to return back to profit growth in Q4. In the housing company, we will continue to level out sales, secure a high level of operating income, and aim to achieve the full year plan. In UIEP, we aim to increase profits by further expanding prioritized products and overseas businesses, which are positioned as growth drivers. In the medical business, we will continue to expand sales of diagnostic reagents overseas. And in the pharmaceutical sciences business, we will capture demand that has been pushed back into the 4th quarter due to customer reasons and aim to return back to profit growth. Here is an analysis of operating profit in the second half. Regarding the bar graph on the right, consolidated basis change includes one time expenses for the acquisition of 63 Aerospace Corporation, as well as one off costs regarding the integration of the US plant. That produces secondary structures like ducts. We also anticipate impact from production cuts from the aircraft manufacturer customer. Regarding sales quantity and composition, the breakdown of the difference is shown in the box. We will not achieve the target with the majority coming from HPP. However, we still expect an increase in profits year on year. On the other hand, we are working to further curb fixed costs and benefit from lower raw material prices so as to achieve this plan. As a result, we expect to see an increase in sales and profits in the second half. By offsetting the temporary increase in consolidation, related one time costs, and the negative impact from foreign exchange rates. Next, Let's look at the full year net sales and operating income forecasts by divisional company. As shown in the middle, We aim to increase sales and profits in all segments except for HPP. And we aim to achieve the highest annual profits in the UIEP and medical segments. We will also promote the selection and concentration of company wide R and D themes, so as to contribute to improved profits, As a result, the company aims to increase operating income by 1,300,000,000 yen to 97,000,000,000 yen for the full year. Here are the forecast for the entire company in fiscal year 2019. Operating income has been revised down by 3,000,000,000 yen, But we aim to grow top line so that we can achieve our targets for net sales, ordinary income, and net income. Ordinary income and net income will reach record highs if achieved. In particular, Net profit is expected to reach record highs for the 7th consecutive year. From here on, I will explain second half forecast by company. As explained earlier, operating income forecast for the HPP company has been revised down by 3,400,000,000 yen. Due to the effects of the prolonged stagnation of the global automobile market, exchange rates, and new consolidation. Our plan is to get back to profit growth, offsetting the negative impact from consolidated basis changes and currency with lower raw material costs, fixed cost reduction, as well as a recovery in the electronics field, an expansion in the building infrastructure field, and a recovery in domestic general purpose products that was affected in the 3rd quarter. Let's look at the 3 strategic fields of the HPP company. In the electronics field, we recognize that it has bottomed out in the first half. We are seeing a recovery trend, mainly in the non liquid crystal field, centered around 5 g and semiconductor related materials. And we expect profits to increase in the second half and full year. In the field of building an infrastructure for a CPVC, Sharing increase and price increase are progressing due to the impact of anti dumping regulations on competing countries by India. Thermal insulation and non combustible materials continues to stay firm. And we expect higher sales and profits in the second half and full year. In the automobiles and transportation field, high performance interlayer films, that have a high market share have been impacted by the slowdown in the global automobile market. But we still have been able to maintain our share. Interlayer film for ahead of displays fell short of the plan, but q 3 volume growth was up by more than 20% year on year. And we will focus on further expanding sales in the fourth quarter. Next, I'd like to talk about the housing company The housing company is progressing as planned in the second half. We have been able to make up for the natural disaster impact in October, and we are working to further level out sales in Q3 and 4. With regards to the number of housing units, We will not be able to reach plan due to the lack of construction in wake of the natural disasters and the impact of the consumption tax hike on apartment buildings and rebuilding. However, we are still expecting to increase housing sales by 100 units. We are also working to curb fixed costs, and we forecast that profits will reach record highs for the divisional company in the second half of the year as planned. Regarding the renovations business, the consumption tax hike is expected to affect both orders and sales but is expected to recover gradually. This page is about new housing orders in the housing company. In the third quarter, there was a downturn in the number of visitors due to the impact of the natural disasters in October last year. And the consumption tax hike impact on rebuilding and apartment buildings affected orders to a certain extent. Still, we were able to keep orders at minus 7% compared to the previous year. As we made efforts to strengthen sales of subdivision housing with land to 1st time buyers and promoted smart houses. We believe That demand from first time buyers will continue to be strong. So in q 4, we will further promote sales of land subdivision and expand sales of smart houses and will strive to keep orders flat year on year for detached houses and minus 1% year on year which is broadly flat for total orders. Next is a UIEP company. In the second half in the domestic market, general purpose products are expected to struggle due to a decline in demand after the consumption tax hike and the decrease in housing starts. However, we expect sales of prioritized products which contribute to natural disaster counter measures, the facilitation of construction, and infrastructure resilience to expand steadily. In the overseas business, the use of artificial wood, SFU, for real waste sleepers, is expanding. And the sheep business is expanding for aircraft and medical use. In addition, we will reduce fixed costs and expect to achieve the profit plan as planned. Next, I will explain the situation of 3 strategic areas of the UIEP company. In the piping and infrastructure field, the decrease in demand for housing is expected to affect general purpose products, while non residential and public works construction pipe materials will continue to perform well. And sales are expected to increase. In the building and living environment fields, structural reforms are progressing as planned. And we expect to increase sales, excluding the impact of structural reforms. In the advanced materials field, the sheep business struggled, due to sluggish sales of general purpose products for agricultural machinery and construction in the United States. But sales continues to steadily expand for airplanes and medical applications. The adoption of FSU as railway sleepers has been progressing steadily overseas and sales is expected to increase in the second half. The UIUP company raises prioritized product sales and overseas sales as growth indicators And as shown in the graph on the lower right, both have been growing steadily. Finally, let's look at the second half forecast of the medical business. In the 3rd quarter, profits declined despite the steady expansion of the diagnostics business. There was a postponement in orders due to customer reasons in the pharmaceutical sciences business. We expect orders to recover in the pharmaceutical science business in q 4. And the diagnostics business is expected to continue to expand sales both in Japan and overseas. With the expectation of achieving the operating income plan in the 2nd half. As a result, we aim to achieve the highest annual profit in the medical business. Details of our results are provided from the next page onwards. This ends my presentation. Thank you for your attention.