Earnings Call: Q2 2020

Oct 30, 2019

Hello. I am Teji Colgate, president of 6 C Chemical. I'll go through our financial results for the first half of fiscal twenty nineteen and the outlook for the second half of the year. Foreign exchange rates in the first half are shown on this slide. Here are the results for the first half of fiscal twenty nineteen. The global economic stagnation was prolonged, Exceeding beginning of your expectations, especially regarding the smartphone and automobile markets. Against that backdrop, the HPP, high performance plastics company struggled quite a lot. But the domestic businesses such as housing with its new detached houses and renovation business As well as construction piping material in the UIEP, urban infrastructure and environmental products company performed well and was able to make up for the decline. As a result, we were able to achieve net sales and operating income that was broadly flat year on year. Ordinary income and net income decreased, mainly due to FX impact, but net income exceeded the plan that was announced in July. Here are the results by divisional company. 1st, for the HPP company, Sales expansion of non LCD materials in the electronics field and high performance interlayer film in the automobiles and transportation field progressed. However, the worse than expected market deterioration, as well as particularly the negative FX impact led to a decline in both sales and operating income. On the other hand, for the housing company, Despite the consumption tax hikes and delays in construction work due to the series of severe natural disasters, we were able to offset the decline and achieve sales and operating income growth. Sales and profits increased. In the UIEP company due to brisk domestic demand, capturing business opportunities related to national resilience policies, to update the country's infrastructure. Record high profits were recorded for the first half on a divisional company basis. All in all, you can say that we were affected by the market conditions globally, but domestic demand was firm. This page shows divisional company results on a quarterly basis. The HPP company suffered heavily in the first quarter. However, going into q 2, one off factors such as customer inventory adjustments ran its course. And due to sales quantity and composition and low raw material cost impact, we were able to return back to profit levels that were about the same as the previous year. The company president will explain the details later. The housing company was affected by a long spell of rain, as well as the recent severe natural disasters during Q2. But due to our efforts to level out sales, first half results did not deviate as much from plan, and we were able to achieve higher sales and profit. The UIEP company continued to increase sales and profits during q 2 as the degree of the increase in profits expanded. Under the other segment, we promoted the selection and concentration of R And D themes and also strengthened our organization for efficient business operation. Here is the performance analysis for the first half. Net sales increased by 1,600,000,000 yen. The details of foreign exchange impact are shown in the red box. In terms of operating profit, the graph on the right shows that despite the harsh business environment with weak global market conditions and a strong yen, we were able to increase sales quantity and composition. Combined with effects of lower raw materials cost and fixed cost control, profits reached 41,500,000,000 yen, which was almost the same as last year levels. Compared to the forecast in July, the housing company and UIEP company did not achieve plan due to the impact from natural disasters. And the high performance plastics company was slightly below plan, but we recognized that it returned to a recovery trend in the second quarter. Now let me explain our plans for the second half and the full year. The exchange rate assumption is 160 yen to the US dollar and 118 yen to the euro. We are anticipating a stronger yen compared to the beginning of year plan. I'd like to explain a little about the outlook for market conditions. Which is the premise of the 2nd half plan. Each of the graphs represents markets such as smartphones, automobiles, and housing. The dotted line in the top left graph represents the beginning of your forecast, and the solid line is the current outlook. For both smartphones and automobile production, at the beginning of the fiscal year, we anticipated severe market conditions that were below market consensus. The results were further below expectations. This trend implies that we cannot anticipate a major recovery from the current situation. As for housing orders on the top right, the market has softened due to the impact of the consumption tax hike. But our company was able to secure orders at 98% compared to the first half in the previous year. In the second half, with our 3 measures in place, comprised of Salesforce, land strategy, and product strategy, Our order plan is to secure orders that are the same level as the same period in the previous year. Although the situation is particularly severe, due to the impact of disasters in October, we hope to secure flat orders year on year for the entire second half. The divisional president will provide details later. Regarding raw materials, due to the trends below the initial forecast, 2nd half domestic net surprise assumptions are set at 41,000 yen. Here are the revised plans by divisional company. We will aim for a shift to profit growth in all the three divisional companies and the medical business and strive for record high profits in the second half. We'll continue to increase sales and profits for the housing company and the UIEP company. The HPP company is expected to see a decrease in sales due to the impact from FX but profits are expected to increase as a result of restraining fixed costs and increasing the share of high performance products. This page shows the factor analysis for the 2nd half revised plan. Sales on the top left is expected to increase by 5,700,000,000 yen, but is negatively impacted by approximately 8,000,000,000 yen due to FX. In terms of operating income, the HPP company will strive to increase market share in high performance products and realize the effects of strategic investments. The housing company will strive to continue to increase the number of new houses sold. We will ensure that we recognize sales for nearly 100 units which has been pushed back to the 3rd quarter due to the impact of the disasters. The UIEP company will focus on continuing to expand sales of disaster resilient, high performance prioritized products. As a result, we will strive to increase sales quantity and compositions substantially on a company wide basis. In anticipation of a harsh, prolonged business environment, We've been working on cost innovation for the entire supply chain. By thoroughly cutting fixed cost, and by benefiting from lower raw material prices, we will strive to offset the negative FX impact so as to achieve a 5,000,000,000 yen profit increase in 2nd half, reaching 58,500,000,000 yen. Each of the company presidents will go through the details of how they will strive to increase sales quantity and composition leader. Here are the revised plans by divisional company for the fiscal 2019 full year. Even for the full year, we will aim to grow profits in all three companies and the medical business. The UIEP and the medical businesses are expected to record record high profits on a full year basis. We will also continue to select and concentrate on certain R and D themes as well as thoroughly control head office costs. Under the influence of the global economic slowdown and the appreciation of the yen, The HPP company operating income forecast has been revised down by 5,000,000,000 yen to 45,000,000,000. Although we have kept a profit growth outlook on a year on year basis. On the other hand, because the head office cost has been controlled, total company operating income has been revised down by only 3,000,000,000 yen as we plan to achieve 100,000,000,000 yen for the year. The revised plan for fiscal year 2019 on a full year basis is shown here. We will try for operating income of 100,000,000,000 yen or less with record high profits at each profit line by increasing both sales and profits. Net income is expected to reach record highs for the 7th consecutive year. Dividends will be increased for the 10th consecutive year. This concludes my part. Thank you for your attention. Hello. I am Icluskishimi Zoo, divisional company president of the HPP company. Let me explain about the high performance plastics company. First of all, to summarize the first half, the significant impact of 1st quarter profit decline led to lower profits for the first half. However, q 2 recovered back to about the same level as last year. In the second half of the year, we plan to return back to profit growth due to increased market share, lower raw material cost, and fixed cost improvements. M and As and strategic investments are progressing steadily. The graph at the bottom shows performance trends. In the first half of fiscal twenty nineteen, net sales and operating income were down reaching 160,400,000,000 yen, and 19,700,000,000 yen, respectively. For the second half, we are projecting of decline in net sales but an increase of profits at 167,600,000,000 yen and 25,300,000,000 yen, respectively. Adding the two halves of the year together, operating income is expected to reach 45,000,000,000 yen. Last year, it was 44,900,000,000 yen, so I'd like to somehow manage to increase profits. The next page shows the analysis of net sales and operating income. As you can see in the graph, which shows net sales, Sales were 160,400,000,000 yen, a decrease of 10,800,000,000 yen from the previous year. However, FX had a negative impact of 3,800,000,000 yen, and net sales decreased by 7,000,000,000 yen on an actual basis. We struggled mainly in the electronics, automobiles, and transportation fields. On the other hand, operating profits shown on the lower right were 19,700,000,000 yen, a decrease of 3,300,000,000 year on year. The breakdown is shown at the top of the chart. Please refer to the line that says 1st half year on year plan. Sales quantity and composition, foreign exchange, and one time expenses related to the acquisition of AIM in the United States and other factors led to the decrease of profits. In particular, sales quantity and composition decreased by 400,000,000 yen against July projections, But this is mainly due to the drop off in domestic general purpose products. And for products in the 3 strategic fields, profits came in broadly in line with expectations. At the bottom, the First And Second quarters are broken down. Looking only at q 2, the sales quantity and composition has turned positive. Due to the increase in sales of interlayer films for head up displays and electronics related products. Excluding the foreign exchange impact and the one time acquisition cost, my view is that q 2 underlying profits group with the first quarter being the bottom. Next, on this slide, the cause analysis of net sales and operating income are shown for the 2nd half. Due to factors such as the slow market recovery, the impact of foreign exchange rates and consolidation changes The second half operating income plan has been revised downwards. Looking at the net sales graph, in the second half of twenty nineteen, Sales is expected to decrease by 2,400,000,000 yen year on year to 167,600,000,000 yen. But on an actual basis, excluding FX impact, sales is expected to increase by 3,600,000,000 yen, It's due to the growth of the building and infrastructure field. We're not anticipating substantial sales growth in the electronics field nor the automobiles and transportation fields. As for operating income, as you can see in the lower right graph, We are expecting an increase of 3,500,000,000 yen reaching 25,300,000,000. The revised breakdown is shown at the top of the graph. Consolidated basis changes and foreign exchange are expected to have a minus 2,800,000,000 yen impact. However, lower raw materials cost will be a positive and better sales quantity and composition is expected to reach +4.5000000000 due to increased sales of interlayer film for head of displays and non LCD products. In addition, fixed costs decreased by 1,600,000,000 yen compared to the initial plan. As you can see in the box, We were intending on increasing fixed costs by 1,400,000,000 yen at the beginning of the year, but decided to cut it by 200,000,000 yen more in our revised plan. Furthermore, by innovating cost in the entire supply chain, we will strive to make up for negative factors in order to achieve 3,500,000,000 yen profit growth. Next, I'll explain the situation in the 3 strategic fields and cost innovation We will aim to achieve plan for all three strategic fields, envisioning that q 2 will be the bottom and that we will increase market share as well as realized effects of strategic investments in Q3 and beyond. The electronics field bottomed out in Q2. Although not stated here, we were able to secure an increase in profits. From Q3 onwards, we will not expect LCD related demand to recover. But focus on growing non LCD product sales instead. In the automobiles and transportation field, The effects of customer inventory adjustments gradually disappeared from Q2, and sales of high performance films are also on a recovery trend. In particular, head up display interlayer film sales volume was 136% in the first half and more than 145% in the second half compared to the previous year. As growth rates were typically around 120% before, I believe that high growth rates have been achieved. Global market conditions continue to be severe, but since Q3, We've been able to expand sales of high performance films, and we are planning to start operations of a new line in Europe from Q4. As for the building and infrastructure field, market share for its CPVC increased in India. Hear has increased rapidly since August. Sales of thermal insulation and non combustible materials are also robust, resulting in a brisk performance in the building and infrastructure field. As for cost innovation, in light of the recent demand trends, We are thinking about rebuilding the profit structure and making this our utmost priority for the 2nd half. As you can see on the slide, we will focus on controlling and reducing fixed cost through better operating efficiency and reviewing overhead expenses. At some of our sites overseas, we've already been working on withdrawing or downsizing products. With low profitability and, accordingly, cutting cost. We have also been reviewing R And D themes. Regarding supply chain reform, the focus is on reforming purchasing and distribution, as well as improving productivity. As for a business structure reform, we will thoroughly review underperforming businesses and reorganize an optimized basis. A timeline is provided beneath the initiatives showing when the effects are likely to materialize, but we hope to accelerate efforts where possible especially regarding initiatives related to structural reform. Last slide for me is on the growth drivers. Which are making relatively steady progress. For the electronics business, we are expanding sales in the non LCD field with the aim of diversifying revenue sources. The line graph shows the ratio of the non liquid field sales. The semiconductor sales are struggling slightly but heat release materials for 5 g and adhesive materials are driving the growth. And in the second half, not only Wakefield will account for more than half of electronic sales. In automobiles and transportation, we focus on growing these cells of high performers interlayer films. The line graph shows a year on year increase in the sales volume of high performance in Jolaya films. Q1 was the bottom and we are now observing solid signs of recovery. Head up display application is driving the growth. By winning new businesses and expanding the market share, we believe that the growth in Q4 will normalize back to the previous level, which was about 10% growth. In building an infrastructure, we are expanding the cells of thermal insulation and non combustible materials. The year on year growth is indicated by the line graph showing an extremely brisk progress. For the non combustible materials business in particular, We have been able to generate synergy with SovereignWiz, a business that we had acquired. In my view, our measures for Sipping up the growth prospects have proven to be effective, achieving the intended progress. This will be the end of my presentation. Thank you for your attention. I am Toshiaki Kamayoshi, company president for the housing company. Let me review on the performance of the housing company. First, I'd like to summarize the first half of fiscal twenty nineteen. In the first half, we achieved net sales of 256,900,000,000 yen with an operating income of 18,600,000,000 yen. Both revenue and profit increased thanks to the effort made in the first quarter to smooth out the quarterly performance fluctuation. Having said that, we were slightly short of the revised July guidance, which raised the original profit outlook to 19,000,000,000 yen. The graphs on the right showed a trend over order. For a new housing, the July outlook was projecting a flat year on year growth but due to some refurbishing from the natural disasters in some areas, Q2 was down 3% year on year. So in total, The first half was a year on year dip of 2%, slightly falling short of the target. However, we were able to mitigate the impact of the tax site compared to the drops seen in the market. As for the renovation orders, We projected a 2% year on year growth against which Q2 was down by 5% due to the impact of attack cycle and natural disasters. Subsequently, the first half was down by 2% year on year. That said, for the 2nd half, We have secured a backlog growth of 2% year on year. So despite adversities, including the impact of the consumption tax hike and the series of natural catastrophes, we continue to enjoy sales and profit growth. For the full year of fiscal 19, we intend to achieve the operating income target 40.5 by young. Next slide covers the analysis of net sales and operating income by businesses in the first half. As shown on the left, net sales was 266,900,000,000 yen, an increase of 4% from previous year. Sales increased in all businesses. The water filture on the right explains the main factors behind the change in operating profits. The housing business was impacted by the natural disasters in some parts of Japan, and the number of houses sold was held back to 89 units 111 less than the original sales target of 200 units. As a result, the profit growth was muted to 100,000,000 yen compared to last year, despite improvements in fixed costs and product mix. On the other hand, the renovation business outperformed the plan by growing a profit by 1,100,000,000 year on year, thanks to the sales growth, driven by capturing the last minute demand right before the tax hike. An improvement in fixed cost. With all of these combined, the operating income grew by 1.4000000000 year. As indicated at bottom right, by promoting to level out seasonal sales fluctuation, we were able to bring forward some businesses into the first quarter and were able to minimize the impact of the natural disasters in Q2. Next, let me walk you through the plan for the second half of fiscal nineteen. In the second half, we plan to achieve sales and profit growth by mainly growing the number of new houses sold. We will aim for 21,900,000,000 yen, which will be a record high profit for the 2nd half when achieved. For new housing business, we plan to make upfront investment for growth, including investment for township and community development project. Which will be hedged by increasing to achieve a quick recovery from the reactionary drop in demand after the tax hike. As the graph at bottom left indicates, The sales target for the housing company is 265,100,000,000 yen, up 2% year on year or by 5,200,000,000 yen. On the right is the analysis of the changes in operating income. In housing, we are projecting for a profit growth of 100,000,000 young by achieving the sales target of 220 houses, which include a shortfall against the first half target of more than 100 units. We will work hard again to even knock the Celsius Nazi in the third quarter just as we did in the first half. Whilst taking necessary measures against natural disasters. For the renovation business, We are expecting a profit decline of 500,000,000 yen, stemming from the reactionary drop in demand after the tax hike. For the Frontier business in Japan, we are expecting a profit increase of 400,000,000 yen, mainly driven by the real estate business. In aggregate, as a housing company, we are aiming for a year on year profit growth of 1,000,000,000 to 21,900,000,000. Marking a new record high for the second half. Next, let me present your measures for capturing new housing orders. At top left is our market outlook. For the first half, the sales of steel framed housing declined due to a greater than predict drop in the urban rebuilding demand. However, the demand from the first time buyers was firm, mainly for the wood framed housing. And the company owned land for a build for sale housing. For the second half, we expect the drop in the urban rebuilding demand to run its course in moderate. Anticipate the solid demand from the first time buyers to continue, partially owing to the incentive policies provided by the government. Based on that assumption, as indicated on the right, we hope to secure a flat order versus last year for the second half so that the full year trend would be 99% vis a vis last year. To achieve the plan, we will execute initiatives shown at the bottom right corner. We will bolster the business with 3 growth initiatives, mainly augmenting the Salesforce, product offering and land for subdivision housing strategies as we did in the first half. To be more specific, for the Salesforce strategy, we will continue as we did in the first half to actively found the immersive experience based showrooms to 25 in total. For the product strategy, we heightened awareness for mitigating the impact of natural disasters. We will focus on expanding the cells of new permanent product with enhanced smart resilience features. Namely high capacity storage batteries and system for stirring drinking water. In the first half, we have been able to procure land for subdivision housing as planned. The orders for land and subdivision housing to grow by over 10%. Lastly, let me also touch upon the renovation frontier and oversee business. As illustrated at Top Left for the renovation business, we will focus on increasing the sales for the basic products. For the customers who have completed the feeding tariff program, we will make the storage battery proposals. We will also push the smart time dinky power trading service that was newly launched. In stepping up the sales structure, the strategy will be similar to their new housing business, and we will roll out the immersive experience rate in showrooms such as family as museum gallery to improve the efficiency of order taking. Top right are the details of the domestic frontier business. We are projecting a sustained revenue and profit growth which we enjoyed in the first half mainly driven by the real estate business. Last part is the overseas business shown at bottom right. Due to the slow progress the rotor in the first half, we expect the full year order for fiscal 19 to be flat. This will conclude my presentation of the housing company. Thank you very much for your attention. Hi, Amayoshiuki Hiroi. The company present for urban infrastructure and environmental products company. Or a U IEP. Let me update you on the business for U IEP. Looking back the first half, that prioritized products with disaster prevention, disaster mitigation, or easy to install features as they PO made a significant contribution to the performance on the Net sales and operating income in terms of absolute value amount and profitability, all renew the previous record highs. We expect the prioritized products to continue to grow to renew the record high performance once again in the second half. Next page is analysis of the changes in net sales and operating income. Revenue in the first half grew substantially in Japan, funding off the impact of a structural reform. Overseas, particularly in the US and Asia, general purpose PVC sheets in industrial piping material will struggle slightly. Impacted by the cutbacks in general investments. Having said that, we have been able to significantly grow the products which we had in 10 to grow, such as the FFO products for well w sleeper application and PVC sheets for aircraft and medical use. As you can say from the waterfall chart on the right, we were able to grow the profit by 1,700,000,000 thanks to the sales quantity and composition factor. This was mainly driven by the sales of prioritized products in Japan. The deviation from the revised outlook announced in July was caused by the overseas order trend, decelerating at a rapid pace from August, particularly in the US. We tried to offset that shortfall with the brisk domestic demand, but the domestic demand was also impacted by the natural disasters in September. Let's also look at the 2nd half on this page. As you can see, the projected revenue growth is a mere 600,000,000 yen. But with some business divestment in the first half, the apple to apple sales in Japan owed to be 114,200,000,000 yen. The overseas sales outlook is slightly lower from the April plan due to some lingering effect on a cutback and general investments that I explained earlier. The operating income will continue to be driven by the prioritized product in Japan, with the self quantity and composition element contributing to a profit growth of 1,600,000,000. However, we made a minor revision from the April outlook as the anticipated recovery for the industrial piping materials for the plants like it will be pushed back a little bit. Let me now talk about the 3 strategic fields. For piping and infrastructure, the domestic piping materials for buildings in nonresidential and public sector fields such as for the renovation of the air conditioning system in school is extremely robust and we are enjoying good sales growth. In addition, the order for rehabilitation pipes, mainly for the storage systems, was conventionally concentrated in Tokyo but now we are seeing the demand expand into the other major cities. Therefore, we now have a structure in place to enjoy stable revenue growth as the demand outside of Tokyo would offset any extension of the installation work in Tokyo. Bottom left illustrates the trend with building and living environment. Although, net sales is expected to come down slightly, due to the business divestiture I mentioned earlier, and some reactionary sales drop in the second half after the consumption tax hike. The profitability is improving. For advanced materials, namely the sheets business, the general purpose PVC sheet sells is expected to decline slightly. But for aircraft and medical applications, the 2nd half will enjoy growth as was the case in the 1st half. The FFU products, especially for the railway sleeper application in the overseas market, have been adopted steadily by various clients and for fiscal 'nineteen, we are projecting the sales to grow by 28%. We have also been competitive with new product launches. Having delivered 100 new items to the market in the industry where new product launches are quite rare. Company's level of new product launches in the last 4 years have been highly appreciated by our distributors and partners. Going forward, we will definitely continue to deliver new products that exploiting 50 customers' latent needs so that the new products will eventually be our prioritized products for sales expansion and contribute in stopping the environmental challenges as well. Let me elaborate further on the prioritized product using this slide. The growth curve is accelerated, which last year's sales going up by 2,200,000,000 year on year and this year projected to increase by roughly 5,100,000,000 yen. This is partially driven by the budget increase related to the for National Resilience and renewal demand for urban infrastructure. There are also some key concepts that we are incorporating into our product. Such as countermeasures against natural disasters like torrential rain or fire, anti corrosion profile. Easy installation to overcome labor shortage and building resilient infrastructure. As such challenges, we face Get More Grave such as natural disasters caused by climate change or shortage of labor, demand for this type of solution based products should increase. In that context, we would like to develop new products, reflecting these keywords into the product concepts. Other overseas is a mixed picture depending on the different market circumstances. Railway sleep result is growing as well as the PVC sheets for airspace and medical device applications. The rehabilitation pipe business is strong in Japan, and although the scale oversees in terms of value, amount is still small, We are waiting on increasing number of projects. In that sense, we believe we can replicate the successful domestic business model overseas where the country is facing similar challenges to Japan. And that would conclude my presentation. Thank you for your attention. Hi. I'm Keita Kato, representative director and head office and strategy department. Let me update you on the medical business for the first half and the outlook for the second half. This is a summary for the first half results. Net sales and operating income in the first half were at the same level compared to the previous year, and the results were in line with the original projections. In the second half, we will expand ourselves with the diagnostic creations to achieve a big jump in the profit so that for the full year, we can reach on your record high profit of 10,500,000,000 yen. With the next medium term business plan on the horizon, We continue to actively launch new products for growth acceleration and made some organizational changes with an intention to speed up the decision making process. This slide shows the factors behind the changes in sales and operating income. The diagnostic business has grown substantially Offsetting a decline in order for the pharmaceutical science business and operating income trended sideways from last year. We were able to contain the fixed cost spending, and the operating income was flat over last year, which was pretty much in line with the plan. In our second half business plan, we expect to grow the sales. We intend to sustain a substantial growth for the diagnostic business. Mainly with the upbeat overseas markets in the US, Europe, and China. With the pharmaceutical sciences business, We project profit growth by achieving business recovery with the increase in the new order for active pharmaceutical ingredients. Here is the RBU by respective business. The diagnostic business is showing steady progress both in Japan and abroad. We will also roll up initiatives to both of the business structures and systems overseas. In China, the operation of the new Suzhou plant, which was slightly pushed back as we have been waiting for the approval from the authority, is scheduled to commence during the second half. We will also accelerate initiatives in capitalizing on the newly acquired various laboratories to make further penetration of the sex free medical products and strike synergy on sales activities in the ASEAN region. For the pharmaceutical science business, we will augment the order taking structure for the active pharmaceutical ingredients as well as to expand the CDMO business, which integrates CMO, the contract management organization business with development capabilities. The last page for me illustrates the main product for the medical business. Please take a look at your convenient time. This will be the end of my presentation. Thank you very much for your attention.