Earnings Call: Q1 2019

Jul 30, 2018

My name is Yoshiyuki Hirai, director and managing executive officer of Sekisui Chemical. Let me go over the first quarter results and the outlook for the first half. At the outset of the fiscal year, we set the currency assumption at 1.18 against a dollar and 1.34 against the euro. For the second quarter, we revised the FX assumption to 110 yen against a dollar and 129 yen against a euro. Here is the P and L for the first quarter of fiscal 2018. Although the profit declined to your disappointment, The result was in line with our expectation. The level of decline for ordinary income and the quarterly net income was more moderate compared to the drop in operating income. This can be explained by the absence of a sizable non operating loss this year. As well as booking an extra ordinary profit last fiscal year. Adjusting for those extraordinary items, the net income was pretty much flat over the last fiscal year. On this page, you can see the sales and operating income by respective divisional companies. Unfortunately, profit declined for all the divisional companies but the level was on par with the plan. HPP, high performance plastics company in UIEP, Urban Infrastructure And Environmental Products company had front loaded fixed cost capital spending intended for their strategic investments. On top of that, higher raw material costs resulted in lower profit for Q1, but we believe that the volume and the product mix should grow and improve coming into the second quarter. The housing company performance was impacted by the decline in the number of households sold in the first quarter, due to delays in construction completion, whilst a balance of orders leading into the 2nd quarter is growing. Negatives 500,000,000 yen for elimination and unallocated accounts includes 1 of the items of roughly 400,000,000 yen. Such as revising the bonus preserving criteria for those who have been suspended from outside to a more uniform standard among others. Those items impacted the results for the first quarter, but that will not be the case for the second quarter and beyond. Next on page 4 is the outlook for the first half. As you can see, we have not revised the guidance announced in April which is shown in the column on the far right. Remain unchanged. The columns in the middle indicate the outlook for Q2. We expect sales and profit growth for all of the divisional companies and hope to maintain this momentum for Q3 and Q4. For HPP, The fruit of the strategic investment, particularly that of a production ramp up will come through and we believe this will help to offset the higher raw material cost and increasing fixed cost, which caused some challenge in the first quarter. For housing, by delivering the new houses in the current order backlog in Q2, We believe we can meet the self improvement plan for the first half. For UIEP, we are enjoying steady growth particularly in the overseas business with better volume and product mix. In the domestic market, will focus on reaching further agreements for product price hike in Q2. Although this year, we are behind by 1 month compared to fiscal year in starting a price negotiation. We will also be spending the R and D expenditure as planned. Let's look at the analysis of net sales and operating income more closely. On the left is a projection for sales. Which is expected to grow by 31,900,000,000, partially owing to the impact of new consolidation. However, even after stripping out such impact, we expect the like for like sales to grow by 16,900,000,000 yen. The analysis of the operating income is illustrated on the right hand side. The blue box indicated as first half plan below the bar graph explains the components of the minus 1,500,000,000 as projected in April. The blue box above the bar graph shows the latest update for the first half and the light blue box indicates the actual progress in the first quarter. Compared to the EPRA projection, The current expectation for the change stemming from selling quantity and composition will be slightly more moderate, mainly due to the housing business, whilst the adverse impact of raw materials and fixed cost is expected to be more benign. Net net, we expect the overall impact to be in line with the original plan, partially thanks to the CR activities. Now, let's go over the details by divisional companies. Starting with HPP. On the left is a sales trend. Need consolidation will have a sizable contribution to the sales outlook for the first half But even when adjusting for that, the cells is expected to go up by 4,500,000,000. On the right is a projection for operating income and selling quantity and composition is expected to slightly outperform the guidance. The raw material cost would be lighter than expected. And with the improvement in CR or cost reduction efforts, we should be able to off the negative implications of the selling price to achieve the operating income in line with the plan. I should also note that there are some one of items in fixed cost. Let's focus on the 4 strategic fields in HPP. For electronics, the smartphone related demand is slightly below our expectation, but Q4 last year, which was the most severe period is already behind us, and we expect the gradual recovery trend in Q1 and Q2. In Q1, The new application for the UltraSync film contributed to the earnings, and we enjoyed brisk business for large size TV and digital signage applications. Marketing activities in packaging and semiconductor field, which is a focus under the current midterm business plan, we're making good progress and we will continue our efforts in this field. The right figures indicate incremental contribution coming from new M and As. In automobiles and transportation, we see the global auto production to be firm in general, although we do detect some slowdown in China. The new production line in Mexico for the interlayer film is now operating at full capacity and is contributing in full to the volume ramp up of high performance products. The heat for this material business is sexy Polymath, acquired last year, is enjoying stronger demand for applications including that of lithium ion batteries. As announced recently, we will set up production in cell space in Europe for this business. We already have established mainstay business in Wurman, Netherlands, so the base for the heat least material business should create synergy from the perspective of total solution package for the auto and transportation business. For building an infrastructure, demand is growing globally for chlorinated PVC, although the trend was somewhat patchy depending on the geography. Asia such as India puts some challenges. As we have newly made our ways into the US, we believe we can grow our market share For fire resistance materials, the newly acquired soft run business was upbeat on top of the brisk performance with existing products. We will capture further business opportunity as we expect the Warrior resistant material demand for everything in particular to grow going forward. In life science, we are enjoying high growth for reagent business, both in Japan and overseas, with a particular boost coming from China. The Diagnostic Regions business that was acquired in Singapore is newly consolidated effective April. And we will step up our efforts for exploiting new demand in ASEAN from second half onward. It is not mentioned in the slide, but we have completed the capacity ramp up over Iwate plant, which is manufacturing the active pharmaceutical ingredients. We expect the incremental capacity to contribute results growth in fall from the second half. Let's now move on to the housing company. Regarding cells shown on the left, we incorporated some risk and have somewhat lowered the housing sales projection compared to the original guidance. That the rest, renovation and frontier, including real estate business, will remain unchanged from the April plan. On the right is the first half forecast for operating income. The latest operating income expectation versus the first half plan presented in April reflects weaker sales growth for new housing and this is mainly because the start of the first quarter was slow. However, we expect a strong year on year increase of 150 units for housing sales in Q2, which is to it picking up for us to achieve an impactful result for CR activities, potentially better than what is in the plan. With the combination of these factors, the overall first half profit should be in line with the original guidance. For the renovation business, Profit was up by 200000000 in Q1. It seems that after a long period, the renovation business has hit the bottom and has finally picked up into profit growth trend. Initiatives to improve the efficiency of the overhead functions for shrinking the earnings power including attrition of fixed cost was nearly completed in the first quarter. So we should be able to achieve more savings on the fixed cost than planned in the first half. However, some of our clients have been deeply impacted by the recent earthquake in Osaka in the torrential rain in the western part of Japan, So as we focus on the recovery efforts for our customers, the sales in Q2 is expected to be lower compared to the original guidance. But this should be offset by other businesses such as the real estate, so the operating income projection for the housing company as a whole remains unchanged. This slide covers the new housing order trend. The graph on the right indicates a 2% year on year growth in new housing order book for the first quarter. The table to the left illustrates how the housing complex was just dragged with a 27% year over year decline Here, the detached housing both for steel frame and wood frame grew steadily. The concern cannibalization did not materialize. And both types of housing enjoyed good growth. We were able to increase the sales personal and model houses which resulted in higher number of visitors and more discussion about the home purchase. In that context, The 3% yield in your increase in order for Q2 shown by the graph on the right is achievable interview, and we also have specific measures to that end. Shown at the bottom half of the slide. As for the product strategy, grant to U5 The out frame housing and smart power station flat roof, the steel frame housing are driving the order book growth. We launched a new buffet in July with which we aim to capture the rush demand focusing on rebuilding needs A 0 energy house target of 65 percent for fiscal 2018 was originally a target set for fiscal 2020. But at the current pace, it seems like we would be able to achieve this goal 2 years ahead of the original plan. This will also be a tailwind for order taking. For land and subdivision housing, the order is upbeat and we will augment fund procurement eyeing fiscal 2019. As for the Salesforce strategy, I already mentioned it by the soul's personal and model houses. We also have experienced based children xenosaka in Nagoya, which are attracting visitors in a different way compared to the conventional model houses. With this approach of appealing the performance features over housing, We have been successful in enhancing the conversion rate. In another words, we have been more successful in lowering the visitors to the next stage of actually discussing about specific orders. We are planning to roll this new type of model houses on a nationwide scale. The sales for UREP grew as shown on the left. On the right is the analysis of the operating income. At the time of business planning, we projected a domestic business to drop by 500,000,000 year on year and the overseas profits to grow by 600,000,000 and this breakdown remains unchanged. On the domestic front, the slowing quantity and composition contribution for Q1 was slightly lower compared to a year ago. This was because we were 1 month slower than last year for negotiating on a price hike, and their front loaded demand before the new price observed in Q1 last year was absent this year. However, we expect the last minute spiking demand before the price hike to repeat itself this year in Q2, for which we must make sure we achieve the intended price hike as much as possible. Domestic demand is that she was strong for non residential facilities in public sector. Traditionally, The demand for pipeline renewal projects tended to concentrate around the fiscal year end, but such demand is coming out into the market from the first quarter. The combination of this trend leads us to believe that we can recover the selling quantity and composition going forward. Overseas, marginal profit was weak last year for the aircraft sheet business as your client was going through an M and A transaction. With the deal being completed, we are now enjoying the steady recovery. Thanks to the partnership strategy with Tian Phon, a company in Vietnam with whom we took some stake. Our products have been successfully delivered to the market through their distribution channels. Let's look at the 3 strategic fields in UIT more closely. For piping and infrastructure, There is a minor risk of delight in the construction schedule, but infrastructure related demand and pipeline renewal business, both in Japan and abroad is firm. For the pipeline renewal business overseas, we have exited from the construction work and now are strictly focused on the sales for materials. We are rolling out the business model, which was proven to be successful in Australia and are making a good progress. I already touched upon the business in Vietnam and Nacion. For building and living environment, The housing complex demand in the market, not just for ourselves, is weak. So the cells of martial bathrooms are coming down. However, we are expecting some contribution from the new products that we have been working on since last year. For example, we would like to capture the demand for efficient water discharge material to be able to countermeasure to ratio rain. For Advanced Materials, the aircraft shaped business recovering with progress made in winning new customers. Traditionally, we were competitive for the business class in the 1st class demand, but we are now starting to cater to the economy class demand. Good development is made for the medical device business and railway business. The FFO for railway sleeper is trying to penetrate to new customers, Thanks to the visual adoption by the German Railway, which makes us to be hopeful for Q2 and beyond. All in all, The domestic prioritized product sales is expected to grow by 7% year on year in the first half and the overseas sales is to go up by 18% year on year. Lastly, let me quickly share with you the progress status of various measures. Following the midterm business plan, we have made significant investments in fiscal 'sixteen and 'seventeen, and now it's time to recoup those investments. Right now, it's a little tough with top heavy investments, but we do expect to see the impact of those investments come into fruition. Delay from Q2 and beyond. We have implemented measures so that there will not be any delay in enjoying that fruit. We will continue to focus on this matter with rigorous management. With that, I'd like to conclude my presentation. Thank you very much for your attention.