Earnings Call: Q3 2018

Jan 30, 2018

Hello. This is Yoshuri, director and managing executive officer in charge of the corporate finance and accounting department. And head of business strategy department. Let me explain the results for the third quarter of fiscal 2017. As well as the forecast for the full year. Foreign exchange rate assumptions are shown on this slide for your reference. On this page are the results for the 9 month period. Net sales increased substantially on the back of contributions from newly consolidated companies. Each level of profit also increased. With no extraordinary losses like last year, Net income increased significantly. Operating income and the bottom line reported record high earnings. The next page shows breakdown by divisional company. Net sales and operating income are as shown. On the left are the results for the 3rd quarter on a standalone basis, and on the right are the results for the 9 month period. The HPP, high performance plastics company, and UIEP, Urban Infrastructure And Environmental Products Company, recorded an increase in profits for both periods and reached record high earnings. The housing company recorded a downturn in earnings due to delays in construction as a result of poor weather conditions. But on a total group basis, earnings increased. Looking at the earnings for forecast, the full year outlook is unchanged from the October outlook. Net sales are expected to increase substantially due to the impact from newly consolidated companies. Operating, ordinary, and net income are expected to reach record highs, which is in line with plan. Here are the net sales and operating income forecasts by divisional company. All three companies are expected to achieve increases in net sales and profit. The HPP and UIEP companies are planning for record highs for both net sales and profits. The housing company revised down its net sales and operating income forecast for the full fiscal year. Due to poor weather conditions, leading to construction delays, as I mentioned earlier. But the outlook for the entire group is projected to come in line with plan. Looking at the outlook for just the second half of the fiscal year, Well, the HPP company is expecting a substantial increase in profit, and the housing company revised down its forecast group wide operating income is projected to come in line with plan. Here is an analysis of net sales and operating income for the second half. As you can see on the graph on the left, net sales is up by 31,900,000,000 yen year on year. But the actual increase is 16,900,000,000 yen when new consolidation impact is excluded. As for the operating income analysis, sales quantity and composition is up by 7,700,000,000 yen. This is mainly due to growth expected in the HPP and housing company during the fourth quarter. Compared to the original second half plan, Sales quantity and composition expectations are lower, and the negative raw materials and housing materials impact is expected to be larger. Due to higher raw material prices, but this is expected to be made up for by higher than expected cost reductions and lower fixed cost. On this page, the progress of major measures, comprising the medium term management plan is listed. I will not go through the details, but progress is underway regarding initiatives related to forward looking investment, structural reform, and fusion. From here on, I will talk in detail about each divisional company. Here is the 2nd half forecast for the HPP company. Looking at net sales on the left, 2nd half sales is forecasted to increase by 21,700,000,000 yen, But it's up by 8,300,000,000 yen on an actual basis when excluding the impact of newly consolidated subsidiaries. As for the operating income analysis, selling quantity and composition is projected to increase by 3,800,000,000. Raw materials is expected to exceed plan. But by offsetting with cost reduction and fixed cost, we expect to achieve the 2nd half plan. On this page, I will elaborate about the conditions surrounding the 4 strategic fields. First is electronics. With the slowdown in demand for the smartphone related business in China, we are thinking that a recovery is hard to expect in Q4. On the other hand, there is firm demand for the large scale LCD's related business. Despite development efforts in fields such as OLED, packaging, and semiconductors that are making steady progress, it is not sufficient enough to make up for the decline in small to medium sized display applications. However, steady progress is being made in reorganizing our portfolio. Regarding automobiles and transportation, conditions are slightly stagnant in North America. Other markets are steadily growing. Globally, steady progress is being made in expanding sales of high performance products, such as interlayer film and foam. The molding business for exterior parts operating in India and Indonesia is steadily expanding too. Moreover, The new interlayer film production line in Mexico started up in line with plan and will contribute to the fourth quarter in earnest. We have also made a decision to invest in increasing production capacity for interlayer film and its raw material, resin, in Europe. Demand for heat release materials is increasing too, and we will therefore strengthen measures to promote synergies with Sekisui Palomatec. As for the building and infrastructure field at the bottom left, CPVC conditions in the Middle East are exhibiting a recovery trend, and we have been able to enter the Americas market smoothly. Regarding fire resistant materials, the non combustible urethane business is expanding steadily. 6 C Soft Long Wizz will be treated as a consolidated subsidiary from Q4. We expect more measures to be implemented. To promote synergies in areas such as sales, production, and R and D. As for the phone business in Thailand, We have decided to make investments for a second processing factory in Thailand as demand for construction in the Middle East, India, and ASEAN region is extremely brisk and production capacity has become tight. In the life science area, The diagnostics business is doing very well in Japan and is growing at a rapid pace in China as well. We expect more synergies with edia to materialize going forward in areas such as fixed cost, as well as in sales. That will increase marginal profitability. Here is the 2nd half forecast for the housing company. Due to the poor weather conditions from September to October, such as long raining period and typhoons, There were delays in construction for both the housing and renovation businesses. This is why the outlook for net sales and operating income was revised down. The housing business has enough order backlog to realize the sales plan for the fourth quarter. And as we are organized To do the construction work towards the fiscal year end, we will work hard to bring the outstanding backlog to completion. As for the renovation business, gross profit margins are expected to improve in Q4 owing to a higher share of strategic product in Q3 orders. The net sales outlook for the second half is up by 5,800,000,000 year on year. But compared to plan, The housing business is 1,200,000,000 yen lower, and renovation business is 1,300,000,000 yen lower. Looking at the bottom of the analysis of operating income chart, the housing business is expected to record a decrease of 400,000,000 yen year on year. Which includes the impact from housing materials. And due to the plan for housing sales units being revised down from plus 170 units to 120 units, the sales factor contribution to operating income is expected to decrease by 700,000,000 yen. As for new housing orders, I would like to explain the measures we will implement in order to secure orders during Q4. During the third quarter, detached houses grew centered on wood framed houses. Subdivision housing grew significantly too, in line with plan. However, housing complexes continued to decline in Q3 as was the case in the first half. Market trends are expected to be broadly the same as Q3. Going to the right, housing orders in Q3 was up by only 1% year on year. As we were not able to attract customers due to poor weather conditions in October. The plan for Q Four is plus 5% year on year. And the measures to enable this are as follows. 1st, regarding the product strategy, grant to you 5 that went on sale from the third quarter, and Smart Power Station GR are both doing very well, adding up to 600 orders in total. As These products have enabled us to acquire orders from new customer segments. We believe this will be a net add, and that 4th quarter orders will be in line with plan as well. By adding Dessio Urban, a three story urban type house that was launched in January, As part of the product strategy, we will strive to acquire more orders. As for land and subdivisions, Sales has been brisk, and we will focus on acquiring more orders during the fourth quarter as well as increase stock for sale for fiscal 2018. Regarding customer traffic, we have diversified the channels through which we attract customers by adding channels such as the web, and site visiting tours. By doing so, traffic in November December grew by 21% year on year. We will continue efforts during q 4 as well by increasing the number of model houses and open houses. Mainly in Tokyo, Nagoya, and Osaka. As for renovation, orders had been trending negatively year on year. But turned positive in Q3. Despite a continued decline in solar power generation systems, strategic products are growing substantially. We believe that the gradual declining trend has come to a halt, and thus, we will aim to accelerate a switchover in sales style. To a style that proposes multiple products in a package by focusing on products such as new exterior walls, baths, kitchens, and others. The last company I will talk about is the UIEP company. Each of the measures is showing steady progress. Regarding the growth measures related to capturing infrastructure related demand in the Tokyo Metropolitan area, sales expanded steadily in prioritized products, such as pipeline rehabilitation products used for sewage pipe rehabilitation. In the area of platform efficiency, we have been able to secure spreads, and we have started structural reform efforts related to production capacity optimization and reorganizing production items. Regarding the overseas strategy, aircraft sheets experienced a delivery delay due to customer specific reasons, but demand is expected to pick up from the fourth quarter. We will also ensure that we will continue investments for the business together with investments for the FSU that has already started. So that the benefits can materialize in fiscal 2018. As for the net sales forecast in the second half, The increase is only 600,000,000 yen year on year due to the impact from structural reform. But if the impact is excluded, Actual growth is plus 2,800,000,000 yen. Looking at the analysis of operating income, Operating income is expected to increase by 400,000,000 yen domestically. A contribution of plus 800,000,000 yen coming from selling quantity and composition, and the increase in operating income from selling price will pretty much cover the negative impact from raw materials. The overseas business is expected to grow by 200,000,000 yen, now capable of generating marginal profit. Here is an explanation of the 3 strategic fields and prioritized products in the UIEP company. For piping and infrastructure, orders for pipeline rehabilitation, employing the SPR method is increasing substantially in Japan, and is also starting to contribute to overseas earnings. We completed making an equity investment in the TN phone group in Vietnam. We have already started activities for synergies in the Sound Region, but we'll promote more fusion with them. As we develop the business in earnest, from fiscal 2018. Regarding building and living environment at the bottom, we had not introduced new products in this field for a long time, But starting from the third quarter, new products such as rain gutters and new modular bathrooms were launched. We are also expanding the capacity of prioritized product supply and products such as functional flooring are increasing rapidly Thanks to the impact through TV commercials. As for advanced materials, although aircraft sheet deliveries were delayed, We make progress in other areas, such as the development of railway, medical, and other fields that made up for the delivery delay. Artificial wood FFUs are growing in line with plan on the back of demand for sleepers in the overseas market. Prioritized product sales are expected to increase by 1,400,000,000 yen in the second half. And we also have plans to introduce 14 new items during the second half of the year, aiming for expansion from next fixed school year, and beyond. That concludes the explanation for the divisional companies. Now I will explain the results for the 3rd quarter. Consolidated companies are shown here. The changes are shown on the right. The influence of change is also listed here. Here is the summary P and L statement. Looking at operating income and the rows below, Equity and earnings of affiliates slightly decreased. Other nonoperating income and expenses hardly changed. FX impact was broadly in line with last fiscal year, although we were slightly impacted. Extraordinary income and losses were not as busy as last year, leading to a 6,000,000,000 increase in income before income taxes. Regarding the balance sheet, on the asset side, total assets were 1,000,000,000,000 yen, up by 96,600,000,000 year on year. Excluding consolidations and FX impact, assets were up by 55,900,000,000 yen on an actual basis. Casting deposits declined by 14,300,000,000 yen. Inventories increased due to work in progress inventories for housing and land. Tangible and intangible non current assets are attributed to active M and As and capital expenditures. Investments in securities are up due to mark to market valuations and other reasons. On the liabilities and net asset side, interest bearing liabilities increased by about 40,000,000,000 yen, which is attributed to the investments mentioned earlier. The breakdown for retained earnings and treasury stock are shown in the bubbles on the right. Translation adjustments increased under other net assets due to mainly a strong euro. Regarding cash flows, operating activities cash flows was 39,000,000,000 yen. That looks like it has gone down by 20,000,000,000 yen year on year. This is due to lower corporate tax payments in the previous fiscal year associated with tax effect accounting. Things have normalized this fiscal year, so in other words, the actual earnings producing power is better now. Investing activities, cash flows were minus 43,300,000,000 yen due to M and A's equity and capital investments. Free cash flow was minus 23,200,000,000, in line with the medium term plan. Here are depreciation and capital expenditure numbers that are also in line with the medium term plan. Finally, here is the full year forecast for fiscal 2017. Again, this concludes my explanation. Thank you for listening.