Earnings Call: Q2 2018

Oct 30, 2017

Hello. I am Tajikoke, president of Sixley Chemical Company. Let me explain the financial results for the first half of fiscal year 2017. Net sales grew by 16,300,000,000 yen. To 534,100,000,000 due to increased sales for new detached houses in the housing company as well as products in the strategic fields under the high performance plastics company. Operating income went up by 2,300,000,000 yen, reaching 46,000,000,000. Subsequent profit levels increased substantially and renewed historical highs for the first half. Moreover, profits at each level exceeded 1st half expectations that were announced in July. Dividend per share for the interim period will be in line with plan at 19 yen a share. This page shows net sales and operating income by divisional company. All three divisional companies achieved an increase in both sales and profits. Operating income for HPP the High Performance Plastic Company, and UIEP, the Urban Infrastructure And Environmental Products Company, reached first half record highs. On the other end, as shown under others, We have made active investments into headquarter research and development to nurture the company's R and D capabilities. This page offers an analysis of net sales and operating income for the first half of fiscal 2017. Net sales increased on a real basis in the first half despite the impact from structural reform and new consolidations. Operating income increased by 2,300,000,000 yen, reaching 46,000,000,000. As you can see on the graph, The surge in raw material prices were minimized by selling price and cost reduction. Whilst, the impact of increased fixed cost was offset by positive sales quantity and composition, mainly driven by sales expansion of high performance products, mainly in the HPP company. Next, I will explain the second half forecast and revised annual plan. The assumptions for foreign exchange rates are shown here. First, here the overview of the revised plan for fiscal 2017. Based off first half results, The operating income outlook will stay at 102,000,000,000 yen as planned, but net sales, ordinary income, and net income has been revised upwards from beginning of year expectations to 1,114,000,101,001,101,000,000,000 and 67,000,000,000 yen, respectively. Net sales were revised upwards due to the new consolidation of Palomatec to can in which we acquired management rights. Ordinary income and other profit levels below ordinary profits were revised as risks such as foreign exchange loss did not materialize in the first half. All profit levels, including operating income, are expected to renew its record highs. Here is the revised full year plan by divisional company. All three divisional companies are expecting an increase in sales and income. The HPP And UIEP Companies are expected to reach record highs on a full year basis. That is why the beginning of year, full year outlook was revised upwards. We are concurrently ramping up growth related research and development investments. And here is the 2nd half revised plan by divisional company. As you can see, all three divisional companies are projecting an increase in both sales and profits for the second half too. Here is the analysis for net sales and operating income. The impact on sales from items, mainly from the new consolidation of PolyMetek Japan, is 15,700,000,000. But even without this factor, net sales is expected to grow organically with total net sales forecasted to reach 579,900,000,000 yen. As for the analysis of operating income, We will continue to hedge the impact of higher raw materials with selling price and cost reduction, but also improve sales quantity and composition significantly. So as to increase operating income by 3,200,000,000 yen to 56,000,000,000. The progress of the medium term management plan is shown here. As you can see, the first half in the 1st year of the plan, set off to a good start. By increasing top line accompanied by profitability, We will strive to raise the profit curve. Operating income is expected to grow 9 periods in a row. And renew its record highs 5 periods in a row. Finally, here is the progress of initiatives that will enable us to achieve the medium term plan. The initiatives under the medium term plan regarding forward looking investment constant structural reform, and accelerated growth through fusion are raised in detail. As you can see in the chart, Each divisional company is rolling out specific measures in their fields of business, and we will ensure that the initiatives bear fruit going forward. Fusion related initiatives are steadily progressing too. And we will focus on generating synergies with companies that were acquired. We will accelerate growth strategies in the second half of the year. This concludes my part. Thank you for your attention. Hello. I am Yoshiyuki Hirai. Responsible for corporate finance and accounting department. I will present an overview of a first half results. The first page shows the number of consolidated companies and the impact of change. The number of consolidated subsidiaries increased significantly to 151 companies. Out of the 16 companies that were added, 12 are from the Palomatec group. The decrease of 8 subsidiaries is associated with the integration of companies, mainly in the housing company. The impact on earnings associated with these changes is shown on the chart. This page shows the summary of profits and losses. I will mainly talk about operating income and items under it. Other non operating income and expenses improved substantially by 6,300,000,000 yen year on year. 4,200,000,000 yen out of the 6,300,000,000 is attributed to FX gains and losses. Basically, non operating income increased, whilst expenditures decreased. Extraordinary income decreased by 4,400,000,000 yen, as there was an absence of gains on sales of investments and securities that was recognized last fiscal year. However, a gain on sales of real estate was booked. Extraordinary losses came down due to the absence of items from last fiscal year. That led to an increase in income before taxes by 11,600,000,000 yen, reaching 50,200,000,000 yen. After taxes, net income increased by 8,100,000,000 yen reaching 34,200,000,000. Here is the balance sheet. Total assets increased by 33,800,000,000 yen compared to the end of March. However, This was primarily due to the change in consolidated companies and foreign exchange. If these factors were taken out, assets grew by only 3,100,000,000 yen. Cash and deposits decreased by 20,200,000,000 yen. And tangible non current assets increased due to M and A activities. The investment in securities increased by 10,000,000,000 yen, due to mark to market. Regarding liabilities and net assets on the balance sheet, Net assets increased by 32,900,000,000 yen due to the impact from retained earnings, purchases of treasury stocks, dividend payments, as well as the increase in other net assets. This page is about cash flows. Operating activities cash flow was at a fairly high level last year at 59,800,000,000 yen. We will ensure that we generate good cash flow from operations once again this year. But for the first half, It was 36,200,000,000 yen due to higher working capital and corporate tax payments. Investing activities cash flows were minus 16,600,000,000 yen due to active investments. Free cash flow was 10,000,000,000 yen as a result. Regarding depreciation and capital expenditures, depreciation was about the same as the first half of last fiscal year. Capital expenditures were 25,500,000,000 yen, with the HPP business primarily accounting for most of the increase. Here is the outlook for depreciation. Capital expenditures, and research and development for the full year. Capital expenditures and R and D expenditure plans are higher year on year. The progress is in line with fully expectations. Here's a summary of the revised plan. This concludes my part. Thank you. Hello. I am Keita Kato. Company president of the high performance plastics company. I will now explain the situation around the HPP business. Looking back at the first half, the 4 strategic fields steadily expanded. Profit grew significantly reaching half year record highs. Contributing factors were Sales volume growth and composition improvement that offset high raw material costs. Initiatives to advance growth from next fiscal year that are in line with the medium term plan are being implemented. During the first half, We have also been able to beat profits of the second half in fiscal 2015 that were times when the yen was 119 yen to the dollar. Compared to the current 111 yen. We recognize this as proof that the implementation of business structural reform and the revamping of a product portfolio were a success. Here are net sales and operating income trends. Net sales increased by 8,800,000,000 yen. But if the impact from business structural reform through which we exited from some products and new consolidations due to M and A were taken out. Net sales growth was 9,600,000,000 yen. As for operating income, selling quantity and composition contributed by 3,000,000,000 while higher raw materials had a negative impact of 2,300,000,000 that was mitigated by cost reduction. Operating income grew by 13,000,000,000 yen year on year due to good fixed cost control in areas other than growth related investments. As for plans for the second half, We will continue to aim for substantial profit growth, focusing mainly on improving sales quantity and composition in the 4 strategic fields. Net sales growth is expected to increase by 21,700,000,000 yen. And once again, Even after taking out the impact of new consolidations, growth is expected to be 8,100,000,000 yen. We will strive to reach more than 30,000,000,000 in operating income, up by 3,200,000,000 yen. With an increase of 4,300,000,000, coming from higher sales volume and minimizing the impact of high raw materials with cost reduction like we did in the first half. Here is the status of the 4 strategic fields. The numbers highlighted in red on the right end of bar charts indicates the contribution from M and As. Palomatek Japan is contributing to the numbers under electronics and automobiles and transportation. Softland Wizz is associated with building and infrastructure. For electronics, the FPD market has reached a bottom. Mainstate products are performing firmly and measures to improve the portfolio by entering into OLED and packaging semiconductor fields advanced steadily. Regarding automobiles and transportation, the US market continues to be uncertain. But China is expected to recover slightly. Global sales expansion for high performance films is underway. And the new factory in Mexico will start contributing from the latter part of the second half. We will also start full scale expansion into car electronics through Palomatec, Japan. As for building an infrastructure, CPVC is showing signs of a global demand recovery. Fire resistant materials performed well, Thanks to steady performance of Mainstay products. Together with Soft Lim Wizz, we will accelerate the expansion of the non combustible urethane business. For life science, the diagnostic reagent business continues to do well. The testing equipment business is expanding in both Japan and overseas, mainly due to mainstay products. The integration with Idia is expected to bear full scale results going forward, including fixed cost benefits. On this slide, the status of initiatives that are aligned with the current and next medium term plan are shown. First, for the growth enhancement areas that are expected to make contributions to the current medium term plan, We are measuring the outcome of our efforts through net sales growth. All four strategic fields were up in the 1st half, and are expected to grow in the second half as well. Annual contribution in total is projected to be 5,000,000,000 yen, and efforts are steadily progressing. Cooperation enhancement are areas that are being implemented over the longer run. In so far, we have implemented measures such as acquiring the management rights for Palomatec Japan in the car electronic materials field. And soft land wiz in the building and infrastructure area. Moreover, in the life science field, We set up a new company with 2 other companies to enter the peptide pharmaceutical ingredients business. For automobiles and transportation, collaboration with the UIP company is steadily proceeding. With a focus on entering the aircraft field of business. As for the new product sales graph on the right, This was a challenge we were addressing under the previous medium term plan as sales was continuing to decline. But as we focused on accelerated development speed and better product planning, as well as choosing quality themes, We believe that the drop off in sales has stopped, and that sales is likely to start growing again from next fiscal year onwards. New business is making good progress too. Thanks to sales from packaging and semiconductor related products. This concludes my part. Thank you. Hello. I am Shumi Tusekiguchi. Company president of the housing company. I will give an explanation of our business. As you can see on the graph on the left hand side, showing performance trends. During the first half of fiscal 2017, The divisional company recorded higher sales and income for 2 consecutive years, reaching 244,400,000,000 yen in sales, and 17,800,000,000 in operating income. The reasons behind this are shown on the right hand side graph. The market was very uncertain, but housing orders managed to exceed last year levels, mainly supported by new detached housing orders. Renovation orders bottom out too with orders picking up compared to the second half of fiscal 2016. Although there is no graph for it. However, there was an end of period concentration of sales, which together with days of rain in August and typhoons in September presented a great challenge for us. Which resulted in operating income that was lower than the 18,000,000,000 yen beginning of year plan by 200,000,000 yen. Here is an analysis of the first half. As you can see at the bottom, sales increased by 6,700,000,000 yen. Owing to mainly new housing sales. As for operating income on the right, the 109 unit sales increase for the housing business led to 1,400,000,000 higher income. The surge in material prices Namely steel was covered somewhat by cost reduction. Overall, operating income in the housing business increased by 800,000,000 yen. Their renovation business had a low backlog at the beginning of the year that led to lower marginal profit, unfortunately, resulting in a 500,000,000 yen decrease in operating income. The results for the Frontier business in Japan and overseas are shown here as well. Here's the plan for the second half of fiscal 2017. We put together a plan for net sales to grow by 8,300,000,000 yen, With all businesses, housing, renovation, and frontier to grow, respectively, as shown on the left. For the housing business, operating income on the right is expected to increase by 2,100,000,000 yen. Due to an increase in unit sales of new houses. But due to the surging steel prices that haven't stopped deteriorating, There will be a negative impact of 1,000,000,000 yen. Cost reduction will cover some of the decline. But looking at the sales outlook for the second half, due to lower sales from housing complexes, there will be a negative product mix impact of 1,200,000,000 yen, leading to a 200,000,000 yen increase in operating income for the housing business. As for the renovation business, beginning of your backlog increased by 3% and 2nd half orders are expected to pick up as what's the case in the first half. As a result, total operating income for the renovation business is expected to increase by 500,000,000 yen, with marginal profit up by 600,000,000 and fixed cost contributing negatively by 100,000,000 yen. The plan for the Frontier business in Japan and overseas is also shown on the slide. Here are the initiatives related to new housing orders. In the first share in the 3 major metropolitan areas, Tokyo, Nagoya, and Osaka succeeded as we were targeting in the medium term management plan, and this contributed to increased orders for detached housing. Detached housing orders were broadly in line with plan, up by 3%. With significant growth and built for sale housings. However, as shown on the slide, housing complexes struggled quite seriously. Especially in West Japan. In the second half, we are expecting the same market trends as the 1st half and will continue to target customers in their twenties and thirties due to the negative interest rate environment. We expect built for sale housing to continue to be steady due to first time buyers. Housing complexes will probably continue to be stagnant like the first half. Based off these demand trends, The housing order plan is shown here on the right. The 3rd quarter in the second half forecast, 5% growth year on year. And 6% growth during the 4th quarter, resulting in 5% growth for the period. Moving down to the bottom, here we show order acquisition measures starting off with initiatives around products. Grant to you five that we were testing in the market has been officially launched nationwide from October 28th. The steel framed smart power station GR has been off to a good start since the launch in July. 2, so we will 1st focus on these two products to capture sales volume in subdivision and built for sale houses. On top of that, in the free major cities of Tokyo, Nagoya, and Osaka, we are planning to launch slightly higher end 3 story urban type new products. We will strive to acquire orders with these products in the second half. Regarding the renovation business, in addition to higher backlog at the beginning of the settling half compared to the first half, Strategic products for exterior walls were launched in September. We will strive to expand sales of exterior products Starting with exterior walls. As for inside the house, we have a reinforced line up of modular bathrooms That will offer more options for the customer. By making propositions for both inside and outside of the house, We will strive to increase average transaction per customer. We will strengthen our organization to support these efforts. By increasing the headcount of after service, design, and sales personnel. For the Frontier business on the right, which is mainly real estate, the integration of real estate companies in Tokyo Nagoya and Osaka is expected to generate a positive impact. The number of dwelling units under management on the right which was 42,000 in 2016 will be increasing to about 45,000. By obtaining prime property and disposing of underperforming units, we will strive to improve operating income per unit by 4000 yen. Which will be an increase to 42,000 yen from 38,000 yen. The 4000 yen improvement times 45,000 units will add up to 200,000,000 yen. As for our business in Thailand, 1 year has passed since the king passed away. The king's funeral was conducted on October 29th, and the morning period is now over. The past year was challenging as no TV commercials were allowed, and we weren't able to attract customers. But now as the morning period is over, we will 1st take care of the properties at hand to close sales. We have also been working on built for sale houses and hope to acquire customers. Hello. I am Hajumekubo, company president of the UIEP, urban infrastructure, and environmental products company. The divisional company reported record high profits for the first half of the fiscal year by improving profitability. We will continue to improve profitability in the second half, so as to renew our record highs again. Looking at the analysis of net sales and operating income, net sales increased by 100,000,000 yen, But on a real basis, if you take out the impact of business structural reform from the last fiscal year, net sales increased by over 3,000,000,000 yen. Operating income increased by 1,600,000,000 overall with Japan up by 2,100,000,000 and overseas, unfortunately, down by 500,000,000 yen. In the domestic market, raw material prices increased rapidly And although we were not able to offset the impact completely through selling prices, cost reduction and selling quantity and composition helped, I will elaborate on sales quantity and composition later, but the brisk growth was supported by good sales of prioritized products. The profit decline in the overseas business is attributed to a delay in the deliveries of aircraft sheets due to customer reasons. This is likely to have some impact on the second half of the year. Regarding the second half outlook, Sales is expected to increase by 600,000,000 yen. But due to the same reasons as the 1st half, On a real basis, sales growth should be close to 3,000,000,000 yen. Operating income is expected to increase by 600000000 yen. With the domestic business and overseas business contributing by over 500,000,001,001,000,000 each. Raw material cost increases will be hedged by selling prices. The rises in fixed cost due to increased investments will be covered by cost reduction, and we will improve sales quantity and composition of prioritized products as a result. Fixed costs will be higher in the overseas business as investments are being made in the aircraft sheet business So growth will presumably be about the same level as the investments we are making. Moreover, The delay in deliveries is likely to hit the second half as well. However, we are seeing a recovery trend and have visibility into future sales. Hence, we do not think the factors affecting us now will be sustained over a long period of time. Let me elaborate by strategic field now. For piping and infrastructure, demand is fairly robust currently. Mainly in the metropolitan city areas. By offering metal replacement type, prioritize products, We believe that we can expand sales steadily. For the SEAN region, investments have been made already into Vietnam. And we will focus on rolling out sales or products such as industrial piping, fittings, and catch basins from the second half. The pipeline rehabilitation business now has recovered to a level that can generate steady profits in the domestic market. But the overseas pipeline rehabilitation business continue to be in the red. So we made plans to turn around the business during this fiscal year. And we're successful in returning to the black in the first half. Now that turnaround measures are completed, we will aim to grow this business. Regarding building and living environment at the bottom, sales have been in line with market trends. We had not launched as many new products in this business, so we have planned for it during the second half of the year through which we would like to grow sales. For advanced materials at the top right, we would like to recover sales of aircraft sheets and advanced development into other areas. As you will see later, we are striving to enhance into business areas such as medical and railway rolling stock. We are also aiming to grow FSU sales by reinforcing the foundation of our overseas business. As for the overseas businesses, in Asia and Australia, we have been able to increase adoptions for industrial piping pipeline rehabilitation, and FFUs. Together with the investment stake in Vietnam that I touched upon earlier, We will strive to grow sales more than ever in Asia during the second half. In Germany, we planned for earnings growth mainly driven by FSU sales as we have obtained the authentication from Deutsche Spam. As for the US, we will strive to expand the pipeline rehabilitation business. Although prior product sales are still low as a percentage of sales. It reached over 14% in the first half. We are striving to exceed 17% in the second half. To accelerate the growth, we will launch new products. We have plans to introduce about 30 new products this year that are likely to contribute to prioritized product sales growth. Regarding strategic investments, we have made equity investments in Vietnam and have decided on investments for aircraft sheet capacity expansion. Investments to increase production capacity for FSU have also been approved, which we will move forward. Here is a page for your reference showing some of the new prioritized products in the different fields of our business. Thank you for your kind attention.