Earnings Call: Q3 2024

Feb 9, 2024

Summary

Q3 sales declined, but pricing and FX helped profits grow amid volume and cost pressures. FY2023 guidance was unchanged, with food products recovery and advanced semiconductor investment supporting the outlook.

Good afternoon, everyone. My name is Hidetaka Shirozume, President, Chief Executive Officer, and Representative Director of the Adeka Corporation. Thank you for taking the time off your busy schedules to participate in today's financial results briefing. I would now like to start today's briefing on financial results for the third quarter of fiscal year 2023 for the Adeka Corporation. First are the consolidated results for the third quarter of fiscal year 2023. We registered JPY 286.4 billion in net sales, JPY 24 billion in operating profit, JPY 24.5 billion in current profit, JPY 16.4 billion in profit attributable to owners of parent, and lastly, JPY 161 in net profit per share. While sales were down, we were nevertheless able to grow profit. Next is an analysis of operating profit. A decrease in sales volume significantly weighed down on results, as did manufacturing and fixed costs, but we were nevertheless able to offset these through improvements in net pricing and foreign exchange gains. Next are the trends in consolidated performance. Realized net sales results as of the end of the third quarter stood at 70% of the full-year forecast of JPY 410 billion, while operating profit registered a progress of 70% versus the full-year target of JPY 34.5 billion. Next are the consolidated results for the third quarter of fiscal year 2023 on a per-segment basis. Here, Polymer Additives, in particular, registered a significant decrease in net sales with the Life Science segment corresponding to Nihon Nohyaku, and Polymer Additives suffering large decreases in operating profit. Worthy of note here is Electronics & IT Materials, which despite growing sales, nevertheless registered a decrease in operating profit. I would now like to give you a more in-depth review of the results for each segment, starting with Polymer Additives in the Chemicals segment. Here are the main factor highlights for sales. Sales of one-pack granule additives and antioxidants struggled amid weak demand in the Middle East and Europe. Additionally, automobile production continued to rally, resulting in solid sales of nucleating agents and other products used in automotive materials. Other plastic products struggled in terms of sales, while flame retardants for engineering plastics used in home appliance frames posted a weak performance, as did materials for use in building materials and food packaging. Lastly, as I mentioned earlier, within materials for use in automobiles, nucleating agents, light stabilizers, and plasticizers for rubber delivered a steady performance. In terms of operating profit, we faced very significant difficulties from the negative impact of a decrease in sales volume, which weighed down on results by JPY 1.8 billion. Fixed costs further weighed down on operating profit by JPY 400 million, and while foreign exchange and net pricing made a positive results contribution, this wasn't enough to offset these two large decrease factors. Next are the results for Electronics & IT Materials in the Chemicals segment. Here are the main factor highlights for sales. High-k materials, photoacid generators, and other materials for advanced semiconductors achieved higher sales than in the same period of the previous year. Additionally, while sales of display-related materials were impacted by production adjustments, demand continued to rally. Regarding semiconductors, we registered strong sales of high-k materials for advanced DRAM, and steady sales of photoacid generators used for semiconductor lithography, especially EUV and ArF semiconductor lithography. In terms of displays, we registered strong sales of photo initiators for color filters and etching materials for LCD panels, and steady results for black matrix resins. On the other hand, photo curing resins for optical film and etching materials for printed circuit boards posted a weak performance. In terms of operating profit, manufacturing costs and fixed costs associated with CapEx had a large negative impact of JPY 800 million. Sales volume only had a slight impact, and while foreign exchange had a positive impact, operating profit overall was down on a Y-o-Y basis. Next is Functional Chemicals in the Chemicals segment. Here are the main factor highlights for sales. Sales of propylene glycol and peroxide products for general industrial use were poor amid lingering market weakness. Conversely, sales of lubricant additives for engine oils that help improve automobile fuel efficiency were strong. Sales of chemicals for general industrial use, for cosmetics, and for home appliances, smartphones, and PCs were weak. Regarding materials for automobiles, the aforementioned lubricant additives for engine oil posted a strong performance. Also within automobiles, special epoxy resins for structural bonding and epoxy resin adhesives for automotive electronic components posted steady results. Additionally, reactive emulsifiers for use in architectural coatings and others also posted a strong performance. In terms of operating profit, a decrease in sales volume and higher fixed costs negatively impacted results by JPY 900 million and JPY 800 million respectively. Net pricing and foreign exchange had a positive effect on results, but this wasn't enough to offset these two negative factors. Next is the food products segment. Here are the main factor highlights for sales. Amid the recovery of tourism demand, sales of margarine for souvenir confections were strong. Marvelous and other high value-added products attained brisk sales in Southeast Asia and healthy sales results in China as well. Lastly, we made progress in price revisions in Japan and overseas. As we wrote here, we delivered strong and steady results in souvenir confections and bread and confectionaries, with the exception of a weak performance from general-purpose fats and oils, which we deliberately decided to produce and sell less of. Lastly, our Deli-PLANTS series of plant-based foods delivered sales growth. Regarding operating profit, net pricing made a positive contribution of JPY 3.7 billion, while higher sales volume and lower manufacturing costs boosted operating profit by JPY 600 million and JPY 400 million respectively. We were therefore able to deliver a significant recovery in this area. Next is the Life Science segment, which corresponds primarily to the results for Nihon Nohyaku. Here are the main factor highlights for sales. Sales struggled due to the falling prices of generic agrochemicals following greater competition in Brazil. Additionally, agricultural chemicals sales stagnated in Japan due to unfavorable weather conditions and the circulation of inventories in the past fiscal year. Agrochemicals in general struggled, especially when it comes to generics in the Brazilian market, with a weak sales performance in Japan and North America. Conversely, sales results were steady in India. Within pharmaceuticals, our topical antifungal agent, luliconazole, posted a weak performance. Regarding operating profit, sales volume negatively impacted results by JPY 2.6 billion, as did higher fixed costs by JPY 600 million. Despite a positive contribution from foreign exchange, this wasn't enough to offset a Y-o-Y decline in operating profit. I would now like to go over the fiscal year 2023 consolidated forecasts. The totals remain unchanged from the forecasts announced in November 2023, as we expect to deliver a full-year performance of JPY 410 billion in sales, JPY 34.5 billion in operating profit, JPY 34.5 billion in current profit, JPY 21 billion in profit attributable to owners of parent, and lastly, a net profit per share of JPY 204.8. The dividend forecast too remains the same as we expect to distribute JPY 40 per share in year-end dividends for an annual total of JPY 80 per share. Next are the consolidated forecasts for fiscal year 2023 on a per-segment basis. As I mentioned earlier, while the forecast totals for sales and operating profit remain the same, we have made minor adjustments to the segment forecasts. More specifically, we have lowered sales guidance for Polymer Additives and Electronics & IT Materials while raising the forecast for the food products segment. We have lowered operating profit guidance for Electronics & IT Materials while raising the forecast for the segments of food products and other. In terms of the forecast totals, we view these as being adequate and not in need of further revisions. I would now like to go over the factors and background behind the rise in performance in the food products segment. This segment has staged a rather significant recovery, and we believe multiple factors contributed to this. We have identified cost reductions, the integration of product varieties, production efficiency improvements, a recovery outside Japan, price revisions, and lastly, the posting of an impairment loss at 2 of our plants as factors. Conscientious efforts in the execution of these improvements made this recovery possible, and profitability was also achieved by seeking functional products. We also made efforts to underscore Adeka's positioning as a food tech company, leveraging the power of oils and fats to solve issues in the food industry. Furthermore, with our Deli-PLANTS series of plant-based foods, we seek to operate in areas closer to B2C. Within this scope, we leverage the voices and needs of end users into the design process of our products and incorporate these into the development of recipes. We believe these efforts were particularly important, together with the fact that we made robust progress in paving the way for marketing functional products in broader areas. Allow me to go over a portion of our lineup within food products. Marvelous C&C, our functional kneading oil, became a hit product. A small amount of Marvelous C&C retains the taste of bread to help extend its consume-by date. In doing so, contributes to improving the efficiency and cost-effectiveness of our customers' operations. This product offers higher concentration of functional content with only half the amount required to produce an equivalent effect to that of our conventional Marvelous product. Marvelous C&C is therefore a product attuned to our customers' needs, and this propelled it to the status of hit product. In terms of differentiating technological key points, the oil easily disperses in the bread dough with only a small amount needed to evenly distribute its functional content across the dough, greatly enhancing product's shelf life and keeping the taste of fresh bread. Next, within Electronics & IT Materials, a number of new plants for materials for advanced semiconductors are scheduled to begin operations. As you are aware, while the impact of decreased production has lingered in the semiconductor market over the short term, production of advanced semiconductor products remains solid. Additionally, while this market has seen some pain over the short term, over the medium to long term, we expect demand for semiconductor materials to expand significantly. Against this backdrop, the Adeka Group has carried out proactive CapEx related to materials for advanced semiconductors, as a series of new plants will be completed and begin operating. Within this scope, we are therefore gradually but steadily increasing production towards full-scale mass production. Our new plant for the production of photoacid generators for EUV exposure processes within photoresists started operations in August of last year. Additionally, we have completed construction of a plant for the production of high-k materials for advanced DRAM as part of our efforts to widen our lineup. We expect to be able to begin commercial operations at this plant shortly. Operations are also scheduled to commence in April 2024 at our new plant for the production of ALD materials for use in the advanced logic IC wiring process. Lastly, Adeka has been selected to be a constituent of the Nikkei Semiconductor Stock Index, which is composed of 30 stocks with the largest market value among the companies listed on the TSE in the semiconductor-related business category, according to Nikkei NEEDS. Calculation and publication of this new index is scheduled to start on March 25, 2024. I would now like to discuss new product development, more specifically, our SPAN active material for next-generation secondary batteries. We are currently in the process of demonstrative evaluation of SPAN's product capabilities. Within this, SPAN's charging and discharging characteristics were evaluated using an original Adeka test cell, which we were able to successfully demonstrate as the world's lightest cell. More specifically, this cell's weight energy density is nearly three times that of existing lithium-ion batteries for only around one-third of the weight, and this allowed us to carry out a successful drone flight with a lithium-sulfur secondary battery using SPAN. We believe SPAN has the potential to meaningfully extend cruising ranges for drones, and these batteries can be reused multiple times. So there is great anticipation for real-world implementations of this kind and is a new business area we intend to pursue and expand going forward. In terms of practical implementation, lightweight batteries are drawing attention for use in drones and other electric aircraft, so we view this as a fertile domain. Furthermore, lower weights increase the potential of secondary batteries and open up the door for other areas of implementations. As a provider of Sozai, that is our excellent value, products, technologies, and services, Adeka will create a new platform and serve to realize a convenient and sustainable society where people can live fulfilling lives. I would now like to discuss the reorganization of Kashima Plant and consolidated subsidiaries. Up until now, our Kashima Plant operated under a rather unique structure in that it manufactured both chemical and food products. However, we have now made the decision to split the two and reorganize the overall plant into a Kashima chemicals plant and a Kashima food plant. This was done with the objective of clearly dividing the responsibilities and authorities between the chemicals segment and the food products segment and carrying out business reforms. As such, within the chemicals segment, we intend to expand into a flagship semiconductor materials plant and, in the food product segment, use a technological approach to the reform of the revenue structure. Additionally, we will be merging our three consolidated food subsidiaries, with this merger marking the completion of the integration of the sales structure in Japan. Through this integration, we seek to speed up decision-making and integrate operations and bases. The merger will go into effect on April 1, 2024, with our subsidiaries being absorbed by Adeka Food Sales Corp as the surviving company operating mainly in Kanto. The companies to be merged into Adeka Food Sales Corp are Crown Company Limited, which operates in Kansai, and Yongo Corp, which operates in the Chukyo area. Next are the reference materials. This slide shows the progress made within the scope of the ADX 2023 medium-term management plan. Unfortunately, we don't believe we will be able to meet our original target for the final year of ADX 2023, which is fiscal year 2023. We view this as a learning experience and will therefore be incorporating what we learned into the formulation of our forecast targets going forward. Page 23 contains the schedule for the announcement of the new medium-term management plan. Things will be proceeding according to the agenda shown here. Last is the overseas sales ratio, which stood at 54.2% at the end of the third quarter. This percentage continues above 50%, which we view as a positive, and going forward, we will continue efforts to further raise this ratio. This concludes today's briefing. Thank you for your time.