Sekisui Chemical Co

My name is Futoshi Kamiwaki, Senior Managing Executive Officer and Head of Business Strategy Department. Thank you for joining the result meeting today. I would like to walk you through the presentation material. The currency assumptions under the business plan for Q1 and Q2 are shown on the first page. Page 2 is the overview of the results for Q1. Let me quickly remind you the assumptions under the business plan we provided back in April. In April, we communicated that we expected severe impact from COVID-19 in the first quarter, but a gradual recovery during the second quarter. Having said that, we still expect a substantial impact from COVID-19 during the first half. There are multiple factors that would significantly hit our business. For instance, auto and smartphone production, number of testing done at the hospitals for lifestyle-related diseases, number of visitors to the housing exhibits, housing starts and delays on construction projects. In Q1, due to these reasons, our business was severely impacted by COVID-19, and as shown on the slide, revenue and other profit lines declined significantly. However, despite this environment, we were still able to generate profit with 1.4 billion yen in operating income and 800 million yen in ordinary income, which were better than what we had expected. Page 3 is a breakdown by divisional companies. Both net sales and operating income were down for all the businesses due to COVID-19. One thing worth mentioning is that HPP, High Performance Plastics Company, generated an operating income of 2.4 billion yen, which was slightly above the plan, owing to the relatively steady electronics business and cost reduction. The operating income for the housing company was 400 million yen, and although we were impacted by the suspension of the construction work, the profit was pretty much in line with the business plan thanks to the cost reduction measures. In UIEP, Urban Infrastructure and Environmental Products Company, despite the business being impacted by the suspension of the construction work and lockdown in the overseas market, the operating income was at breakeven in Q1, in line with the business plan. All in all, with benefits reaped from cost reduction efforts, we were able to secure an operating income of 1.4 billion yuan on a consolidated basis. Page 4, please. Before talking about the first half outlook for Sekisui Chemical, let me share with you how we see the market, starting with the global auto production. The blue line represents the yellow near change we expected in April, and the red line indicates the revised outlook as of July. Q1 slightly outperformed the April expectation, but now we anticipate the recovery in Q2 and beyond to be slower than the initial expectation. Our revised forecast for the smartphone shipment is roughly 5% below the original outlook, and we pursue the environment to be challenging. However, leading into Q4, we anticipate recovery with the demand shifting from 4G to 5G. For housing, the blue line represents the year-on-year change in the number of visitors to the housing exhibits, which were extremely low in April and May, but showing recovery in June up to roughly 80% of what we saw last year. However, the speed of recovery in Q2 seems to lack momentum and we project Q2 visitors to be roughly 80% of last year. We aim to offset this weakness by attracting the viewers online. The outlook for the new housing starts in 2020 remain pretty much unchanged from the initial forecast and we expect roughly 400,000 units in the first half, which would be a year-on-year decline. The domestic NAFTA price trended slightly in favor during the first half. However, we expect the price to go up within the range of our expectation in the second half. Page 5 illustrates the first half earnings forecast based on the market outlook that I just explained. Although the net sales have revised down slightly from the original guidance to 488 billion yen, we project that we would be able to achieve the April guidance for operating income, ordinary income, and net income. We aim to achieve the profit targets mainly by cost reduction. Page 6 is a snapshot of the first half outlook by divisional companies. I'd like to draw your attention to the column at far right, which shows the difference in the revised operating income projection versus the original business plan. In HPP, mobility and building and infrastructure fields will continue to be severely impacted by COVID-19. But we expect the electronics field to drive the business, and combined with the cost reduction measures, we revised up the operating income forecast by 1.6 billion to 5.3 billion yen. Although the housing company will be hit by the suspension of the construction among other factors, we aim to offset that impact by lowering the cost and thus kept the original forecast of 12.8 billion yen. On the other hand, for UIEP, the setback from the suspension of construction work in Japan and lockdown overseas will be more severe than the initial expectation, and based on that assumption, we revised down the operating income guidance by 1 billion to 1.5 billion yen. In medical, the number of outpatient diagnostic tests and in-hospital tests are down by more than the original anticipation, and reflecting this fact, we revised down the operating income guidance by 800 million to 1.6 billion yen. In summary, the consolidated outlook remains unchanged from the original forecast at 14.7 billion yen of operating income. Page 7 illustrates the first half breakdown by Q1 and Q2. As I mentioned earlier, the first quarter was better than the plan, but the recovery from COVID-19 in Q2 seems to be slower than what we had originally anticipated. All in all, with Q1 and Q2 combined, we are reiterating the original outlook of 14.7 billion in operating income for the first half. Page 8 is the analysis of the first half performance. Net sales will be down by 68.5 billion yen a year. The graph on the right is a waterfall chart on the changes for the operating income, and as shown, operating income will be down substantially due to sales volume and product mix factor, which is more than the original expectation. On the cost side, we will aim to improve the fixed cost by 8 billion versus the original plan, and raw material cost will also slightly improve. With these positive factors offsetting the weakness, we aim to achieve the operating income target of 14.7 billion yen. From page 10, I will explain in more details by each segment, starting with the HPP company. Net sales for the first half is projected to be down near by 26.8 billion yen. The graph on the right demonstrates that the operating income is significantly impacted by the sales volume and product mix factor. The consolidated basis change reflects the newly consolidated Sekisu Aerospace business, which is adversely impacted by the weak airline sector. Yet, we plan to compensate for the weakness with improvements in fixed cost and raw material cost and aim to overachieve the initial plan by 1.6 billion to reach 5.3 billion yen in operating income. Page 11 offers detailed information on the three strategic fields in HPP. For electronics, Q1 was very robust as you can see from the slide. In Q2, we projected secure cells comparable to last year as well. The non-LCD fields, namely semiconductor and 5G applications are growing very strongly, and as indicated at bottom right, the non-LCD cells ratio has increased to 56%. On the other hand, in mobility, we expect small quarter-on-quarter recovery in Q2. As you can see at bottom right, the sales of high-performance interlayer film, a prioritized product, is growing at a pace exceeding the original plan, so this will be the main driver as we aim for a recovery in Q2. For sector aerospace, which has been severely affected by the sluggish demand from the airline industry, we will make further progress in rationalization. In building and infrastructure, the impact of COVID-19 was more severe than expected. Particularly with India under lockdown, the demand for chlorinated PVC went down significantly. In Japan, with the suspension of construction projects, the demand for thermal insulation and non-combustible materials is down, and the business environment is very tough. Page 12 is the first half forecast for the housing company. Net sales is projected to decline by 21.9 billion yen year. However, the order book, the leading indicator shown at top right, has been trending better than the April projection, with new housing order at 77% of the same period last year and for renovation at 68%. Therefore, we expect to secure first half order in line with initial projection, 82% for new housing and 86% for renovation. The moving factors are shown on the right, and we plan to offset the operating income decline due to lower sales by improvement in fixed cost and aim to achieve the original operating income target of 12.8 billion yen. Page 13 illustrates remittance for capturing new housing orders. The plan for securing the number of customers is to offset the decline in the visitors to the physical housing exhibits by increasing the visitors online to maintain the total sum of visitors. Looking at the business by type of construction, order for already built subdivision housing, our prioritized strategy for the first half has recovered to 110% versus last year as of June, and we plan to grow the order book focusing on this offering. Bottom half of the slide explains our initiatives for growth. With some restrictions on face-to-face meetings, we will actively use online tools to communicate with the customers and launch new products under the concept of WithCorona model. We increased the inventory for ready-built houses, our core growth initiative, by 53% year-on-year, so we have sufficiently secured enough units to sell. With these measures, we believe we can recover the order intake mainly with the first-time buyers as originally planned. Page 14 is the first half outlook for UIEP. The impact from COVID-19 is greater than what we anticipated in April, and the business has been hit by suspension of the general contractor's construction work in Japan and lockdowns in the overseas market. Net sales is expected to be down by 17.4 billion yen, and as indicated by the chart on the right, the adverse impact from the sales volume and product mix factor is bigger than the initial plan. We've made efforts to offset this with savings on the fixed cost and raw material cost, but those were not enough, and we revised down the operating income outlet by 1 billion from the original plan to 1.5 billion yen. Page 15 illustrates the three strategic fields. The piping and infrastructure field was particularly hit severely by the decline in domestic construction starts, and net sales is expected to drop substantially from last year. Having said that, the pipe business for plants is making steady progress mainly driven by the semiconductor industry in China and Korea, where the recovery from COVID-19 happened relatively quickly. Net sales for building and living environment is declining due to COVID-19, but structural reform has already been underway and the progress is on track. Top right of the slide is advanced materials business, which has been hit harshly especially by the sluggish demand for aircraft sheets from the airline industry. We are now trying to transform the portfolio to shift more toward medical applications. Although the medical business is growing steadily, the adversity with the aircraft sheet business is severe and the sales is projected to decline year on year. Business reform is in place, one of which is preparing to transfer some of the businesses from Sekisui Hinomaru. As you can see at bottom right, UIEP's critical medium-term KPI is to raise the ratio of the prioritized product sales. Despite the decline in the overall URIP sales, the ratio of the prioritized product is coming up, and we aim to move toward recovery from Q2, mainly focusing on growing the sales of the prioritized products. Page 16 is the medical business. The business has been affected significantly by the decrease in the number of outpatient tests, with the sales coming down by 2.4 billion yen. The waterfall chart on the right depicts that the negative impact of the diagnostics business both in Japan and overseas was greater than the initial expectation, and the operating income guidance was revised down by 800 million to 1.6 million yen from the original plan. Page 17 offers more details on the subsegments under the medical business. Although the EL near decline in the number of outpatients for the domestic diagnostics business was observed both in Q1 and Q2, resulting in sales decline, we are starting to see some recovery in June. Sales for the overseas diagnostics business was down mainly due to temporary shutdown of clinics and other medical institutions caused by the lockdown. At the same time, we have also been steadily growing the sales for COVID-19 diagnostic kits, particularly in the overseas market. The pharmaceutical sciences business is making good progress on par with the plan, so we will continue to grow the medical business from Q2 onward, capitalizing on the pharmaceutical science business as the main driver. From page 18, we have attached the financial information of the results, so please have a look at your convenient time. When we initially announced the business plan for the year, the assumption was that the impact of COVID-19 will subside in the second half and the market environment will normalize back to the level we saw in the previous year. However, in reality, the speed of recovery from COVID-19 is slower than anticipated, and our countermeasures are to more rigorously reduce fixed costs leading into the second half and bring forward the structural reform measures to Q2 to be well-prepared for the second half. This will conclude my presentation. Thank you very much for your attention.