Artience : Presentation Briefing transcript of First Quater of FY2024 Results Briefing

Financial Results Briefing for the First Quarter of Fiscal Year Ending December 31, 2024

Presentation (Transcript)

• Date/time: May. 17, 2024 10:00am - 11:00am (Japan time)
• Presenter: Hiroyuki Hamada: Senior Managing Director, in charge of Corporate Divisions
• Presentation Material:https://ssl4.eir-parts.net/doc/4634/tdnet/2444146/00.pdf

TRANSLATION:

This is a transcript of Financial Results Briefing for the Fiscal Year Ending December 2024, Question & Answer session, held on May. 17, 2024. This is an English translation of the Japanese original, prepared only for the convenience of shareholders residing outside Japan. The original Japanese version will prevail should there be any difference in the meaning between the English version and the Japanese version.

DISCLAIMER:

The forecast or projections in this material are based on the assumptions and beliefs of our management in light of the information available as of May. 17, 2024. Changes in global, economic and business conditions could cause actual results to differ materially from these forecasts.

The content of this transcript have been edited or revised by the company.

Hamada: Good morning, everyone. Thank you for joining us today.

Beginning this year, in addition to the two previous half-year and full-year financial results briefings, we have decided to report financial results for Q1 and Q3 in a compact format.

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Let me start with the consolidated P&L.

The sales were JPY81.7 billion, an increase of 9.2% compared to the same period last year. Overseas sales accounted for JPY45.7 billion of this total, and the ratio of overseas sales to total sales was 55.9%. The overall revenue increase was JPY6.9 billion, of which about JPY2.7 billion was due to the conversion of overseas sales resulting from the depreciation of the Japanese yen.

Although there are some variations depending on products, overall, sales units grew slightly over by 1%. The demand for general consumer goods, on which we depend heavily, was not necessarily strong. In addition, the high cost of raw materials over the past few years has made us more profit-oriented, and we have seen a decrease in high-volume,low-margin products. The net sales grew more than the sales units did due to price adjustments and the sales mix.

Operating profit was JPY4.4 billion, an increase of JPY2.5 billion, or 128%, over the previous year's JPY1.9 billion. This was due to price revisions and various cost reduction measures, as well as increased sales of UV, LED inks, and gravure inks, especially in overseas markets. Overseas profits have reached 67% to 68%, with Asia accounting for about 2/3 of these overseas profits. In Europe and the US, profits and costs were break-even last year, and the businesses started to mold a profitable structure, which led to contributing to the overall profitability.

I will discuss divisional profit later in my segment-by-segment review. I would like to note that the operational profits weren't affected by any surplus conversion of overseas sales resulting from the depreciation of the Japanese yen. I will provide details later on as well.

Ordinary profit was JPY5 billion, an increase of approximately JPY3.4 billion, or 212.5%. While the operating profit increased, we gained JPY470 million in the Japanese yen conversion of receivables and payables resulting from the depreciation of the Japanese yen.

Net profit was JPY4.1 billion, an increase of about JPY3.7 billion from the subpar previous year. The factors include strong ordinary profit, substantial overseas profits, as well as the deductible expenses inclusion after completing the sale of TOYO INK Myanmar Co., Ltd., the entity that has already withdrawn and ceased operations, to a third party.

The effective tax rate for the current year is 13.6%, which includes special factors like the sale of TOYO INK Myanmar.

Although the current net profit is 41% of the full-year forecast, we do not plan to revise our performance target at this stage, as we are only three months after the start.

The exchange rates, as you can see at the bottom of the slide, the Japanese yen is weakening in all aspects.

Naphtha, which affects more than half of our raw materials for the current fiscal year, has remained high due in part to the depreciation of the Japanese yen, and we have a grave concern about future trends in crude oil.

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Next, I would like to show you the quarterly trends.

For us, Q1 has been the slowest quarter for sales and profits in recent years. This may be because demands are typically slow in the winter season, around Chinese New Year and Japanese New Year. Once the big year-end and seasonal sales events are over, things get quiet, which brings a quite sluggish start for us.

Since I am comparing YonY, I will briefly describe what kind of year we had last year. Given the continuing high prices of raw materials, we started this term with a goal to regain some profits by revising prices and reducing costs.

As for Q1, there were still many delays in price revisions, while raw material costs remained high, and the LCD color filter and smartphones, from which we derive revenue, were both sluggish, making it a particularly stagnant quarter. Therefore, we should not just compare the results with the bearish Q1.

After Q1 of last year, operating profit reached JPY13.1 billion due to successful price revisions and cost reductions, but we should focus on whether the trend of improved profitability from H2 of last year is continuing. Looking at the quarterly trends, we see that the recovery trend is progressing.

Regarding divisional reviews, the largest improvement was in printing and information.

On the other hand, profits were not favorable. Despite the sales for color filter materials for large-size TVs increased, sales for small- and medium-size products, such as PCs and smartphones, have yet to recover.

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Next, I will explain the increase and decrease analysis.

The increase in personnel and expenses due to inflation brought roughly negative JPY0.7 billion against profit. This does not include the foreign exchange impact of JPY0.8 billion. There was also an increase in depreciation due to LiB and other factors. Personnel expenses increased by roughly JPY300 million, and depreciation increased by about JPY200 million.

Regarding raw material cost prices, domestic prices increased by JPY100 million, which negatively impacted the profit. However, overseas, raw materials dropped by JPY1.1 billion. We had a net positive effect of JPY1 billion compared to the previous year. We have a serious concern about the expected sharp rise in the price of raw materials in Japan and the depreciation of the Japanese yen. The increase in profits from sales growth was largely due to contributions from overseas inkjet inks, plastic colorants, and gravure inks, as well as the impact of the sales mix.

Price revisions in response to soaring raw material prices had a positive effect of about JPY1.1 billion in Japan compared to the same period last year, while overseas prices fell in some areas, resulting in a negative JPY0.2 billion, for a net positive profit of JPY0.9 billion.

Regarding exchange rate fluctuations, while there was an increase in profits from overseas conversions, the negative impact of the depreciation of the Turkish lira had a negligible effect on profit growth.

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Next, I will discuss the results by segment.

As you can see, sales and profits increased in the four main segments.

The following is a description of each business segment. The first is the colorants and functional materials segment.

Sales increased thanks to CF materials, plastic colorants, especially in the overseas market, and inkjet inks, among other contributions.

Profits increased thanks to plastic colorants sales overseas and inkjet inks sales. Additionally, pigments and pigment dispersions, which had been in the red in the previous year, turned profitable. Pigments are our key material. As the use of pigments for offset printing, once our mainstay material, starts to decline, we promote the integration of sales bases and price revisions. We also strive to

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expand the new business domains. Pigments play the primary role in our business, supplying raw materials for our products and enhancing our products.

As for CF and CF-related materials, the large-size market for TVs and other products shifted to a recovery trend, and sales grew by about 10% compared to the same period last year. However, demand for small- and medium-size products, such as PCs, smartphones, and automobile-application products, remained sluggish. Thanks to the higher profit margins for the products of this category, the profits were down only slightly. In the CF segment, we started to see results for image sensors used in smartphone cameras and other products, and we have high expectations for the future of these product groups.

Sales of colorants were up slightly from the previous year. Demand for general consumer goods and home appliances was weak, while demand for solar panels and automotive applications was strong. The profits for plastic colorants increased significantly in comparison to the sluggish performance of the previous year due to the sales mix of enhanced and higher value-added products, as well as the effect of price adjustments.

We have many global production bases for these types of products. While the world shifts away from plastics, we don't limit ourselves to simply coloring objects, and we strive to increase recyclable and function-added products, in order to grow profits, not just coloring products. For this business segment, too, the price hike of raw materials, such as titanium dioxide, is extreme, and we asked for a price revision.

Inkjet inks are steadily increasing sales and profits. We positioned the inkjet inks as the next pillar of our business. We have offices in Europe, the US, India, China, and Japan, each of which is a very exciting market. We will be exhibiting at the world's largest printing equipment exhibition in Düsseldorf, Germany later this month.

I would like to report on the status of CNT dispersions for LiB, which we have positioned as a future growth engine in this segment and which have been attracting a lot of attention from our stakeholders.

As you are aware, the market has continued to slow down since Q4 of 2023. The current Q1, as expected, got off to a slow start, with sales of JPY1.2 billion. We expect to see the demand rise in H2 of this year, though it can vary slightly by region, with sales of JPY2.2 billion in H1 and JPY4.3 billion in H2.

Although sales for the US market are slow, we expect a 20% increase in sales to China this fiscal year compared to our original plan. Europe is also expected to rise, and Japan will also see results.

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We believe that these factors will cover the decrease in sales in the US and that we will manage to achieve sales of JPY6.5 billion.

In FY2025, we plan to hold on to the initial target, as we are looking to launch in the US market some products that the application has internally confirmed, and we can expect further sales increases in China, Europe, and other regions.

Regarding these business initiatives, we plan on providing a detailed report at a business briefing during the Q2 financial results briefing in August.

Next is the polymers and coatings segment.

The segment here also saw an increase in both sales and profit.

Functional films and tapes for smartphones and other components, which had been stagnant in the previous fiscal year, adhesives, especially overseas, and can coatings, which also benefited from acquisitions, contributed to sales growth and profit.

There was an apparent difference in this segment, with overseas sales strong and domestic sales somewhat stagnant.

Adhesive products are inevitably affected by consumption trends, so the cooling of consumption due to rising domestic prices had a significant impact.

The decline in the operating margin, from 7.4% in the previous quarter Q4 to 6.7% in this quarter, is largely due to low profitability impacted by the sales mix of adhesives in Japan and the burden of development costs for the next-generation businesses.

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This is the packaging segment.

The segment here also saw an increase in both sales and profit.

In the mainstay gravure inks business, domestic sales of gravure inks were on par with the same period of the previous year due to the integration of product lines and price revisions, given the cooling demand for general consumer goods and soaring prices of imported raw materials. As a result, profits declined due to a slight decrease in sales volume and higher raw material prices.

In the overseas markets, both units and sales grew, while profits also increased significantly. India, Southeast Asia, and Turkey performed particularly well. Flexographic inks also contributed to improved earnings both in Japan and overseas.

In the domestic market, large price increases for pigments and titanium dioxide have been and will continue to be proposed by raw material manufacturers. Also, the costs of logistics and sub-materials have exceeded the scope of absorption, and on May 10, we issued a request for a price revision.

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Printing and information segment.

This segment also reported an increase in revenues and a significant improvement in profitability from a loss in the same period of the previous fiscal year. This was probably a surprise to all of you. For us, this was a very significant contribution overall.

In particular, with the domestic information printing market shrinking from 5% to 10% per year, we have been downsizing our domestic structure; for example, integrating sales companies, shifting personnel, and changing production systems. These efforts finally came to fruition.

Additionally, UV curable, LED curable inks, and functional coatings enhanced profits significantly, which contributed to the profits for the Japanese business. The old oil-based ink remains in a slight deficit, but we are on track to eliminate it.

In the overseas market, UV curable inks and oil-based inks both showed steady profits in all regions. The traditional structure in which domestic demand offsets overseas surpluses is no longer the case. In addition, we are developing new businesses by combining our resins, color materials, and functional materials with printing technologies and applying them to create the strategic priority business groups that we have identified in our medium-term management plan. We intend to expand our business domain.

This is my report on the Q1 overview.

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Let me add one more topic as a conclusion to the report.

The full-year sales forecast is JPY340 billion, and we achieved nearly a quarter of that during the quarter under review. Operating profit, ordinary profit, and net profit have progressed better than expected, and we assess that Q1 has gotten off to an extremely favorable start, given the usual tendency for Q1 to be slow.

Despite weak domestic market conditions, cost reductions and price revisions helped to secure an increase in profit YoY. Although overseas market conditions differ by product and region, we were able to overcome the sharp rise in raw material prices, resulting in a large increase in profits compared to Japan.

Despite sales growth in materials for color filters, stagnant profits in the sales mix are a concern for the future. For CNT dispersions, the market continues to slow as expected.

Going forward, we expect a full-scale start in China and a recovery in market conditions from H2 of this year through 2025, as well as full-scale business with our clients.

As for future prospects, we expect a recovery of materials for LCD panel color filters for small- and medium-size products this fiscal year. As for CNT, I think it is largely in line with the plan.

I also believe that the earnings increase driven by overseas operations is progressing well, as stated in our medium-term management plan policy one-transformation of existing business groups into highly profitable ones-by prioritizing our businesses.

On the other hand, we believe that the continued depreciation of the Japanese yen, price increases of raw materials due to slumping earnings of raw material manufacturers, and geopolitical risks are concerning.

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