Toyo Seikan : Summary of FY2022 Full-Year Financial Results Briefing (text version)

Toyo Seikan Group Holdings, Ltd.

Summary of FY2022 Full-Year Financial Results Briefing (text version)

Date:	Monday, May 22, 2023
Venue:	Conference room of the head office of Toyo Seikan Group Holdings
Speaker:	Ichio Otsuka, President and Representative Director
	Masakazu Soejima, Director and Executive Officer

Opening speech by Ichio Otsuka, President

Thank you very much for attending our financial results briefing today. I would also like to take this opportunity to thank for your continued support.

For fiscal 2022, which was the second year of the Mid-Term Management Plan 2025, net sales increased from the previous year, while profit significantly declined year-on-year although the decline was not as severe as we had expected. The contributors to the sales growth were our efforts to pass on raw material and energy cost increases to customers, an expansion in steel sheet products for automotive rechargeable batteries, and good performance of overseas operations. The eased Covid-19-related restrictions and relatively favorable weather conditions also helped bring sales volume back to the pre-pandemic levels. However, our cost pass-through efforts during the year failed to fully absorb the impact of rapid changes in external factors, such as currency fluctuations and rises in material and energy prices, resulting in a significant year-on-year drop in profit.

For fiscal 2023 (ending March 2024), we will continue to place a high priority on price hikes that have not been achieved in the previous year while reducing environmental impact as well as cutting costs through automation and labor saving measures. We will also focus on restructuring unprofitable operations and investing in growth areas, aiming to achieve the Mid-Term Management Plan 2025.

As you know, the Tokyo Stock Exchange has recently announced its intention to urge companies to focus more on capital costs and stock prices in business management. Institutional investors have also expressed their concerns over capital efficiency. Recognizing the importance of the issue, we launched, on May 12, the Capital Efficiency Initiative 2027 to boost returns on capital by pursuing both our growth strategy and capital and financial strategy toward continuous development and a mid- to long-term improvement in corporate value.

Despite an uncertain outlook, we will commit ourselves to implementing measures to achieve the Mid-Term Management Plan 2025 and the Capital Efficiency Initiative 2027, aiming for continuous growth and greater corporate value.

Detailed explanation by Masakazu Soejima, Director and Executive Officer

[Slide 4]

I will begin with an overview of the full-year results for fiscal 2022 (ended March, 2023).

Net sales increased by 84.4 billion yen from the previous year to 906.0 billion yen, while operating income dropped by 26.7 billion yen from the year earlier to 7.3 billion yen. I will provide the details later.

Ordinary income also fell by 31.9 billion yen to 13.7 billion yen from the previous year. Profits of affiliates accounted for under the equity method was lower than in the year earlier as TOSYALI TOYO CELIK ANONIM SIRKETI in Turkey reported a decline in profitability as its profit margins have been decreasing since the third quarter of fiscal 2022. Profit attributable to owners of parent plunged by 34.0 billion yen to 10.3 billion yen.

[Slide 5]

The breakdown of the change in sales is shown on this slide. Sales grew as a result of our efforts to pass on raw material and energy costs to customers in Japan and favorable performance of Stolle Machinery Company ("Stolle Machinery") overseas.

[Slide 6]

Next, I will explain the decrease in operating income of 26.7 billion yen.

Our domestic operations recorded a 24.7 billion yen drop in operating income. This is attributed mainly to the fact that the cost pass-through amount of 40.0 billion yen failed to fully cover the increase in raw material and energy costs, which totaled 66.0 billion yen, including 9.7 billion yen for steel, 12.9 billion yen for aluminum, 18.6 billion yen for resins, and 16.8 billion yen for energy.

Our overseas operations, primarily in Asia, also posted a 2.2 billion yen decline in operating income.

[Slide 7]

The slide shows a breakdown of sales and operating income by segment.

The mainstay packaging segment reported an operating loss. The engineering, filling and logistics segment posted sales growth thanks to the strong performance of Stolle Machinery, but it recorded disappointing operating income due to a decline in the domestic filling operation. Meanwhile, the steel plate related segment saw a rise in operating income due to successful efforts to pass on higher costs to customers and increased sales of automotive rechargeable battery components and materials, which are highly profitable. The functional materials related segment suffered from poor performance of both magnetic disk aluminum substrates and optical functional films.

[Slide 8]

This slide shows our sales composition. Each segment is broken down into sub-segments. I will omit the explanation because of the time constraints.

[Slide 9]

The next slide shows sales and operating income by region. Operating income substantially declined in both Japan and Asia.

[Slide 10]

The financial position as of the end of fiscal 2022 is shown on the slide. In the year, we raised funds through debt financing to meet the increased need for working capital, as accounts receivable increased with higher sales and inventories grew due to a rise in purchasing costs.

[Slide 11]

This slide is about capital investment and depreciation. Capital investment for fiscal 2022 totaled

65.8 billion yen. Depreciation expenses were 52.9 billion yen, increasing by 1.7 billion yen from the year earlier.

[Slide 12]

Now I will explain our full-year forecast for fiscal 2023 (ending March 2024).

[Slide 13]

Here are key factors as preconditions for the earnings forecast.

In our assumptions, the foreign exchange rate is set at 135 yen against the U.S. dollar, the crude oil price at 87 dollars per barrel, and the aluminum price at 2,600 dollars per ton.

[Slide 14]

First, I will show you an overview of the full year forecast. Net sales are expected to be 950 billion yen, increasing by 43.9 billion yen from the previous year. The sales growth includes the effect of cost pass-through efforts of 48 billion yen.

Meanwhile, operating income will be 23 billion yen, 15.6 billion yen higher than the previous year. I will provide the details later. Ordinary income will be 25 billion yen, which will grow at a slower rate than operating income. This is mainly due to the impact of a year-on-year decrease in equity in earnings of affiliates, which is dragged down by weak earnings of TOSYALI TOYO CELIK ANONIM SIRKETI. Profit attributable to owners of parent will be 16.5 billion yen, increasing by 6.1 billion yen from the previous year. We expect a slight increase in EBITDA and ROE, which will be 79 billion yen and 2.6 percent, respectively. Please note that this forecast does not take account of the sale of strategic shareholdings.

[Slide 15]

The breakdown of the change in sales is shown on this slide. Domestic sales will rise with progress in cost pass-through in the packaging business and increased sales of automotive rechargeable battery components and materials in the steel plate related business. As for overseas operations, sales of Stolle Machinery is expected to fall due to a growing concern over the economic slowdown in the U.S.

[Slide 16]

I will now explain the details of the estimated operating income for the full year of fiscal 2023.

We expect a cost increase of 23 billion yen from the year earlier as soaring raw material prices are likely to have a smaller impact on our operations. The cost increase will amount to 1 billion yen for steel, 3 billion yen for aluminum, 3 billion yen for resins, 7.5 billion yen for energy, and 8.5 billion yen for other materials.

Meanwhile, the total amount of cost increase that is passed on to customers is expected to be 48 billion yen for the full-year with the total rate of cost pass-through for two years from fiscal 2021 reaching approximately 80 percent. We have successfully made progress in material cost pass- through as our customers have increasingly accepted the rise in the costs; however, we are struggling to pass on higher energy prices to them. Toward the achievement, our group companies are negotiating price increases with customers in a patient manner.

Higher labor costs and depreciation and amortization expenses will also contribute to lower operating income growth.

[Slide 17]

This slide provides our forecast for sales and operating income by segment. As for the packaging segment, we expect the business conditions to remain challenging although the segment will recover from an operating loss for the previous year. We will continue to work on passing on higher energy costs to customers in order to keep our product prices at appropriate levels.

[Slide 18]

The next slide shows sales and operating income by region. I will omit the explanation due to limited time.

As for the dividend forecast for fiscal 2023, the annual dividend will be 90 yen per share, consisting of an interim dividend of 45 yen per share and a year-end dividend of 45 yen per share, based on the shareholder return policy of the Mid-Term Management Plan 2025.

[Slide 19]

Now let me tell you about our new initiative, the Capital Efficiency Initiative 2027.

[Slide 20]

After the previous year's record profit, the highest since we transitioned to a holding company structure, the profit for fiscal 2022 significantly fell year-on-year as our price increases to pass on higher costs did not keep up with the rapid rise in raw material and energy prices during the year. At this moment, we still have no prospect of full recovery in earnings in fiscal 2023, which is currently the biggest challenge for management.

Domestic and foreign institutional investors have been demanding that we show a path to recovery and our commitment to a better balance-sheet management, including reducing capital equity and improving capital efficiency. The Tokyo Stock Exchange also released on March 31, 2023 a statement to urge listed companies with a price-to-book ratio (PBR) below 1.0 to formulate and announce their plans to improve capital efficiency, including targets, periods, and specific measures, toward management that pays attention to capital costs and stock prices.

We have discussed how to meet the demand from capital market investors. Recognizing that the low profitability of our core business, the packaging segment, underlies this issue, we have concluded that we need to promptly announce our approach to the issue from the following three perspectives: how to shift to a new business portfolio; what growth areas to focus on next; and how to increase our capital efficiency, which has remained very low.

We then developed the Capital Efficiency Initiative 2027, which is shown on the slide. We have set specific targets as key performance indicators (KPIs): a return on equity (ROE) of 8% or more, the amounts of operating income and profit (net income), and the amount of equity capital, which has been included in our KPIs for the first time. We have determined that the necessary equity capital amount is 600 billion yen by taking account of characteristics and risks of the Group's businesses. To achieve this target, we are going to buy back shares worth 100 billion yen during the five years to fiscal 2027.

[Slide 21]

I will explain the background of setting the KPIs a little more. First, there has been the issue of PBR. As our PBR has been well below 1.0 for years, we seriously take the fact that our stock price remains below the liquidation value. Furthermore, as we estimate our shareholders' equity cost at around 7% to 8%, the current ROE being less than the equity cost indicates that we are far from the expectations of our shareholders. To address this situation, we have set an ROE target that exceeds the cost of shareholders' equity.

[Slide 22]

As shown in the slide, ROE is broken down into three components: profit (net income) margin, total asset turnover, and financial leverage. I will talk about these components briefly. Among the three, our profit margin, in particular, has been significantly below the manufacturing industry averages. We are facing an urgent need to improve the profit margin, and to this end, we will change the perspectives of all our members to focus on increasing returns on capital, not just pursuing growth in sales volume and amount and expanding market shares.

[Slide 23]

Next, I will discuss how we achieve an ROE of 8% or more. The basic approach is to promote both our growth strategy and capital and financial strategy.

The main pillar of our growth strategy is to optimize our business portfolio. While our resources have traditionally been concentrated in the packaging business, we will allocate more to growth areas of other segments, including the steel plate related and functional materials related businesses. Meanwhile, the domestic packaging business will continue its efforts to raise product prices to appropriate levels and streamline and restructure unprofitable operations.

The main pillar of our capital and financial strategy is to improve asset efficiency by increasing shareholder returns, unwinding strategic shareholdings, and reducing assets in unprofitable operations. We will also streamline our real estate management through asset disposal and other means to increase the value of real estate we hold.

[Slide 24]

By implementing these two strategies, we will pursue continuous growth in operating income while reducing equity capital to an appropriate level, thereby aiming to achieve an ROE that constantly meets the target of 8% or more.

[Slide 25]

In the new initiative, we have not set any sales target. As I already mentioned, we will focus on returns on capital, not an absolute sales amount or market shares.

By fiscal 2027, we will aim to increase operating income to 65 billion yen, EBITDA to 120 billion yen, profit (net income) to 48 billion yen, and ROE to 8% or more. During the five-year period to fiscal 2027, we will reduce equity capital to 600 billion yen while implementing a share repurchase program of 100 billion yen. The targeted payout ratio of 50% or more on a consolidated basis, which has been set in the Mid-Term Management Plan 2025, remains unchanged. The total dividend payout for the five years will be around 80 billion yen, estimated based on the currently planned dividend payout for fiscal 2025, as we have not yet determined our dividend policy for fiscal 2026 and 2027.