Toray Industries, Inc. (3402) Earnings Call Transcript

Thank you very much for joining us today despite your busy schedule. On behalf of Toray Group, I'd like to take this opportunity to extend my gratitude towards your continued understanding and your interest in our management and business activities. Now, I'd like to report Toray's business results for the first quarter ended June 30, 2026. Now, I would like to follow the table of contents shown on Page 1. This is a summary of the business performance and forecast. Operating income for the first quarter increased year-on-year marked a record high for any quarter, reflecting front-loaded demand arising from the situation in the Middle East and recovering demand across applications as well as efforts to pass on higher raw material and fuel prices to selling prices and cost improvement initiatives. In terms of the consolidated business forecast for the first half of the fiscal year ending March 2027, Toray has revised upwards initial forecast announced on May 13, 2026, based on the first quarter results. The full year consolidated business forecast is planned to be reviewed as appropriate at the time of the announcement of second quarter business results. I will explain the details starting from the next page. I'd like to begin with an overview of business results for the first quarter ended June 30, 2026. Please turn to Page 4. Consolidated revenue for the first quarter increased 14% compared with the same period a year earlier to JPY 679 billion. Core operating income increased 66.6% to JPY 48.4 billion and profit increased 82.3% to JPY 31.3 billion. Special items for the first quarter improved by JPY 0.5 billion to negative JPY 1.1 billion. Page 5 is about assets, liabilities, equity and free cash flow. As for financial position at the end of June 2026, both assets and liabilities were affected by the increase in translated yen amount of overseas subsidiaries because of the depreciation of the yen. The total assets stood at JPY 3,492.1 billion, up JPY 16.1 billion from the end of the previous fiscal year due mainly to increases in trade and other receivables, property, plant and equipment and retirement benefit assets. Total liabilities decreased JPY 5 billion from the end of the previous fiscal year to JPY 1,544.2 billion, owing mainly to decreases in borrowings and deferred tax liabilities. Total equity increased by JPY 20.1 billion from the end of the previous fiscal year to JPY 1,947.9 billion, primarily due to an increase in other components of equity. Owners' equity was JPY 1,817.1 billion. Interest-bearing liabilities was JPY 901.1 billion, and D/E ratio was 0.5. Free cash flow was positive at JPY 20.9 billion. Page 6 explains about capital expenditures, depreciation and amortization and R&D expenditures. Capital expenditures for the first quarter decreased by JPY 11.2 billion to JPY 23.8 billion on a year-to-year comparison. Depreciation and amortization increased by JPY 2.1 billion to JPY 34.9 billion. R&D expenditures increased by JPY 0.1 billion to JPY 18.2 billion compared with the same period of the previous fiscal year. The table on Page 7 describes revenue and core operating income by segment. In addition, the graph on this page shows the factor analysis of JPY 19.4 billion increase in core operating income for the current first quarter on a year-to-year comparison. Overall, the company was affected by soaring raw material and fuel prices resulting from the worsening situation in the Middle East, but responded through emergency measures, including passing these increases on to sales prices and improving costs. By segment, a recovery trend was seen mainly in the automotive applications in the Fibers & Textiles and Performance Chemicals as well as the aircraft applications in the Carbon Fiber Composite Materials. As a result of capturing front loaded demand and recovering demand as well as promoting structural reforms and strategic pricing, core operating income increased 67% year-on-year, while core operating margin improved by 2.3 percentage points. Using Page 8 and after, I'd like to explain the results of each segment. First, Fibers & Textiles. Revenue of the Fibers & Textiles segment increased 8% to JPY 259.9 billion compared with the same period a year earlier and core operating income increased 18% to JPY 18 billion. The apparel applications were affected by intensifying competition from overseas products but focused on capturing demand. The industrial applications were on a gradual recovery trend driven mainly by the automotive applications, et cetera. Page 9 is the Performance Chemicals segment. Revenue increased 14% to JPY 251.1 billion compared with the same period a year earlier. Operating income increased 69% to JPY 23.1 billion. The Resins & Chemicals business were affected by soaring raw material prices resulting from the worsening situation in the Middle East, but sales remained firm owing to the capture of front-loaded demand while passing the cost increases on to the sales prices. Films business, sales of the electronic applications, including MLCC and optical applications remained steady. In the Electronic & Information Materials business, OLED-related materials and circuit materials were affected by sluggish display panel demand in China and intensified competition, but sales for the power industrial application grew. Page 10 is the Carbon Fiber Composite Materials segment. Revenue increased 34% to JPY 89.7 billion compared with the same period a year earlier, and this segment posted core operating income of JPY 7.9 billion, a 71% increase from the same period a year earlier. In aircraft applications, sales for major customers was steadily expanded and sales in the space and defense application also grew. In the sports applications, inventory adjustment in general purpose products for outdoor leisure continued, but sales of high-end products were strong. The industrial applications were on a recovery trend, mainly in pressure vessel and wind turbine blade applications. Page 11. In the Water Treatment and Healthcare segment, revenue increased 14% to JPY 40.7 billion compared with the same period a year earlier, and operating income increased 127% to JPY 3.1 billion. In the water treatment business, the impact of sluggish market conditions in China continued, the shipment of reverse osmosis membranes for major products in the Middle East and sales in the Americas, one of its key markets remained strong. In the Pharmaceuticals and Medical Products business, sales of pharmaceutical products stagnated, but efforts were made to shift towards higher value-added hemodialysis dialyzers and to reduce costs. Page 12 shows business results of major subsidiaries and regions. In Japan, at Toray Engineering, shipment of electronics-related equipment was strong. At the subsidiaries in Southeast Asia, in the Fibers & Textiles and Performance Chemicals businesses, demand for the automotive applications in the industrial applications was steady. At our subsidiaries in China, the apparel applications in the Fibers & Textiles business were robust. As for subsidiaries in the Republic of Korea, in the Fibers & Textiles business, scaling down of unprofitable applications and cost reductions were promoted. In the Performance Chemicals business, sales for power applications in the Electronic Materials business grew. Our subsidiaries in the U.S., Europe and others in the Performance Chemicals business, sales of high value-added products in the U.S. films business expanded. In addition, in the Carbon Fiber Composite Materials business, sales of aircraft space defense applications increased. Next, I'd like to explain the consolidated business forecast for the first half of the fiscal year ending March 2027. Please turn to Page 14. The global economy is expected to continue with a gradual recovery phase. The Japanese economy is also expected to continue with its gradual recovery. However, downside risks remain, including escalating tensions in the Middle East and the resulting rising raw material prices and supply constraints as well as prolonged impacts that may weigh on the global economy. Further, the current economic conditions will be affected by the direction of the U.S. trade and foreign policies, together with the responses from other countries, trends in AI-related demand and slowdown in the Chinese economy. These factors may significantly affect supply chains and trade structures in the medium to long term. Given the business performance for the first quarter and the business environment, Toray revised its consolidated forecast for the first 6 months announced on May 13, 2026. It now expects revenue of JPY 1,390 billion, core operating income of JPY 87 billion and profit attributable to owners of parent of JPY 45 billion. As for the full year consolidated business forecast, the company plans to review it as appropriate at the time of the announcement of second quarter business results, taking into account changes in the business environment. Assumed exchange rate from July to September is JPY 155 per U.S. dollar. Page 15 shows the consolidated business forecast for the first half of the fiscal year ending March 2027 by segment. Given the first quarter business performance and other factors, the company revised the forecast for each business segment, specifically Performance Chemicals. Page 16 shows the comparison between the initial forecast and the new forecast for the first half of the fiscal year ending March 2027 and variance factors by segment. This concludes my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]