Last Updated: Nov. 5, 2019
Financial Results for 2Q of FY2019 and Progress under the Management Plan
About the HPP Company's financial results
Improvement in the HPP Company's operating income was due to increased sales of interlayer films for use in head-up display (HUD) systems mainly in the Automobiles and Transportation field. Other factors included the build-up of stock by certain customers and an increase in product sales in the non-liquid field both in the Electronics field.
- *HPP Company:High Performance Plastics Company
Each of the three strategic fields are expected to contribute. In specific terms, sales of heat release materials for 5G base stations and non-liquid-related products are forecast to increase in the Electronics field. We also anticipate a recovery in sales volumes of high-performance interlayer films in the Automobiles and Transportation field. In addition, successful steps have been taken to expand CPVC sales in India in the Building and Infrastructure field.
Thanks largely to the implementation of emergency fixed cost measures in the fiscal year under review, we are anticipating cost savings of hundreds of millions of yen in the 1H and 1.6 billion yen in the 2H. Focusing on supply chain reform from FY2020 and beyond, we expect to realize positive flow-on effects of billion of yen by FY2022 on a cumulative basis compared with FY2018. To this end, we have already initiated certain themes.
About trends in demand for automotive interlayer films, and other matters including the status of sales growth
For the most part, we anticipate sales volumes of standard films will trend in proportion to sales volumes of High-performance interlayer films. In addition, while a new film line is scheduled to commence operations from the 4Q in Europe, sales growth can also be expected in certain construction application fields.
Demand for interlayer films is increasing across a wide variety of vehicles and expanding from high- to middle-end models. In addition, the adoption rate as an option is also increasing with the growth rate trending at an accelerated pace. While Europe has historically driven the market, demand in increasing substantially in other countries and regions including China.
While the deterioration in market conditions in Europe has been greater than anticipated at the start of the fiscal year with delays in the liquidation of customers' inventories, we are expecting trends to return to normal in the 4Q.
In addition to ongoing growth in Europe, application is also expanding to the Americas where use to extending to side and other car windows. We are looking at a recovery in the 2H and an increase in sales volumes year on year.
About the status of heat release materials sales growth
We are experiencing robust trends for heat release materials for use in 5G base stations. Our products are mainly used in the sheets that are used to line server components which generate large amounts of heat as a result of increased data capacity. Sales are projected to double in the fiscal year under review compared with the previous year.
Sales are expanding mainly for gel-type products for installation in electric vehicles. Customers are looking favorably at the low outgassing properties and abrasion resistance performance during application of our products. Currently, we are establishing a new plant in the Netherlands. Operations are scheduled to comment in the 1H of 2020.
About certain issues including trends in mainstay businesses of the UIEP Company
While we were able to secure an increase in sales in the 1H in the sheet business as a whole, results were slightly impacted as customers adjusted inventories in the 2Q. To some extent, we are expecting a recovery from the 3Q. As far as the decrease in production by The Boeing Company is concerned, we anticipate only a minor impact for the foreseeable future. This is because of the high ratio of economy class seating in the 737MAX, and the fact that most of our products are geared toward first and business class seating.
- *UIEP Company:Urban Infrastructure and Environmental Products Company
We anticipate the bulk of work undertaken in the 2H will revolve around repairs and recovery. Accordingly, there is a chance of delays in general construction. Meanwhile, the number of inquiries regarding our high flowrate drainage systems and drop shafts that serve as countermeasures for rainwater inundation is increasing. We are looking at a pickup in use at the reconstruction stage. In addition to our rainwater inundation countermeasure lineup, we are fielding a lot of inquiries for our emergency and disaster prevention products. For example, sales of our AC drain pipes that can be easily installed during air conditioning construction work at public schools and disaster evacuation sites are expanding as a countermeasure to address hot weather conditions.
About Medical Business results
The main reason for the downturn in sales in the 1H was the drop in orders for certain pharmaceutical raw materials due to customers' circumstances. We had anticipated this trend at the beginning of the period and through efforts to strengthen sales activities targeting other customers are anticipating a 2H recovery to the around the same levels as the previous year.
Looking back on the current medium-term management plan and about the next medium-term management plan
The HPP and Housing Companies will each account for approximately 10 billion yen of the 20 billion yen shortfall. A deterioration in the business environment caused by such factors as trade friction between China and the United States had a significant impact in the HPP Company. In addition to a surge in component costs, failure to expand the renovation and domestic frontier businesses where growth was targeted, and a shortfall in the number of new houses sold as a result of natural disasters had a negative impact on the Housing Company. In contrast, we believe steady progress has been made in implementing growth investments. On a separate note, and in retrospect, full-fledged efforts by each company to push forward structural reforms both in Japan and overseas should have been started a little earlier. While we are currently in process of formulating the next medium-term management plan, we intend to introduce indices such as ROIC as new management benchmarks. Our goal is to place greater emphasis on securing returns that exceed capital costs going forward. From a corporate social responsibility perspective, we believe that initiatives aimed at addressing environmental, social, and governance, or ESG, concerns should contribute to a gradual decrease in capital costs over the medium to long term.
We have not lowered our sights on doubling business capacity in the 2020s and achieving net sales of 2 trillion yen and operating income of 200 billion yen, all targets identified under our long-term vision. We still very much intend to establish as position as a leading company in Japan. At the same time, we recognize the need to better clarify and commit to targets regarding returns to shareholders and return on capital.
Yes, that is correct. In addition, we are looking to increase net sales in the Medical Business to the 100 billion yen level at an early stage. Moreover, we will ramp up efforts to promote “fusion” identified under the current medium-term management plan, while also considering reorganizing segments in the future.