financial results briefing 2qmar2021...improvement in the profit margin, resulting in an increase of...

JCU Corporation Q2 Financial Results Briefing for the Fiscal Year Ending March 2021 November 11, 2020

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Event Summary [Company Name] JCU Corporation [Company ID] 4975-QCODE [Event Language] JPN [Event Type] Earnings Announcement [Event Name] Q2 Financial Results Briefing for the Fiscal Year Ending March 2021 [Fiscal Period] FY2020 Q2 [Date] November 11, 2020 [Number of Pages] 24 [Time] 13:00 – 13:22

(Total: 22 minutes, Presentation: 22 minutes, Q&A: 0 minutes)

[Venue] Webcast [Venue Size]

[Participants] [Number of Speakers] 1

Masashi Kimura Representative Director, President, COO


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Presentation

Kimura: Hello, ladies and gentlemen. This is JCU Corporation’s Representative Director, President, and COO, Kimura. Thank you for watching the video.

Originally, we would have explained it directly to you, but in consideration of the situation of the COVID-19, we have decided not to hold a briefing and decided to stream a video. We also accept individual meetings. Contact us for interviews, inquiries, et cetera.

We will use these documents to explain Q2 results for the fiscal year ending March 2021. First of all, regarding the impact on us by the COVID-19: In the electronic components field, the operating rate of customer factories in China recovered to almost the level before the COVID-19 by the end of March.

Worldwide, however, consumer appetite was sluggish due to restrictions on outings and restricted economic activity. Growth in the market as a whole, driven by 5G anticipated at the beginning of the fiscal year, has slowed down and has not led to a significant increase in chemical demand.

Meanwhile, in the automotive field, customer plant operations resumed in China. In addition, the operating rate in ASEAN countries has been sluggish due to lock-downs, plant shutdowns, and limitations on sales activities. Economic conditions in the automobile industry were sluggish worldwide, including in Europe and the United States, and this caused a significant decline in demand for our chemicals.

Then, at our Hubei Plant, we completed construction at the end of last year with the aim of expanding sales and strengthening services in the Chinese market. Originally, it was scheduled to start full-scale operations in April of this year, but it has been delayed. Preparations resumed in June of this year, and we are currently steadily advancing improvements, with the aim of commencing full-scale operations at the beginning of next


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year. Until then, we will manufacture products at our contractors as we have done so far, and we provide chemicals to our customers.

For details, please refer to page three of the document. This is an overview of business results up to Q2.

Overseas subsidiaries experience a three-month-lag, thus the period is April to September for Japan and January to June for overseas subsidiaries.

First of all, in the electronic field, demand for smartphones peaked in 2016 and decreased thereafter due to restrained purchases from the previous fiscal year as well as the ongoing restrictions due to the COVID-19.

Meanwhile, in the Chinese market, infrastructural improvements are increasing in preparation for the full-scale launch of 5G. In Taiwan, demand for chemicals is robust due to an increase in sales of various high-performance devices and semiconductor package circuit boards for servers. This was driven by an increase in non-face-to-face activities such as telework. In South Korea, the decline in demand for chemicals for the circuit board manufacturers, which withdrew from the HDI Manufacturing Business last year, continued.

Next, in the automotive field, domestic sales showed signs of recovery in Q2 compared to Q1. However, the number of automobiles sold remains sluggish. In China as well, production operations at automotive parts manufacturers have been on a recovery trend in Q2 compared to Q1. However, the impact of lockdowns in Asian countries other than China and the prolonged trade friction between the United States and China has been a factor. Automotive unit sales remained sluggish, and demand for chemicals declined significantly.

Next, the Equipment Business. Domestic construction progressed, resulting in a temporary increase in sales. We anticipate a substantial decline in orders for the full year as customers' capital investments have run their course and large-scale projects have declined.


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The following is the results for the Q2 consolidated cumulative period. The materials are on page four.

In the Chemicals Business, sales to the automotive field decreased significantly, although sales in the electronics field remained firm. Sales of equipment increased temporarily.

As a result, sales decreased 5% YoY to JPY9.673 billion. Operating income was essentially unchanged at JPY2.917 billion and ordinary income increased 2.9% to JPY2.953 billion. As a result, quarterly net income declined slightly to JPY2.012 billion.


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Next, regarding the exchange rate.

Our main currencies are the Chinese yuan, Taiwan dollar, and Korean won. For Q2, average exchange rates during the period from January to June are used.

Compared to the same period of the previous fiscal year, the yen appreciated against the Chinese yuan by 5% and against the Korean won by 6%. Q3 is expected to be on a par with Q2.


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Next, the graph shows the change in operating income from the same period of the previous fiscal year.

First, gross profit decreased by JPY195 million due to a decrease in chemical sales. An increase in the percentage of electronic chemicals and an increase in locally manufactured products resulted in an improvement in the profit margin, resulting in an increase of JPY19 million. The impact of foreign exchange rates is characterized by a decrease of JPY153 million as a result of the appreciating yen against the Chinese yuan and the Korean won, which both have a large impact on sales.

As for SG&A expenses, travel expenses decreased mainly due to restrictions on travel caused by the COVID-19. In Japan, we merged our head office into one and abolished shareholder benefits. As a result, SG&A expenses decreased by JPY340 million. Overall, operating income decreased by JPY2 million compared to the same period of the previous fiscal year.


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Next, we will discuss the trends of the consolidated business results. The line indicates the amount of consolidated operating income for each quarter.

Sales decreased in Q2 compared to Q1. The percentage of electronic chemicals, which have relatively high profitability, increased, resulting in an increase in operating income. In Q3, chemical sales are expected to recover to the previous year's level.


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Next, consolidated financial results by segment. The linear graph shows the operating income margin. The operating income margin also increased YoY.


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Next, see page nine. This is the consolidated results of the segments.

Although sales of electronic chemicals were firm, sales of automotive chemicals were unable to overcome the slump, resulting in a YoY decrease in chemical sales. As for equipment, the number of plasma equipment required for the manufacture of printed circuit boards increased. Sales of plating equipment for automotive parts increased in the first half of the fiscal year due to ongoing domestic construction. However, customers became cautious about investing due to the COVID-19, and the number of large-scale projects, including those overseas, declined.


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Next, we look at trends in domestic and overseas chemical sales. The domestic market is shrinking, and sales of chemicals are gradually declining. Approximately 80% of chemical sales are from overseas.


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Next, see page 11. It shows the sales trend of our main chemical products.

First of all, we have Via Filling. In the electronic components field, the chemical of Via Filling is our main product. It is a copper plating additive used for manufacturing printed circuit boards, mainly for high-performance electronic devices such as smartphones and PCs. Sales were strong, particularly in China and Taiwan, driven by the full-scale launch of 5G and increased demand for IT-related products during the COVID-19.

In the first half of the fiscal year, sales remained above the previous year's level despite the coronavirus crisis. In the second half of the fiscal year, we expect a recovery in consumer appetite, and a further increase due to factors such as sales of new smartphone models.

Next, we have POP, Plating on Plastics, which is our main chemical product in the automotive field. It is used for plating metal films on plastic materials. These chemicals are used in automobile front grilles, emblems, and door handles.

In Q1, production capacity utilization rates of automobiles declined significantly due to the impact of the COVID-19 in China. In Q2, there were lockdowns in ASEAN countries other than China, thus sales and manufacturing of automobiles both decreased significantly, and demand for our chemicals also decreased significantly. In the second half of the fiscal year, we expect to recover along with China and other ASEAN countries.


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Next is a graph showing trends in chemical sales by region.

First, as shown in the top panel, China has the greatest impact, accounting for about 40% of chemical sales. The coronavirus disaster lead the continuation of a sluggish trend. Next, in Japan, the market is shrinking, and it is also affected by the COVID-19, thus the decline is continuing moderately.

Meanwhile, in Taiwan, sales of chemicals for the electronics field remained steady, with little impact from the COVID-19. South Korea was sluggish due to the impact of the circuit board manufacturers that withdrew from the HDI Manufacturing Business last year, but is expected to show a recovery trend in the future. Vietnam and Thailand account for a small percentage of the total, but we expect moderate growth in the future partly due to shifts in production from China and the so-called “China Plus One” movement.


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The graph below shows the change in sales of chemicals by application.

First of all, electronic chemicals. Global demand for smartphones, PCs, and other high-performance electronic devices affects our business performance. Overseas, Q1 from January to March is affected by seasonal factors such as the former lunar holiday, and sales are on the rise from Q1 towards Q4.

On the other hand, regarding our key chemicals, the worldwide sales of Japanese-affiliated automobiles in particular affect our business performance. Compared to the electronic products, sales are stable. In the current fiscal year, sales declined due to the COVID-19, but we expect stable and moderate growth thereafter.


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Next, sales of chemicals by applications in the domestic market are shown.

Overall, the volume of work for electronic chemicals is on a downward trend. In the first half of the fiscal year under review, demand for chemicals, mainly for semiconductor package circuit boards, was firm. Even during the COVID-19, the extent of the decline was limited.

In the Key Chemicals Business, production operations declined significantly in Q1 due to the impact of the coronavirus crisis, leading to restrictions on outings. From Q2 onward, there are signs of a gradual recovery.


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Next, we have chemical sales by application for all overseas markets. Both electronics and key chemicals are closely linked to conditions in China, where sales are large.


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This is the situation in China.

In electronic chemicals, high-performance electronic devices such as PCs, tablets, and game devices are performing well. The number of printed circuit boards for antennas at 5G base stations and printed circuit boards for 5G-supporting security camera systems with face-recognition functions continues to rise. The figures recovered to the same level as the previous year. The number of smartphones sold declined, and from Q3 onwards, it is expected to remain at the same level as the same period of the previous fiscal year. Since July, manufacturing of Chinese smartphones other than Huawei has been on the rise.

On the other hand, with regards to the key chemicals, the impact of the COVID-19 lead to the demand decreasing significantly. Demand declined further in Q2 due to inventory accumulation by some customers in Q1.

From Q3 onward, automobile sales have recovered and demand for chemicals has gradually recovered. However, the automobile industry continues to experience a slump due to reduced exports of automotive parts to Europe and the United States caused by US-China trade friction.


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Next is the situation in Taiwan.

Sales of semiconductor packaged circuit boards remained strong, with little impact from the COVID-19. Demand for IT increased sharply due to teleworking and other factors, lead by an increase of semiconductors for data center servers. Growth in Apple products other than smartphones, such as iPad, smartwatches, and wireless earphones, were also a driving force.

Amid prolonged US-China trade frictions, there are moves by Taiwanese companies to return production partially from China to Taiwan. Furthermore, sales of new iPhone models will continue to be strong from Q3 onward.


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Next is the situation in Korea.

Semiconductor package circuit boards for PCs and servers are increasing. Demand for COFs for smartphones and 8K TVs is also increasing. In the previous fiscal year, some printed circuit board manufacturers withdrew their HDI manufacturing business from South Korea, and sales declined YoY. We expect demand for chemicals to remain robust from Q3 onwards after the negative effects of declining HDI chemicals have peaked.


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Next, I will refer to the full-year earnings forecast.

Due to the impact of the COVID-19, economic activities are still constrained around the world at present, but we have decided not to revise our full-year results forecast.

Electronic chemicals are expected to continue to drive sales in the second half of the fiscal year. As automobile unit sales are increasing, we expect the recovery in demand for circuit board chemicals. Although sales will decrease YoY, we aim to increase operating income.

As a result, we forecast net sales of JPY22 billion, operating income of JPY6.4 billion, ordinary income of JPY6.5 billion, and a current net income of JPY4.45 billion.


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This is a breakdown of the full-year sales forecast.

We forecast that sales of chemicals, including purchased chemicals, will grow by JPY19.7 million YoY to JPY424 million, while sales of equipment will decrease by JPY735 million YoY to JPY2.2 billion. Toward the end of the year, the key factors will be the recovery in consumer appetite, sales of new smartphone models, and production utilization.


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Next, we move on to shareholder returns. The interim dividend of JPY25 will be paid, as announced at the beginning of the fiscal year. The year-end dividend forecast is JPY25, and the annual dividend is expected to increase by JPY1.5.


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Please refer to the graph showing the trend of dividends.

We maintained a policy of paying stable dividends even when profits declined, achieving a 10-year consecutive increase in dividends during the previous fiscal year. We will continue aiming to increase dividends for the 11th consecutive year.

Thus, the explanation of the financial results will be completed. Thank you very much for your attention.

[END]

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Document Notes

1. Portions of the document where the audio is unclear are marked with [Inaudible]. 2. Portions of the document where the audio is obscured by technical difficulty are marked with [TD]. 3. This document has been translated by SCRIPTS Asia.


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