Sangetsu Corporation · 2020. 6. 1. · Regarding Sangetsudo (Shanghai) in China and Goodrich Global Holdings Pte., Ltd. in Southeast Asia , sales declined in Sangetsudo (Shanghai)

Sangetsu Corporation Financial Results Briefing for the Fiscal Year Ended March 2020

May 26, 2020

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Event Summary

[Company Name] Sangetsu Corporation

[Event Type] Earnings Announcement

[Event Name] Financial Results Briefing for the Fiscal Year Ended March 2020

[Fiscal Period] FY2019 Annual

[Date] May 26, 2020

[Number of Pages] 17

[Time] 10:30 – 10:46

(Total: 16 minutes, Presentation: 16 minutes)

[Venue] Webcast

[Venue Size]

[Participants]

[Number of Speakers] 1

Shosuke Yasuda President, CEO



Presentation

Yasuda: After providing an explanation of the financial results for the fiscal year ending March 2020, we will explain the long-term vision, "DESIGN 2030," and the medium-term management plan, "D.C. 2022", both of which are announced this time. So, there will be three topics in total.

First, I will explain the financial results for the year ending March 2020.

The main point of our financial results was sales of JPY161.26 billion, an increase of JPY840 million YoY. However, due to the sales of Yamada Shomei Lighting Co., Ltd. in the previous fiscal year, sales increased approximately 3% compared with the fiscal year before last, including the impact of the sales of Yamada Shomei Lighting Co., Ltd.

Gross profit was JPY52.92 billion, an increase of JPY2.2 billion YoY. SG&A expenses were JPY43.65 billion, decreased by JPY1.16 billion YoY. Operating income was JPY9.26 billion, up 57.2% YoY. This was the highest profit since the fiscal year ended March 2002.

On the other hand, net profit was JPY1.43 billion, down JPY2.14 billion YoY, due to the impairment loss of intangible assets related to Koroseal Interior Products Holdings, Inc. in the US belonging to the overseas segment.



I would like to explain this for each segment.

First, let’s look at the interiors segment, which is mainly operated by Sangetsu Corporation on a non-consolidate basis. As a result of higher procurement costs and other factors, price increases implemented on October 1, 2018 penetrated the market further, resulting in an increase and an improvement in the gross profit margin.

In the wallpapers business, we recovered our marketshare and increased sales thanks to an increase in the number of mass-produced wallpapers, which was evaluated highly in the market.

Sales of flooring materials increased for the 10th consecutive year, reflecting an increase in marketshare and strong sales of tiles.

In the fabrics business, although there was a reactionary decline following the consumption tax hike in the second half of the fiscal year, there was a slight increase from the previous fiscal year.

As a result, segment income totaled more than JPY9.5 billion.



Continuing on to the exteriors segment.

At Sungreen Co., Ltd., in the first half of the fiscal year under review, sales increased due to the impact of natural disaster restoration construction and disaster prevention construction. However, while sales decreased in the second half due to a backlash decrease after the consumption tax hike, sales decreased and profits increased due to an increase in sales of high-value-added products and an increase in construction orders with a high profit margin.

Moving on to the overseas segment.

At Koroseal Interior Products Holdings, Inc. in the US, sales declined due to a slump in the key North American hotel-related market. In relation to this, as I will explain later, we have recorded impairment loss of JPY5.94 billion for intangible assets.

Regarding Sangetsudo (Shanghai) in China and Goodrich Global Holdings Pte., Ltd. in Southeast Asia , sales declined in Sangetsudo (Shanghai) due to a backlash decrease from large-scale properties delivered in the previous fiscal year. Sales also declined in Goodrich Global Holdings Pte., Ltd. due to a slump in the market.



Next, I would like to explain the results and figures of each segment.

The interiors segment recorded sales of JPY125.68 billion and operating income of JPY9.51 billion, which is a segment profit.

In the exteriors segment, sales were JPY16.08 billion and operating income was JPY640 million.

In the overseas segment, sales were JPY19.8 billion and operating income was negative by JPY930 million. The operating income before amortization of goodwill was negative by JPY90 million.



I would like to explain the individual products in each segment. First, let’s look at wall materials in the interiors segment.

Regarding related markets, we allow a time lag of three months between the starts of housing construction and our interior decoration work, and we captured the figure from January to December 2019 as a period of housing starts that affected us from April to March last year. The number of housing starts from January to December of last year decreased by 4% and the floor area decreased by 0.6%.

On the other hand, in the housing renovation market, we estimate an increase of 4.9% and, as the number of shipments in the industry as a whole, a decrease in volume by 1.7% for the period from April to March last year was announced. In this circumstance, our sales of wall materials were JPY60.19 billion, an increase of 5.3%. We recognize that our marketshare has increased.



Continuing on to the flooring material.

Regarding flooring materials, according to the figures announced by industry associations for the period up to February, roll carpet in the carpet categories was down by 10.1% YoY and carpet tiles were up by 2.5%. On the other hand, long PVC sheets decreased by 1.8% and floor tiles increased by 1.6%.

In contrast, our sales of flooring materials amounted to JPY44.69 billion, an increase of 3.7% YoY. As I mentioned earlier, sales of flooring materials increased for the 10th consecutive year.



Moving on to the fabrics.

For fabrics used in curtains, chair fabrics, and the like in the previous fiscal year, sales rose 1.8% to JPY8.46 billion.

We recognize that this was due to the introduction of new sample books for curtains and the introduction of new sample books for chair fabrics, as well as the positive sales at Sangetsu Vosne Corporation, a sales company specializing in curtains established three years ago.



Here, I will explain the impairment loss in the overseas segment.

Koroseal Interior Products Holdings, Inc. in the US, which was acquired in November 2016, manufactures and sells wall materials in the US as well as selling wallpapers and related products manufactured by other third parties.

The main factors behind the impairment losses were the slowdown in the hotel and hospitality markets, where Koroseal Interior Products Holdings, Inc. is the mainstay, the subordination of its design capabilities, and the inability to produce sufficiently high designs due to the deterioration of the manufacturing facilities, as well as a high scrap rate.

As a result of careful consideration of the business plan for the future, we have decided to make an impairment loss this time.

As for the current turnaround plan, we have been implementing the turnaround plan since last year.

First, in July of last year, we replaced the CEO and we are reforming our management under a leaner, new management structure. Two new facilities began operating in the summer of last year. The range of design and manufacturing has been drastically expanded from five-color printing to seven-color printing. In the US, the other competitors have six-color printing at maximum, therefore we believe the seven-color printing will be helpful in differentiating us from competitors.

At the same time, as recruiting designers develop products that are popular in markets other than hospitality, we are strengthening our product portfolio as well as taking measures to strengthen our branding.



I would like to explain the status of the recording of intangible assets at the end of the previous fiscal year as a result of this impairment loss.

At the end of the fiscal year before last, we recorded four intangible assets: goodwill, customer-related assets, technology assets, and trademarks. They totaled JPY13.32 billion.

Among these, goodwill was amortized in the previous fiscal year, and an impairment loss was recorded. As a result, the amount recorded as goodwill was zero. We also recorded no customer-related assets as of the end of the previous fiscal year due to the previous fiscal year's amortization and impairment.

For technology assets, due to the amortization and impairment, the amount recorded was JPY630 million at the end of the previous fiscal year. This will be amortized over the next 10 years.

Trademark rights, which are intangible assets not subject to amortization, were recorded at JPY5.79 billion at of the end of the previous fiscal year.

Deferred tax liabilities totaling more than JPY1.6 billion were recorded on the liability side for the approximate amount of JPY6.42 billion recorded as the technology assets and trademark rights.

For your reference, regarding intangible assets related to Goodrich Global Holdings Pte., Ltd. acquired in Southeast Asia, we recorded goodwill of JPY40 million at the end of the previous fiscal year. It is currently scheduled to be amortized over the next eight years.



This is a consolidated cashflow.

At the end of the fiscal year before last, the amount including marketable securities, which we regard as cash and cash equivalents, was JPY29.44 billion. In contrast, net cash provided by operating activities was JPY13.8 billion in the previous fiscal year. Net cash used in investing activities was negative JPY5.01 billion. Cash flows from financing activities were negative by JPY5.47 billion.

Altogether, at the end of the previous fiscal year, the amount we recognized as cash and cash equivalents was JPY36.81 billion.



Next, I would like to explain our full-year forecasts for this fiscal year.

Taking into account the widespread impact of the new coronavirus infection to the business in Japan and overseas, we forecast net sales of JPY135 billion, which is a decrease of 16.3% YoY.

In preparing this forecast, we calculated net sales of JPY135 billion based on the forecasts for each category of new construction and renovation of housing, and new construction and renewal of non-residential housing.

We expect operating income to decrease by 54.7% YoY to JPY4.2 billion, ordinary income to decrease by 54.3% YoY to JPY4.5 billion, and net income to be JPY2.3 billion.



Forecasts for the first half and the second half are as shown on this slide.



For your reference, these are the figures announced by relevant industry associations.

The Japan Interior Decoration Association is an industry association centered on companies engaged in the construction of interior decoration materials, such as wallpaper, flooring material, and the like. As a result of a questionnaire survey of 373 companies that are the main members out of more than 5,400 member companies, they announced those figures as the impact of the new coronavirus infection on the business in April to June.

On a nationwide basis, about 30% of jobs have been postponed or discontinued, and in the regions covered by the initial emergency declaration, 40% of jobs have been postponed or discontinued according to these figures.



On the other hand, these are housing starts for new construction of housing and non-residential housing.

The Ministry of Land, Infrastructure, Transport and Tourism announced that the number of new housing starts in January to March this year decreased by 9.9% YoY. This number of new housing starts is expected to affect us in April to June, although there are already some impacts at present.

In the non-residential housing–related market, the area of construction starts has been gradually declining over the past few years, a situation that I would like to note is occurring.

Now I will conclude my explanation on the financial results for the fiscal year ending March 2020 and the forecasts for this fiscal year, the fiscal year ending March 2021.

[END]

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Document Notes

1. Portions of the document where the audio is unclear are marked as follows: [Inaudible]. 2. This document has been translated by SCRIPTS Asia.



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Sangetsu Corporation · 2020. 6. 1. · Regarding Sangetsudo (Shanghai) in China and Goodrich Global Holdings Pte., Ltd. in Southeast Asia , sales declined in Sangetsudo (Shanghai)