Earnings Call: Q2 2023

Nov 8, 2022

My name is Nakajima, CFO of Mitsui Chemicals. Now let me get into the details by the following material distributed to you. This is about the trends in key related markets. On the left is the 2nd quarter trend. Arrows indicate directions from Q1 to Q2. On the right is the trend for the second half, and the arrows indicate movement from the first half to the second half. Regarding automobile production, although the impact of global parts and the material shortage remained in the first half, production recovered from Q1 to Q2, except in some regions. The recovery is also expected in all regions in the second half. However, we believe it is necessary to monitor future trends closely due to the risk of economic recession. In the semiconductor market, demand has been deteriorating very badly, and arrows are showing a downward trend for both the second quarter and the second half of the year. As for prices, the overseas market for bisphenol A is expected to decline continuously in the second quarter and also in the second half of the year. We also expect the downward trend in the TDI market to continue. Our major investment projects. The projects colored with yellow are plants that started commercial operation in the first half this year. Light blue ones are the projects we made the investment decisions in the first half. As shown at the bottom of this table, we have made decisions to transfer shares of Fino subsidiary to lower volatility and to make our asset lighter. Consolidated financial highlights. Operating income before special items was JPY 77,600,000,000 and net income attributable to owners of the parent was JPY 44,400,000,000. Both profits were down from the same period last year. While the total company profits were down by 16,700,000,000 from last year, the growth domains shown in the lower portion of the bars increased by 7,500,000,000 yen year over year. 1st, sales of polyolefins and phenols declined due to lower demand. Demand in the semiconductor and smartphone market is also slowing. And semiconductor related sales volumes are declining. As for automotive applications, we recognize that the market is on a recovery track, although the impact of global parts and the material shortages remains. Sales of Vision Care and Agrochemicals continue to be strong. Regarding terms of trade, inventory valuation gains were generated due to higher raw material prices. In addition, price revisions due to higher raw material prices under weaker yen have also led to improved terms of trade. On the other hand, we are also affected by the declining price of Bisphenol A in the overseas market. This table shows segment breakdown of sales revenue and operating income before special items. Details are explained in the following pages. First of all, Life and Health Care Solutions. Operating profit of the segment increased by 2,100,000,000 yen year over year. In Vision Care, while sales are strong, in terms of terms of trade, our price adjustment have not been able to catch up the rising raw material prices. As for nonwoven fabrics, price revisions are finally catching up and terms of trade are improving. In Oral Care, sales are on a par with the previous year, but costs are increasing due to the investment of resources in preparation for future growth. In agrochemicals, terms of trade are improving due to strong overseas sales and foreign exchange rate. On the other hand, fixed costs, including selling expenses and R and D, are increasing. Mobility Solutions profit increased by 7,100,000,000 yen As for movements in individual businesses, sales of elastomers for solar cell encapsulation materials have been strong. On the other hand, there's a slight delay in the recovery of elastomers for automotive material use. Terms of trade have improved significantly due to price revisions, foreign exchange effect and the shift to high value added products. Composite Materials business, such as PP Compounds and Performance Compound, is recovering for automotive applications. In addition, terms of trade are improving due to price revisions and foreign exchange rates. In the Solutions business, orders continue to decline and are roughly on a par with the previous year. ICT Solutions operating profit dropped by 1,700,000,000 yen from a year earlier. For semiconductor and optical materials, while sales of EUV Pelicos are strong, overall sales are declining due to the slowdown in demand in the semiconductor and smartphone markets. On the other hand, terms of trade are improving due to exchange rate differences. In addition, fixed costs increased as we started operation of a new plant. Sales of industrial films also declined due to the slowdown in demand for semiconductors, while terms of trade improved due to exchange rate differences. Basic and Green Materials was down by 22,300,000,000 yen from last year. But still, the absolute amount of 27,300,000,000 yen in profit was secured despite the uncertain economic environment. As for each business, petrochemical products saw a decline in sales due to lower demand, but we have inventory valuation gains due to higher raw material prices. Basic Chemicals were also affected by deteriorating market conditions for bisphenol A in addition to a decline in demand. Similarly, polyurethane was affected by the decline in the TDI market price in addition to the decrease in demand. This chart compares the previous forecast for the first half and its actual results. We made more profit than the forecast in Life and Health Care Solutions and Mobility Solutions. Foreign exchange rates had a positive impact, while ICT Solutions was affected by lower demand. In Basic and Green Materials, inventory valuation gains are shrinking due to lower naphtha prices. In nonrecurring items, others was positive in the first half of the previous year. This was mainly due to negative goodwill resulting from the acquisition of Honshu Chemical as a subsidiary. On the other hand, impairment losses of 3,800,000,000 yen were recorded in the current period, mainly due to the impairment in the polyurethane business. As for the balance sheet, the total at the bottom shows an increase of JPY 145,200,000,000 from last year. However, half of this increase was due to the effect of foreign exchange rates. There are also increases in inventories and other assets. Next, cash flow. As you just saw in the balance sheet, working capital has increased partly due to the increase in inventories. So despite being profitable, cash flow from operating activities has decreased from last year. As for cash flow from investing activities, cash inflows due to the polyurethane restructuring in the second half last year came in this year. And cash outflows are decreasing from last year. As a result, overall free cash flow was somehow managed to remain positive. Now let me explain our FY 2022 full year forecast. On the far left, we have financial results in last fiscal year, both first half and full year. The columns colored in yellow is this year's first half results I have just explained and the forecast for the full year. Operating income before special items for 2022 is forecasted to be JPY 140,000,000,000 unchanged from the previous forecast. As for net income attributable to owners of the parent, yen 105,000,000,000 yen which is a slight decrease compared to the previous year, but an increase compared to the forecast previously announced. Consolidated operating income before special items is forecasted to drop by 21,800,000,000 yen but the growth domain businesses are but the growth domain businesses are expected to grow their profit by 21,700,000,000 yen as they did in the first half. As stated in the comments, we expect a recovery in automobile related production volume in the second half of the year. Also, sales of Vision Care and Agrochemicals are expected to remain strong. However, sales of semiconductor related products are expected to decline. Overall, the terms of trade are expected to improve due to price revisions and yen depreciation. On the other hand, we have incorporated a price decline in the overseas market for Bisphenol A. In addition, we have factored in higher fixed costs due to the soaring costs of materials and repair work and investment of resources into the development of new businesses and products. The details of the forecast of sales revenue and operating income before special items by segment are explained on the next and following pages. This page shows historical changes of Life and Healthcare Solutions profits since 2019, and we expect its profit this year to increase by 5,600,000,000 yen in the current fiscal year compared to the previous one. As for Vision Care, while sales are firm, we expect terms of trade to be slightly difficult as in the first half results. As for non woven fabrics, we will proceed with price revisions. Sales of oral care products are firm, but fixed costs are expected to increase. Agrochemical sales are expected to be strong, and the business will be positively benefited by factors such as exchange rates. Mobility Solutions was significantly affected by COVID-nineteen in FY 2020, but has been on a recovery track since then. Last month's sales are expected to increase due to the recovery in automotive applications and the firm demand for solar battery encapsulants. Its terms of trade are also expected to improve with price revisions and exchange rate effects. Composite material sales are also expected to increase due to the recovery in automotive applications, and terms of trade are to improve due to price revisions and exchange rates. We expect the segment as a whole to post a large increase in profit due to volume and terms of trade. In ICT Solutions, we expect a slight increase in profit for the full year despite some difficulties in the first half. While sales of EUV Pelicos are strong, the semiconductor related business continues to face a difficult situation in terms of volume, which we expect to be recovered by improving terms of trade and in foreign exchange and other factors. We also expect the Industrial Film business to be affected by the decline in demand for semiconductors. However, overall profits of the segment would be increasing. Basic and Green Materials is expected to see a significant decrease in profit by JPY 40,800,000,000 compared to the previous year. But today, the structure of the businesses is strong enough to secure a profit of positive JPY 37,000,000,000 for the year even under uncertain economic conditions. For Petrochemical Products, we expect a decline in sales and also inventory valuation losses due to lower raw material prices. And for Basic Chemicals, in addition to lower demand, we expect a decline in the bisphenol A market and the resulting deterioration in equity method income of affiliates. For polyurethane, we expect an increase in equity method income from last year as a result of the restructuring. Let me now explain about the changes of operating income before special items by segment from the first half into the second half. We expect operating income of growth domains would increase from first half to the second. However, basic and green materials income would drop due to the impact of inventory valuation losses caused by falling raw material prices. We also have payments of taxes and public charges to be recorded in the 4th quarter, which could be This is about outlook for nonrecurring items. In FY 2021, we had posted impairment losses on fixed assets due to restructuring of polyurethane. On the other hand, the item of others increases significantly this year, and this is due to the gain from the transfer of shares of the FENO subsidiary in Singapore. Next is the outlook of the cash flow. Cash flow from operating activities is expected to be JPY 81,000,000,000 and our outlook for investment cash flow is negative JPY 69,000,000,000 which includes the cash inflow from the sales of shares of the Singapore FINA business. As a result, free cash flow is forecasted to be JPY 12,000,000,000 As for the FY 2022 dividend, we are paying an interim dividend of JPY 60 per share and another JPY 60 at the year end for a total full year dividend of JPY 120 per share. In addition, we intend to enhance shareholder returns with solid actions by buying back our own shares up to JPY 10,000,000,000 and canceling the treasury shares. Thank you very much for your attention.