Thank you very much you for joining the Mitsubishi Chemical Group Earnings Presentation. It is time to start our presentation. First, our CEO and President, Jean-Marc Gilson, will give you greetings, and then CFO Nakahira, Yuko Nakahira, will present financial results for the fiscal year ended March 31st, 2023. The entire conference, including the Q&A session, is scheduled to last 60 minutes. I'd like to remind you that the presentation may contain forward-looking statements based on current expectations, all of which are subject to risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements. Please also note that the audio recording of today's conference, including the Q&A session, will be posted on our website. Now, let's start the presentation. Jean-Marc Gilson, you can start.
Yeah, thank you, Shimizu-san. Good afternoon, and welcome to all of you to our fiscal year 23 first quarter earnings presentation. My name is Jean-Marc Gilson, and I'm MCG CEO. Like always, let me make a, I mean, very brief introductory comment, before I hand it over to Nakahira, CFO, for... Who's gonna give you a detailed review of our research for the first quarter. A little more than 2 years ago, we decided to start restructuring the company in order to put it back on a growth and profitability trajectory. To accomplish that task, we formulated a new Forging the future strategy, including the five pillars that are supporting it. Again, the five pillars are around simplification, around cost cutting, around portfolio focus, around exiting some business, and also around better capital allocation.
Despite what I would call difficult trading conditions for the chemical industry, that really are the result from a sharp contraction of what we can call the goods economy across the world. Despite all that, we are really starting to see the benefit of our laser-focused strategy. We will see even more in the future. One, we have really rebuilt, in our company, a pricing and growth discipline that was lacking. Our costs are down, and they really are in control, and they are showing another significant reduction of around JPY 230 billion in the last quarter. Our balance sheet is gradually improving. Also to support our future growth, at the same time, we are ramping up investments in digital R&D and in our most promising business opportunities through targeted capital expenditure.
In terms of our different business, it is true that there are different stages of improvements and recovery. Our gas business has been really improving the last several years. It is now a strong business, it's growing, it's profitable, and at the same time, it has also shed a lot of cost. Our pharma business is now showing good growth and profitability in Japan and certainly in the US, and that follows a deep restructuring that we conducted last year that shed a lot of unnecessary costs. Our MMA business, we think, has turned a corner, and is looking to a return to a more stable business environment after shutting down unprofitable assets in the US and in the UK. You should expect that together with a return to a better economic situation, that we will continue our restructuring activities in this business.
Now, our attention is turned heavily towards our specialty material business to also finish to turn it into a profitable and growing business, supporting a range of fast-growing end markets. Our recently announced Qualicaps asset disposal is again another sign that we are doing what we are saying we're gonna do, and that we are relentlessly implementing our Forging the Future strategy as we are narrowing down our activities on what we do best. In our basic material business, progress continued to be made on the sale of our carbon business and the creation of a JV for our petrochemical business. We continue to be optimistic about announcement on both projects before the end of the year. Now, the current results and future projections completely support our view that a deep restructuring of the Japan petrochemical industry is necessary and urgently needed.
Overall, at a company level, our first quarter results were in line with our forecast. We do not see the need to change our guidance at this stage. We expect the global economy to gradually recover and overall to avoid a recession. As a company, we will continue to work hard at upgrading the Mitsubishi Chemical Group towards a growing and sustainable company. We are all expecting the economy at one point to turn around. Thanks. Let me now hand it over to Nakahira, CFO, for a detailed review of our first quarter. Thank you.
Nakahira, CFO. I would like to discuss our performance for the first quarter on the fiscal year ending March 31, 2024. The severe business environment continued from the previous fiscal year. In addition to a notable slump in demand in petrochemical and semiconductor-related markets, the decline in raw material naphtha prices also contributed to a 4% decline in sales revenue. Core operating income decreased 30% year-on-year overall, although the negative impact of lower sales volume and inventory write-downs was mitigated by price and cost restructure reforms. By segment, the decline in earnings was particularly large in basic materials. In specialty materials, core operating profit improved compared to the fourth quarter of the previous year, due to the recovery trend in the automobile and display markets. The semiconductor-related market and sluggish demand in Europe and the US continued, resulting in a year-on-year decrease in profit.
MMA sluggish market started to show some improvement from Q4 last year, but still down from Q1 last year. On the other hand, the industrial gases and healthcare business performed well, resulting in a year-on-year increase in profit. Profit attributable to owners of the parent decreased 5% from the last year, mainly due to the special factor. Looking ahead, although the recovery in demand for MMA basic materials and specialty materials lacks strength, the first half forecast remains unchanged from the initial forecast due to strong industrial gas performance and steady progress in price and cost structure reforms. For the second half of the fiscal year, we also maintain our initial forecast because the outlook for the business environment is very uncertain, and it's difficult to predict the impact on earnings at this time. Let me explain consolidated base P&L.
The average exchange rate for the full year was JPY 139.6. The unit price of naphtha was JPY 67,500, down 22% from the same period last year. Sales revenues were JPY 1,061.2 billion, down 4% from the same period last year. Core operating income was JPY 50.8 billion, down 30%. The level of core operating income represents 47% progress towards the first half FY 2023 forecast announced on May 12th. Special income of JPY 18.9 billion was from healthcare business. This was mainly due to the recognition of revenue from advances received in connection with product supply contracts that no longer required to be returned.
Financing costs increased due to higher interest rates on euro-denominated debt, resulting in pre-tax income of JPY 68.8 billion and income attributable to owners of the parent of JPY 42.5 billion, down 5% from the same period last year. Revenue and core operating income as shown for each business segment. Specialty Materials reported an 8% decrease in sales and a 59% decrease in profit compared to last year.
While core operating income was in the red in the fourth quarter of the previous fiscal year, all three subsegments were profitable this quarter. Industrial gases performed very well, with a 12% increase in revenues and a 35% increase in profits. Healthcare reported a 4% increase in sales and a 150% increase in income, thanks to the continued strong performance of Radicava in North America, as well as cost structure reforms. MMA was a loss, as in the fourth quarter last year, but the negative margin narrowed. Compared to the same period last year, sales decreased by 21% and income decreased by JPY 3.7 billion. Basic materials posted a loss of JPY 8.0 billion this quarter due to continued sluggish demand.
Compared to the same period last year, sales decreased 10% and income decreased JPY 23.2 billion due to, in part, to a JPY 30.6 billion inventory valuation loss. The following is a breakdown of the JPY 21.3 billion decrease in core operating income. The decrease in sales volume due to a significant deterioration in demand and deterioration in inventory valuation, including in others, were mitigated by pricing and cost reduction activities. The price difference was positive JPY 19.6 billion. As shown on the table on the right, we continued price management in specialty materials and industrial gases, keeping the price differential in the positive territory. Volumes decreased in specialty materials and basic materials. Cost reductions totaled JPY 23.6 billion, approximately 30% of the JPY 80 billion in annual reductions projected for the current fiscal year.
Others includes a JPY 30.6 billion deterioration in inventory valuation. As for specialty materials, core operating income, our price management continued even amid cooling demand, contributing JPY 10.4 billion in price difference. Volumes showed a gradual recovery in automotive and display markets, but compared to the same period last year when demand was strong, sales volume declined significantly for displays, semiconductors, and industrial materials in Europe and North America in general. Core operating income for industrial gases increased by JPY 10.3 billion versus the previous year. We continued to promote price management, mainly in Europe and in the U.S., and made progress in passing on higher electricity costs to customers in Japan and the Asia Oceania region. Productivity improvement has been effective through the implementation of measures reflecting characteristics of each region.
Healthcare core operating income was up JPY 6 billion from a year ago. Radicava sales in North America remained strong and contributed to volume growth. SG&A increased due to new drug launch and settlement of joint development expenses for the previous year. Structural cost reforms, such as streamlining locations and the exit from Medicago in the last year, contributed to profit growth. MMA was down JPY 3.7 billion. MMA monomer prices have improved quarter-on-quarter, but are down year-on-year. Volume difference had a negative impact on Acrylonitrile, which is now part of the MMA segment, but for others, the volume difference was almost flat year-on-year. Things appear to have bottomed out in general, but we only expect gradual recovery for the time being. Basic materials came down significantly by JPY 23.2 billion.
The price factor was positive due to the polyolefin price revision timing, but weak demand continued, and inventory assessment or inventory valuation had a negative impact of JPY 30.2 billion. Coking coal-associated inventory valuation loss is expected to continue in Q2. Non-recurring items came to a net gain of JPY 18.9 billion. This mostly comes from that healthcare advances received converted into revenue. Other than that, things are as expected as the beginning of the year in general. Now on cash flow. Operating cash flows were a net inflow of JPY 55 billion. Investment cash flows were a net outflow of JPY 57.3 billion. Free cash flow was a net outflow of JPY 2.3 billion. We continue to focus on reducing working capital this year, too. Working capital management is now part of daily operations.
This is a comprehensive undertaking, including a disciplined process, training, tools, and sharing of best practices. Cash flow from financial activities was a net inflow of JPY 500 million. On the balance sheet, total assets came to JPY 5,992.8 billion, up JPY 218.5 billion, including JPY 223 billion due to the foreign exchange. Total liabilities came to JPY 3,852.5 billion, up JPY 66.6 billion. Equity came to JPY 2,140.3 billion. As a result, net D/E ratio came to 1.29, an improvement from 1.33 at the end of March. Last but not least, let us compare results on a quarter-on-quarter basis. Core operating income in Q4, excluding the TENELIA impact, was JPY 21.8 billion.
Q1 is JPY 50.8 billion, meaning 2.3 times up. Regarding Q2, specialty materials continue to face soft semiconductor-related demand in Europe, America, and China, will strive to improve earnings through price management and cost reduction. Industrial gases and healthcare are stronger than initially expected and will continue to work for further growth. MMA is soft, we expect gradual recovery. Basic materials will remain challenging through the first half. With all that, we maintain our current guidance for the first half. Regarding the second half, the business environment looks quite uncertain. Given the difficulty to assess the impact, we are maintaining the initial guidance for the full year as well at this point in time. Thank you very much for your kind attention.
Now, we will have a Q&A session. If you have a question, please use Raise Hand button at the bottom of the Zoom screen. If it's difficult to ask orally, you can enter your question by text. Please enter your question in Q&A at the bottom of the screen. Please mention your name and the company name, and ask your question. In the beginning, please mention all together how many questions you are going to ask, and we will answer each question, question one by one, and limit your questions up to two. Regarding pharma business development, of Head of Pharma, Tsujimura, Executive Vice President in charge of pharma, may answer. If detailed confirmation is required in your question, please contact us later at the IR department. You can start asking questions. Watabe from Morgan Stanley. Thank you very much for your presentation.
I have 2 plus 1 questions. 1st, specialty materials. Well, in the last page, you showed sub-segment-based demand recovery. Can you comment on that? For the 1st half, probability of success to achieve goals. In page 28, you have the data by market applications. Thank you very much. Including that by segment or by industry, what's the pace of recovery?
Thank you very much, Watabe-san. First, polymers and compounds. In this segment, SoarnoL, PP polymers will continue to be positive. On the other hand, last year, as some segment which was good-- which were good last year, may be deteriorated. Automotive sale segment is getting better. That's a positive sign. On the other hand, not so much recovery may be observed, or in terms comparison to last year, some negative comparison, like food wrapping materials, especially in the US market, construction materials, adhesives, those are the areas. For the optical area, it's coming back, but against last year, we do see some decline. As for polymers and compounds, generally speaking, pricing, well, it's not just negotiations, but the dynamic pricing may be introduced or value-based pricing may be adopted from early stage, and also restructuring benefits can be observed.
In those areas, we maintain a good business. films and molding materials, last year in Q4 and Q3 and Q4, in optical area, we had a big decline, but in Q1, display, compared to those quarters, is getting better.
... Having said that, for smartphone application materials or in North America, label liner, those demands are weak and totally it's not a big positive factor. Overall, it's positive, but there are some offset depending on areas. For films and moldings, well, in terms of films, display is coming back, but for molding products, mainly for semiconductor manufacturing parts and resin parts, those molding products demand in Q1 was not very strong, and those are the areas of high margin. Regarding those application, in Q2, we may struggle a little bit, but for display, we do see some recovery, and invest market recession may not be so pessimistic. That is our expectation.
For advanced solutions, like, in films and molding materials, for display application, we do see some recovery, but for semiconductor-related area, like especially memory and logic areas, except the state-of-art application, there is a significant decline for Q1 and Q2. We may hit the bottom or the display is back, but those negative factors may exist going forward. That is how we see it.
Thank you very much. The second question is about MMA. The carbon divestiture and JV operator chemical you mentioned within this year, and for stability, you mentioned that it's bottoming out. What about the U.S. investors, acceptance? What about go signs? Well, regarding U.S. feedback, what should I say?
There is license acquisition associated matter, there are some progresses, as to the timing of decision-making, we can't disclose when we would make decision. That does not change from before. Lastly, about healthcare. For each product, there would be a trend, a GLP-1 start, for this year and for the midterm, what's your outlook for profitability and revenue?
Tsujimura from Healthcare. Let me answer to your question. You are talking about Mounjaro. The launching start was quite good. Regarding the channel distribution and hospitals, we are delivering products to medical institutions according to the plans. Going forward, we do not disclose any specific comments. For this year, there would be contribution from this product. You incorporate that to a certain level? Yes. What's your feedback so far against your internal goal?
Well, as I explained before, this is in line with our plan. That's how it has started from the launch. Thank you.
Thank you. Next question will come from Miyamoto-san from SMBC Nikko Securities.
Thank you very much. This is Miyamoto speaking. I have two questions. First is about specialties, and on slide 28, and it relates to Watabe-san's question. If you look at different areas, the EV mobility isn't really contributing to EBITDA. The automotive industry overall is improving, so I would like to ask why this is still the case for EV and mobility, and what path are you charting going forward? Then for food, you've got JPY 34 billion in the forecast for the year, but you only already have earned JPY 11 billion, and you mentioned SoarnoL. Could you perhaps explain why Q1 results were so strong? If you could also tell us about the geographical differences, the global situation, maybe.
I know BASF said that Europe is weak and Chinese recovery is slower than expected, but the United States is stronger than expected. I would like to hear your view on the difference between geographies, geographical areas.
Thank you very much, Miyamoto-san, for your questions. With regards to the segment and breakdown within specialty materials, EV mobility, you mentioned that this is very slow. It's mostly about moldings and battery materials that are not growing as much as we expected. Having said so, for automotive, I understand that the recovery is firmly underway, and so obviously, one question is how close we can get to the initial forecast. With regard to our expectations for this segment, we actually have very high expectations overall.
... and we also have a lot of products in the pipeline that we have very high expectations for. I hope we can catch up as soon as possible. With regards to the food that you mentioned, yes, SoarnoL is doing very well. In previous year, Q4, it was a little slow, slow, but sugar ester was... A sugar ester was weak, a little weak, but it's now recovering.
We, we can increase supply, there would be some constructions in plan. Regarding that specific area, we try to improve our margin, and that should contribute to the top line and the bottom line. Both can be expected from this, and that is reflected in those numbers. By region, oh, yes, that's right, that was also your question. By region, well, I can't tell you absolutely, or also comparison to last year, same period last year. When you look at the absolute situation, Europe and the UK is earning our EBIT, is contributing to our EBIT. Last year in Q1, US in many businesses had a very strong performance, could be our best in the past. Compared to that, the US business, compared to last year, may be a bit weak for this quarter.
By region, especially for specialty materials, U.S. is, in terms of profit and revenue, the biggest earner, followed by European countries. Understood. Regarding food, in terms of sales revenue, 1 quarter or less for the progress, and EBIT contribution is something you would need to look. ASP may be improved, that contribute to better margin. Well, that possibly that could be a factor, and also product mix is another factor.
I see. Second question, I have also a question regarding MMA. Utilization rate, I understand, is going up according to some reports, Karakuni Pokogio report that the Q1 utilization into our Q2, what would be the change? You mentioned gradual recovery regarding market condition, but towards Q2, I don't see any specific factors that can push up demand or market overall. What are possible factors? MMA utilization and market outlook from Q1 to Q2, please.
Excuse me. Regarding utilization rate, actually, there's not much improvement comparison to the same period last year, 65% around the utilization ratio. Compared to Q3, Q4 last year, there is an improvement. We are on recovery trend, but compared to the very strong demand level, we are not there yet. As for the market condition, last year in Q4, compared to Q4 last year, ICIS Asia, ICIS China in Q1, $1,563 and $1,431, there is an improvement in NAFTA prices coming down. This is mainly for C4 area. The margin in C4 is improving. That is contributing to better EBITDA, the profit level. In Q2, we think this trend will continue, and NAFTA price could go down a little bit more.
ICIS Asia, ICIS China prices would be $1,550-$1,560, and ICIS China would be $1,400+. That is our expectation, and for the short term, we think that would be the trend. It's not really full recovery yet, but compared to Q3, Q4 last year, in terms of prices, margin, and volumes, we do see some recovery trend.
Particularly, any strong application in terms of demand recovery, any strong application areas?
For optical application, we do see some good recovery, according to what I understand. In terms of general demand, it's yet to come.
Thank you very much. Lastly, rain in June 30 in Louisiana, they discontinue control, production in Louisiana, and, this is based on your decision-making, for investment. Is it going to be following, or did you expect this very much, so there's not much change in your guidance?
Well, surprise? No, it was not a surprise regarding that. That could have been expected. We had some scenario based on that. Our view would not change based on that very much.
Thank you.
Thank you very much. Next, let's go to Yamada-san from Mizuho Securities, please.
Good afternoon. This is Yamada from Mizuho Securities speaking. I have 2 questions, and then I would also like to seek clarification on 1 point with regard to healthcare. My 1st question is about specialty materials, and thank you very much for the additional comments that we just heard. Then volume difference appears not too strong, particularly on film and moldings materials. If you look at that subsegment, their, the results appear to be quite squeezed. If you look at year-on-year, film and materials, molding materials, is that the lagger, or is it actually also coming from polymers and compounds? We've got the JPY 21.6 billion negative impact from volume factor. Could you perhaps give us a breakdown of that? Then in addition, with regard to Q2, how sure are you about the recovery?
What would be the volume factor, difference between Q1 and Q2? That was my question one.
Thank you very much, Yamada-san. With regard to the volume factor, maybe earlier, we didn't describe this very well, but if you look at sub-segment, this impact was largest from films and molding materials. Well, volume is larger to begin with, so that's a big factor, so whatever change there is obviously has a larger impact than other sub-segments. What's behind this is polyester films, the display application demand is recovering, but in Europe and United States, the label liners, that demand is quite slow now. As mentioned earlier, the resin parts for semiconductor processes and productions, that business falls under films and molding materials, and that's why this sub-segment is mostly affected.
The next contributor would be advanced solutions, and as you are aware, this is basically about displays and semiconductors. Again, the semiconductor-related part is partly down, even on a quarter-on-quarter basis, and that's why the situation is. Polymers and compounds, given the scale and the overall size of the business, the impact is much smaller. You also asked about the Q1 to Q2 difference and the outlook we have. With auto recovering, we are trying to see how much that would reinforce or boost the polymers and compounds sales. The largest concern is really semiconductor-related applications, so memory, logic related things. There may not be good or strong recovery, so for films and molding materials, the semiconductor-related part may not be so strong in Q2.
In Europe and the U.S., maybe it's not so recessionary there, so that could mean other parts of the business could be stronger. It's really about the speed of recovery with regard to display-related material. We are one month into Q2, and we are trying to deliver as much upside as possible, there's not much of a marked change in Q2 compared with Q1. We will continue to work hard on price management and cost reduction so that we can be prepared to ride the tide when there's recovery in the second half. Thank you. With regard to films and molding materials, polyester films and label liners, you mentioned label liner demand is weak, and that's probably about related to the overall global economy, and that's means it's related to industrial gases.
Industrial gases, Nippon Sanso has issued a quite conservative comment with regards to expected demand in Europe and the United States. I'm concerned that there's may not be much recovery there as well. What is your take on that? Right. Well, we do expect recovery in the second half or later, we, given the voices we hear from our users and customers. For Q2, we're not that optimistic internally.
Thank you very much. Now my second question. On basic materials and the carve-outs and divestiture, you said that by the end of the year, meaning the end of calendar 2023, and it's not just a financial carve-out, but you will have a joint venture partner, and you will have a scheme to share with us, and carbon will present a date by which they will be off balance. What exactly can we get by the end of this calendar year?
Thank you for the question. What we are trying to deliver at this point in time, is that by the end of the year, or maybe, by the end of Q3 in our financial year, for petchem, we will have a partner, and if it's carbon, it will be a buyer.
We hope that we will be in a stage where we can disclose all those details. Even when that happens, when the deal actually closes is another question. It will probably be sometime in early 2024. Well, that's 1 year behind the original Forging the Future idea. That joint venture scheme, once that's disclosed, how much would it take, I mean, before the deal is closed? You initially said it, there will be a year or so, but are you actually expecting a shorter duration of that, or shorter term? No, we don't expect 1 full year between the disclosure and the closing of the deal. Obviously, there are some processes we need to go through.
We hope that in Q3 we can make that announcement, and maybe within half a year, we can close the deal. The current idea timeline we have is more tied to the plan that we announced in February 2023. There's no slide in timing in that sense.
Thank you very much. Third question is on healthcare. The TENELIA royalty, that's minus JPY 700 million. Why is that? The canagliflozin and other royalty coming down, is that SGLT2 and the dual agonist cannibalizing each other, or is it not the case? In the renal area, SGLT2 agonist, antagonist, is that it's effective, so there's no cannibalization with the dual agonist? Could you explain that, please?
Yamada-san, Tsujimura speaking. Thank you very much for your question. First question regarding TENELIA royalty revenue of JPY 700 million minus, that is the question. At the earnings presentation, based on available information, we estimate based on accounting, and the generic erosion is higher than our expectation. Compared to our estimate, royalty revenue was much lower. Therefore, the royalty revenue, and that's there's a gap from our expectation, and that amounts to JPY 700 million.
I see.
The second question was, canagliflozin royal is down JPY 400 million. Is that from competitors' erosion? Also from Mounjaro. No, that's not what we think.
You can maintain the level as last year, is that okay? TENELIA would be lower, and you mentioned that at the beginning of the fiscal year in a qualitative manner, is the decline within that range?
Yes.
Compared to your initial expectation, it is within your risk scenario?
Yes, that's right.
I see. Thank you very much.
Thank you. Next, Nomura Securities, Okazaki-san, please ask your question. Okazaki from Nomura Securities.
Thank you very much for the presentation. Do you hear me okay? Yes. I have 2 plus 1 questions. Basic materials and Q1 and Q2, cracker utilization that you expect and also trouble. You mentioned that what's the impact in Q1 and what you are looking for Q2. Regarding carbon business, according to what I heard, the divestiture are to be announced by the end of December, so it may not impact. Basic business, environment would continue in Q2. Is that what you think? Also, related to the last question, exit of petrochemical-... may be announced in early part of 2024. Is that right? Can you confirm that, please? First, extreme cracker utilization rate.
Well, as reported in various areas, nationwide average is 80%. Ours is in line with that. Having said that, in our case, in May, we had power shortage impact, and Ibaraki plant cracker and related derivative plant operations stopped. That impact actually is rather significant. Having said that, demand has been weak, so in that sense, although the impact was significant, but overall, what should I say? Because of sluggish demand and the negative factor in inventory valuation, there is this negative number. Regarding the resolution of that, well, in Q2 it may remain, but overall level, when you consider that we have this petrochemical situation in the current situation and additional negative factor, that is our assessment so far. The petrochemical exit, the announcement within this year, that's our plan. What was the other question about carbon?
Well, in the second quarter, business environment may not improve very much. Is that also your assessment? Well, this is inventory valuation, and coking the coal, and the price is in declining demand, and the level is still high, so Q2 would be feeling the impact. Beyond that, we don't think there is much impact. Thank you very much. Second question about healthcare. Progress has been quite okay, you mentioned, and there are factors that difference Radicava, Stelara, those sales revenue are quite good. Is that right? For cost side, compared to 3 months ago, is there an improvement? Can you give feedback on that point?
Okazaki-san, thank you very much. This is Tsujimura speaking. The first question, you are right in your assessment and feedback. In Q2 and onwards, you think you will continue to have good business?
Yes, we think the good situation will continue. For Stelara, additional indication, and then three year passed for UC and Crohn's disease. For each, we are close to number one position, so there has been good growth, and we hope that this trend will continue. For Mounjaro, the start is as we expected, so we think this a good situation will continue. About Radicava, well, this is about Japan, or are you talking about overseas? For U.S., it's particularly strong, right? On page 25, of course, 20 in Japan and also outside. For Japan, the start is as we expected after launching. For U.S., there is a competitor's product, but still, the sales has been very good. We think that this trend will continue. How about cost aspect? You have good progress?
For the cost activities, it is in line with our initial expectations. Thank you very much. Lastly, regarding development of product, this Mounjaro's use, it's not only for diabetic patients, it could be used for those who want to go on diet. There are some precaution announced for diet purpose application usage. We should not expect that very much from that kind of users? Regarding Mounjaro, well, I said this is in line with our expectation, but the off-label use is not particularly increased. That's our assessment. In Japan, off-label use and Mounjaro usage situation, we continue to monitor carefully, and as of now, there is no particular significant increase of off-label use. For optimal use of this indication, we continue to pay attention to that. If additional actions are required in our judgment, we will take those actions right away.
That's how we are prepared for that kind of situation. For off-label use, there's no particular increase of consumption, and if that would happen in future, we would take appropriate actions going forward. Thank you very much. Clear.
Thank you very much. We are running out of time, so the next one would be the last person to ask a question. Omura-san from UBS Securities, please.
Omura from UBS. Thank you very much. I have one question with regard to cost reduction. This time, you mentioned JPY 23.6 billion of cost reduction. If you look at SG&A, it's only down by JPY 400 million. Could you perhaps give us a breakdown of what cost is going up and what cost is not going down, or why the result is like this?
Thank you very much. With regard to the cost reduction, this JPY 23.6 billion that we have generated, that includes the decisions made in the previous year, about 5 companies in the United States being liquidated, and therefore, no costs associated anymore. Muse stopping the development, Cassel being closed, those are all part of that.
In addition, we have streamlined the locations, we've also streamlined the number of operating companies as well. Another category would be reducing procurement costs. We are moving toward a one team, one company. In the past, every purchase was done by legal entity, but now we have regional, collective purchasing, like in the Americas, we do the American regional purchasing, and that impact is there, and there will be more coming going forward. As we said at the beginning of the year, this year we are trying to realize JPY 80 billion of cost reduction, and of which, JPY 40 billion was already based on decisions made in the previous year. As Jean-Marc mentioned, we are continuing with simplification, standardization, unification to further drive costs down.
Where did that JPY 400 million come from? SG&A and other general expenses. Last year, it was JPY 220.1 billion consolidated. This year, JPY 219.7 billion, and the percentage is 20.7% this year. Last year, it was 19.9%. I wasn't sure if there's any reduction seen in these numbers, so I was wondering if there's anything else that's going up, or more realistically, going forward, you may do a lot of cost reduction and still have a lot of new costs added, and I was concerned about that. Thank you for that. I think the best way to explain this is to use this core operating income breakdown slide. That's slide six.
On the variable costs side, that's part of the price factor here, and cost reduction is here. Then there's this other part. This is mostly inventory valuation difference. Some fixed cost related increases due to inflation is also a part of the others part. Last year, there was a large contribution from this bin. Now that increased fixed cost part is not so large, it's really all about inventory valuation difference. Cost reduction is there, and that's directly translated to our profit figures. Thank you. I think I understand. Thank you very much.
Thank you very much. With this, we close the Q&A session. Sorry, it's past the time schedule, but Nakahira, our CFO, will give you some short remarks.
Thank you very much for joining us today in our presentation. Business environment continues to be challenging, especially petrochemical area and also semiconductor-related areas. A big profit improvement may not be what you think, that's how it looks like, but in the Forging the Future, we showed you our plans and what we are doing according to that strategy, even under the current business environment, help us to secure profit. We are reminded of that once again. Some areas like displays and automotive sectors are coming back in terms of demand. We make sure we capture those opportunities, and towards second half, we will do our best. Thank you very much for your continued support and participation for today. Thank you very much. Today's conference will be distributed in our archives. With this, we close the meeting. Thank you very much.