Mitsubishi Chemical Group Corp

F:M3C0

Earnings Call Transcript 2019-Q1

[Motohiro Oki, executive]

I am Motohiro Oki, Executive Officer and General Manager of Corporate Management Office of Mitsubishi Chemical Holdings Corporation. Thank you very much for your day-to-day support for us. Let me now present the result of the first quarter of fiscal year ending March 2019.

Please turn to Page 4. This page shows consolidated statement of operations. In the first quarter of March 2019, the average exchange rate was JPY 109.5, up JPY 2 to the dollar from the JPY 111.4 a year before. The price of naphtha went up by JPY 9,600 year-on-year to JPY 48,700 in the first quarter.

The sales revenue posted JPY 941.9 billion, up JPY 43.9 billion from the previous year. The increase in sales revenue was as a result of the negative impact of about JPY 3 billion by the foreign exchange rates, which was more than offset by positive impacts of prices worth JPY 38 billion and the volume was JPY 9 billion. The JPY 38 billion growth driven by prices mainly consists of rises in market prices of naphtha and MMA. The positive impact of JPY 9 billion attributed to the sales volume reflects increased sales of high-performance engineering plastics, battery materials and Industrial Gases, although there were negative impacts from the scheduled maintenance and repairs and decline in the sales volume of optical films due to decreased demand for smartphones.

The core operating income was JPY 92.8 billion, down JPY 2.7 billion year-on-year partly because of the difference in size of scheduled maintenance and repairs at the ethylene production facility. I will give you more details by business segment later.

Special items totaled a gain of JPY 800 million, which represents an improvement of JPY 5.3 billion year-on-year since in the first quarter of the previous year, around JPY 2 billion in expenses related to integration of 3 chemical companies was recognized. Again, I will elaborate more on this later in my presentation.

The operating income on IFRS basis was JPY 93.6 billion, up JPY 2.6 billion from the year before. The line item of financial income and expenses came in as a net gain of JPY 900 million, an improvement of JPY 2.3 billion year-on-year. This was mainly due to the increase of JPY 800 million in dividend received from group companies and the foreign exchange gain of JPY 800 million posted as compared to the foreign exchange loss of JPY 700 million posted in the previous year. As a result, the earnings before taxes was JPY 94.5 billion.

Corporate income taxes posted JPY 22.3 billion, which is 24%, as a percentage of the earnings before taxes, lower than the effective tax rate. This was because of the equity income and differences in tax rates imposed on overseas subsidiaries. Consequently, we have achieved a net income of JPY 72.2 billion and net income attributable to owners of the parent of JPY 58.1 billion, up JPY 10.4 billion or 22% year-on-year. The net income attributable to owners of the parent of JPY 58.1 billion was the highest ever as a first quarter performance of our company.

Now the equity income included in the core operating income went up by JPY 3 billion to JPY 8.6 billion mainly due to the rise in profits at affiliates engaged in MMA and high-performance engineering plastic businesses.

Please turn to the next page where you see sales revenue and core operating income by business segment. Sales revenues achieved a positive year-on-year growth in all segments, except for Health Care. While in core operating income, we saw slight decline year-on-year, except in MMA and carbon products. The details will be given later.

Moving onto the next page where I will explain about the analysis of core operating income on a total consolidated basis. The total consolidated core operating income dropped by JPY 2.7 billion, which was brought about by negative impacts of JPY 1.2 billion of the price difference and JPY 5.5 billion by volume and JPY 1.2 billion by others, while there was a positive impact of JPY 5.2 billion due to the decreased fixed cost. Prices have a negative impact of JPY 1.2 billion on the total consolidated basis. The rising MMA prices pushed up the core operating income in Chemicals by JPY 6 billion, while increased prices of raw materials reduced the price differences by JPY 2.5 billion in Performance Products.

In terms of the volume, the core operating income went up by JPY 2.5 billion in Health Care segment due to contribution from sales of Radicava. But in Chemicals, differences in size of the scheduled maintenance and repairs, the reducing -- thus, reducing the core operating income by JPY 8.5 billion. As a result, the volume-driven decline on a total consolidated basis was JPY 5.5 billion. Fixed cost reduction achieved was JPY 5.2 billion, showing a steady progress towards the initial full year goal of JPY 20 billion.

With regard to the items on the others was JPY 1.2 billion. In Chemicals, inventory valuation gain was a major factor, while negative impacts include increased R&D expenses in Health Care and increased fixed costs such as personnel and repair expenses, especially in Performance Products.

Please turn to the next page where I will explain about the Performance Products segment. In this segment, we have achieved JPY 289.7 billion in sales revenue, up JPY 12.5 billion year-on-year and JPY 23.9 billion in core operating income, down JPY 2.6 billion year-on-year. By subsegment, functional products saw its sales revenue go up by JPY 5.1 billion to JPY 193.8 billion, while its core operating income go down by JPY 2.4 billion to JPY 14.3 billion.

Sales volume of high-performance engineering plastics and alumina fibers increased, while raw materials costs generally increased, eroding the price difference. And sales volume of some optical films dropped due to the decreased demand for smartphones in China, all of which resulted in the year-on-year decline in core operating income.

In Performance Chemicals, sales revenue was JPY 95.9 billion, up JPY 7.4 billion year-on-year, while core operating income remained almost unchanged at JPY 9.6 billion.

In the subsegment, performance polymers and battery materials increased in their sales volumes, and market prices went up in phenol-polycarbonate chain. However, mainly due to the scheduled maintenance and repairs in phenol-polycarbonate chain, we have only achieved core operating income comparable to that of the year before.

To explain about the bar chart showing the analysis of the core operating income in this segment, the negative impact from prices of JPY 2.5 billion was chiefly due to the rise in the costs of the raw materials in functional products. The positive impact of JPY 600 million in terms of volume was a result of increased sales volumes of high-performance engineering plastics and alumina fibers as well as battery materials, including electrolytes and anode materials, which more than offset the negative impacts from scheduled maintenance and repairs in phenol-polycarbonate chain as well as from decreased sales volume of some optical films due to the decreased demand for smartphones.

In others, although we did benefit from inventory valuation gain and equity income, there was an increase in labor cost, and repair costs went up due to the scheduled maintenance and repairs. And the electrolyte business in the U.K. had its expenses go up because of the restart of the operation.

Let me now move to the Chemicals segment. In this segment, we have posted sales revenue of JPY 313.3 billion and a core operating income of JPY 36.9 billion, up JPY 25.4 billion and JPY 2.8 billion year-on-year, respectively. By subsegment, MMA saw its sales revenue increase by JPY 16 billion to JPY 108.3 billion, the core operating income by JPY 6.7 billion to JPY 31 billion.

In this quarter, scheduled maintenance and repairs were concentrated, and decline in productions and sales were seen due to disruptions at some of our plants. However, strong demand helped the market prices go up. And the new facilities in Saudi Arabia started to contribute financially in April this year, which led to the positive growth in profit. Now the market price of MMA averaged $2,180 in the first quarter last year and $2,618 in the first quarter this year. And most recently, it has been hovering around $2,700.

With regard to force majeure and sales controls in the U.S., in order to secure enough inventories for the near term and during the scheduled maintenance and repairs planned in October, we have been implementing sales controls since June 1. We expect it to be lifted when the scheduled maintenance and repairs is completed in November. Moreover, the scheduled maintenance and repairs that has been underway since March in Europe took more time than initially planned and, therefore, delayed the start of the operation. This has led to our decision to declare force majeure on May 10, which was subsequently lifted on June 14, but the sales control has remained in place.

Next, in petrochemicals, sales revenue increased by JPY 5 billion to JPY 132.5 billion, while core operating income dropped by JPY 5.5 billion to JPY 300 million. Sales revenues increased because despite the decreased sales volume reflecting an impact from scheduled maintenance and repairs at the ethylene production facility in Kashima, sales prices increased due to rising prices of naphtha.

Factors behind profit decline include an impact from scheduled maintenance and repairs; shrinking price difference, especially in polyolefin, due to the rising naphtha prices; and the effect from the disruptions in polypropylene production facilities at Kashima plant of Japan Polypropylene Corporation that happened in September last year.

In carbon products, we have posted sales revenue of JPY 72.5 billion and a core operating income of JPY 5.6 billion, up JPY 4.4 billion and JPY 1.6 billion year-on-year, respectively. This was mainly due to higher market prices of needle coke brought on by the continued strong demand for coke and other products.

Please turn to the next page, and you can see the Industrial Gases segment. Sales revenue increased in this segment by JPY 7.7 billion from the year before to JPY 156.8 billion, while the core operating income remained almost unchanged at JPY 13.3 billion. Sales revenue increased mainly because a new domestic on-site gas plant was established.

Despite the continued strong demand, profit remained unchanged as cost of fuel and raw materials increased and the large-scale installation work was posted in profit in the same quarter last year.

Let me move on to the next page and explain about the Health Care segment. Sales revenue posted JPY 135.6 billion and core operating income, JPY 20.1 billion, down JPY 2.5 billion and JPY 1.9 billion year-on-year, respectively.

In pharmaceuticals, sales revenue decreased due mainly to the impact of the NHI price revisions and lower sales resulting from the transfer of a generic drug business, despite sales contribution of Radicava in the U.S. and sales growth of priority pharmaceutical products, including Simponi.

In terms of core operating income, the impact from the NHI price revisions was made up for by the increased sales of Radicava and Simponi as well as the cost reduction through operation productivity reform initiative. However, profit decreased because of rising R&D expenses resulting from the inclusion of NeuroDerm Ltd. into the consolidated financial results.

The next page shows consolidated special items. In this quarter, total special items ended in net gain of JPY 800 million. More specifically, gain on sale of property, plant and equipment posted was JPY 2.2 billion; impairment loss, JPY 800 million; and loss on sale and disposal of fixed assets, JPY 800 million. Gain on sale of property, plant and equipment includes, among others, the gain on sale of an idle land sites previously used for company-owned condominiums. Impairment loss was incurred mainly because of the structural reforms carried out for Aqua and separator solution business. Loss on sale and disposal of fixed assets was posted mainly for the disposal of unnecessary equipment in Naoetsu and Yokkaichi plants carried out on a plant basis.

To give you the breakdown of line item others posted in the first quarter of last year, loss of JPY 2 billion incurred due to the integration of 3 chemical affiliates and special retirement allowance of slightly more than JPY 1 billion, paid in the Health Care segment.

The next page is about consolidated cash flows. Let me refer to the adjusted cash flow indicated in the middle of this slide to explain about this page. In terms of free cash flow, a net cash inflow of JPY 36.5 billion was posted. Net cash provided by operating activities totaled JPY 89.6 billion, while net cash used in investment activities was JPY 53.1 billion. Under the net cash provided by operating activities, in addition to income before income taxes and depreciation and amortization, the line item others shows a cash outflow of JPY 49.1 billion. This is because tax paid increased following the strong earnings achieved the previous year.

Under the net cash used in investment activities, there's a cash outflow of JPY 55.5 billion. But there was no major capital investment, and most of the investments were made for production reforms and streamlining. Included here, a cash outflow of JPY 18 billion at Taiyo Nippon Sanso and another JPY 12 billion at the Mitsubishi Chemical Corporation. Sale of assets include the sale of idle land sites and sale of shares based on the review on our strategic holding of stocks.

Net cash used in financing activities include payment of dividend at the end of the fiscal year and share buyback of JPY 20 billion and totaled JPY 60.2 billion in cash outflow. The interest-bearing debts totaled JPY 5.4 billion in cash inflow.

The next page is on the consolidated statements of financial positions. Total assets at the end of June stood at JPY 4,696.6 billion, down JPY 4 billion from the end of March this year. Foreign exchange rates had a positive impact of JPY 25 billion, but cash-on-cash equivalents, trade receivables and inventories decreased, resulting in the net decline of JPY 4 billion.

At the end of the quarter, interest-bearing debts totaled JPY 1,624.6 billion, up JPY 18.5 billion from the end of March this year, but this includes the effect of the foreign exchange rates of JPY 13.1 billion, which means that actual increase was JPY 5.4 billion.

The total balance of net interest-bearing debts as of the end of the quarter was JPY 1,173.7 billion. Total equity attributable to owners of the parent was JPY 1,307.4 billion, up JPY 21.6 billion quarter-on-quarter. This was a net result of the increase in the net income for the quarter and cash used on dividend payment and share buyback. Consequently, as of the end of the quarter, the net debt equity ratio was 0.90, and ratio of equity attributable to owners of the parent was 27.8%.

That concludes the presentation of the financial results of the first quarter. But before I wrap up, I would like to share with you our forecast for the future as of now. In the first quarter, as I already said, despite the decline in sales of display-related film products, rising market prices of MMA and needle cokes have helped improved the price difference, making us ahead of the initial forecast. We expect the strong market prices to continue in the second quarter and, therefore, our performance to remain strong as in the first quarter.

Compared to the forecast for the first half announced on May 10, despite the uncertainties in market price fluctuations in MMA, crude oil and naphtha as well as in market environment, we expect some 10% upside in the core operating income to end up at the level comparable to that of the first half of last year of around JPY 192.3 billion, though not as much as an upside as to allow us to revise the forecast.

With regard to the second half, there are uncertain factors at the moment such as future economic performance, effects from the trade war between the U.S. and China, crude oil prices, currency markets, sales of smartphones and automobiles, MMA market prices. Therefore, we will closely watch how the first half will play out and revise the forecast if necessary.

That is all for me. Thank you for your attention.