Mitsubishi Chemical Group Corp

F:M3C0

Earnings Call Transcript 2022-Q1

[Hidefumi Date, executive]

[Interpreted] Welcome. I am Hidefumi Date, CFO, of Mitsubishi Chemical Holdings. Thank you for your joining us today. Let's get started.

Please turn to Page 4. Consolidated statements of operations. Sales revenue for the first quarter of fiscal 2021 was JPY 928.3 billion, up JPY 205.6 billion, or 28% year-on-year, showing a recovery from the downturn due to the COVID-19 pandemic last year. Differences in volume contributed JPY 114 billion to the increased revenue with JPY 40 billion each was attributed to the Performance Products and Chemicals, respectively, and JPY 30 billion to Industrial Gases. The trend of the weaker yen also pushed up the revenue by about JPY 29 billion. The unit prices had a positive impact of about JPY 63 billion on the revenue sales of which a majority was for Chemicals, but selling prices also went up in Performance Products contributing slightly less than JPY 10 billion.

The core operating income was JPY 88.7 billion. a surge of JPY 73.7 billion from a year before. In the first quarter of fiscal 2020, the core operating income was JPY 15 billion, with the estimate back then that there was a negative impact of JPY 38.2 billion from COVID.

Even if we exclude this impact from the previous year, we would still have posted a significant growth in the core operating income. As shown in the light color letters in the pre-pandemic first quarter of 2 years before, JPY 70.1 billion was recorded from which a 27% increase was achieved in the first quarter of fiscal 2021 and negative JPY 1.7 billion was recognized for special items. The operating income on an IFRS basis totaled JPY 87 billion, up 267% and. As for financial income and expenses, dividend received increased, while expenses decreased. The bottom line, net income attributable to owners of the parent, the second line from the bottom was JPY 49.9 billion, up JPY 44.7 billion from the year before when we posted a small amount of profit. This also represents a growth of JPY 12.1 billion or 32% from 2 years before. Over to the right is the comparison to the forecast of the first half announced on May 12.

In terms of progress, the core operating income achieved 87% and the net income, 113%, already exceeding the forecast for the first 6 months. This is why we have decided to make an upward revision to the forecast of the first half, as I explained later.

Page 5 shows sales revenue and core operating income and loss by business segment. You can see the overview in the table. But what is noteworthy is in the footnote, inventory valuation gain and loss. Looking back, the first quarter of last year was when the lower prices of the naphtha in the domestic market resulted in a significant amount of inventory losses. But this year, raising prices of naphtha and crude oil brought about JPY 9.4 billion in valuation gains on cheaper inventories.

Page 6 describes analysis of the total core operating income for the company. The positive difference of JPY 73.7 billion was partially due to the COVID-19 but JPY 42.7 billion was attributable to the volume. All segments contributed to the increased profit through increased volume. In terms of price differences, in Chemicals, selling prices of MMA, bisphenol A and COGS trended higher than the year before, resulting in the expansion of the spreads. Now the negative impact of JPY 2 billion in Health Care was due to the NHI drug price revisions. Cost reduction contributed JPY 3.5 billion and others a positive JPY 14.5 billion, incorporating the inventory valuation gain of JPY 24.7 billion and positive difference in the share of profit of associates and joint ventures of JPY 4.4 billion. This year, in the Health Care, partially due to the increased expenses from the progress in the development of the vaccine for COVID-19 in Canada, fixed costs also increased.

In terms of the increase in fixed costs in this fiscal year, we also expect additional cost due to a rise in the payment of bonuses to employees upon recovery from the COVID-19 pandemic.

Page 7 shows the results of Performance Products segment. Polymers and compounds achieved JPY 8 billion in core operating income, a surge of JPY 6 billion year-on-year. As described on the right, this is because sales recovered and grew for products used in automobiles, pushing up the profit significantly. However, we have seen factors specific to the first quarter come into play. One is the tight supply-demand situation brought about by the cold waves in North America. There was also a shortage of containers due to a pickup in economies after the COVID-19.

In many cases, those resulted in disruptions of the supply-demand balance, especially among polymers, there were concentrated demand for certain products, sharply lifting up their prices at one point in the first quarter. As a result, we believe we enjoy a positive impact was JPY 2 billion in the first quarter alone. That said, more recently, prices of those products have since settled down to more normal levels.

Films and molding materials also posted JPY 15.3 billion, up JPY 10.1 billion year-on-year. In addition to strong sales to automotive customers, the fact that the sales volume of films for optical applications for use in displays decreased in the first quarter last year, now had a positive impact this fiscal year.

What also happened in the first quarter was an increase in prices of high-end, high-performance engineering plastics. And as we have also been requesting price increase for our products, there was a last-minute surge in demand before the price hike was about JPY 2 billion. This value of JPY 2 billion, however, was merely an estimate that we came up with in our company.

Advanced solutions has been in a similar situation with a recovery in terms of volume. The core operating income dropped by JPY 800 million. In October last year, when we acquired Gelest, a company dealing with silicon. The purchase price allocation led to the reclassification of the inventory, resulting in an increased cost of JPY 3 billion. The depreciation period is about 9 months and around JPY 1 billion in depreciation cost was posted in the first quarter. Aside from this effect of the acquisition, the core operating income would have been flat from the year before, but partly due to this depreciation, it fell by JPY 800 million.

Page 8 is about Chemicals segment. As for MMA, the Asian price in the first quarter of last year was $1,340, but it was $1,995 on the average in this first quarter, which was the main reason for the JPY 14.2 billion growth in the core operating income.

The price of acetone had been rising since summer last year, but it again has now gradually started to settle down.

In petrochemicals, the plant in Okayama will have a scheduled maintenance this fiscal year. but the expense will be evenly split between Asahi Kasei and Mitsubishi Chemical. Therefore, the cost to us will be half of what was spent last year. Increased sales volume as well as inventory valuation gain contributed to a JPY 30.3 billion rise in the core operating income to reach JPY 16 billion. In petrochemicals, bisphenol A had been experiencing disruptions quite frequently in the industry. even before being hit by the cold waves in North America, causing supply shortage and historically high prices in the market. The price hit a record high during April to June quarter, and this had a significant effect of pushing up the profit.

Regarding carbon products, sales volumes increased in tandem with an overall recovery in demand, and we also saw a rise in selling prices for export coke. The Chinese government banned the import of Australian coal, leading to a sluggish price of Australian coking coal, hovering between $200 and $100 in the first quarter. On the other hand, the price of export cokes, references the export cokes of Chinese cokes to some extent.

And as the price of Chinese domestic coal has been rising, we have been able to sell our products at higher prices, while buying coking coal at lower prices.

Page 9 shows Industrial Gases. This segment has recovered to more than the pre-pandemic levels, posting JPY 23.8 billion in core operating income, up even from 2 years before.

Page 10 shows the Health Care segment. In the period of April to June, the Phase III clinical study for the research and development of vaccine for COVID-19 made progress. As a result, the core operating income fell by JPY 4.2 billion to JPY 4.7 billion.

Page 11 describes consolidated special items. There are no major items of note this fiscal year. But in last fiscal year, gain on sale of property, plant and equipment was posted as there was a sale of a land site for an office in Toda by Mitsubishi Tanabe Pharma.

Page 12. This is the statement of consolidated cash flows. The right side is last fiscal year in real terms. On the left-hand side, as for the surplus funds of Mitsubishi Tanabe Pharma Corporation, we have incorporated them into our cash management system. So from this year, there have been no more investments of surplus funds. Therefore, the cash flow on the financial statement is the actual business cash flow. Free cash flow this year is JPY 24.5 billion, almost the same as last year.

Last year, we were in a phase of declining raw material prices and recovering working capital due to decrease in volume. This year, due to the sharp rise in prices of raw materials, and a minus JPY 34.4 billion for inventories and also cash expenditures, free cash flow is a little sluggish.

Page 13, consolidated statements of financial positions. Total assets remained almost unchanged from March at JPY 5,286.7 billion. From April last year with the start of COVID or in response to COVID, we started to build up the amount of cash on hand. We repaid about JPY 70 billion of that and also used cash to repay other funds, resulting in a decrease in cash and cash equivalents of JPY 89.9 billion.

On the other hand, the yen weakened slightly compared to March, boosting total assets by JPY 17 billion. Also increase in inventory due to higher raw material cost is JPY 37.1 billion. If you exclude the foreign exchange impact, it will be about JPY 35 billion. In addition, due to a slight rise in stock prices, investment securities increased JPY 24 billion, and total assets remained unchanged. As for the net D/E ratio on the lower right, net interest-bearing debt was almost unchanged, but the equity portion increased by about JPY 62.6 billion. This is due to the increase in net income and the slight impact of the weaker yen.

Towards our goal of less than 1 in fiscal year 2023, in the first quarter, we had dividend payments and bonus payments. So it was not a time to recover the funds. From July onwards, we would like to steadily work towards realizing this year's interest-bearing debt reduction goals. I will continue with the explanation of the revised forecast for the first half.

For the second quarter, we assume the exchange rate to be JPY 110 to the dollar and naphtha prices to rise further to JPY 54,000, Sales revenue for the first half is forecast to reach JPY 1.86 trillion, an increase of about JPY 86 billion. Sales of Performance Products and Chemicals are expected to each increase by around JPY 40 billion. Core operating income for the first quarter was JPY 88.7 billion. And for the second quarter, we expect JPY 60.3 billion or around JPY 60 billion, which is on par with the third and fourth quarters of last year, so a total of JPY 149 billion. This is an increase of 45% from what we announced in May.

The bottom line, that is the second line from the bottom, net income attributable to owners of the parent is expected to be JPY 79 billion, an 80% increase. I would like to explain on Page 16, how we calculated this forecast. There were special factors in the first quarter. As I explained earlier, polymers and compounds recorded JPY 8 billion in first quarter operating income but about JPY 2 billion of this was due to an increase in unit prices caused by a temporary tightening of supply and demand, which will dissipate towards the second quarter.

However, the economy is recovering more than what we had expected in the first half forecast, we announced on May 12, and we expect an increase in both sales and profits in a wide range of fields mainly in polyester films, coating materials and additives. In films and molding materials, I mentioned earlier that in the first quarter, there likely was some last-minute temporary demand before the price hike, which was about JPY 2 billion. Naturally, there will be a slight decline in demand in the second quarter. And so with all that considered, we expect JPY 26 billion for the first half.

However, compared to the forecast for the first half announced on May 12, we have revised the forecast, taking into account the effect of increased volume of high-performance engineering molded parts, alumina fiber and other products in the automotive field. And a slight increase in semiconductors as well as a revision in our forecast for optical films, which we had been a little cautious, but is now a little stronger. As for advanced solutions, in the first quarter, there was a close to JPY 1 billion write-off of Gelest's inventory.

Considering that it is the summer season, we forecast basically flat for the first half. For MMA, it was $1,995 and core operating income was JPY 12.3 billion. For the second quarter, although the current price is still around $2,000, 2 Chinese manufacturers are scheduled to start operations. As a result, the price in Asia is expected to fall below $2,000 by September and settle between $1,900 and $2,000, which is a little lower than the average price in the first quarter.

As for petrochemicals, there was a very large inventory valuation gain. That alone accounted for about JPY 16 billion in profits. In the second quarter, we will continue to post inventory valuation gain. But due to the gradual stabilization of bisphenol A prices, we expect that to land at JPY 6 billion. The forecast for the first half has increased more than tenfold since May. This was due to the rise in the price of bisphenol A continuing for an unexpectedly long period of time and inventory valuation gain becoming larger than expected. As for carbon, I mentioned earlier that the price of Australian coal was in the $100 range in the first quarter. This is expected to rise to above $200 in the second quarter, and so we expect the spread to decrease. However, the increase in sales price is still greater than what we forecasted in May, resulting in an increase of about JPY 4 billion in profits.

As for Industrial Gas and Health Care, we have not made any changes to our May forecast. Lastly, if you would take a look at Page 19, I'd like to talk a little more about the trends from the fourth quarter to the first quarter. In the fourth quarter, polymers and compounds had JPY 5.5 billion in core operating income. In fact, the soaring of bisphenol A prices was already seen in January, March period, and profits from the equity method joint venture with Sinopec which we have sold was JPY 2.2 billion in the fourth quarter. So that makes up a part of the JPY 5.5 billion. And also the JPY 8 billion in the first quarter of this year was due to about JPY 2 billion in special factors. Special factors cancel each other out. So basically, there was a profit increase of JPY 2.5 billion. The current economic recovery has manifested in greater growth than we expected in the fourth quarter in automobiles, coating materials, polymers and others. And so there was that recovery and a tailwind to our company that were considerable in the first quarter or rather it is continuing.

Although we had been cautious, demand is stronger than we expected. Film and molding materials had JPY 6.4 billion core operating income in the fourth quarter. However, this figure was JPY 6.4 billion after posting an impairment loss of JPY 4.2 billion due to a decline in profitability.

So the figure was actually JPY 10.6 billion for the quarter. In the first quarter of fiscal 2021, it was JPY 15.3 billion, of which last-minute concentration of demand before price hikes was JPY 2 billion. So it was actually about JPY 13.3 billion. Compare those 2 figures and you get a profit increase of a little less than JPY 3 billion. This again is due to the strength of the automotive business and stronger-than-expected demand for films for optical applications.

In advanced solutions, our business model is to provide construction on an inspection basis. And there was a concentration of such inspection-based acceptance in the fourth quarter. Excluding such factors, it was JPY 3.3 billion in the first quarter, but there was a little less than JPY 1 billion in inventory write-offs. So basically, the business is still strong. The average price of MMA was $1,814 in the fourth quarter. As for petrochemicals, as a result of the change in segments, the profit for the fourth quarter was JPY 14.1 billion. That includes impairment due to declining profitability of about JPY 1.8 billion. So in that sense, it was really JPY 15.9 billion. The price of bisphenol A continued to rise from the fourth quarter to the first quarter. The rise of the price of bisphenol A continued so that it reached the highest level ever in the April-June period.

But at that time, there was scheduled maintenance and repairs. So it was roughly flat. As for coke, as I mentioned earlier, the price of coke increased while the price of Australian coal was low. Other than that, ordinary industrial gases, we also have a little bit of inspection-based business so you see these kinds of movements. In the Health Care business, there is a concentration of R&D in the fourth quarter, and this is the reason for this trend that you see. So I have tried to explain the movements from the fourth quarter to the first quarter and from the first quarter to the second quarter, so that you can better understand the situation. That's all for now.

[Unknown Executive]

[Interpreted] Thank you very much. Now we would like to entertain questions. Let me introduce the first person to ask questions Mr. Watabe from Morgan Stanley MUFG Securities.

[Takato Watabe, analyst]

[Interpreted] Watabe from Morgan Stanley MUFG Securities. Let me first thank you for Page 19, where you disclose numbers by new segments, including those in the past? My first question, it's been 3 to 4 months since your company started under new leadership. I wonder if there has been any changes in the atmosphere of the organization.

Moreover, the new President said he would focus on the control of costs. Have there been any progress? If you look at the SG&A expenses, it is not clear as the cost of business activities may have started to be spent again. So could you give us updates on the changes inside the organization, including any new developments to reduce costs as you move forward to the second half.

[Hidefumi Date, executive]

[Interpreted] I get asked the same question by members of the media as well. And I find it quite hard to answer this question. I'm worried if I will be able to give an answer that will be to the point and meet the expectation that you might have. The President is always consistent in what he says. What happens often is that your President may say one thing on one occasion and another on another occasion, which puts us into trouble.

But that is not the problem at all as far as our President is concerned. He's always consistent and quantitative in his remarks. Therefore, for us, it is possible to have discussions with him that are logical and makes sense. So I feel the organization is becoming more transparent in a sense. If you're dealing with the Japanese President, you tend to reach an agreement in an extremely vague manner, or try to act preemptively by reading the others mind. But you cannot act in such a manner in English. And in that sense, there is a certain level of tension that runs when we talk, which I personally find enjoyable.

With regard to cost control, what I want him as President to do most is to keep mentioning it over and over again, which he does. When he reviews the actual result, he always references the numerical results. It is quite difficult to analyze in detail at the time of earnings report, how we performed compared to the previous quarter in cost reduction in a very limited time available.

I plan to spend another week or so to really sit down and analyze the breakdown of the cost control. That said, however, as I work with numbers, my gut feeling is that if you compare the first quarter of this year and last year, activities were suspended abruptly in the first quarter last year.

But after around fall last year, people started to engage in activities bit by bit gradually to move along as businesses usual. Therefore, obviously, those expenses have been gradually increasing in second and third quarters. In the first quarter, since he repeatedly mentioned the cost reduction, everyone has become mindful of tightening their postings again. So if you compare the [ 2 1st quarters], it may not make sense, since people felt no activities were allowed last year. Therefore, in terms of cost control, I believe he is walking the talk. But I want to brush up the internal system a bit more so that we can have a more quantitative control.

[Takato Watabe, analyst]

[Interpreted] I see. I would like to ask 2 non-healthcare questions and 1 healthcare one. MMA has not been affected by the cold wave too much and has been steady in its prices, not soaring or falling. And even if it fell a rose, it has been able to come back up again. You mentioned China earlier, but how do you see the current market sentiment?

[Hidefumi Date, executive]

[Interpreted] Because of the cold waves in the U.S., force majeure was issued, shutting down the U.S. operations first. Once the supply became extremely tight, we shut down the Beaumont plant. And the products produced in Saudi Arabia are no longer transported over to Asia, but are shipped to U.S. or from time to time, European countries to be sold there. While the supply-demand situation remains tight in both U.S. and Europe. Asia is the only region where tight supply has been somewhat alleviated and products from China are now shipped over to U.S.

Basically, the U.S. is still in extremely tight supply. But the product is being absorbed in the U.S. or in Europe to maintain the price in the market. I do hope you recognize the fact that we, as a company, to hold a 40% market share are closely monitoring the supply-demand situation in Asia.

[Takato Watabe, analyst]

[Interpreted] I see. Can you confirm that nothing has been decided yet for the story reported on the front page of Nikkei newspaper today?

[Hidefumi Date, executive]

[Interpreted] Nothing has been decided about the story. The final decision will not be made until next year.

[Takato Watabe, analyst]

[Interpreted] Could you elaborate more on progress of major products in the Health Care, which I'm sure was good. Instead of the development pipeline, including the timing of the accrual of the costs, since there was not much explanation on the financial result.

[Hidefumi Date, executive]

[Interpreted] With regard to vaccine for the COVID-19, as has been reported from time to time, we are conducting a Phase III clinical study and hope to file for and obtain approval by the end of this year and launch the product by the end of this fiscal year. So it is making steady progress. For other items, last year, clinical studies were sometimes delayed due to COVID-19 but people have become gradually used to running studies under the pandemic. Therefore, though the progress has not been good in clinical studies, it has not been as bad as in last year. Mr. Kobayashi, do you agree?

[Yoshimitsu Kobayashi, executive]

[Interpreted] Kobayashi from Mitsubishi Tanabe Pharma speaking. What you said is exactly right. If you can take a look at Page 24, or 25, you can see the sales of each product in comparison to the year before, which shows that they are making progress while absorbing the impact from COVID-19.

[Hidefumi Date, executive]

[Interpreted] Thank you very much. Let us move to the next question. The next person is Mr. Watanabe from Mitsubishi UFJ Morgan Stanley Securities.

[渡邉 亮一, analyst]

[Interpreted] Watanabe from Mitsubishi UFJ Morgan Stanley Securities. My first question is about Page 16. Earlier, you explained about the special factor in films and molding materials, one of which was that in the first quarter, there was a tentative surge in demand to build up the supply ahead of the time. But this factor seems to have grown in the second quarter. Therefore, if you look at the first half alone, the situation is in the steady state. If that is the case, what are the factors behind the upside to the original plan?

[Hidefumi Date, executive]

[Interpreted] The business in this segment has turned out to be much stronger than expected most recently. The high-performance engineering plastics exceeded the plan by JPY 3 billion. However, there was especially concentrated demand in the first quarter because price hike was to be executed in the second quarter for the high end or super engineering plastics.

On top of that, there was more demand than expected. Therefore, in the second quarter, there will be no longer the last-minute demand, but demand more than expected, will be there.

[渡邉 亮一, analyst]

[Interpreted] In that sense, looking at the full year, can we expect the same level of demand in the second half as in the first half?

[Hidefumi Date, executive]

[Interpreted] The JPY 2 billion increment for polymers and compounds will no longer be there in the second half. But I'm not so sure about the JPY 2 billion upside for films and moldings. I wouldn't say the probability of the JPY 2 billion will have been turning to the real demand is zero. But it is highly unlikely to see a preprice hike surge in demand twice.

[渡邉 亮一, analyst]

[Interpreted] So you're saying that the demand was strong in the first place. And on top of that, there was last-minute surge due to the scheduled price hike in raw materials.

[Hidefumi Date, executive]

[Interpreted] Yes.

[Unknown Executive]

[Interpreted] Let us move to the next question. Mr. Miyamoto from SMBC Nikko Securities.

[Go Miyamoto, analyst]

[Interpreted] Miyamoto from SMBC Nikko Securities. I also have 3 questions. My first question. Under the new leadership, I would assume you could be more selective in capital investments as well. When I looked at the most recent securities report, capital investment plan of JPY 260 was disclosed, which does not seem to have changed so much from the previous year. However, in the first quarter, JPY 55.7 billion was spent. Therefore, it seems that you're slightly reducing the investments. At this moment, is it correct to understand that the capital investment plan for fiscal 2021 is JPY 260 billion? Or do you plan to be more selective in reality?

[Hidefumi Date, executive]

[Interpreted] Using the JPY 260 billion as a baseline, we are planning to narrow down a bit more. If you ask me, if it is not our plan to make JPY 260 billion in capital investment, the answer is yes. but we want to reduce the amount where we can. Does that answer your question?

[Go Miyamoto, analyst]

[Interpreted] As we project the cash flow, are we supposed to assume that you plan to reduce it at least from JPY 260 billion?

[Hidefumi Date, executive]

[Interpreted] Yes. However, if CapEx is to be reduced, it will be done at the timing of giving an approval to that particular project. Therefore, the effective reduction in terms of cash flow will be reflected sparing over 2 years.

[Go Miyamoto, analyst]

[Interpreted] I see that means that the amount will not be that different from JPY 260 billion this fiscal year.

[Hidefumi Date, executive]

[Interpreted] Correct, it will be difficult to see a considerable reduction.

And then from the next fiscal year, will you be more selective in capital investments under the new leadership.

Yes.

[Go Miyamoto, analyst]

[Interpreted] I see. My second question is about MMA. You explained in detail about the supply of -- what about demand by geography or by application, including the prevention of COVID-19 infection.

[Hidefumi Date, executive]

[Interpreted] Household appliances and automotive applications are both strong, MMA is used for diverse applications. It is not the case that some specific applications are particularly weak in demand. And there are many applications that have strong demand. Therefore, the demand itself is quite brisk.

[Go Miyamoto, analyst]

[Interpreted] Does the application of prevention of COVID-19 infections still have continued strong demand. What about the capacity utilization?

[Hidefumi Date, executive]

[Interpreted] The demand has turned into a gradual downward trend since last winter. In the first quarter of last year, the demand was 25,000 tonnes. And in the second quarter, 26,000 tonnes but it has been declining to 20,000 tonnes more recently and further dropped below 20,000 tonnes as we proceed from quarter-to-quarter.

But this is only limited to the demand of PMMA sheets in the U.S. The European market is about 60% of that of U.S. Then there is also Asian market. So compared to the peak demand last year, the volume has been declining to about 60% to 70% more recently.

[Go Miyamoto, analyst]

[Interpreted] I see. So how do you see the utilization rate of your company? Actual results in Q1 and outlook for Q2?

[Hidefumi Date, executive]

[Interpreted] As for the capacity utilization rate, it may seem low because we exclude scheduled maintenance and repairs, but the actual rate is 75%. In the first half of this fiscal year, we had quite a few scheduled maintenance and repairs in Thailand and China. At this moment, there are not many And so all the facilities that are not very high cost are running at full capacity.

So the utilization is 80%. In the second half of the year, there will be more large-scale scheduled maintenance and repairs so it will be 60% to 70%. This is utilization rate vis-a-vis nameplate capacity. And so the utilization rate does not represent the busy season.

[Go Miyamoto, analyst]

[Interpreted] Third, regarding Healthcare. Concerning VLP vaccine MT-2766, there has recently been talked of considering booster administration and also reports of price increases for vaccines. So I feel that the environment is improving for vaccine manufacturers. On the other hand, the vaccination rate in Canada has already risen to among the top 5 in the world. And I understand that you have a contract with the Canadian government that sets the maximum volume. But could you comment on your outlook for sales and profits after launch based on the current situation?

[Hidefumi Date, executive]

[Interpreted] Basically, the current situation is that we will properly market the product according to the contract with the Canadian government and we will consider other matters in the future.

As you mentioned, from the perspective of vaccine manufacturers, we believe that the virus is moving in a more positive direction. Mr. Kobayashi, was that explanation okay?

[Yoshimitsu Kobayashi, executive]

[Interpreted] Yes, it is, as you say. We have a sales agreement with the Canadian government, and there is no change in that agreement at present. So we will steadily work to complete the Phase III trials and take the good results for a successful application and approval.

[Hidefumi Date, executive]

[Interpreted] We will now move on to the next question. Mr. Yamada of Mizuho Securities. Please ask your question.

[Mikiya Yamada, analyst]

[Interpreted] This is Yamada of Mizuho Securities. I'd like to ask 3 questions, including 1 on Health Care. The first question is a little bit related to Health Care. For the past 16 or 17 years, I have been saying that you should not do Health Care and Chemicals together. The reason is it would lead to underinvestment in Health Care during difficult times. You have been talking a lot about various reductions, but the most important thing in healthcare is intellectual property.

So let me confirm that you are continuing to invest resources in a way that fully utilizes intellectual property even under these circumstances. In particular, I see that Mitsubishi Tanabe's R&D expenses increased by only JPY 3.5 billion year-on-year. Considering the fact that they are conducting vaccine clinical trials for 30,000 subjects that alone must have caused a hefty sum. So then it makes me wonder if the NeuroDerm's ND0612 and others have not been neglected. And would it not lead to another impairment loss on intangible fixed assets in the future? I think there's still JPY 40 billion or so remaining. So those are my concerns. Could you please explain.

[Hidefumi Date, executive]

[Interpreted] I understand your concern about underinvestment. There is no need for you to have such concerns about NeuroDerm and other current projects. As for the development for COVID, we are receiving subsidies from the Canadian government and the R&D expenses are indicated net of that. Also it's on a net basis. It's netted. I can't say out loud exactly how much we have received, but it is quite a huge sum.

So in that sense, it is not that big a burden for us at the moment. And also about the future direction, we share your concerns about underinvestment. But rather, we have begun to discuss, maybe we should consider going forward the issue of narrowing down a little more in terms of our product lineup. So we are trying to move ahead, avoiding under investment. Mr. Kobayashi, is that right?

[Yoshimitsu Kobayashi, executive]

[Interpreted] Yes, it is, as you explained. For example, on Page 33 of the reference material, there is a pipeline chart, including the late-stage developments. For example, in Japan, we filed an NDA for 51-99 tardive dyskinesia in April and we put out a press release about filing an application today for TA-7284 diabetic nephropathy. I haven't seen it yet. As some have passed the point of requiring large development costs in the late stage and move on to the next phase. So it's not that we are seeing lower R&D costs because we are stopping something. I think that ND0612 and MT-3921 will be particularly expensive. ND0612, especially.

Also, I thought with 30,000 subjects in a vaccine trial, I thought that R&D for other items have decreased but I understand the situation if subsidies are included in those figures.

[Mikiya Yamada, analyst]

[Interpreted] I was a little worried because I thought it couldn't be just this much of an increase.

[Yoshimitsu Kobayashi, executive]

[Interpreted] Not to worry.

[Mikiya Yamada, analyst]

[Interpreted] Okay. I understand. Second question, you earlier explained about films and molding materials, and polymers and compounds. I want to ask about the situation of battery materials, semiconductors, electronics and battery materials. I believe that semiconductors are booming and batteries should be coming back. So I'd like to ask you mainly about information electronics in advanced solutions. How do you see the current situation? And how do you see the second half for which you haven't changed the forecast?

[Hidefumi Date, executive]

[Interpreted] In terms of advanced solutions, it was a bit of a mixed bag relative to the same quarter of the previous year with some good and some bad. First, the water treatment business of Aqua saw substantial decline of orders amidst the COVID pandemic. So last year, it was profitable because of the orders received the year before. But this year, profits are down. So that is a negative development. Also, semiconductors were really booming last year. So year-on-year, it is a bit down for this first half. And batteries, the factory had been stopped for some time. So this year, it's generating big profits. In the first quarter, we had very high utilization rate.

Overall, automotive in general, was extremely strong. So if you add up those positive and negative factors, the situation for advanced solutions is that it is somewhat on par with the previous year. I see information electronics is growing well, but is being dragged down by Amenity Life, which had been impacted by COVID. And so the final result turned out to be about the same. Now actually, in information electronics, last year was phenomenal for semiconductors.

[Mikiya Yamada, analyst]

[Interpreted] Are you saying that semiconductors have fallen quite a bit, not just slightly?

[Hidefumi Date, executive]

[Interpreted] No, no. It's only falling slightly. Compared to Amenity Life, it's not that bad, but semiconductors are also not as good as last year. We are making up for it with battery materials and other electronics products.

[Mikiya Yamada, analyst]

[Interpreted] Yes, understood very well. I was wondering why there was not more growth given the situation, but now I see why. There were some disappointing developments. There is a disappointing product group. I'm sorry, I had forgotten about that.

Third question, please tell us the progress of the clinical trials, MT-1186 and ND0612. I have high hopes, especially for MT-1186. As for ND0612, as I mentioned earlier, I'm very afraid of another impairment loss. But do we have to worry about that now? I'm sure you'll say no, but if you can disclose anything about the test of MT-1186 and outlook toward filing, that will be very much appreciated.

[Hidefumi Date, executive]

[Interpreted] You don't need to worry about impairment. Other than that, I ask Mr. Kobayashi to respond.

[Yoshimitsu Kobayashi, executive]

[Interpreted] Yes, on Page 28 of reference material 2, there is 1186, which is an oral drug for ALS. As you can see here, we are planning to file for approval in the U.S. in the third quarter of this fiscal year. There is no change in this plan.

ND0612 for Parkinson's. This is a very complicated trial because it is a trial that involves a tie-up with a medical device. And we are making various efforts to ensure that patient enrollment remain on schedule.

In that sense, as of today, we are proceeding so that it progresses in the same way as before.

[Mikiya Yamada, analyst]

[Interpreted] Since ND0612 requires a certain period of time, and you expect to launch it in fiscal 2023, I think the progress of patient enrollment is quite important. Do you not see any problems on that front?

[Hidefumi Date, executive]

[Interpreted] Well, I would be lying if I said we had not been impacted by COVID at all. But factoring in such impact, it is within the realm of margin of error, and we would like to proceed as scheduled.

[Unknown Executive]

[Interpreted] Thank you for that. We're running out of time. So the next question will be the last one. Mr. Okazaki of Nomura Securities.

[Shigeki Okazaki, analyst]

[Interpreted] This is Okazaki from Nomura Securities. I'd like to ask 1-plus-1 question. One, please tell us about the progress of new sales and whether there has been any change in your plan to file this fiscal year and have it approved next fiscal year?

[Hidefumi Date, executive]

[Interpreted] There is no change. I think that there might be some impact of COVID, but is it correct to say that there are no major problems. No, there is not.

[Shigeki Okazaki, analyst]

[Interpreted] Secondly, as you have already mentioned, if we double the core operating income for the first half of this fiscal year, it will be about JPY 300 billion. I think the target of the midterm plan for the next fiscal year is JPY 250 billion. So if it continues like this, I think there will be a considerable upside. Do you not see any sense, Mr. Date, that you might get more relax about portfolio reform, capital investments and cost cutting?

[Hidefumi Date, executive]

[Interpreted] Absolutely zero. As I mentioned earlier, he has been saying the same thing on every situation with the focus being on making proper judgments based on profitability and growth. Profitability or rather efficiency and growth and the cornerstone of low carbon and carbon neutrality.

We do not make decisions based on short-term considerations. So I am always by his side, silently affirming and cheering him on.

[Unknown Executive]

[Interpreted] Thank you for that. So it's time, so we will conclude for today. If you have any questions that you are not able to raise today, please contact our IR department at a later date. Lastly, CFO, Mr. Date, will say a few words in closing.

[Hidefumi Date, executive]

[Interpreted] So I apologize for running a little over time today. I regret that I should have been a little more brief in my answers. So I'm sorry for that. Next time, I'd like to make to the point succinct answers to each question. I ask for your continued support. Thank you very much.