Mitsubishi Chemical Group Corp

F:M3C0

Earnings Call Transcript 2024-Q1

[Seiichi Kiso, executive]

Thank you very much 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; then CFO Nakahira, Yuko Nakahira, will present the financial results for the fiscal year ended March 31, 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.

[Jean-Marc Gilson, executive]

Yes. Thank you, Seiichi-san. So 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's CEO. So like always, let me make a, I mean, very brief introductory comment before I hand it over to Nakahira, CFO, who is going to give you a detailed review of our results for the first quarter.

So 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 our new Forging the Future strategy, including the 5 pillars that are supporting it.

And again, the 5 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, and 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 (sic) [ 23 ] billion in the last quarter.

Our balance sheet is gradually improving. And 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 to targeted capital expenditure.

In terms of our different business, it is true that there are different stages of improvement 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 costs.

Our Pharma business is now showing good growth and profitability in Japan and certainly in the U.S. And that followed a deep restructuring that we conducted last year that shed a lot of unnecessary costs.

Our MMA business, we think, has turned the corner and is looking to a return to a more stable business environment after shutting down unprofitable assets in the U.S. and in the U.K. You should expect that together with the 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 Materials 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're saying we're going to do, and that we are relentlessly implementing our Forging the Future strategy as we are narrowing down our on what we do best.

In our Basic Materials business, progress continue to be made on the sale of our carbon business and the creation of a JV for our Petrochemical business. And we continue to be optimistic about announcements 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, and 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, and let me now hand it over to Nakahira, CFO, for a detailed review of our first quarter. Thank you.

[Yuko Nakahira, executive]

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. But the semiconductor-related market and sluggish demand in Europe and the U.S. continued, resulting in a year-on-year decrease in profit. MMA's sluggish share 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 Health Care business performed well, resulting in 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 and 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 maintained our initial forecast because the outlook for the business environment is very uncertain, and it's difficult to project 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 1.612 trillion, 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 a 47% progress towards the first half FY 2023 forecast announced on May 12.

Special income of JPY 18.9 billion was from Health Care 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. And financing costs increased due to higher interest rates on euro-denominated debt, resulting in pretax 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 3 subsegments were profitable this quarter.

Industrial Gases performed very well with a 12% increase in revenues and a 35% increase in profits. Health Care 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. A decrease in sales volume due to a significant deterioration in demand and deterioration in inventory valuation, including in others when 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 the Industrial Gases, keeping the price differential in the positive territory. Volumes decreased in Specialty Materials and Basic Materials.

Cost reductions totaled to JPY 23.6 billion, approximately 30% of the JPY 80 billion in annual reductions projected for the current fiscal year. Others include 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 gradual recovery in automotive and display markets. But compared to the same period last year when demand was strong, sales volume declined significantly for display 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 continue 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.

Health Care 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 settlements 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 provision timing, but weak demand continued, and inventory assessment or inventory evaluation had a negative impact of JPY 30.2 billion. Coking coal associated inventory valuation loss is expected to continue in Q2.

Nonrecurring items came to a net gain of JPY 18.9 billion. This mostly comes from that health care 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 the net inflow of JPY 500 million.

Now 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 Gilenya impact, was JPY 21.8 billion, Q1 is JPY 50.8 billion, meaning 2.3x up.

Regarding Q2, Specialty Materials continue to face soft semiconductor-related demand in Europe, America and China, but we'll strive to improve earnings through price management and cost reduction. Industrial Gases and Health Care are stronger than initially expected, and we'll continue to work for further growth. MMA is soft, but 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.

[Seiichi Kiso, executive]

Now we will have a Q&A session. [Operator Instructions]

Regarding Pharma business development, 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.

Watabe from Morgan Stanley.

[Takato Watabe, analyst]

I have 2 plus 1 questions. First, Specialty Materials. Well, in the last page, you showed subsegment-based demand recovery. Can you comment on that? And for the first half, probability of success to achieve goals in Page 28, you have the data by market applications and including that by segment or by industry or the pace of recovery.

[Yuko Nakahira, executive]

Thank you very much, Watabe-san. Base polymers and compounds, in this segment, PPE, polymers will continue to be positive. On the other hand, last year, as some segment, which was -- which grew last year may be deteriorated.

Automotive segment is getting better. That's a positive sign. On the other hand, not so much recovery may be observed. Or in terms of comparison to last year's negative comparison, like food wrapping materials, especially in the U.S. 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 & Compounds, generally speaking, pricing -- while 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. So in those areas, we maintain group business.

And Films & Molding Materials. Last year in Q4 and Q4 -- Q3 and Q4, in optical area, we have a big decline. But in Q1, display -- well, 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 that big positive. But overall is 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. So regarding those applications in Q2, we may struggle a little bit. But for display, we do see recovery. And in Western market, recession may not be so pessimistic based on expectation.

For Advanced Solutions, like in Films & Molding Materials, for display application, we do see some recovery. But for semiconductor-related area, like especially in memory and logic areas, except the state-of-art application, there is a significant decline for Q1 and Q2. We may hit the bottom. Although display is back, but those negative factors may exist going forward. That is how we see it.

[Takato Watabe, analyst]

The second question is about MMA. The carbon divestiture and JV of Petrochemical, you mentioned within the year. And for stability, you mentioned that the -- it's bottoming out. But what about the U.S. investors' acceptance, what about the signs?

[Yuko Nakahira, executive]

Regarding U.S. feedback, what should I say? There is license acquisition-associated matter, and there are some progresses. But when -- as to the timing of decision-making, we can't disclose when we would make a decision. That does not change from before.

[Takato Watabe, analyst]

Lastly, about Health Care. For each product, there would be a trend [indiscernible]. And for this year and for the midterm, what's your outlook for profitability and revenue?

[Akihiro Tsujimura, executive]

Tsujimura from Health Care. 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. And going forward, we do not disclose any specific comments.

[Takato Watabe, analyst]

For this year, there would be contribution from this product? Do you incorporate that to a certain level? And what's your feedback so far against your internal goal?

[Akihiro Tsujimura, executive]

Well, as I explained before, this is in line with our plan. That's how it has started from the launch. Thank you.

[Seiichi Kiso, executive]

Next question will come from Miyamoto-san from SMBC Nikko Securities.

[Go Miyamoto, analyst]

This is Miyamoto speaking. I have 2 questions. First is about the specialties, and on Slide 28, and it relates to Watabe-san's question. So if you look at different areas, the EV and 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?

And then for food, you've got JPY 34 billion in the forecast, full year, but you already have earned JPY 11 billion. And you mentioned Soarnol, but could you perhaps explain why Q1 results were so strong? And if you could also tell us about the geographical differences. The global situation maybe said that Europe is weak and Chinese recovery is slower than expected, but the United States is stronger than expected. So I would like to hear your view on the difference between geographies -- geographical areas.

[Yuko Nakahira, executive]

Thank you very much, Miyamoto-san, for your questions. With regards to the segment and the 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 formally underway. And so, obviously, one question is how close we can get to the initial forecast?

But with regard to our expectations for this segment, we actually have very high expectations overall. So -- and we also have a lot of products in the pipeline that we have very high expectations for. So I hope we can catch up as soon as possible. With regard to food that you mentioned, yes, Soarnol is doing very well. And in previous year, Q4, it was a little slow.

But sugar ester was a little weak, but it's now recovering. We can increase supply there with recent constructions in plan. And regarding that specific area, we try to improve our margin, and that should contribute to the top line and the bottom line. So both can be expected from this, and that is reflected in those numbers.

[Go Miyamoto, analyst]

By region?

[Yuko Nakahira, executive]

Yes, that's right. That was also your question. By region, well, I can't tell you absolutely also comparison to last year -- same period last year. When you look at the absolute situation, Europe and the U.K. is earning -- is contributing to our EBITDA.

Last year, in Q1, U.S., in many businesses, had a very strong performance. This could be our best in the past. Compared to that, the U.S. business compared to last year, maybe a bit weak for this quarter. But by region, especially for Specialty Materials, U.S. is, in terms of profit and revenue, the biggest earner, followed by European countries.

And regarding foods, in terms of sales revenue, one quarter or less for the progress and EBITDA contribution is something you need to look. And ASP may be improved. That contribute to better margin. Well, that possibly -- that could be a factor, and also product mix is another factor.

[Go Miyamoto, analyst]

I see. And second question, I have also a question regarding MMA. Utilization rate, I understand, is going up according to some reports. [indiscernible] report that the Q1 utilization. And towards Q2, what would be the change?

And 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? So MMA utilization and market outlook from Q1 to Q2, please?

[Yuko Nakahira, executive]

Regarding utilization rate, Actually, there's not much improvement comparison to the same period last year, 65% around utilization ratio. But compared to Q3, Q4 last year, there is an improvement. So we are on recovery trends, but compared to the very strong demand level, we are not there yet.

And 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 ]. So there is an improvement in naphtha prices coming down. This is mainly for C4 area. The margin in C4 is improving. That is contributing to better EBITDA, the profit level.

And in Q2, we think this trend will continue, and naphtha price could go down a little bit more. And ICIS Asia, ICIS China, prices would be $1,550 to $1,560 and ICIS China would be $1,400-plus. That is our expectation.

And for the short term, we think that would be a 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.

[Go Miyamoto, analyst]

Particularly, any strong application in terms of demand recovery and strong application areas?

[Yuko Nakahira, executive]

For optical application, we do see some good recovery, according to what I understand. But in terms of general demand, it's yet to come.

[Go Miyamoto, analyst]

And lastly, the rain in June 30, in Louisiana they discontinued production in Louisiana, and this is based upon 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?

[Yuko Nakahira, executive]

Well, surprise -- no, it was not a surprise regarding that, that could have been expected, and we had some scenario based on that. So our view would not change based on that very much. Thank you.

[Seiichi Kiso, executive]

Next, let's go to Yamada-san from Mizuho Securities.

[Mikiya Yamada, analyst]

This is Yamada from Mizuho speaking. I have 2 questions, and then I would also like to ask a clarification on one point with regard to Health Care. So my first question is about Specialty Materials. And thank you very much for the additional comments that we just heard.

But then volume difference appears not too strong, particularly on Film & Molding Materials. If you look at that such segment, the results appear to be quite squeezed. And if you look at year-on-year, our Film & materials -- Molding Materials, is that the [ larger ]? Or is it actually also coming from Polymers & Compounds? So we got the JPY 21.6 billion negative impact from volume factor. Could you perhaps give us a breakdown of that?

And 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.

[Yuko Nakahira, executive]

Thank you very much, Yamada-san. With regard to the volume factor and maybe earlier, we didn't describe this very well. But if you look at subsegment, this impact was largest from Films & 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 subsegments.

And what's behind this is polyester films and the display application demand is recovering. But in Europe and United States, the label liners, that demand is quite slow now. And as mentioned earlier, the resin parts for semiconductor processes and productions. And -- that business falls under Films & Molding Materials, and that's why this subsegment is mostly affected.

And then the next contributor would be Advanced Solutions. And as you are aware, this is basically about displays and semiconductors. And again, the semiconductor-related part is partly down even on a quarter-on-quarter basis, and that's why the situation is. Polymers & Compounds, given the scale and the overall size of the business, the impact is much smaller.

And then 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 & Compound sales. The largest is really semiconductor-related applications. So memory, logic-related things, there may not be a good or strong recovery.

So for Films & Molding Materials, the semiconductor-related part may not be so strong in Q2. But then in Europe and the United States, maybe it's not so recessionary there so that could mean other parts of the business could be stronger. And then it's really about the speed of recovery with regard to display-related material.

We are 1 month into Q2, and we are trying to deliver as much upside as possible. But then there's not much of a marked change in Q2 compared with Q1. So 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 a recovery in the second half.

[Mikiya Yamada, analyst]

So with regard to Films & 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 means it's related to Industrial Gases. And the Industrial Gases, Nikon-san have issued a quite conservative comment with regards to expected demand in Europe and the United States. So I'm concerned that there might not be much recovery there as well. What is your take on that?

[Yuko Nakahira, executive]

Right. Well, we do expect recovery in the second half or later, given the voices we hear from our users and customers. But for Q2, we're not that optimistic internally.

[Mikiya Yamada, analyst]

Now my second question. On Basic Materials and 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 would be off -- well, just present a date by which they will be off balance. What exactly can we get by the end of this calendar year?

[Yuko Nakahira, executive]

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, we'll be a buyer. And we hope that we will be in a stage where we can disclose all those details. And even when that happens, when the deal actually closes is another question, it will probably be sometime in early 2024.

[Mikiya Yamada, analyst]

So well, that's 1 year behind the original Forging the Future idea. So that joint venture scheme, once that's disclosed, how much would it take, I mean, before the deals close? You initially said there will be a year or so, but are you actually expecting a shorter duration of that or shorter period or term?

[Yuko Nakahira, executive]

No, we don't expect one full year between the disclosure and the closing of the deal. Obviously, there are some processes we need to go through. So we hope that in Q3, we can make that announcement. And maybe within half a year, we can close the deal. The current ideal time line we have is more tied to the plan that we announced in February 2023. So there's no slide in timing in that sense.

[Mikiya Yamada, analyst]

Third question is on Health Care. And the Gilenya royalty, that's minus JPY 700 million. Why is that? And the CANAGLU and other royalty coming down, is that SGLT2? And the deal, I don't know, it's cannibalizing each other? Or is it not the case? In the renal area, SGLT2 agonist -- antagonist, is that -- it's effective? So there is no cannibalization with a dual agonist? Could you explain that, please?

[Akihiro Tsujimura, executive]

Yamada-san, Tsujimura speaking. Thank you very much for your question. First question, regarding Gilenya royalty revenue of JPY 700 million minus, that is the question. And the earnings presentation based on available information, we estimate based on accounting, and the generic erosion is higher than our expectation. And compared to our estimate, royalty revenue was much lower. Therefore, the royalty revenues and that there is a gap from our expectation, and that amounts to JPY 700 million.

[Mikiya Yamada, analyst]

And the second question was on [indiscernible], it's down JPY 400 million. Is that from competitors' erosion? And also from Mounjaro?

[Akihiro Tsujimura, executive]

No, that's not what we think.

[Mikiya Yamada, analyst]

So you can maintain the level as last year, is that okay in Gilenya? Would it be lower? And you mentioned that at the beginning of the fiscal year in a qualitative manner, is the decline within that range?

[Akihiro Tsujimura, executive]

Yes.

[Mikiya Yamada, analyst]

Compared to your initial expectation, it is within your risk scenario?

[Akihiro Tsujimura, executive]

Yes, that's right.

[Operator]

Next, Nomura Securities, Okazaki-san.

[Shigeki Okazaki, analyst]

Okazaki from Nomura Securities. Do you hear me okay?

[Akihiro Tsujimura, executive]

Yes.

[Shigeki Okazaki, analyst]

I have 2 plus 1 questions. Basic Materials in Q1 and the Q2, cracker utilization that you expect? And also travel, you mentioned that. What's the impact in Q1? And what's your outlook for Q2? Regarding carbon business, according to what I heard, the divestiture to be announced by the end of December. So it may not impact the base business environment would continue in Q2? Is that what you're seeing? And also related to the last question, so exit of petrochemical may be announced in early part of 2024. Is that right? Can you confirm that, please?

[Yuko Nakahira, executive]

First, ethylene cracker utilization rate will have reported in various areas. Nationwide average is 80%, and 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. And 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. And the petrochemical exit, our announcement within this year. That's our plan. And what was the other question about carbon?

[Shigeki Okazaki, analyst]

Well, in the second quarter, business environment may not improve very much. Is that also your assessment?

[Yuko Nakahira, executive]

Well, this is inventory valuation and coking coal and the price is in declining demand and the level is so high. So Q2 would be feeling the impact. But beyond that, we don't think there is much impact.

[Shigeki Okazaki, analyst]

Second question about Health Care. So progress has been quite okay, you mentioned, and the factors and difference RADICAVA [ or STELARA ] those sales revenue are quite good. Is that right? And for cost side compared to 3 months ago, is there an improvement? Can you give feedback on that point?

[Akihiro Tsujimura, executive]

Okazaki-san, thank you very much. This is Tsujimura speaking. The first question, you are right in your assessment and feedback.

[Shigeki Okazaki, analyst]

So in Q2 and onwards, you think he will continue to have good business?

[Akihiro Tsujimura, executive]

Yes. We think the good situation would continue. But for STELARA, additional indication and then 3 year past to 4 years' fee and [indiscernible] For each, we are close to #1 position. So there has been good growth. And we hope that this trend will continue. And for Mounjaro, the start is as we expected. So we think this good situation will continue.

And about RADICAVA, 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 expect 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.

[Shigeki Okazaki, analyst]

How about the cost aspect, you had good progress?

[Akihiro Tsujimura, executive]

For the cost activities, it is in line with our initial expectations.

[Shigeki Okazaki, analyst]

Lastly, regarding development product for Mounjaro's use. It's not only for diabetic patients, it could be used for those who want to go on diet, but there are some precaution announced for diet purpose application usage. We should not expect that very much from that kind of uses?

[Akihiro Tsujimura, executive]

Regarding Mounjaro, well, I said this is in line with our expectation, but off-label use is not particularly increased. That our assessment in Japan off-label use in Mounjaro usage situation, we continue to monitor carefully. And as of now, there is no particular significant increase of off-label use.

And for 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. And for off-label use, there is no particular increase of consumption. And if that would happen in future, we would take appropriate actions going forward.

[Operator]

We are running out of time. So the next one would be the last person to ask a question, Omura-san from UBS Securities.

[Shunta Omura, analyst]

Omura from UBS. I have one question with regard to cost reduction. This time, you mentioned JPY 236 (sic) [ 23.6 ] billion of reduction. If you look at SG&A, it's only down by JPY 400 million. So could you perhaps give us a breakdown of what cost is going up and what cost is not going -- going down or why the result is like this?

[Yuko Nakahira, executive]

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. Any more news and stopping the development and [ castle ] being closed, those are all part of that. And in addition, we have streamlined the locations. We've also streamlined the number of operating companies as well.

And then another category would be reducing procurement costs. So we are moving to more of a 1 team, 1 company. So 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.

And 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. And then as Jean-Marc mentioned, we are continuing with simplification, standardization, unification to further drive costs down.

[Shunta Omura, analyst]

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%. So 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 at it, and I was concerned about that.

[Yuko Nakahira, executive]

Thank you for that. I think the best way to explain this is to use this core operating income breakdown slide, that's Slide 6. So on the variable cost side, that's part of the price factor here. And cost reduction is here. And then there's this other part. This is mostly inventory valuation difference.

And some fixed cost-related increases due to inflation is also a part of the Others part. And last year, there was a large contribution from this [ bin ]. But now that increased fixed cost part is not so large. So it's really all about inventory valuation difference. So cost reduction is there, and that's directly translated to our profit figures.

[Operator]

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.

[Yuko Nakahira, executive]

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. The profit improvement may not be what you're seeing. 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.

And 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. And thank you very much for continued support and participation for today.

[Operator]

Thank you very much. Today's conference will be distributed in our archives. With this, we close the meeting. Thank you very much.