Mitsubishi Chemical Group Corp

F:M3C0

Earnings Call Transcript 2018-Q3

[Hidefumi Date, executive]

Good evening. My name is Hidefumi Date, Executive Officer, General Manager of Corporate Management Office of Mitsubishi Chemical Holdings. I thank you for your continued support and understanding.

Let me start my presentation on the financial results. Page 4, consolidated statements of operations. Exchange rate was JPY 111.8 to the dollar, which represents a yen depreciation of about JPY 4.5 compared to the same period of the previous year. Naphtha prices soared in the third quarter, bringing the average to JPY 39,900 per kiloliter, which was JPY 7,600 higher than a year ago.

Sales revenue for the 9-month period totaled JPY 2,762.2 billion, up by about JPY 311.6 billion year-on-year, of which the impact of the yen depreciation totaled about JPY 46 billion. In addition, surging market prices and higher naphtha price pushed up selling prices, which had an impact of about JPY 170 billion. Larger sales volumes had an impact of about JPY 100 billion coming from about JPY 40 billion in functional products, about JPY 25 billion in Chemicals and about JPY 25 billion in Industrial Gases and about JPY 10 billion in Health Care, roughly speaking.

Core operating income was JPY 305 billion, up JPY 74.9 billion. I will explain the details later. Net of special items was negative JPY 10.8 billion, which was about JPY 8.9 billion less than in the previous year. I will explain this in more detail later.

Operating income was JPY 294.2 billion, up JPY 83.8 billion year-on-year. Net of financial income and expenses was negative JPY 6.5 billion, about JPY 1.3 billion more than in the previous year. This was due to deterioration in the foreign exchange gain and loss shown 2 lines below.

Earnings before taxes totaled JPY 287.7 billion, up JPY 82.5 billion. Income taxes were JPY 63.9 billion for 9 months and JPY 15 billion for the third quarter, much lower year-on-year, as the tax reform bill to lower corporate tax rates in the U.S. was signed into law on December 22, which resulted in a reversal of deferred tax liabilities. The gain amounted to around JPY 12.5 billion. However, tax payments increased by JPY 35.9 billion year-on-year because during the first half of fiscal 2016, there was a decrease in tax expenses associated with recognition of deferred tax assets relating to the terephthalic acid business transfer, which brought about a gain of JPY 33.9 billion.

Net income from continuing operations totaled JPY 223.8 billion. Net income attributable to owners of the parent totaled JPY 169 billion, an increase of nearly 30% year-on-year. This amount for the 9-month period already exceeds the full year net income of JPY 164.1 billion recorded in fiscal 2007 (sic) [ 2017 ] on the Japan GAAP basis.

Page 5, sales revenue and core operating income by business segment and subsegment. As you can see, higher sales revenues were recorded in all subsegments, but profit decreased in functional products and Health Care year-on-year. I will explain this in more detail later.

Page 6, analysis of changes in core operating income totaling JPY 74.9 billion year-on-year. JPY 43.3 billion coming from variance in selling prices and price spreads. As for sales volume variance, over JPY 10 billion in Performance Products and JPY 12.1 billion in Chemicals as a result of reduced impact of maintenance turnaround or scheduled plant maintenance and repairs in petrochemicals and an increase in volumes for MMA and others.

Industrial Gases felt the effect of mergers and acquisitions and strong sales in electronics-related products.

Health Care benefited from sales volume increase of Radicava, which was launched this fiscal year, as well as sales volume growth in domestic priority products.

All in all, increase in sales volumes pushed up profit by about JPY 33.4 billion. As for cost reductions, at the beginning of the fiscal year, we set a target of over JPY 20 billion. By the end of the third quarter, the amount was JPY 11 billion, indicating we are slightly lagging behind.

In others, Chemicals recorded positive JPY 9.4 billion, including a difference in receipts and payments totaling JPY 7.4 billion; while in Health Care, an increase in SG&A expenses and R&D expenses and others had a total negative impact of JPY 17.5 billion. The net result was negative JPY 12.8 billion.

Moving on to the details of the Performance Products segment. Functional products posted sales revenue of JPY 584.3 billion, up JPY 31 billion year-on-year, thanks to increase in sales volumes of advanced moldings and composites, including high-performance engineering plastics business at Quadrant as well as alumina fibers and growth in sales of films for displays centering on OPL films and polyester films.

Core operating income totaled JPY 48.3 billion, down JPY 1.2 billion. Factors for increase in sales volumes and sales were felt but material prices for high-performance films and films for displays increased due to higher naphtha price and others, which resulted in overall decline in profit year-on-year.

Performance Chemicals posted sales revenue of JPY 268 billion, up JPY 29.7 billion. Core operating income was JPY 27.6 billion, up JPY 3.8 billion. Market prices of phenol-polycarbonate chain continued to be very strong. Last year, there was a maintenance turnaround at Kashima, which resulted in a volume decrease. In the absence of maintenance turnaround at Kashima this year, sales volume increased year-on-year. Sales volume of battery materials for automobiles increased, pushing up sales.

Core operating income benefited from strong sales of phenol-polycarbonate chains, together with an increase in volumes. Performance polymers for automobiles saw an increase in sales volume. Materials for batteries for automobiles also recorded increase in volume. As was explained at the second quarter briefing, epoxy resins for electronic materials posted an increase in volume. These factors contributed to higher profit.

You can see analysis of core operating income on cumulative 9-months basis. Negative JPY 8.6 billion from selling price variance impact in the third quarter amounted to negative JPY 6.1 billion. The difference from the second quarter might have caught your attention so let me explain.

Of that JPY 6.1 billion in the third quarter, about half came from SBUs not described here, for which due to changes in product mix, average selling price declined slightly. There also were impacts of sales volumes and some onetime factors. The remainder, JPY 3.1 billion, were in relation to businesses and products described here, which were affected by higher naphtha prices and others.

In terms of passing that on to the selling price of our products, as for packaging films, we have already announced price hikes. We will continue to work on transferring the higher material costs to our selling prices.

Earlier, I mentioned OPL films. This relates to the full year forecast to be explained later, the new seventh production line constructed at Ogaki Plant with the capacity of 18 million square meters, which accounts for about 20% of the previous capacity, has been qualified, and we expect revenue contribution starting in the fourth quarter.

Next, Chemicals segment. MMA posted sales revenue of JPY 281.6 billion, up JPY 73.3 billion. Core operating income was JPY 81.4 billion, up JPY 54.5 billion. As you are aware, market price of MMA in the third quarter exceeded $2,400 on average. Although acetone and methanol and other market prices are rising somewhat, the price spread is widening. More recently, MMA price in January was $2,440; and in the first week of February, it was $2,470. As I will explain in relation to the full year forecast later, as for the fourth quarter, we are assuming the price of $2,360.

I said at the second quarter briefing that, both in North America and Europe, inventories were running short. In the U.S., force majeure declared in January of last year was lifted on November 20, but inventories are not yet enough and sales controls are continuing. In Europe, at the end of the second quarter on September 22, force majeure was redeclared, which was lifted on October 31. Still, inventory buildup is not yet enough and sales controls remain in place.

Petrochemicals posted sales revenue of JPY 400 billion, up JPY 43.3 billion year-on-year. Core operating income was JPY 23 billion, up JPY 14.6 billion year-on-year. In addition to firm market prices, smaller impact of ethylene center maintenance turnaround compared to the previous year was a positive factor. To be more precise, in the previous year, there were disruptions in the post-maintenance start-up work and some disruptions at Mizushima facilities, and accordingly, sales volume was higher this year. Core operating income also benefited from firm market prices and reduced impact of maintenance turnaround-related disruptions.

At the second quarter briefing, I said that the shutdown of -- or the suspension of polypropylene production at Kashima was expected to have an adverse impact of around JPY 5 billion on a full year basis. For the third quarter, we felt the impact of about JPY 1 billion out of that total. Since January, we have been arranging for sourcing from overseas to secure supplies to our customers, which should hurt the profit by about JPY 4 billion for a full year total of JPY 5 billion. So the full year estimate remains unchanged.

With regard to carbon products, sales revenue was JPY 187.8 billion, up JPY 59.2 billion year-on-year. And the core operating income was JPY 8.4 billion, up JPY 6.4 billion. With the continued steady demand, the spread of coke expanded, and with the price of needle coke surging from $1,600 to almost reach the level of $2,000, its spread also increased. This resulted in the increase in the revenue.

Now the first bullet point under the major initiatives refers to the MMA plant in Saudi Arabia. It says trial operations are underway currently. We started up and operated the plant several times and stocked up the inventory while encountering some issues in equipment, which we replaced. Though it is officially called trial operations, what it is going through actually is basically operations to produce commercial products. Commercial operation, scheduled in March, is defined as the operation that allows the plant to take repetitive orders from customers. Ahead of such commercial operation, it is now under trial operations accumulating inventories for commercial shipment.

Moving on to Page 9. Industrial Gases segment posted sales revenue of JPY 465.9 billion, up JPY 54.9 billion; and a core operating income of JPY 43.9 billion, up JPY 5 billion year-on-year. Last fiscal year, Taiyo Nippon Sanso, one of our subsidiaries, acquired assets divested from Air Liquide as well as an Australian-based company, Supagas, which pushed up the sales revenue by slightly more than JPY 20 billion and core operating income by about JPY 3 billion. Furthermore, revenue growth was also driven by the continued firmness in domestic and overseas sales of electronics material gases and strong domestic sales of separate gases.

Now let's take a look at Health Care segment on Page 10. Sales revenue grew by JPY 13.9 billion to JPY 428.8 billion. As you can see in the table on the right, sales of domestic ethical pharmaceuticals increased, while in the U.S., Radicava, a treatment drug for ALS, launched in August last year, achieved JPY 6.4 billion in sales by the end of December.

Core operating income was JPY 72.2 billion, down JPY 9.8 billion year-on-year. As indicated in the analysis of core operating income, there was a negative impact of JPY 17.6 billion in others, of which JPY 6.5 billion was accounted for by the increase in SG&A expenses, the majority of which was represented by the increased expenses of launch preparations and other sales activities of Radicava.

In addition, R&D expenses went up by JPY 11 billion from the previous year. Those together have resulted in the increase of expenses by JPY 17.6 billion.

Now daily newspaper, Nikkei, today carried an article on our decreased royalties. The absolute amount of decline in royalties compared to the previous fiscal year was about JPY 1 billion.

Now on consolidated special items on Page 11. In the third quarter, the impairment loss of JPY 5 billion was recognized. Included in this amount are an impairment loss posted by Mitsubishi Tanabe Pharma on intangible assets and an impairment loss recognized on fixed assets upon restructuring of one of the MMA businesses in the U.S.

If you go down the items by 4 lines, you can find provision for loss on litigation. This provision was posted in anticipation of a possible increase in expenses as the deadline for fighting lawsuits by hepatitis C patients was extended by 5 years.

Next, on Page 12, consolidated cash flows. I will explain using the adjusted cash flows in the middle of the slide, which is calculated by excluding cash flows from the investment of surplus funds. Of the net cash provided by operating activities of JPY 287.2 billion, operating receivables and payables increased by JPY 49.1 billion, partly due to the fact that the end of December fell upon the weekend.

As for the inventories, there was an increase in the inventories of MMA, as they have been depleted at the end of March 2017.

Net cash used in investment activities was JPY 290.4 billion. Under this item, investment and loans receivable of JPY 151.1 billion includes JPY 119.7 billion spent for Mitsubishi Tanabe Pharma to make NeuroDerm, one of its wholly owned subsidiaries in October 2017.

Next on consolidated statements of financial positions on Page 13. Total assets stood at JPY 4,692,400,000,000, up JPY 228.9 billion, of which JPY 67 billion was accounted for by the impact of the end of the term falling upon the weekend. Another JPY 60 billion was due to the increase in the operating receivables and the inventories, as explained on the page of cash flow statement, after excluding the impact by the foreign exchange and JPY 36 billion due to the yen's depreciation. Furthermore, with a rise in the Nikkei average in the stock market, increases in the strategic holding of shares and the pension assets also pushed up the total assets by JPY 43 billion.

Now on the right bottom corner, net interest-bearing debt totaled JPY 1,228,400,000,000, which was an increase of JPY 72.5 billion from the end of March 2017 as Mitsubishi Tanabe Pharma spent some of its cash on hand to acquire NeuroDerm. Interest-bearing debts per se decreased, as shown on the left top, but net interest-bearing debts as of the end of December, reflected the decline in cash and cash equivalents. On the other hand, a strong performance in revenues helped net D/E ratio improve by 0.1 from the end of March 2017 to 0.96. Moreover, equity ratio also improved by 2.7 percentage points to 27.2%.

Now let me explain about the financial results forecast for the full fiscal year of 2017.

Please turn to Page 15. Sales revenue is expected to post JPY 3,740,000,000,000, and the core operating income, JPY 383 billion. As for special items, there are some which were not anticipated as of October 26, and therefore, we expect to see a slight increase to total JPY 22 billion. The bottom line or net income attributable to owners of the parent is now expected to reach JPY 200 billion, up JPY 20 billion from the revised forecast announced on October 26.

It will be faster to explain the core operating income by business segment, so please turn to Page 16. Functional products is expected to see a drop in the core operating income in the fourth quarter, as films for displays will probably be affected by the Chinese New Year, which will start next week. And the films for food packaging will be in low-demand season as the period of the year-end gift-giving custom ended in December.

While those are the factors to reduce profits, aqua and separator solutions is expected to see an increase in profits due to the concentration of the completion of the installation work at the end of the fiscal year. And as I said, the seventh line in the OPL film plant will start its contribution. These positive and negative factors are expected to cancel each other out to result in the fourth quarter performance almost comparable to the third and a bit behind the forecast announced on October 26.

Performance chemicals are expected to see a JPY 2 billion decline in the core operating income as we anticipate an increase in repair and other fixed costs concentrated in the fourth quarter.

As for MMA, the average market price was $2,423 in the third quarter and is assumed to be $2,360 in the fourth. The price of acetone was $820 in the third quarter and $840 in January. The price of methanol was $370 in the third quarter and $420 in January. Those increases in the costs have been incorporated in the forecast. Given those impacts from the price increases in feedstocks and the decline in market prices, MMA core operating income is expected to be JPY 26.6 billion.

With regard to petrochemicals, the core operating income is expected to drop by JPY 8 billion from JPY 8.5 billion to JPY 500 million. As I said, the suspension of the production of polypropylene in Kashima had a negative impact of JPY 1 billion in the third quarter and JPY 4 billion in the fourth, which will bring down the core operating income by JPY 3 billion. Furthermore, as I said at the first half earnings report, the treatment of PCB, or polychlorinated biphenyl, will be accelerated, with JPY 2.5 billion expected to be incurred in the fourth quarter. In addition, the price of ethylene glycol, which was $905 in the third quarter, is assumed to be $836 in the fourth quarter.

This price drop is incorporated because polymerization companies will enter the scheduled maintenance during the Chinese New Year, which is likely to result in the supply-and-demand balance of both terephthalic acid and ethylene glycol. A slight concentration of fixed costs is also assumed in the fourth quarter.

Carbon products, on the other hand, are expected to see a rise in the core operating income. The price of needle coke has been rapidly rising, which is just about the single reason for the increased profit.

In the Industrial Gases, the number of operating days will be reduced slightly in the fourth quarter. Some will be affected by the Chinese New Year in terms of the volume. There will be some concentration of expenses posted as well. As a result, we expect to see a JPY 2 billion decline in the core operating income.

As for Health Care, the fourth quarter core operating income is expected to be JPY 11.8 billion, mostly due to seasonal factors.

Last but not the least, let me talk about capacity utilization ratio. As for domestic petrochemicals, olefin, monomer and polyolefin excluding polypropylene in Kashima will all see an operation at a full capacity. Production of polypropylene in Kashima started its operation in late January and is expected to gradually be restored to the normal operation. MMA has been at full capacity operation and will remain so in the fourth quarter. The same goes for phenol and polycarbonate chain. Production of carbon fiber was run at slightly less than 80% of the capacity in the first half but has improved to 85% in the second half and is expected to remain at that level in the fourth quarter. The seventh line of OPL film has become operational in the second half of December and started shipment in January.

That is all. Thank you for your attention.