Mitsubishi Chemical Group Corp

F:M3C0

Earnings Call Transcript 2021-Q3

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Good afternoon, Kasubuchi of corporate management office. Let me start my presentation.

Please turn to Page 4. There, you can see the quarterly changes of core operating income and loss, starting from Q3 of FY 2018. For this fiscal year ending March 2021, core operating income for Q1 was JPY 15 billion, and for second quarter or Q2, JPY 39.4 billion, both remaining at a constrained level due to the impact of COVID-19. But beginning in early fall, we saw recovery in the automobile product and others to the previous year's level or even higher. Due to these factors and others, overall demand exceeded expectations beginning in October. For Q3, core operating income totaled JPY 59 billion, far larger than a year earlier, which was JPY 50.2 billion. From here, I will be reporting on operating results, mainly focusing on the 9 months total. But for the core operating income, I would like to explain the results for the 3 months of Q3 as well.

Page 5, consolidated statements of operations. Assumptions were exchange rate of JPY 105.5 to the U.S. dollar, a 3% appreciation of the yen year-on-year. And napththa price of JPY 28,800 per kiloliter, 32% lower than a year ago. Sales revenue was JPY 2,255.4 billion, down JPY 375.4 billion. Factors include volume difference amounting to negative JPY 220 billion or so, due to significant impact of COVID-19 felt in all segments except for Health Care, mainly during the first half, as well as selling price difference reflecting deterioration in market prices in Chemicals that continued through Q2, amounting to negative JPY 140 billion or so. Remaining JPY 20 billion was in relation to the exchange rates. Core operating income for 9 months was JPY 113.6 billion, down JPY 67.4 billion. For the 3 months, up JPY 8.8 billion year-on-year. More on this later.

Special items totaled net expense of JPY 112.9 billion. As we explained at the Q2 earnings briefing in MMA, we've decided to close the Beaumont plant in the U.S. And during Q3, related expenses totaling JPY 23.6 billion was recorded. Consequently, operating income for 9 months was JPY 700 million.

As for financial income and expenses, reflecting lower interest rates and improvement in foreign exchange gain and loss, expenses were reduced by about JPY 2.4 billion at net expense of JPY 13.5 billion. Loss before taxes was JPY 12.8 billion.

Income tax expense totaled JPY 15.6 billion. This was partly because, as was the case in previous quarters, development companies and others running continuous losses cannot post deferred tax assets, making it impossible for us to recognize tax effects.

Net loss from continuing operations was JPY 28.4 billion. And the bottom line, net loss attributable to owners of the parent was JPY 47.8 billion, which represented a year-on-year deterioration of JPY 124.1 billion.

Page 6, sales revenue and core operating income or loss by business segment. I would like to focus on changes in core operating income from Q2 to Q3. In functional products, core operating income grew from JPY 8.7 billion in Q2 to JPY 10.1 billion in Q3, up JPY 1.4 billion. In October we acquired a U.S. company, Gelest, Inc. There were expenses in relation to that acquisition, and also in the process of purchase price allocation there were some portions that had to be allocated to inventory, which served to push up cost of sales. This temporary increase in expenses totaled around JPY 2 billion. At the same time, such products as high-performance engineering plastics and alumina fibers posted higher sales, reflecting recovery in demand for automobile applications.

Sales of optical films were also strong. These positives more than made up for a temporary increase in expenses related to M&A, bringing about higher profit.

In Performance Chemicals, phenol-polycarbonate chain materials, engineering polymers benefited from improvement in price spread. In addition, performance polymers and coating materials in Performance Chemicals and battery materials saw expanded sales, benefiting from the recovery in the automobile-related demand. Core operating income increased by JPY 5.4 billion at JPY 8.3 billion. In MMA, there were scheduled maintenance and repairs in the U.S. and Europe. But as the market price in Asia recovered from $1,371 in Q2 to $1,589 in Q3, profit grew by JPY 1.8 billion to JPY 4.8 billion.

In petrochemicals, Q3 profit was JPY 2.6 billion, up approximately JPY 1.5 billion quarter-on-quarter. Main reason was a general rise in market prices of polyolefins and basic chemical derivatives due to production disruptions in South Korea and Japan.

For Carbon Products, which in Q2 posted a loss of JPY 2.6 billion, there was an improvement in the price spread of exported cokes. And also in Japan, with the recovery in the steel industry, sales began to recover. As a result, a profit of JPY 1.3 billion was recorded in Q3, an improvement of JPY 3.9 billion.

In industrial gases, with economic activities resuming, profit improved by around JPY 1.2 billion over Q2 at JPY 23.3 billion.

Health Care posted a profit of JPY 9 billion, up JPY 4.5 billion quarter-on-quarter, owing to such factors as an increase in domestic sales of pharmaceuticals. Others remained almost unchanged with a loss of JPY 400 million.

Page 7, various analysis of core operating income, which was down JPY 67.4 billion year-on-year. Price difference amounted to negative JPY 23.3 billion, main factors being minus JPY 18 billion in M&A and Carbon Products and Chemicals and JPY 10 billion in Health Care due to NHI drug price revisions and others. Volume difference amounted to negative JPY 54.8 billion with negatives recorded in all segments. Positives on fixed cost totaled JPY 13.4 billion, with Q3 alone contributing JPY 4.4 billion. Others, negative JPY 2.7 billion, including impacts from inventory valuation gain and loss amounting to minus JPY 10.1 billion and equity income amounting to minus JPY 5.4 billion. Excluding these factors, the Others would have been positive JPY 12.8 billion, mainly owing to underspending of expenses and fixed costs.

These are the 9 months total.

In the bar chart and below that, you can see the amount for 3 months, up JPY 8.8 billion from JPY 50.2 billion to JPY 59 billion. Owing to improvement in market prices for Chemicals, price difference was positive JPY 5 billion, while volume difference was negative. But with larger fixed cost reductions, profit increased year-on-year.

Page 8, overview of Performance Products segment. Functional products posted a decline in sales and profit for 9 months. Demand picked up for Q3, driven primarily by recovery in automotive-related demand. But for 9 months, with a decline in sales of high-performance engineering plastics and moldings, both sales and profit decreased. In Performance Chemicals, sales and profit both decreased in 9 months with a decrease in sales of performance polymers for automotive applications, and the effect of scheduled maintenance at Ibaraki plant for phenol-polycarbonate chain materials during the first half.

But as you can see on the lower left, for the 3 months, core operating income increased from JPY 13.4 billion to JPY 18.4 billion, up JPY 5 billion. This was owing to recovery in demand in recent months. Volume difference was positive year-on-year, and price difference was positive JPY 2.4 billion, with an increase in market price for phenol-polycarbonate chain materials, underscoring a shift in trend from the first half.

Next, Page 9, Chemicals segment. MMA came in with a core operating income of JPY 6.6 billion, posting a significant year-on-year drop in both sales and profit. However, Asia ICIS price was $1,340 in the first quarter, $1,371 in the second and $1,589 in the third, showing a steady recovery. And the single quarter of Q3 posted a year-on-year increase. As for petrochemicals, on a cumulative basis, a big impact by a scheduled maintenance and repair in the first quarter and lower raw materials prices was -- resulted in a drop in both sales and profit. But in the third quarter alone, partially due to higher prices for olefin, a year-on-year growth was posted.

Carbon Products year-to-date through the third quarter posted a year-on-year drop in sales and profit due to lower prices as a result of reduced raw materials costs and drop in sales volume from decline in demand for cokes and for needle cokes for graphite electrodes. However, in the 3 months of third quarter, partly due to the improvement in the spread of cokes [ ex post ], the result was almost flat from the previous year.

As you can see at the bottom of the bar chart on the lower left, on a 3 months basis in the third quarter, the core operating income went up from JPY 2.5 billion to JPY 8.7 billion, an increase of JPY 6.2 billion mainly because of the price improvement.

Next, Page 10, where you see the Industrial Gas segment. The core operating income was JPY 13.5 billion in the first quarter and JPY 22.1 billion in the second and JPY 23.3 billion in the third, showing an improvement quarter-by-quarter. The deterioration in the first quarter was so large that on a cumulative basis, it dropped by JPY 7.6 billion year-on-year. But in the third quarter alone, an improvement of JPY 1.1 billion was posted.

Page 11, the Health Care segment. Total cumulative core operating income through the third quarter was JPY 22.4 billion. Although sales of domestic pharmaceuticals went down amid NHI drug price revisions, core operating income was basically unchanged year-on-year because COVID-19 pandemic suppressed SG&A and R&D expenditures. In terms of third quarter alone, NHI drug price revisions, among others, pushed down the core operating income by JPY 2.7 billion from the year before.

Moving on to Page 12, consolidated special items. Among the items recorded in the third quarter, totaling JPY 30.2 billion in expenses, a major one is, as I said at the outset, the item related to the closure of the Beaumont site for MMA in the U.S. As stated in the footnote, the expenses are divided into several different items, such as impairment loss, special retirement expenses and provision for loss, which totaled JPY 23.6 billion. The expense of JPY 4.3 billion associated with career change support program of Mitsubishi Chemical are included in the special retirement expenses.

Page 13 shows consolidated cash flows. I will explain by referring to the right column, Adjusted Cash Flows. The net cash provided by operating activities was JPY 70.1 billion in the first quarter, JPY 93.2 billion in second and JPY 108.9 billion in the third, showing a steady increase, which totaled JPY 272.2 billion. The cash flow from investment activities, including the acquisition of Gelest in the third quarter, resulted in a net cash outflow of JPY 218.8 billion. As a result, total free cash flow was JPY 53.4 billion in net cash inflow.

Cash flow from financing activities. As we explained after the previous quarter, JPY 95.4 billion was posted as an additional expense for making Mitsubishi Tanabe Pharma a wholly-owned subsidiary in April. And in hope to stabilize funding status under the COVID-19 pandemic, we added about JPY 100 billion to cash on hand. As a result, anticipation debt increased and cash and cash equivalents had a balance of JPY 321.1 billion.

Page 14, consolidated statements of financial positions. Total assets as of the end of the third quarter stood at JPY 5,121.7 billion, down JPY 10.4 billion year-on-year, which can be regarded as almost flat from the year before. In the second quarter, JPY 84.5 billion of impairment loss was charged on the intangible assets of NeuroDerm. However, in the third quarter, the acquisition of Gelest and the appreciation of euro against the yen helped increase the assets by JPY 37 billion, which partially canceled out the impairment loss.

On the right bottom, the net interest-bearing debt totaled JPY 2,196.5 billion, with a net D/E ratio 1.94x, and the ratio of equity attributable to owners of the parent, 22.1%, which is almost unchanged from that at the end of September.

Last but not least, I will explain about the revision to the consolidated financial result forecast for fiscal 2020 from Page 15.

First, on consolidated statements of operations on Page 16. The fourth quarter assumptions include the ForEx rate of JPY 104 to the dollar and the price of naphtha of JPY 37,500 per kiloliter. Sales revenue is forecast to be JPY 3,193 billion and the core operating income, JPY 153 billion for the full year, an improvement of JPY 13 billion from the forecast announced in November. The breakdown will be elaborated on the next page. The special items are expected to be net expenses of JPY 130 billion, down JPY 6 billion from the previous forecast. The main reason for that is a decrease in expenses related to career change support program at Mitsubishi Chemical, forecasted a total JPY 10 billion in the forecast in November. Consequently, the operating income for the full year is expected to be JPY 23 billion, representing an improvement of JPY 19 billion from the forecast in November. Net income attributable to owners is forecasted to be a loss of JPY 48 billion, an improvement of JPY 11 billion from the forecast announced in November.

On Page 17, I will explain about the fourth quarter and second half forecast for the core operating income. Functional products will be affected by a seasonality factor, where it will enter a lower demand season from third to fourth quarter for optical and packaging films, due to the Chinese New Year. Thus, the core operating income is expected to go down by JPY 3.6 billion to JPY 16.6 billion for the second half, which is a deterioration of JPY 3 billion from the forecast in November. This is mainly due to onetime M&A expenses.

Performance Chemicals is expected to post core operating income of JPY 7.6 billion in the fourth quarter, almost unchanged from the third quarter, and JPY 15.9 billion in the second half, an improvement of JPY 6 billion from the forecast in November. This is mainly due to the improvement of the price of engineering polymers.

MMA Asia ICIS price in the fourth quarter is assumed to be around $1,600. Market prices will not have changed that much from the third quarter. But the scheduled maintenance and repair will be reduced in the U.S. and Europe, which will help improve the core operating income by JPY 1.6 billion to reach JPY 11.2 billion in the second half. This will be an improvement of JPY 8 billion from the forecast in November, mainly due to the recovery in the market prices.

In petrochemicals, an increase in the price of naphtha is expected to lead to an inventory valuation gain, and therefore, a slight increase from third quarter to JPY 3.4 billion in the fourth quarter and JPY 6 billion in the second half. This will represent an increased profit from the previous forecast, mainly due to an improved market price.

In Carbon Products, export cokes is expected to remain strong, while needle cokes is getting out of the worst period, which allows us to assume a slight improvement in the fourth quarter. In the second half, JPY 3.4 billion is estimated. Mainly due to an improvement in spread of export cokes, there will be an improvement of JPY 2.5 billion from the previous forecast.

Industrial Gas is expected to remain almost unchanged from the last forecast, at JPY 81 billion for the full year. Health Care is assumed to be JPY 13 billion in the core operating income, unchanged from the last forecast.

In the fourth quarter, due to the concentration of R&D expenses, the core operating income is expected to go down from the third quarter. In Others, the core operating income is expected to be JPY 0.7 billion in the fourth quarter and minus JPY 1 billion for the full year. Thus, the total core operating income is expected to be JPY 98.4 billion in the second half and JPY 153 billion for the full year, representing an upside of JPY 13 billion from the forecast in November.

That's all from me. Thank you for your attention.

[Operator]

[Interpreted] First questioner is Mr. Watabe from Morgan Stanley MUFG Securities.

[Takato Watabe, analyst]

[Interpreted] This is Watabe speaking. I have 2 questions on Mitsubishi Chemicals, and one on Health Care. First is on MMA. I think the market price is recovering more than expected. What is the current level of your facility utilization? Can you also share your view on supply and demand in the industry overall from a bit longer perspective?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Thank you for your question. First, on facility utilization rate. In Q3, from October to December, the average for MMA monomer was 67%, somewhat lower due to -- due partly to scheduled maintenance and repairs in Europe and the U.S. In January, it was around 84%. For Q4, we are assuming the average of 80%.

Regarding supply and demand, for Asia, demand is firm overall. Consumer electronics-related applications, such as transparent resins and coating materials and automotive applications, are recovering. On the other hand, supply had been a bit tight due to some disruptions and scheduled maintenance and a delay in the ramp-up of new plants, which resulted in higher market prices. But with the Chinese New Year holiday going forward, supply and demand balance might loosen a bit. And the market prices in China declined towards the end of December, most probably due to the restrained buying ahead of the Chinese New Year. So we are forecasting a slight decline in ICIS price in Asia, down from around $1,700 to $1,600 or so. Having said that, demand itself is firm and strong.

So for after Chinese New Year, as we move towards spring, we are told that demand for coating material applications and consumer electronics demand are picking up once again. So we expect some recovery.

For Europe and the U.S., overall demand is strong and special demand in relation to COVID-19 for droplet barriers is continuing. And with the lessening impact of scheduled maintenance, the volume is expected to increase. That's the situation for Europe and the U.S. I hope that answers your question.

[Takato Watabe, analyst]

[Interpreted] I see, thank you. My second question is on functional products. In Q4, with Chinese New Year, you are expecting a decline. Can you give us a feel product by product? And what about the profit contribution from Gelest, Inc.? Maybe not much during this fiscal year, but what is your expectation over a medium term?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Functional products for Q4. As for optical film related offerings, polyester films and OPL films, they are doing very well currently, including Clearfit. But these are going to enter the non-high demand season in Q4, as was explained earlier. And in such areas as the food packaging films, every year, January to March, tend to be a low-demand season, and therefore, a slight decline is expected. However, the demand itself is strong with a vibrant demand in relation to dining at home. As for restaurant business, commercial use wrappers and others for the food industry are seeing signs of recovery. So they are doing well.

Regarding semiconductors, there is a special demand for data center application and others that we are enjoying this fiscal year. The market itself is growing, and we believe this will continue into Q4. And elsewhere in functional products, automobile related, the alumina fibers and others are doing well with the recovery in automobile demand. They had a strong third quarter. We expect this strength to continue in Q4. We expect the plants to operate at almost full capacity.

And regarding high-performance engineering plastics, again, automotive applications are the big area. The plastic composites and injection molding applications were strong in Q3, and we expect this recovery trend to continue in Q4.

And regarding Gelest, Inc., I'm afraid we cannot disclose the profit contribution of individual companies.

[Takato Watabe, analyst]

[Interpreted] So I have one question on Health Care. The coronavirus vaccine clinical studies carried out in Canada. In the slide, you indicate that Phase III is to start. Should studies succeed, what would be the delivery time frame? I understand that there is a contract with the Canadian government to supply 76 million doses of vaccines. What's the schedule for shipments? There are other pharmaceutical companies that have contracts with the government as well. So what is your shipment projection?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] I would like to refer that question to Mr. Kobayashi from MTPC. Can you hear me?

[Yoshihiro Kobayashi, executive]

[Interpreted] Yes. I suppose you are referring to Slide 31. Phase II study is currently underway. And Phase III is to start from the early part of this calendar year. Based on the results, we will start supplying to the Canadian government. So the work is underway with a view to honoring the schedule for 2021.

[Takato Watabe, analyst]

[Interpreted] Would the entire 76 million doses be shipped and sold this year, is that your projection?

[Yoshihiro Kobayashi, executive]

[Interpreted] Well, as mentioned in the press release, that will be the maximum amount. And I cannot comment on the details, including if all of that is for this year.

[Takato Watabe, analyst]

[Interpreted] Still, are you confident that you will be supplying close to that maximum amount, even considering supplies from other pharmaceutical companies?

[Yoshihiro Kobayashi, executive]

[Interpreted] Well, as long as the development efforts go smoothly as planned, that's what we are hoping for. In terms of production capacity, we believe 80 million doses can be produced by around the end of 2021. And we would like to proceed accordingly.

[Operator]

[Interpreted] The next questioner is Mr. Yamada from Mizuho Securities.

[Mikiya Yamada, analyst]

[Interpreted] This is Yamada from Mizuho Securities. I also have 2 questions, plus 1 on Health Care. First, on Chemicals, the petrochemicals. Can you comment on capacity utilization rates of the ethylene center and other major products for Q3 and your projection for Q4 as well? Also, regarding Q4 profit projection. Personally, I don't see reasons for a decline. So can you elaborate on the reasons why you are not expecting much growth in profit for Q4, given net gain on the inventory valuation, for example?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] First, facility utilization rates by products, major product areas, ethylene third quarter full capacity and full capacity currently. And as for Q4, we expect full capacity. E.g., ethylene glycol, in line with the market conditions in Q3, we carried out some production adjustments, same currently. And for Q4, again in line with the market conditions, we may adjust production. As for polypropylene, utilization rate was high in Q3 and remains high currently. And for Q4, we expect high utilization rate. For polyethylene, utilization rate was high in Q3, same now and expect the same for Q4.

[Mikiya Yamada, analyst]

[Interpreted] And phenol-polycarbonate chain material?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Oh, that's a different segment. So I'll stop here.

[Mikiya Yamada, analyst]

[Interpreted] Well, actually, can you comment on the utilization rate for phenol-polycarbonate chain materials as well, although it's in Performance Chemicals?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Well, for phenol, about a month the operation was suspended due to equipment issues. Other than that, it was operating at full capacity. Full capacity now, and we expect full capacity for Q4 as well. Bisphenol A, because of the suspension of phenol production, the operation was suspended for 1 month. But other than that, full capacity, and we expect full capacity for Q4 as well.

[Mikiya Yamada, analyst]

[Interpreted] So wouldn't that indicate that Q4 profit could be higher, given such factors as inventory valuation gain and formula time lag? Or are there any special factors?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] With naphtha price increasing, the gain on inventory valuation is factored in, in our projection. But we do not expect any particular negative factors.

[Mikiya Yamada, analyst]

[Interpreted] I see. I presume C4 fraction is expected to be soft, maybe? Fine. My next question is on Performance Chemicals. Can you talk about the shipments for LCD panel applications, for Q2, Q3 and Q4, the quarter-on-quarter change? And what about battery materials?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Polyester films for optical applications. The inventory adjustments at polarizing plate manufacturers have subsided and have shifted to high operating rate. So sales volume increased in Q3 over Q2. And as for OPL films, similar situation, with polarizing plate manufacturers operating at full capacity, a large year-on-year increase in sales in Q3. Clearfit felt an impact of COVID-19, but recovered in summer. And order inquiries from customers are continuing. But all these products will enter the low demand season in Q4, but they all enjoyed a strong third quarter.

[Mikiya Yamada, analyst]

[Interpreted] So is it fair to assume that they will all drop quarter-on-quarter in Q4?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] A slight decline, yes, because Q4 is a low-demand season.

[Mikiya Yamada, analyst]

[Interpreted] What about battery materials and new energy?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Battery materials and new energy felt strong impact of COVID-19 in Q1, but since Q2, recovery is taking place. And in Q3, in Europe and China, sales expanded, resulting in expanded sales over Q2. In terms of facility utilization rate, I can't give you a specific number, but operating rate was high in Q3, and we expect high utilization in Q4 as well. Basically, the utilization would be in accordance with the demand from the customers. But generally, we expect a steady progress. Potential risks include shortage of containers and semiconductors, which might result in reduced production of automobiles. So this may be a slightly conservative forecast, but overall, we expect steady progress.

[Mikiya Yamada, analyst]

[Interpreted] I have a question on Health Care for MTPC. Again, on the virus-like particle vaccine, MT-2766. I understand that Phase III study is planned to be conducted in 30,000 subjects in the early part of 2021. But given that the number of infected people is not that large, I'm wondering whether 30,000 subjects would be sufficient to show the efficacy. So is it fair to expect that the protocol is so designed to achieve that, even with this seemingly small size of subjects?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Kobayashi will take that question.

[Yoshihiro Kobayashi, executive]

[Interpreted] Well, taking into consideration a rise in neutralizing antibody titers and others, the subject size has been determined. Results of the Phase II studies will be looked at as well. And currently, the studies are underway in Canada and the U.S. only. But the coverage will be expanded, which should include some places with higher rate of infection. And so this is deemed to be the sufficient size. But the number may change somewhat going forward.

[Mikiya Yamada, analyst]

[Interpreted] I see. So because of high rate of infection in the U.S., this size would be sufficient. Is that correct?

[Yoshihiro Kobayashi, executive]

[Interpreted] Yes, that's the basic thinking.

[Mikiya Yamada, analyst]

[Interpreted] Sorry, I was looking at the infection rate in Canada, and it made me wonder. It's clear now.

[Operator]

[Interpreted] The next question is from Mr. Miyamoto of SMBC Nikko Securities.

[Go Miyamoto, analyst]

[Interpreted] Miyamoto from SMBC Nikko Securities. I also have 2 plus 1 questions. My first question is for Mr. Kobayashi of MTPC. I'm looking at Page 24, at the progress rates in particular. The progress rate of R&D expenses appear low. Earlier it was mentioned that R&D expenses tend to concentrate in Q4. But are there any particular reasons this fiscal year for this concentration in Q4? Or is it that you just did not revise the guidance? I'm also looking at the progress rate of the revenue, which seems high. So can you comment on how we are to look for Q4?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] You asked about the reason for increasing R&D expenses in Q4. One is the COVID-19 vaccine, which was a subject of earlier questions. With the start of Phase III clinical studies, R&D expenses would go up, that's one factor. In addition, due to impact of COVID-19, there had been some delays in clinical studies, particularly for MT-7117 and others, primarily in the U.S., including ND0612. But now that they are beginning to be back on track, we are expecting increases in expenses.

[Go Miyamoto, analyst]

[Interpreted] What about the progress rate of revenue?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] The revenue for Q4, largely in domestic market due to the impact of COVID-19, pediatric vaccination rates had stayed low earlier in this fiscal year. But now we expect this issue to be resolved. And also on the diabetes treatment, we expect continued strong sales. And thus, we expect to achieve the forecasted amount for full year.

[Go Miyamoto, analyst]

[Interpreted] I see. It seems that you take this conservative estimate every year, but I take it that this year, in the fourth quarter, there will be added expense related to the clinical study for VLP vaccine. And therefore, you have reviewed the forecast to some extent and decided to leave the number unchanged. Am I correct?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Yes, you are.

[Go Miyamoto, analyst]

[Interpreted] I see. My second question has to do with MMA. I understand that the demand related to prevent the infection continues to be strong. In the third quarter, was MMA performing well because of the renewed expansion of the infection? How do you now expect the strengths to continue going forward? Furthermore, acquisition of a greenfield property in Geismar U.S. has been announced. Could you share with us your long-term view on the supply-demand balance for MMA for the next 5 years as far as possible?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] The application of MMA to prevent the infection has been gaining momentum from the first to second quarter, and though we had expected the demand to slightly die down in the second half, it turned out that the demand remained strong globally in the third quarter as well. Going forward, it is difficult to foresee how the impact of COVID-19 will be, but we suspect that demand could lose momentum slightly in the fourth quarter.

[Go Miyamoto, analyst]

[Interpreted] Could you tell us your long-term view, given the fact that you're going to add to production capacity?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Based on the long-term global supply and operation strategy, we are aiming to optimize the group-wide production and supply. With regard to the closure of the Beaumont site, we did take the decision to do so. But going forward, in order to continue to maintain and expand our competitiveness, we will seek to hit the right balance between sales and production. I'm afraid I need to decline comment on the long-term supply/demand balance.

[Go Miyamoto, analyst]

[Interpreted] My last question is about Performance Chemicals. Could you elaborate more on the breakdown of JPY 700 million drop in the core operating income from third to fourth quarter, especially focusing on your assumptions for market prices of phenol-polycarbonate chain, as well as status of battery materials for the fourth quarter?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] In the third quarter, especially bisphenol A to produce polycarbonate in China, mainly for the applications of automobile and home electronics, made a significant recovery. Furthermore, demand for epoxy for use in PCs was quite strong. On the other hand, disruptions in production occurred in Asia, resulting in a drop in supply and tighter supply/demand balance. PPA improved, recording a historically high spread.

Going into the fourth quarter, however, as disruptions have been being resolved, production in Asia is now getting back almost to the full capacity, which relaxed the supply-demand balance and made the business slightly weaker. This means that the spread of polycarbonate will get better, but the business in its entirety may deteriorate slightly from the third to fourth quarter.

[Go Miyamoto, analyst]

[Interpreted] So the reason for the decline in the profit in the fourth quarter is due to the resolution of disruptions in your competitors, with respect to the deterioration of the spread of phenol. Am I correct?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Yes, deterioration of the spread of bisphenol A is a major factor.

[Go Miyamoto, analyst]

[Interpreted] As for the battery materials, it is the case -- is it the case that the high operating rate is expected to continue from the third to fourth quarter, and not much change is being seen in profit?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Well, there is a slight conservatism incorporated in the forecast, due to the shortage of semiconductors and issues related to containers, but not much. Basically, the business is strong.

[Operator]

[Interpreted] We'd like to move to the next question. Mr. Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

[Interpreted] Okazaki from Nomura Securities. I would like to ask 3 questions. The first question is addressed to Mitsubishi Tanabe Pharma on Page 26. Vafseo, a drug to treat renal anemia, seems to have posted hardly any sales in the third quarter. You told us that compared to competitor products, the performance would be better and therefore, promising. Could you give us an update on the progress?

[Yoshihiro Kobayashi, executive]

[Interpreted] Thank you for the question. Kobayashi speaking. After you have launched a new drug, you first need to introduce it to hospitals and medical institutions so that the drug can be adopted by those hospitals. We are currently in the process of persuading hospitals to adopt our drug. However, due to COVID-19, there has been imposed and voluntary restrictions on the visit to the hospitals and the medical institutions by sales reps. Especially, there is even more stringent restriction by dialysis centers. Therefore, we do see a slight delay in activities to negotiate for adoption of our drug. But we are still at the phase of negotiations for adoption. And therefore, even though we have not seen much increase in sales figures, we are not that pessimistic.

[Shigeki Okazaki, analyst]

[Interpreted] My understanding is that competitors' products have been relatively strong, but are we not supposed to be worried?

[Yoshihiro Kobayashi, executive]

[Interpreted] No, as we are still at the initial stage. I would assume you are referring to EVRENZO from Astellas Pharma when you're talking about competitor products. EVRENZO has been launched first only for patients on dialysis, but obtained additional indications later with long-term prescription. It is not the case that our product is selling most currently. And therefore, we will continue to focus on our efforts to deliver its value.

[Shigeki Okazaki, analyst]

[Interpreted] My second question is about functional products. Looking at the fourth quarter, you mentioned seasonal factors several times, but the sales revenue is expected to drop compared to a year before, when there was a certain level of impairment loss posted. Therefore, given the current business environment, the profitability level seems to be a bit low as well. You explained that there was a special factor worth JPY 3 billion annually, but it's still something similar you have assumed in your forecast for the fourth quarter.

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] There are various factors involved, and it is not the case that we have incorporated one distinctive negative factor. By looking at the overall trend, due to COVID-19, for example, capital investments have been slightly weaker. And therefore, in applications such as interior and exteriors in the construction materials, there are slight weaknesses, although not in such a large value each. But those bits and pieces got accumulated and ended up in a slightly negative territory.

[Shigeki Okazaki, analyst]

[Interpreted] But there's no special factor like the ones seen last year incorporated?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] No, we're not talking about the impairment losses or anything like that.

[Shigeki Okazaki, analyst]

[Interpreted] I see. My third question is somewhat ambiguous. Now recently, you are promoting a job based employment, career chain support program and portfolio reforms. As a new President takes office soon, can we expect this endeavor to continue going forward? It is a bit qualitative question, but can you share your current position?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Job-based employment has been started or at least, we are moving into that direction. And it is my understanding that the portfolio reforms will also be carried on even under the leadership of the new President.

[Operator]

[Interpreted] We'll move to the next question. Mr. Nishihira from Okasan Securities.

[Takashi Nishihira, analyst]

[Interpreted] Nishihira from Okasan Securities. I have 2 questions. The first question is about carbon fiber and composite materials. What was the status in the third quarter as compared to the second quarter? And what is your outlook for the fourth quarter?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Carbon fiber has a lot of different applications. The automotive applications have a mixed picture. But overall, the third quarter was on a recovery trend. This is partly because of the recovery in the automotive industry. There's also a globally strong demand for use in wind turbines. We're experiencing shortage of the inventories currently, and so we expect to see this demand to continue.

Another area where strong demand has been seen, especially from Asian customers, is sports and leisure, such as cycling and golf. Aircraft application, on the other hand, has been weaker, which is a negative factor. As for the fourth quarter, we expect to continue to see a strong demand for use in automobiles, wind turbines and sports and leisure.

[Takashi Nishihira, analyst]

[Interpreted] My second question is about Carbon Products. Your comments sounded more bullish than in the last conference call. Could you tell us more about the business environment in and outside of Japan in the third quarter, and your outlook for the fourth quarter?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] Carbon Products mainly includes cokes and needle cokes. With regard to cokes, I said that the spread of export cokes has increased, which helped improve the profitability in the third quarter. In Australia, the market price of coking coal declined, partly because of the import regulation by China, which in turn has pushed up the market price of cokes in China.

As the global steel industry recovers, the demand for Chinese cokes increased and the market price went up, while the price of coking coal went down, which led to an improvement in the spread.

In the fourth quarter, export cokes will continue to see strong demand from Chinese steel manufacturers, and therefore there is no shortage of spot demand, with no problem foreseen for prices in the near term. Therefore, the overall tone of the business is better than at the last conference call.

With regard to needle cokes, in the third quarter, the business for electrodes was challenging, as challenging as in the second quarter. In the fourth quarter, especially in the domestic market, things are expected to remain challenging. But in the export of needle cokes, we're beginning to see slight signs of the business bottoming out and turning upward.

In terms of the volume, exports to China are declining, seemingly due to issues of containers. This has made the supply-demand balance tighter, bringing in more orders to our company. Furthermore, the prices of Chinese petroleum-derived needle cokes were raised based on the market prices. So with this improvement in prices, the export environment for needle cokes improved. At the last conference call, I said that needle cokes will get better in the second half, but you're now beginning to see more specific signs for that trend.

[Operator]

[Interpreted] Let us move to the next question. Mr. Watanabe from Mitsubishi UFJ Morgan Stanley Securities.

[渡邉 亮一, analyst]

[Interpreted] Watanabe from Mitsubishi UFJ Morgan Stanley Securities. I only have one question. I want to ask about Performance Chemicals again. Its profit increased close to JPY 5 billion from second to third quarter. According to your explanation, most of the increase was accounted for by engineering polymers. But am I correct to understand that there was not much change in the rest of the products?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] I apologize for my insufficient explanation. Engineering polymers are improving, but as automobile-related demand has shown a strong recovery from the second to third quarter, increases in sales of performance polymers, coating materials and battery materials for automotive use contributed JPY 2.5 billion out of the total JPY 5.4 billion and increasing core operating income of Performance Chemicals, with the improvement in the spread contributing to the remaining JPY 3 billion.

[渡邉 亮一, analyst]

[Interpreted] A follow-up question. How are you looking at the deterioration of the spread in the fourth quarter? Furthermore, the market price of bisphenol A seems to be going up more recently. Could you share your company's view on the outlook, whether it will go down again or not?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] As I said, as the spread surged in the third quarter, we had expected the supply-demand balance to be relaxed somewhat and spread to peak out a bit in the fourth quarter. It is true that more recently, the spread has started to rise again slightly, and therefore, there could be a slight upside to our forecast, because as you said, we put together our forecast assuming that the spread would peak out a bit.

[Operator]

[Interpreted] We are getting closer to the ending time, so we will take one last question. Mr. Umebayashi from Daiwa Securities.

[Hidemitsu Umebayashi, analyst]

[Interpreted] Umebayashi from Daiwa Securities. I have one question. At the earnings conference call 3 months ago, you said that with regard to Muse cell-based product, there was a delay in procurement of raw materials, and that you changed the time line to file for approval by the end of fiscal 2020 to early fiscal 2021, hopefully. Now that 3 months has passed since, could you give us updates, if there are any?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] 3 months has passed. And one of the things of note is that on January 28, we started an exploratory clinical trial in Japan for Muse cell therapy for the treatment of ALS. But to answer your question on the expected timing of filing for approval in fiscal 2021, we're proceeding following the guidance we get in our consultations with the regulatory authority. As for a more specific date, we'd like to communicate in due course, as we learn when.

[Hidemitsu Umebayashi, analyst]

[Interpreted] I see. Am I correct to say that there is no longer any problem in procuring raw materials?

[粕渕 幹雄 (かすぶち みきお), executive]

[Interpreted] You're correct. The problem has been solved for the moment.

Thank you very much for attending our web conference despite your busy schedule. We'd like to ask for your continued kind understanding and cooperation. Thank you for your attendance.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]