Mitsubishi Chemical Group Corp

F:M3C0

Earnings Call Analysis

Mitsubishi Chemical Lifts Profits Amid Downturn

Mitsubishi Chemical Group delivered an impressive performance in a challenging quarter, significantly increasing net profit by approximately ¥86.9 billion amidst a prolonged industry downturn. CEO Jean-Marc Gilson showcased the results of the company’s ‘Forging the Future’ strategy, highlighting better-than-forecast core operating income of ¥183.9 billion, strong cash flow of ¥165.7 million, and cost reductions exceeding the annual target by ¥2 billion. He emphasized that these achievements were due to disciplined management across operational excellence, cost control, and targeted growth, particularly in the gas and healthcare sectors, which posted stellar results. Despite flat sales and low customer demand in other segments, resilience in the petrochemical business led to profit. However, the basic materials and MMA segments faced breakeven performance, with the carbon products sector needing significant cost reduction. Gilson, leaving his position feeling accomplished, lauds the company's improved employee satisfaction and strong financial position. CFO Nakahira maintained the full-year earnings forecast unchanged, with continued outperformance expected from industrial gases and healthcare.

A Mixed Performance with Bold Efficiencies Amidst Industry Challenges

In a period marked as one of the most severe downturns for the chemical industry in three decades, Mitsubishi Chemical Group (MCG) has made a commendable stride forward. Despite industry headwinds, the company managed to surpass its own core operating income forecasts to report JPY 183.9 billion, supported by robust cash flows and substantial cost reductions. Vital segments such as gas and healthcare businesses have been stellar performers, counterbalancing weaker demand in the automotive sector, and upholding overall results through strategic pricing actions and cost management initiatives.

The Struggle Against Overcapacity and Market Dynamics

Compounded by global overcapacity and muted pricing power, MCG's MMA segment treaded water, just breaking even—a state countered by stronger results in the Petrochemical business and demanded immediate attention in the carbon products arm due to persistent losses. This highlights the delicate balance the company must maintain against broader economic trends and customer demand patterns.

Restructuring Pays Off Amidst Economic Strain

The importance of MCG's three-year restructuring efforts cannot be overstated. It is these efforts that have largely enabled the company to post an impressive core operating income of JPY 65 billion for the last quarter, demonstrating resilience with an EBITDA margin close to 12% in a tough global market.

Leadership Transition with a Strong Foundation

The pending departure of Jean-Marc Gilson as CEO in late March is set against a backdrop of a strengthened company across several dimensions. Gilson cites improvements in employee satisfaction, safety records, compliance, sustainability, R&D focus, and financial metrics, positioning MCG as a strong competitor in the industry landscape under new leadership.

Financial Resilience in the Third Quarter

CFO Yuko Nakahira detailed a scenario of financial tightness faced in Q3, with core operating income inching up by 3% year-on-year, despite a 5% decrease in sales revenue. While the industrial materials sector remained sluggish, industrial gases and healthcare sectors have been robust revenue drivers. Moreover, the company achieved a sizable JPY 82 billion in cost reductions for the year, outperforming their targets. Additionally, notable non-ordinary income boosted profits significantly, thanks to strategic business transfers like the sale of Qualicaps to Roquette.

Segment Performance: A Dichotomy of Success and Struggle

Performance varied substantially across segments: while industrial gases and healthcare realized strong growth, the films and molding materials segments, as well as the MMA division, remained subdued with falling sales and profits. Notably, sales decreased for key areas such as high-performance engineering plastics for semiconductor applications and wind power generation carbon fiber.

Treading with Caution Into the Fourth Quarter

Expectations for Q4 are met with cautious optimism. A modest uplift is anticipated in high-performance engineering plastics and carbon fibers, although the overall outlook remains weak. Healthcare and industrial gases are expected to maintain their progressive streak, offsetting other less buoyant segments. The market for MMA shows signs of stabilizing, but the path to recovery is shrouded in ambiguity. The persistence of challenging conditions in the carbon products market caused by languishing coke prices hints at another quarter of caution for MCG. Yet the company remains steadfast in its cost reduction drive and strategic initiatives anticipating steady gains in core areas.

Earnings Call Transcript 2024-Q3

[Operator]

[Interpreted] Good afternoon. Thank you very much for joining us for the third quarter earnings presentation for Mitsubishi Corporation Group. I'd like to first invite our President and CEO, Jean-Marc Gilson, for a few words; and then our Executive Vice President and CFO, Yuko Nakahira, will explain the Q3 results. And then we will take questions. This meeting is expected to last for 60 minutes in total.

Jean-Marc Gilson will leave this meeting after delivering the opening statements. Before we start, please note that the forward-looking statements are based largely on current company expectations and information subject to risks and uncertainties and that actual results could differ materially due to numerous factors. Also please be advised that today's conference call, including the Q&A will be recorded and uploaded to our company website.

With that, we would like to begin the meeting, and Jean-Marc, the floor is yours.

[Jean-Marc Gilson, executive]

[Foreign Language] and good afternoon, and welcome to our fiscal year 2023 third quarter earnings presentation. So my name is Jean-Marc Gilson, and I'm the Mitsubishi Chemical Group CEO.

So let me make a few introductory comments and also followed later by a few words of farewell as it is the last time that I have a chance to talk to you directly as the CEO of MCG. Then after, I will hand it over to Nakahira, CFO, for -- who will give you a detailed review of our results for the third quarter.

So let me start by saying that, frankly, the last quarter, I think, more than ever, during that quarter, you saw the impact of the relentless implementation of our Forging the future strategy that we explained a long time ago back in December 2021.

So despite being in one of the most prolonged downturn of the chemical industry in the last 30 years, our company, MCG, delivered year-to-date better than forecast core operating income of JPY 183.9 billion. We also delivered strong positive cash flow of JPY 165.7 million and also JPY 82 billion in cost reductions above the yearly target of JPY 80 billion. And we also continued the improvement in our balance sheet with a net debt to equity that is now reaching a low of 1.2.

Let me stress that we achieved these results not by chance. This is the result of unprecedented restructuring. This is the result of discipline and constant attention on operational excellence, price management, targeted growth, expense control working capital and CapEx management across all of our businesses.

Our gas business as well as our health care business, continue to produce what I would call stellar results through a mix of cost savings, pricing actions and implementation of growth opportunities. The latter was especially true in our health care business, where the team did a great job in driving both sales and core operating income growth in Japan and in the U.S.

Now as expected, the economic environment was very tough for specialty materials. In the last quarter, sales were flat compared to Q2 and core operating income was very positive, thanks to continued cost savings. This was driven by customer demand across industries except automotive that were weak and where destocking continued.

Global overcapacity, low pricing power and lack of customer demand also contributed to breakeven performance in MMA despite continued cost reductions. In Basic Materials, the Petrochemical business showed resilience and turned a positive profit for the year. This was not the case in carbon products as the business continued to suffer for a third quarter in a row, and now needs to seriously implement a cost reduction program to turn the corner.

Overall, as a company, I cannot stress enough that without our continued restructuring of the last 3 years, we would have been unable to post a core operating income of JPY 65 billion in the last quarter, and impressive to me, JPY 183.9 billion in COI and an EBITDA margin close to 12% in these difficult times for the global chemical industry.

Now for me, it is time now to say farewell to all of you. And for the following reasons, I will be leaving the Mitsubishi Chemical Group late March with a great sense of accomplishment. Our last employee satisfaction survey showed improvement in 16 out of the 17 categories measured. Our safety record has strengthened, our compliance program and audit functions have gone through a significant positive step change. We are on track to deliver our 2030 sustainability goals. We have also completely realigned our R&D with key focus markets.

On the financial front, thanks to a new operational excellence mentality, every metric has improved and the company is well positioned for the future. In terms of value creation and share price, MCG was until the end of 2023, one of the best performer of the global chemical industry. None of this would have been possible without our incredible employees. And what I would call one of the best and most diverse management team I ever had a chance to work with.

Now it's time for me to turn the page, and I wish MCG and the new leader and leadership from Chikumoto-san, I wish them all the best for the future, and it's time for me to say to all of you. Thank you for your continued support and [Foreign Language]

[Operator]

Jean-Marc will leave now and we'll move to the presentation. Nakahira, CFO, will start.

[Yuko Nakahira, executive]

[Interpreted] This is Yuko Nakahira, CFO. Let me go over the financial results for the third quarter of fiscal year 2023. At the first half financial briefing, we talked about the harsh business environment surrounding the chemicals industry. And that's not been the business environment continued into the third quarter. Amid weak sales volume, we promoted disciplined price management and cost structure reforms, resulting in a 3% increase in core operating income for the first 9 months, although sales revenue decreased 5% year-on-year.

A strong recovery from the slump in demand was not seen in a wide range of industrial materials field, including semiconductor-related markets and housing and construction materials. And volumes continued to decline in specialty materials and basic materials. In addition, the weak market conditions in the MMA and carbon businesses did not improve.

On the other hand, industrial gases and health care continue to perform well, driving core operating income for the entire group. In terms of cost structure reforms, we achieved a total of JPY 82 billion for the first 9 months, exceeding the company-wide full year cost reduction target of JPY 80 billion, contributing to securing profits.

As part of business portfolio reform, net profit attributable to owners of the parent increased year-on-year due to the recording of non-ordinary income on the transfer of all shares of Qualicaps to Roquette in the third quarter of the current fiscal year.

Although we do not expect a full-fledged recovery in the business environment for Specialty Materials and Basic Materials in the fourth quarter, we do expect that industrial gases and health care will continue to perform well as well as the promotion of business portfolio reform.

As we anticipate the recording of nonordinary profits associated with this, our full year earnings forecast will remain unchanged from the revised forecast announced in November. We will continue to steadily implement important measures to achieve our financial goals based on our plan related to our management policy forging the future.

The average exchange rate for the third quarter was JPY 143.8 to the dollar, a 5% depreciation compared to the same period last year. Naphtha price was JPY 67,900, down 15% year-on-year. Revenue was JPY 3,245.1 billion, down 5% year-on-year. Core operating income increased 3% year-on-year at JPY 183.9 billion.

Compared to the revised full year forecast announced on November 1, both revenue and core operating income are progressing smoothly and steadily. Non-ordinary income was JPY 28.6 billion, and operating income was JPY 212.5 billion. Last year, we recorded a large loss related to the closure of the MMA Cassel site and the liquidation of Medicago. So compared to the previous fiscal year, profit increased by more than JPY 160 billion. As a result, pretax profit was JPY 191.8 billion, and net profit attributable to owners of the parent was JPY 103.9 billion, an increase of approximately JPY 86.9 billion. This performance was also favorable compared to the JPY 135 billion forecast announced in November.

This shows revenue and core operating profit for each business segment. Specialty Materials saw a 6% decrease in sales and 69% decrease in profit year-on-year. Demand continues to be sluggish and in particular, in films and molding materials, profits decreased significantly year-on-year despite posting a profit of JPY 17.3 billion due to slumps in the main semiconductor and electronics markets and inventory adjustments by overseas customers towards the end of the year.

Industrial gases continued to perform well with sales increasing by 6% and profits increasing by 45%. In health care, sales increased 6% and profits increased 177% due to a significant increase in sales of RADICAVA oral formulation in the U.S. as well as portfolio and cost structure reforms implemented since last year.

MMA sales decreased by 12% and profit decreased by JPY 500 million compared to the same period last year, although we were profitable in the second quarter, we were once again recording a loss. Although profitability was recorded as a total of MMA monomer and PMMA business, the subsegment as a whole was affected by the sluggishness in the AN business.

Basic Materials improved slightly compared to the first half but ended up in a loss of JPY 10.4 billion. Year-on-year, sales decreased by 13% and profit decreased by JPY 28.1 billion. Among the profit decreasing factors, the impact of inventory valuation gains and losses was negative JPY 18.7 billion. Although demand for petrochemicals continues to be weak, profits have been improving since bottoming out in the fourth quarter of the previous fiscal year. Carbon business recorded a loss for the third consecutive quarter due to no improvement in coke market conditions.

This is a breakdown of the JPY 6 billion increase in core operating income. The price factor was positive JPY 33.4 billion. Amid falling naphtha prices and sluggish market conditions for major products, pricing activities continue, and in particular, made a significant contribution to securing core operating income in Specialty Materials and industrial gases.

The volume difference was negative JPY 30.8 billion due to continued sluggish demand in specialty materials and basic materials. Cost reductions contributed to an increase of JPY 82 billion. The contribution in the third quarter was approximately JPY 28 billion. We achieved this year's annual reduction target of JPY 80 billion in the first 9 months. We are gaining strong momentum in our efforts to reform our cost structure. So we will continue to move forward, not only in the fourth quarter, but also into the next fiscal year.

Others include a decrease in inventory valuation gain and loss of JPY 20.3 billion. Health care-related expenses amounted to approximately JPY 24 billion due to the discontinuation of sales of Lexapro, changes in distribution arrangements and the impact of IP transfers in the previous fiscal year.

Other factors include a decrease in the share of profit of associates and joint ventures and an increase in fixed costs due to the effect of foreign exchange and inflation. Specialty Materials profit decreased by JPY 37.9 billion. The price factor was positive JPY 25 billion, and cost reduction was positive JPY 13.1 billion.

Amid weak demand, we promoted pricing activities and cost structure reforms, alleviating the deterioration in 3 core operating income in all subsegments. The biggest factor behind the decline in profits was the volume difference, which continued to be strongly affected by the decline in demand.

In polymers and compounds, the automotive application market recovered, and there was an increase in new adoption and sale of biopolycarbonates. The demand for barrier packaging materials and additives for paint, inks and adhesives was weak.

In films and molding materials, there was no sign of recovery in semiconductor-related applications. And volume further decreased due to inventory adjustments by overseas customers towards the end of the fiscal year. In particular, sales continued to decline for a high-performance engineering plastics for semiconductor applications, carbon fiber for wind power generation and general purpose sports applications and general purpose polymer or polyester films.

For advanced solutions, the adjustment phase in the semiconductor market continues. Although some of the cutting-edge semiconductor market are on a recovery trend and some products such as aquaSAVE have performed well. The overall trend has not changed significantly at this point.

In all 3 segments, we continue to manage prices, costs and cash, while focusing on new product development and recruitment activities in preparation for an upcoming recovery in demand in our focused markets.

Industrial gas sales continued to perform well, with profits increasing by JPY 38.2 billion compared to the same period last year. Although the volume was not strong, the efforts to pass on prices and improved productivity in each region were successful and added with positive impact of exchange rates contributed to the increase in profits.

In health care, core operating income increased by JPY 35.4 billion year-on-year, mainly due to strong growth in sales of oral RADICAVA in North America. Priority pharmaceutical products and new products in Japan also performed well. In addition, cost structure reforms, such as the liquidation of Medicago, which was decided in the previous fiscal year and a review of the development product portfolio greatly contributed to the increase in profit.

MMA profit decreased by JPY 500 million. We recorded a loss of JPY 300 million for the 9 month period. And the negative impact of AN was about JPY 2 billion. The price factor continued to be affected by the worse than a year earlier conditions in the MMA monomer market. Although the volume continues to be weak, MMA monomer and PMMA are on an upward trend compared to the same period last year. There are some positive signs such as prices in China starting to rise slightly due to the feeling of tight supply in January, the future outlook remains uncertain.

Basic Materials profit decreased by JPY 28.1 billion. In petrochemicals, the sales differential was positive due to price pass-through activities and the delay in price revisions for polyolefins. But for basic materials as a whole, the sales differential was negative due to the worsening of the decline in coke market prices. Profit decreased due to a decline in volume due to sluggish demand and inventory valuation gains and losses of JPY 18.7 billion. Nonrecurring items came to an income of JPY 28.6 billion. In Q3, we received approximately JPY 18 billion from the sale of the Qualicaps business on a net basis, excluding related expenses.

Now on cash flow. Operating cash flow was a net inflow of JPY 285 billion. Investment cash flow was a net outflow of JPY 119.3 billion. Free cash flow was a net income of JPY 165.7 billion. Free cash flow in the same period last year was a net outflow of JPY 400 million. We were able to significantly improve this through company-wide cash management activities. Trade receivables and payables increased due to significant increase in health care sales. Inventories were firmly controlled amid weak demand.

Cash flow from financing activities was a net outflow of JPY 103.8 billion. Total assets were JPY 5,984.6 billion, up JPY 210.3 billion from the same period last year, of which JPY 193 billion was due to the foreign exchange.

Total debt was JPY 3,807.1 billion, up JPY 21.2 billion from the same period last year. Equity amounted to JPY 2,177.5 billion. As a result, the net D/E ratio was 1.20%, an improvement from 1.33% at the end of March last year.

This slide shows quarterly trends starting from the fiscal year ending March 2023. Core operating income in Q3 fell short of the JPY 68.8 billion in Q2 and came to JPY 64.3 billion. This is relatively high level given the business environment. Although the Specialty Materials business has improved compared to Q4 last year, it is still far from a full-fledged recovery.

In Q4 this year, although we expect a slight improvement compared to Q3 in the high-performance engineering plastics and carbon fibers, we will promote efforts to reduce working capital and implement inventory adjustments in some businesses. We expect the outlook to be weak overall. Industrial Gases and health care are posting steady profit growth. We expect continued strong performance in Q4. However, as in every year, health care will be affected by reduced purchasing of domestic pharmaceuticals ahead of the NHI drug price revision.

For MMA, the market appears to have bottomed out, but the outlook for recovery is uncertain. For basic materials, petrochemical profit is improving. But for carbon products, the coke market continues to be sluggish. We do not expect a significant recovery in demand for the MMA, petrochemicals and carbon businesses in Q4.

Given all that, we do not expect major improvement in Q4 business environment for specialty materials and basic materials, rather. However, industrial gases and health care remained strong. We also expect nonrecurring income from business portfolio transformation. Our full year forecast, therefore, remains unchanged from what we announced in November.

This concludes my presentation. Thank you very much for your kind attention.

[Operator]

Thank you CFO, Nakahira. We will now move to the Q&A session if you have a question. The first question is from Watabe from Morgan Stanley.

[Takato Watabe, analyst]

[Interpreted] I don't think, Jean-Marc, is there anymore but I'd like to say good job for the last 2 years. The mindset for the cost control and management improvement, I hope will continue on a company-wide basis.

So I have 2 questions, plus 1 on pharmaceuticals. One is on Specialty Materials. The customers adjustment, I think had a major impact. Still, the third quarter level was very low. So the impact of adjustments of inventories on the part of customer, can you quantify that? And I wonder if there were any special negative factors that we should keep in mind?

If this continues, I'm afraid specialty materials are going to suffer even further. So could you elaborate on the specialty materials? That's my first question.

[Yuko Nakahira, executive]

Specialty Materials in Q3, sluggish situation and you asked about the factors for that. One, well, overall, by region, China plus in the Specialty Materials, Europe also had an impact, overall weakness observed in Europe.

Display during the first half, some of the panel manufacturers recovered their production. But as a result, inventory are the part of the panel manufacturers are built up, which had an impact on Q3, no movement. That was a big factor as well.

In addition, for semiconductors, the cutting-edge AI chips and others, very strong. And aquaSAVE, in our case, for example, did very well. But overall volume, semiconductor in the third quarter, did not return, no recovery. That was another factor. Partially food additives and infrastructure-related products. We saw some recovery there. But for us, films and molding, which is a volume zone business continued to be affected by the market situation, which was reflected in the third quarter results. So there are no special factors, in other words, I know that there was an impact of inventory adjustment.

[Takato Watabe, analyst]

How about the supply chain inventory. Do you think that's been cleared?

[Yuko Nakahira, executive]

Yes, display adjustments by the panel manufacturers have been resolved. We see a strong inventory level looking at the first couple of weeks.

[Takato Watabe, analyst]

MMA is talked about the recovery in the China market. Since the beginning of the year, we see a rather strong situation. You think that, that's a short-term phenomenon? You don't see this to be sustainable. Am I correct? And any update on the investment in the U.S.?

[Yuko Nakahira, executive]

Regarding MMA, as you have correctly indicated, the tightness in supply, especially in China had an impact. Strong restriction on production in China. And so we see a slight recovery in the market price.

So from the upstream, the shortage of materials, feedstock phase will continue. So I'm afraid this trend will continue. But on the other hand, after the Chinese New Year holidays, the utilization is rumored to go up again in China, although under the condition of a constrained feedstock supply in the upstream. So whether we can expect a steady recovery going forward is something that needs to be really watched carefully.

As for the investment in the U.S. This is going to be the investment for the U.S. market. So it is not directly affected by the situation in China. But currently, we are still submitting permits for the construction in that area. And when we have a better visibility in getting those permissions, we will be making the investment decisions.

[Takato Watabe, analyst]

ALS drug very strong. How about the competitive landscape? What's the potential for the growth areas? That is the pharmaceutical question.

[Yuko Nakahira, executive]

Tsujimura will answer that question.

[Akihiro Tsujimura, executive]

Competitive [ Relyvrio ] has been launched, and that treatment continues to get an increase in prescriptions. So we are paying a close eye on the development of the competition. But today, in terms of new patients, we continue to gain more patients and so we expect the current trend to continue.

[Takato Watabe, analyst]

I see. Nakahira, one question for clarification. The joint venture for petrochemicals. I think that's been canceled. How about the divestiture of carbon business, would that continue? So it's going to be 0 in the next fiscal year?

[Yuko Nakahira, executive]

Yes. For the carbon business, the current situation is really dire. So we will consider what to do, including the possibility of further restructuring efforts internally under the new leadership. So we're not expecting any divestiture in the near future.

[Operator]

The next question will be from Miyamoto from SMBC Nikko Securities.

[Go Miyamoto, analyst]

This is Miyamoto speaking. I also have 2 questions, first one on pharma. First, let me start with pharma. On Slide 27, you're showing your sales revenue. And you touched upon this briefly. But RADICAVA, in Q2, we have [ 2.9 ], Q3 is JPY 20 billion. And so the second half plan was 40.7, and it's rather slow. So is it also because of [ Relyvrio ] that competitor drug?

And you earlier mentioned that health care is actually slightly weaker than your expectations. But what about RADICAVA, what do you expect? And is there any slowness in progress? Are you trying to make up for that from other drugs? And if that's the case, what drug would you be looking to? So if you could talk about RADICAVA and then other drugs as well.

[Yuko Nakahira, executive]

Thank you very much for your question. Yes, North America might appear a little weaker. But then in December, there was the Christmas season. So that's one factor. But then the general underlying trend doesn't really change, at least that's our view. So overall, things are as we have anticipated. So in Q4, we will expect this current picture to effectively continue.

[Go Miyamoto, analyst]

So generally, Q3 is in line in your view?

[Yuko Nakahira, executive]

Yes.

[Go Miyamoto, analyst]

What about RADICAVA towards next financial year, do you expect further growth? Or would you maintain this year's revenue level? What is your expectation?

[Yuko Nakahira, executive]

Well, as a pharmaceutical company, obviously, we want to maximize the value of all our drugs, and we are implementing various measures to that effect. There are obviously competitor drugs, which are launched and we are monitoring the situation. So in the next financial year, we will continue to -- we will hope to leverage the positive trend we have this year and try to continue that as much as possible.

[Go Miyamoto, analyst]

The next question would be on Specialty Materials. So on Slide 29 and 30, you have the data by market or application. So if you look at the bottom, the industrial consumer goods, building construction and the EBITDA appears to be slow compared with your target.

But obviously, this is a mixture of a lot of things. So if you could perhaps tell us why this subsegment is short of plan? And are you trying to make up for that in Q4? With regard to food, from Q2 to Q3, EBITDA is coming down by JPY 1 billion quarter-on-quarter. But then you talked about recovery in the demand for food packaging. So do you expect that and EBITDA to also recover?

[Yuko Nakahira, executive]

So we have a focus markets, four from the top. So industrial, consumer goods, building construction is not necessarily our highest priority field, but then obviously, it's not going to be weak. And particularly, for general industrial applications like molding, we do see that progress against the full year target is slow.

And perhaps in Q3, compared with an average year, there was more inventory adjustments in Europe and the United States and particularly, in Europe, given the weak economy. We are trying to get more from the higher line items in this table.

With regard to packaging, obviously, packaging is a mixed tag. There is a lot. And packaging had -- among packaging EVOH had been breadwinner or DIAMIRON and others. But there are some other products that are more like a general type polyester films and those are not so competitive or do not have a large competitive edge. And with regard to food, we have additives and packaging. Additives are actually doing quite well. But packaging as a whole, packaging material as a whole, given the inflationary environment, sales volume growth is not as much as we had expected.

And that trend, we do see some recovery in the United States. So we are -- and because these items have high contribution to EBITDA figures, we will try to focus our efforts around those products. So with regard to EVOH, from Q2 to Q3, their shipments are up, but capacity utilization are going down. I think that's what you said earlier in the previous earnings briefing.

[Go Miyamoto, analyst]

What is the situation now?

[Yuko Nakahira, executive]

Right. With regard to EVOH up to Q2, the business was very strong. And our production capacity was serving as a bottleneck, so to speak. But once in Q3, the market environment changed. Our outlook for Q4 is that sales volume would probably recover. But Q2 sales volume was at the bottom.

And compared with that, Q3, Q4 sales volumes are actually coming up. And Q3 was slightly up from Q2 with regard to sales volume. In Q4, we are expecting a growth slightly short of 20%. So Q2 was the bottom with regard to sales volume.

[Go Miyamoto, analyst]

So that would be a significant recovery. Does that mean that inventory adjustments and supply chain has made good progress?

[Yuko Nakahira, executive]

Yes, that happened in Q3 actually because things were almost out of standstill, but started to recover and things started moving. But then the sales volume would still be short of what we had in Q1. Percentage-wise, the figure may appear large, but volume-wise, it's not that significant.

[Go Miyamoto, analyst]

My third question is on MMA. So we have some logistics and shipping disruptions in the Red Sea. And does that have an impact on your SAMAC operations? And then in Q3, your capacity utilization outlook was 60%. What was the actual and what is your expectation in Q4?

[Yuko Nakahira, executive]

With regard to SAMAC, it's running at near full capacity. For Q4, overall capacity utilization, we are expecting around 70%. With regard to the situation around the Red Sea, yes, there would be an impact. There could be an impact. But as of now, it has not manifested in any significant way.

[Go Miyamoto, analyst]

What about the capacity utilization in Q3?

[Yuko Nakahira, executive]

Q3 was 60% plus.

[Operator]

Next is from Mizuho Securities. Mr. Yamada, please.

[Mikiya Yamada, analyst]

Yamada from Mizuho. I have one question on specialty, question on cash flow and one on Pharma. First, specialty materials. In Q3, as many have already pointed out, your results were not good. I think it's basically the volume issue.

Some demand will come back. Others would not. So ink and packaging materials, not coming back in terms of demand, others demand recovery is expected. In other words, so when the economic conditions improve, you think that you'll go back to 54.

For packaging materials, other than changes there, with a loss of competitive edge, do you think some demand is not going to come back. So if you were to separate between demand returning and demand not returning, what is your view?

[Yuko Nakahira, executive]

Well, that's really the crucial question. So by applications, whether we are losing the market share is what we are really looking at very closely. As for semiconductor related, we are not losing the market share, which means that when the demand returns, the business will return as well.

As for display, here, again. Our market share is not encroached, but the demand is soft now. And so far, we were focusing more on the liquid crystal display and not much on OLED. But taking this opportunity, we would like to promote that transition. So I think this will be a positive for us eventually.

As for packaging materials, EVOH, DIAMIRON, those products. When overall demand returns, we believe the business will return as well. Polyester films for general applications, we don't have much competitive edge there. And conventionally, we had a volume business. But given the demand situation, we are thinking of changing the product mix so that we would not be affected.

[Mikiya Yamada, analyst]

Molding and compounds, you expect demand to recover there as well?

[Yuko Nakahira, executive]

Yes, for moldings. Especially the high-performance engineering plastics, we expect recovery there. And for carbon fiber, in Q4, we are indeed seeing signs of recovery. So there, we expect a recovery.

[Mikiya Yamada, analyst]

So that would mean that when fundamental reforms are to be implemented. For general purpose polyester films, some impairment losses will have to be recorded. That could be avoided. Am I correct?

[Yuko Nakahira, executive]

Yes. In that sense, in the IR day presentation, we talked about JPY 200 billion sales business to be exited. So those where we don't have competitive edge will be part of that. So we are not expecting a large impairment loss. That's it. They are small ones, divest or withdraw. Those will be implemented as planned.

[Mikiya Yamada, analyst]

I see. my next question is on cash flow. Free cash flow, 9 months, JPY 165.7 billion. Of that amount, JPY 47.4 million is in relation to Nippon Sanso. And then there will be sales of assets and about JPY 8 billion for investment and loans, JPY 71.4 million. So altogether, there will be only about JPY 40 billion remaining.

Specialty materials, If that is to be expanded to secure expansion. The cash flow from Nippon Sanso cannot be used, which would mean that with the current cash flow, do you think it's sufficient or do you plan to continue to sell assets to make up the difference?

[Yuko Nakahira, executive]

Well, operating cash flow will continue to be improved in that sense -- the 9 months inventories translated into cash. But our inventory level considered, especially given that last year, about JPY 100 billion increase. So there is a room for improvement there as well. So profit and loss before tax is kind of challenging, but for our working capital, we are implementing improvements affected by health care for now, but we are trying to cash and noncore asset sales will continue to be implemented so as to secure necessary cash flow.

[Mikiya Yamada, analyst]

This free cash flow, the specialty materials investment, I'm afraid, cannot be secured. So are we in disagreement here? I don't think you have enough free cash flow.

[Yuko Nakahira, executive]

Well, current CapEx and Specialty Materials related investment -- we are securing funds, but you're right. By increasing the operating cash flow, we are trying to strike out the balance with the debt. So we are repaying the debt now. But if the cash flow is not good the debt would increase, so we would try to strike a balance. To operating cash -- in addition to operating cash flow, I'm expecting through the sales of assets.

[Mikiya Yamada, analyst]

My third question, pipeline on pharmaceuticals. MT-7117. The clinical trial expenses are expected to increase. And 2990, I am afraid, we'll see an increase in cost as well. And I think JPY 50 billion to JPY 60 billion is the level of R&D now on a full year basis. But what's your idea for R&D expenses for next fiscal year. When do you think an increase in clinical trials are to rise?

Now Parkinson Parkinson's disease maybe in the middle of the fiscal year ending March '25, I think launch in that time frame is what you're expecting. Can you just say whether things are proceeding steadily?

[Yuko Nakahira, executive]

Certainly. First, about R&D expenses. You're right. 7117, Phase III would start again. And of course, we'll make necessary investment for that. So that would result in an increase. And accordingly, we are revisiting the breakdown of the pipeline, and we are considering where to stop regarding the R&D expenses. Of course, we have to keep in mind what the profit level is to see how much we can afford. So it's not that we'll just think about the necessary R&D expenses to hurt the profit. So we are taking a more balanced view.

And for ND0612, the Parkinson's disease. In Israel, several -- because of the conflict with Hamas. Despite that, we are seeing a steady progress in the efforts. We don't see any delays.

[Mikiya Yamada, analyst]

So the impact of Israel-Hamas situation on near term is minimal?

[Yuko Nakahira, executive]

Yes. Of course, we have to negotiate with the authorities, but we are not expecting a major delay or a major impact -- major negative impact taking place. We don't see that.

[Mikiya Yamada, analyst]

You said revisiting the pipeline. Are you saying that some will not go into Phase III trial?

[Yuko Nakahira, executive]

No. In addition to pipeline listed here, there are preclinical agents underway as well. And that's what we are revisiting.

[Mikiya Yamada, analyst]

So for the major development pipeline. Even when P2 is good, you're not going to P3. That's not what you're talking about.

[Yuko Nakahira, executive]

That is correct.

[Operator]

Next, Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

Okazaki speaking. I also have 2 plus one question. The first is to Nakahira. So just to clarify what you said on the nuance. So the core operating income forecast there's a risk that you may fall short. But then because of nonrecurrent items positive, you will -- the operating income figure will come in line. Is that what you were suggesting?

[Yuko Nakahira, executive]

I didn't intend to say that. The core operating income, will meet the core operating income forecast, which is actually the same as the initial forecast. And then there's this nonrecurring item. And the bottom line would be the bottom line. So sorry, maybe I misled you. Okay. So qualitatively, Specialty Materials is challenged. And then there are small ones that are also challenged. But then industrial gases and health care are strong. And then the core operating income of the group will be in line. Compared with what we revised in November, yes, that's the case.

[Shigeki Okazaki, analyst]

So in a related question, films and moldings in particular, from Q2 to Q3, the profit figures are dipping more significantly. But what products led that decline, if you could perhaps mention the top decliners, please?

[Yuko Nakahira, executive]

From Q2 to Q3, which products led the decline. acetyl films, that was about half. Polyester films -- no, polyester films are plus. Acetyle films for displays in the first half. As I said earlier, the panel manufacturers we're producing, but then they started inventory adjustments in Q3. So there is that impact. Other than that, in Advanced Materials, that's minus, that's negative. Among that, we've got high-performance engineering, plastics and carbon fibers as well, those were down.

[Shigeki Okazaki, analyst]

Acetyl films and engineering plastics -- carbon fiber, are they like equally contributing from Q2 to Q3?

[Yuko Nakahira, executive]

Yes. Similar in scale, I would say. But among that, if I were to give priority, carbon fiber was worse, but then magnitude wise, the 3 are comparable. .

[Shigeki Okazaki, analyst]

But what about OPLFILM from Q2 to Q3 and then what you expect for Q4, please?

[Yuko Nakahira, executive]

With regard to sales volume in Q3, there was a significant dip. In Q4, we are expecting some recovery. So as I mentioned earlier, because of the inventory in trade for displays, there was this inventory adjustments on the part of the display manufacturers and that was a big impact. For Q4, we are expecting some recovery.

[Shigeki Okazaki, analyst]

My third question is on health care and Mounjaro. Can you tell us about the recent sales? And then you've got the other plant that has been released, but then there is still restricted supply. And domestically, what do you expect? When do you expect the supply to be normalized?

[Yuko Nakahira, executive]

Thank you very much. With regard to Mounjaro, things are as initially expected, making good progress. But with regard to the supply restrictions, and it's not just Japan, mostly in the United States, but the Mounjaro, there's a stronger demand than expected. And then in Japan, so we have supply restrictions.

So with regard to those restrictions and when that will be lifted, it's difficult to give an answer at this point in time. We are working with Eli Lilly so that the restriction can be lifted as soon as possible.

[Operator]

We're getting close to the end time. So the next question will be the last. From UBS Securities. Omura, please.

[Shunta Omura, analyst]

Omura from UBS. I have a follow-up to Yamada-san's question about impairment loss. As you are aware, your peer engaged in overseas and Japanese pharmaceuticals are expected to record large impairment loss in pharmaceuticals.

So impairment loss test, do you plan to do that going forward because you are in a similar business? And also MMA P&L, I am afraid that's rather sluggish as well. Saudi Arabia, I think that business is okay, but Thailand and other overseas sites, hundreds of billions of yen worth of value has been recorded. So what do you think is the likelihood of impairment loss?

[Yuko Nakahira, executive]

When businesses are suffering, we always have to watch the risk of impairment. In pharmaceuticals or rather in petrochemicals and MMA, we are not expecting large impairment losses to be recorded. In our business, petrochemical business, not good, of course, but it's still making profit.

And of course, on a microscopic level, they are small items to -- for impairment loss like suspending the operations, et cetera, but not a material one. So in that sense, last year in the second half, it was not really good. Now this last fiscal year. So MMA, health care. We decided to take actions for the future. That's what we did in the last fiscal year. So going forward, we would be looking at possibilities within the framework portfolio rearrangements, but not a major one scheduled for the immediate future.

[Shunta Omura, analyst]

I see. A follow-up question about carbon fiber. In Q4, demand for carbon fiber is returning, you said. What are the applications where you see the demand returning?

[Yuko Nakahira, executive]

The way I understand power -- wind power generation and aircraft applications, I'm told that some demand is returning. The pressure vessel has always been strong, but the general application has been weak and now that part is returning.

[Operator]

Thank you very much. So with that, we conclude the Q&A session.

[Yuko Nakahira, executive]

This is Nakahira speaking. So it's already 1/3 past or we are 1/3 into Q4. But in May, we had some expectations, but the market conditions remain weaker than that expectation. Despite that, we are working hard to do what we can do so that we can achieve the core operating income target that we posted at that point in time. We are proceeding with the sales of noncore assets and controlling working capital. And that is improving our financials. We are preparing for the next growth in demand. We are preparing new products to that end, and we will continue to enhance our corporate value. We will ask for your continued support. Thank you very much.

[Operator]

Thank you, CFO Nakahira. And with this, we would like to conclude today's meeting. This conference will be archived and be made available on the web. So with that, we would like to conclude the meeting. Once again, thank you very much for joining us.

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