Asahi Kasei Corp

TSE:3407

Earnings Call Transcript 2019-Q1

[Unknown Executive]

Welcome to the conference call on Asahi Kasei Corporation's Earnings for the first quarter that ended June 30, 2018. We will begin with a presentation from Mr. Yutaka Shibata, CFO, and then take questions.

Other participants from Asahi Kasei are: Isao Satou, Corporate Accounting and Control; Toshiyasu Horie, Petrochemicals Strategic Business Unit or SBU hereinafter; Yukifumi Kuwaba, Performance Polymers SBU; Akira Fukuda, Separators SBU; Izumi Kawata, Asahi Kasei Microdevices Corporation; Kensuke Sakai, Asahi Kasei Homes Corporation; Hiroki Ideguchi, Asahi Kasei Pharma Corporation; and Futoshi Hamamoto, Investor Relations.

Mr. Shibata, the floor is yours now.

[Yutaka Shibata, executive]

Good afternoon. Thank you very much for joining us for this earnings briefing. I would like to discuss first quarter results and the latest forecast for the first half of the financial year. As described in Slide 2, in the quarter that ended June 30, 2018, we posted new record for net sales, operating income, ordinary income and net income attributable to owners of the parent. Sales and operating income both increased from the same period last year for the Material segment.

In Fibers, shipments increased for Lamous microfiber suede and Bemliese continuous-filament cellulose nonwoven. In Chemicals, terms of trade improved and shipments increased for acrylonitrile or AN. In Electronics, shipments increased for the lithium-ion battery or LIB separator.

For the Homes segment, sales and operating income were flat. In order-built homes, the number of buildings delivered decreased for unit homes, but rental management and condominium construction under real estate were firm. Sales and operating income increased for the Health Care segment. In Medical Devices, shipments increased for Planova virus removal filters.

In Critical Care, shipments increased for defibrillators for professional use. LifeVest wearable defibrillator business was firm, too. We have now upward revised the first half forecast figures for net sales, operating income, ordinary income and net income. We are expecting a best first half ever. We have upward revised the operating income forecast for all 3 segments.

A major development during the quarter was the recently announced decision to acquire Sage Automotive Interiors, Inc., an automotive interior material manufacturer. This is part of our strategic expansion of automotive-related business. It will give us a stronger position in the automotive interior-related market and accelerate expansion of our automotive-related business. The deal has not been closed yet and therefore, does not affect Q1 earnings. The latest first half forecast does not reflect any impact either.

In addition, we have released today preliminary results of the overseas Phase III clinical study for ART-123. Again, this does not change Q1 earnings, and the forecast does not reflect any impact.

Slide 6 summarizes the financial results. Net sales came to JPY 489.8 billion, up JPY 41 billion year-on-year. Operating income came to JPY 47.9 billion, up JPY 10 billion. Ordinary income came to JPY 51.8 billion, up JPY 10.6 billion. Net income attributable to owners of the parent increased by JPY 6.4 billion. All these figures are the highest ever for a first quarter. The domestic naphtha price averaged at JPY 48,700 per kiloliter during the period, up JPY 9,600 per kiloliter from a year before. The exchange rate averaged at JPY 109 to the U.S. dollar with the yen stronger by JPY 2 per dollar.

Turning to Slide 7 and the income statement. SG&A came to JPY 113.5 billion, up JPY 4.7 billion year-on-year. This comes from increased headcount to reinforce sales activity and expenses related to the planned relocation of our headquarters this summer. Net extraordinary income came to JPY 6 billion, an improvement by JPY 1.6 billion year-on-year. As in FY 2017, we are reducing our strategic shareholdings, which have resulted in gain on sale of investment securities. Net income attributable to owners of the parent came to JPY 36.4 billion, up JPY 6.4 billion.

Slide 8 shows the summary balance sheet. Total assets increased by JPY 53.2 billion during the first quarter. Cash and deposits increased on the back of sales growth. Fixed assets increased in line with capital investments. Inventories increased mostly for Homes. The weaker Japanese yen at the end of the quarter played a role, too. Liabilities increased by JPY 36.2 billion. Interest-bearing debt increased to address a peak impairments of bonuses and dividends. Net assets increased by JPY 16.9 billion, thanks to the quarterly net income.

Slide 9 describes consolidated cash flows. Operating cash flow was a net inflow of JPY 35.3 billion, thanks to continued strong operating performance. Investment cash flow was a net outflow of JPY 11.3 billion, which is an improvement from a year ago. While strategic investments for growth continued, there were cash receipts from repayment of loans made to equity method affiliates on the back of their strong performance. As a result, the free cash flow came to a net inflow of JPY 24 billion. Cash and cash equivalents at the end of the period stood at JPY 185.8 billion.

Slides 10 to 12 provide net sales and operating income broken down by segment and by business category.

Slide 13 and onwards provide review of operations by business category. Let us turn to Slide 13, which describes the Fibers business category. Net sales for the category came to JPY 36.2 billion, up JPY 4.2 billion year-on-year. Operating income increased by JPY 400 million to JPY 3.9 billion. While feedstock costs were higher, shipments increased for Lamous and Bemliese.

Please turn to Page 14. In Chemicals, net sales where JPY 205.6 billion, up JPY 27.3 billion and operating income was JPY 28.6 billion, up JPY 6 billion. In Petrochemicals, terms of trade for acrylonitrile, AN, improved. In the first quarter of fiscal 2017, there was a maintenance turnaround at naphtha cracker of Asahi Kasei Mitsubishi Chemical Ethylene Corp., but none in this past first quarter. Owing to sales volume increase and expense reduction, those sales and operating income increased year-on-year. Market price and the price spread for AN for the first quarter were: AN $1,998 per ton, propylene $1,088 per ton for a price spread of $910 per ton.

In performance polymers, sales and operating income decreased. Sales for engineering plastics were firm, but partly due to deteriorated terms of trade for synthetic rubber for fuel-efficient tires. Both sales and operating income were down year-on-year. For performance materials and consumables, sales increased, but the operating income was flat year-on-year. Sales were firm for ion-exchange membranes and others. But due partly to decreased shipments of electronic materials, sales increased, while the operating income remained almost unchanged year-on-year.

Please turn to Page 15. In Electronics, sales totaled JPY 38.4 billion, up JPY 1.9 billion. And operating income was JPY 2.5 billion, up JPY 0.5 billion. In separators, sales and operating income increased with increased shipments of lithium-ion battery separator. In electronic devices, sales were flat and operating income decreased year-on-year. While there was a decrease in sales of camera module devices for smartphones, there also was effect of consolidation of Senseair AB, a Swedish manufacturer of gas sensor modules starting in April.

Please turn to Page 16. In Homes, net sales were JPY 115.7 billion, little changed year-on-year; and operating income was also little changed at JPY 7.1 billion. In order-built homes, the number of buildings delivered decreased for Hebel Haus unit homes. Added with increased SG&A expenses, such as labor costs and advertising expenses, sales and operating income decreased. But with increased sales and operating income for real estate and remodeling operations, overall sales and operating income were comparable to the same period of the previous year. Value of new orders for order-built homes increased centering on unit homes, up 7% year-on-year.

Please turn to Page 17. In Construction Materials, net sales were JPY 13 billion and operating income was JPY 0.8 billion, both at the same level as in the same period as the previous year. Impact of higher feedstock costs was felt, but with firm sales of each product, sales and operating income were flat year-on-year.

Page 18. In Health Care, sales were JPY 34.7 billion, an increase of JPY 1.9 billion. And operating income was JPY 7.2 billion, an increase of JPY 1.9 billion. Pharmaceuticals posted lower sales and flat operating income, despite increased shipments of Teribone osteoporosis drug, due largely to the impact of reduced NHI drug price and competition from generics. Devices recorded higher sales in operating income on increased shipments of Planova virus removal filters.

Page 19. In Critical Care, net sales were JPY 41.7 billion, up JPY 4.3 billion and operating income was JPY 5.1 billion, up JPY 1.4 billion, with increased shipments of defibrillators for professional use and firm performance of LifeVest wearable defibrillator business. On a U.S.-dollar basis, net sales increased 13.7% over the same period of the last fiscal year. Gross operating income before PPA impact increased 20.1%.

I will now go over the forecast for the first half of fiscal 2018, starting Page 21. Today, we announced upward revisions to the consolidated operating performance forecast announced in May as follows: net sales JPY 1,045 billion, up JPY 8 billion from the May forecast; operating income JPY 97 billion, up JPY 11.5 billion; ordinary income JPY 103.5 billion, up JPY 13 billion; and net income attributable to owners of the parent, JPY 78.5 billion, up JPY 16 billion. We assume the domestic naphtha price to be JPY 50,850 per kiloliter for the first half in light of the feedstock costs trending upward from the first to the second quarters. This is JPY 850 higher than the assumption made for the forecast announced in May. Exchange rate is assumed to be JPY 110 to the U.S. dollar, reflecting the current rate back in May, when we assumed the exchange rate of JPY 105 to the dollar as yen was foreseen to appreciate somewhat back then.

With respect to dividends, in May, we forecasted a full year dividend of JPY 34 per share. We are forecasting an interim dividend of JPY 17 per share. The actual amount of dividends will be decided properly as the performance is confirmed in accordance with the company's dividend policy so as to return profit to our shareholders. This time, we are revising only the first half forecasts. Full year forecasts will be revised as deemed necessary together with the second half forecast when we announce the first half results.

Page 24. I will explain the operating income forecast for each business. First, Fibers. Operating income revised upward by JPY 0.5 billion, reflecting strong performance of Bemliese, Lamous and Bemberg cupro fiber.

In Chemicals, operating income is revised upward by JPY 6.5 billion as we expect AN price spread and others to improve in petrochemicals. Market price assumptions for the first half are: AN $2,049 per ton, propylene $1,099 per ton for a spread of $950 per ton.

For Electronics, operating income revised upward by JPY 0.5 billion. We anticipate the electronic devices to be affected by camera module devices and others being weaker than the projection, but we expect the separators to remain strong.

For the Homes segment, sales forecast remains unchanged, while the operating income has been revised upward by JPY 1 billion as a total for Homes and Construction Materials, as we projected decline in the SG&A expenses for Homes.

For Health Care, operating income has been revised upward by JPY 1 billion with the strong sales projected for Planova and others. For Critical Care, operating income has been revised upward by JPY 2 billion.

That concludes my presentation. Thank you for your kind attention.

[Unknown Executive]

Now let us take questions.

[Takato Watabe, analyst]

Watabe from Morgan Stanley MUFG Securities. First on Electronics. Can you provide more detail on separators and electronic devices, in particular, on quarter-on-quarter differences between Q4 FY '17 and Q1 FY '18 as well as what to expect going on to Q2, perhaps some numbers, please?

[Akira Fukuda, executive]

Fukuda from Separators SBU. With regard to Separators, Q1 sales and operating income were both up from Q4. This was largely driven by an increase in shipment volume of the LIB separator. With regard to Q2, we are expecting shipments to increase quarter-on-quarter for each product, including the lead acid battery separator, not just the LIB Separator. At the same time, however, we are proactively expanding capacity and that pushes up fixed costs. As a result for Q2, we are expecting net sales growth, but operating income decline.

[Izumi Kawata, executive]

Kawata from Asahi Kasei Microdevices. With regard to electronic devices, Q1 sales and operating income were both up from Q4, thanks to recovery in demand for audio LSIs for smartphones and for the electronic compass. We expect this to continue into Q2 so that Q2 would be level with Q1.

[Takato Watabe, analyst]

What about LIB separator shipments year-on-year? Can you provide us with specific numbers?

[Unknown Executive]

For the usual shipment volume indices, please kindly wait for Q2 results. Just roughly speaking, shipments are up by about 30% from the same period the previous year.

[Takato Watabe, analyst]

Now turning to the Health Care segment. Can you explain the large sales growth in medical devices? And with regard to Critical Care, can you tell us more about the JPY 2 billion increase due to sales prices? Could you also comment on the preliminary results of your overseas clinical study for ART-123?

[Yutaka Shibata, executive]

Shibata speaking. First on devices. As we explained earlier, Planova drove this growth.

[Takato Watabe, analyst]

Does that mean nothing new or extraordinary? It appears to me that sales growth is breaking away from trend levels.

[Yutaka Shibata, executive]

Actually, Planova sales volume is subject to quarterly fluctuations depending on the timing of purchases made by users. Yes, Q1 was strong, and we expect Q2 to be strong, too, but we cannot simply extrapolate. The sales price difference for Critical Care comes from the difference in product mix and regional mix. With regard to the overseas clinical study for ART-123, please understand that the release is only about preliminary results. Analyses are still underway.

[Mikiya Yamada, analyst]

Yamada from Mizuho Securities. My first question is on Chemicals. According to Slide 11, there is a large impact of sales prices. Now the net impact of sales prices and operating costs and others is a positive JPY 2.5 billion. I understand that terms of trade improved for AN, but deteriorated for synthetic rubber. Does it mean that there was something other than AN or synthetic rubber for which terms of trade changed significantly? Additionally, is it correct to understand that the JPY 3.5 billion positive impact from sales volume difference mostly comes from growth in high value-added products?

[Toshiyasu Horie, executive]

Horie from Petrochemicals SBU. Terms of trade improved for petrochemicals in general. This includes MMA or methyl methacrylate and styrene, although the impact is not so large. With regard to your question on sales volume, a major factor is that last year, there was a maintenance turnaround at the naphtha cracker of Asahi Kasei Mitsubishi Chemical Ethylene Corporation, but not this year. Most of this difference, therefore, comes from AN and basic chemicals.

[Mikiya Yamada, analyst]

My understanding is that styrene is mostly for captive use and that you sell very little outside of the group. If so, how would the terms of trade make a difference?

[Toshiyasu Horie, executive]

It is true that most of the styrene is used within the group, but we do sell to the outside, too, and therefore, there is benefit from improved terms of trade. That means the improvement was significant enough to make a difference.

[Mikiya Yamada, analyst]

I see. My next question is on Critical Care. In response to an earlier question, you explained that the sales price difference was, in reality, sales mix difference. But prices for such offerings must be regulated just like pharmaceuticals. So there would be a single price for a same product. How could sales mix make a difference? Do you mean, for example, that LifeVest business is now picking up outside of the United States? Or are you now offering new differentiated services within the United States?

[Yutaka Shibata, executive]

Shibata speaking. Sales mix here includes both product mix and regional mix.

[Hidemitsu Umebayashi, analyst]

Umebayashi from Daiwa Securities. With regard to depreciation, according to the financial summary release, depreciation and amortization in Q1 decreased year-on-year by JPY 2.9 billion. Previously in May, you explained the switch from the fixed percentage method of depreciation to the straight-line method for your domestic operations and said that it would make a difference of about JPY 10 billion over the full year. It would be most helpful if you could use the table on Slides 11 and 12 and point out where and how much the impact of the change in depreciation method would play out for each segment.

[Yutaka Shibata, executive]

Shibata speaking. In Q1, the impact of the depreciation method change came to about JPY 1.5 billion. Since a large part of our CapEx is for chemicals, most of this amount falls under chemicals.

[Hidemitsu Umebayashi, analyst]

Is it correct to understand that while consolidated depreciation and amortization decreased year-on-year by about JPY 3 billion, only JPY 1.5 billion or roughly half of that is due to the accounting change?

[Yutaka Shibata, executive]

That is correct. The impact on Q1 figures is described under the other information part of the financial summary.

[Hidemitsu Umebayashi, analyst]

Can we now talk about your equity method affiliate in Thailand, PTT Asahi Chemical? Despite strong market prices for MMA and AN, that contribution does not show up in equity in earnings of affiliates. Is that because the Thai baht is weaker?

[Toshiyasu Horie, executive]

Horie for Petrochemicals. Yes, that is correct. Operating income of PTT Asahi Chemical came in very strong and up year-on-year, thanks to both AN and MMA. However, the rapid depreciation of the Thai baht against the U.S. dollar since the beginning of the financial year resulted in foreign exchange loss on dollar-denominated borrowings. Therefore, net contribution to consolidated results ended up small.

[Atsushi Ikeda, analyst]

Ikeda from Citigroup Global Markets Japan Inc. First on Chemicals. Q1 operating income increased by JPY 7.2 billion from Q4 FY 2017. Can you provide a breakdown of this figure into each of the 3 businesses? In particular, for performance materials and consumables, the seasonality factor is always big. So could you explain that? Also AN is currently traded at around $2,200 per ton, which is pretty high. What is your view on the demand-supply balance? What about the delay in the launch of a new plant by a Chinese AN producer?

[Toshiyasu Horie, executive]

Horie for Petrochemicals. From Q4 to Q1, petrochemicals across the board, including AN and basic chemicals as well as MMA were all strong and operating income was up.

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Polymers SBU. Performance polymers can be broken down into synthetic rubber and engineering plastics. Operating income for synthetic rubber was up quarter-on-quarter mostly because of the maintenance turnaround in Q4 at our capacity in Singapore. Operating income for engineering plastics was almost unchanged. Shipments were mostly flat, too.

[Futoshi Hamamoto, executive]

Hamamoto from Investor Relations. With regard to performance materials and consumables, operating income increased from Q4 to Q1. Saran Wrap cling film shipments increased due to seasonality. Sales of ion-exchange membranes were firm, too.

[Atsushi Ikeda, analyst]

What about the AN supply and balance?

[Toshiyasu Horie, executive]

Horie for Petrochemicals speaking, again. That new plant in China that you mentioned was originally expected to come online sometime between January and March this year, but that additional supply has not happened yet. In addition, from May to June, there were supply disruptions at 2 locations in Europe, a stoppage at one plant and reduced production at another for around a month. On the other hand, demand has been as expected. The result is overall tightness. There are reports that the new plant in China has received permission for trial operation, but no news so far that it is actually running. Until that happens, the current tightness is likely to continue.

[Atsushi Ikeda, analyst]

Now on Separators. Do you see any different signs between dry process separators and wet process separators? Any new developments or progress with regard to your capacity expansion for the 2 types of separators?

[Akira Fukuda, executive]

Fukuda for Separators. Capacity expansion is making progress as planned for both dry process and wet process separators. With regard to shipments, inquiries keep coming in for both types.

[Atsushi Ikeda, analyst]

Generally speaking, can we say that smartphone-related demand is weaker, while there is strong demand for use in energy storage systems or ESS and in automotives?

[Akira Fukuda, executive]

There is indeed strong demand growth for use in automotives and in ESS. Smartphone-related demand also remains firm, although the growth rate is smaller.

[Shinobu Takeuchi, analyst]

Takeuchi from SMBC Nikko Securities. I have some questions on Chemicals. On Page 27, your forecast for the second quarter expects a quarter-on-quarter decline of JPY 1.5 billion. Can you give us your profit trend projections for each of the 3 businesses?

[Toshiyasu Horie, executive]

Horie from the Petrochemicals SBU. For Petrochemicals, we are not expecting any major quarter-on-quarter difference. We are expecting improved terms of trade for AN and MMA to continue. So we are projecting similar operating results for the first and second quarters.

[Shinobu Takeuchi, analyst]

You're projecting the AN propylene price spread for the first half to be $950. Since the spread for the first quarter was $910, you must be expecting a wider spread for the second quarter. Why is it that the operating income for the petrochemicals is projected to be flat quarter-on-quarter?

[Toshiyasu Horie, executive]

For AN, we are expecting higher profit owing to increased shipment as well as wider price spread as you indicated.

[Yukifumi Kuwaba, executive]

Kuwaba from the Performance Polymers SBU. Shipments of synthetic rubber are firm, and we are expecting butadiene price to stabilize. So between increased shipments and improved terms of trade, we expect higher profit quarter-on-quarter. As for engineering plastics, shipments are very strong. But with expected rise in feedstock cost, we are projecting profit to decline quarter-on-quarter. For the performance polymers overall, we expect a slight decline in profit quarter-on-quarter.

[Futoshi Hamamoto, executive]

Hamamoto of Investor Relations to comment on the performance materials and consumables. First on performance materials. Ion-exchange membranes presented a firm performance in the first quarter. From this high level, shipments of ion-exchange membranes are expected to decline slightly in the second quarter. But with other products performing firmly, operating income for performance materials overall is expected to remain almost flat quarter-on-quarter. Consumables expect the adverse impact of recent rises in feedstock cost. Overall, we are projecting the operating income for the performance materials and consumables to be lower quarter-on-quarter.

[Shinobu Takeuchi, analyst]

I see. Chemicals operating income forecast for first half has been revised upward by JPY 6.5 billion. Do I understand correctly that this is basically related to petrochemicals while higher naphtha price is a factor? For performance polymers, you are keeping the first half profit forecast as announced in May, correct?

[Yukifumi Kuwaba, executive]

Kuwaba from the Performance Polymers SBU. Compared to the forecast announced in May, operating income for Performance Polymers is now forecasted to be slightly lower.

[Shinobu Takeuchi, analyst]

My second question is on pharmaceuticals. Lower sales and flat operating income. Can you elaborate on factors once again? Page 12 says decrease of JPY 0.2 billion due to sales price. But given that full year impact of reduced reimbursement price is projected to be around JPY 2 billion, the size of this negative figure sounds rather small. Are there any positives in sales price factor, including product mix?

[Hiroki Ideguchi, executive]

Ideguchi from Asahi Kasei Pharma. As you know, impact of downward revision of NHI drug price is felt in terms of sales price factor. But since we have a higher proportion of new drugs compared to our peers, the impact has been rather limited, kept at JPY 2 billion on a full year basis.

[Shinobu Takeuchi, analyst]

And so the impact of NHI drug price revision was largely made up for by sales volume increase of Teribone and others and streamlining, am I correct?

[Hiroki Ideguchi, executive]

Yes.

[Shigeki Okazaki, analyst]

Shigeki Okazaki from Nomura Securities. I have some questions on Critical Care. Last fiscal year, your defibrillators for professional use greatly increased the market share. At the May earnings briefing, you were projecting 10% growth in sales year-on-year on U.S.-dollar basis. But first quarter results and second quarter forecast seem to be stronger. What's the difference from your projection for LifeVest and defibrillators?

[Yutaka Shibata, executive]

Shibata speaking. No major change in our view. We are expecting a 10%-or-so growth, and the actual performance is in line with that. It was slightly better particularly for professional-use defibrillators in the first quarter.

[Shigeki Okazaki, analyst]

And upward revision to the first half forecast is mainly due to increased sales of defibrillators for professional use, I mean, the JPY 2 billion in operating income forecast. Am I correct?

[Yutaka Shibata, executive]

Yes, both defibrillators and LifeVest as those were stronger in the first quarter.

[Shigeki Okazaki, analyst]

Last year, your professional use defibrillators enjoyed increased market share. So back in May, you were projecting the growth rate to become more moderate this year. But do you think the market share actually is still growing?

[Yutaka Shibata, executive]

Professional-use defibrillators continue to enjoy favorable condition due to the competitor factor. That remains unchanged although the growth rates of the market share has been more moderate. But the market itself is growing, and our sales are growing.

[Shigeki Okazaki, analyst]

I see. Moving on to Health Care. First half operating income forecast has been revised upward by JPY 1 billion. What are the factors?

[Yutaka Shibata, executive]

Shibata speaking. Upward revision of operating income is in relation to Planova in devices, which was firm in the first quarter. We are expecting this momentum to be maintained throughout the first half.

[Shigeki Okazaki, analyst]

So no change for pharmaceuticals. Only the strong Planova performance is reflected. Am I correct?

[Yutaka Shibata, executive]

Yes.

[Shigeki Okazaki, analyst]

And Planova is projected to do better than in the past, although with some ups and downs in some quarters. Am I correct?

[Yutaka Shibata, executive]

Yes.

[Go Miyamoto, analyst]

Miyamoto from UBS Securities. My first question is on Electronics. Page 23 shows first half sales forecast revised downward by JPY 1 billion while Page 24 shows operating income revised upward by JPY 0.5 billion. Can you give us the breakdown, separators versus electronic devices? And furthermore, for separators, wet process versus dry process versus lead-acid battery separators?

[Akira Fukuda, executive]

Fukuda from the Separators SBU. While there are some differences by products, in light of changes in foreign exchange rate assumptions and improvement in cost of sales, including improvement in operating rates of facilities and lower fixed costs, we expect operating income to be higher than the May forecast. All sales forecasts remain unchanged.

[Izumi Kawata, executive]

Kawata from Asahi Kasei Microdevices. Now as electronic devices expect sales of camera module devices for smartphones to be lower than when we put together the May forecast, we are projecting lower sales and profit.

[Go Miyamoto, analyst]

A follow-up question. The ESS market seems to be expanding. Am I correct to assume that you have the top market share in this particular market segment of separator for ESS? And what is your comparative advantage?

[Akira Fukuda, executive]

It's hard to comment on the market share as we don't know the exact size of the denominator or the total size of the pie. The dry process LIB separator is well appreciated in the market by the customers given its property of no horizontal shrinkage leading to high adoption rate.

[Go Miyamoto, analyst]

I see. My next question is on Homes. I'm looking at Page 11. In order-built homes, operating costs and others pushed up operating income by JPY 0.1 billion year-on-year, yet you mentioned higher advertising expenses and labor cost in order-built homes. So can you explain why operating cost and others are positive for homes?

[Kensuke Sakai, executive]

Sakai from Asahi Kasei Homes. In the first quarter, SG&A expenses for order-built homes were higher than a year ago, but condominium construction in real estate presented firm performance and canceled out negatives associated with operating costs and others.

[Go Miyamoto, analyst]

You're revising the first half operating income forecast from May by JPY 1 billion. Why is that?

[Kensuke Sakai, executive]

We're expecting SG&A expenses in order-built homes to be lower and we are expecting firm performance centering on rental management in real estate. These are the main factors for upward revision.

[Shogo Umeda, analyst]

Umeda from JPMorgan Securities Japan. I have a question on operating income increase and decrease shown on Page 11. For electronics, operating income cost and others pushed up profit by JPY 1.7 billion. But earlier, you explained that you are projecting production increase of separators and indeed shipments are growing. But that doesn't seem to sit well with the profit increase of JPY 1.7 billion coming from operating cost and others. So can you help me here? Also can we expect this to continue into the second quarter and beyond? Or is this a onetime factor?

[Akira Fukuda, executive]

Fukuda from the Separators SBU. The positive associated with operating cost and others is mainly attributable to improved operating rates of separator production facilities.

[Shogo Umeda, analyst]

So I take it that the plant capacity expansion for the wet process for first half is up and running and the difference in operating rates is having a positive impact. Am I correct?

[Akira Fukuda, executive]

Well, actually the effect of operating rate differential is common to both wet process and dry process.

[Shogo Umeda, analyst]

So you're saying that for second quarter onward, there will be positives coming from improved operating rates, but with increase in depreciation associated with capacity expansion, positives from operating cost and others are not sustainable?

[Akira Fukuda, executive]

Actually the -- at the currently projected volume, we expect positive impact of difference in operating rates to continue.

[Unknown Executive]

This concludes the first quarter earnings conference call. Thank you for your participation.