Asahi Kasei Corp

TSE:3407

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. Thank you very much for joining us for the conference call on Asahi Kasei Corporation's earnings for the first quarter that ended June 30, 2019. We will begin with a presentation from Mr. Yutaka Shibata, CFO; and then take questions.

Other participants from Asahi Kasei are Yozo Sato, Corporate Accounting and Control; Toshiyasu Horie, Basic Materials Strategic Business Unit, or SBU; Yukifumi Kuwaba, Performance Products SBU; Hiroaki Sugiyama, Specialty Solutions SBU; Akira Fukuda, Separator Administration, Specialty Solutions SBU; Izumi Kawata, Asahi Kasei Microdevices Corporation; Kensuke Sakai, Asahi Kasei Homes Corporation; Masato Kashiwagi, Asahi Kasei Pharma Corporation; and Futoshi Hamamoto, Investor Relations.

Let me give the floor to Mr. Shibata now.

[Yutaka Shibata, executive]

Good afternoon. This is Yutaka Shibata, CFO. Thank you very much for joining us for this briefing. I would like to present Q1 earnings and the Q2 forecast and will refer to the presentation material slides.

Let us begin with Slide 3. In Q1 FY 2019, consolidated operating income was down year-on-year, mainly due to the slowdown of the Chinese economy. However, thanks to firm performance in Homes and Health Care, the quarterly figure was still the second highest after Q1 FY 2018.

Homes and Health Care segments were up year-on-year with operating income of the 2 segments combined growing by 13% from the same period last year. The Materials segment was down year-on-year due to the maintenance shutdown of naphtha cracker and plants of derivatives, combined with lower market prices for products as well as the slowdown of the Chinese economy and smartphone-related markets. Operating income for the segment declined 26% year-on-year. Consolidated operating income was down 14% year-on-year.

From Q1 to Q2, we expect continued firm performance for Homes and Health Care. For Material, that maintenance shutdown impact will be gone, and we expect increased shipments centered on Specialty Solutions.

For the first half, we have downward revised the consolidated operating income forecast to JPY 94.5 billion. This is down 3% from the initial forecast released in May, but will still be the second highest for a first half after that of FY 2018.

Slide 4 shows the outline of Q1 operating income for each segment. In the Materials segment, the Basic Materials business category suffered from the impact of maintenance shutdown of the naphtha cracker and plants of derivatives, combined with deteriorated terms of trade for MMA, polyethylene, polystyrene, et cetera, resulting in a year-on-year operating income decrease.

Performance Products benefited from the consolidation of Sage Automotive Interiors, Inc., yet operating income declined due to the impact of the slowdown of the Chinese economy on fiber products, such as nonwovens.

Specialty Solutions was also down year-on-year. Demand was down for lithium-ion battery separators for use in ESS, or energy storage systems. The slowdown in the smartphone market had an impact mainly on electronic devices. Shipments of ion-exchange membranes decreased in China.

For the Homes segment, operating income increased year-on-year. The largest contributor was order-built homes operations. Deliveries increased and the average price was higher, in line with the increase in home sizes. The segment posted highest ever sales and operating income for a first quarter.

Health Care operating income also increased, thanks to growth in shipments of defibrillators for professional use.

Moving on to Slide 5, which shows the Q2 forecast. From Q1 to Q2, we expect firm performance to continue for Homes and Health Care. We also expect operating income to improve for Material in the absence of that maintenance shutdown of naphtha cracker and plants of derivatives and with increased shipments of ion-exchange membranes, lithium-ion battery separators and electronic devices.

Within Material, we expect operating income to increase for Performance Products. Unlike Q1, there will be no maintenance turnaround impact on synthetic rubber operations and shipments for Saran Wrap cling film are planned to increase.

For Specialty Solutions, again, we expect operating income to increase. Shipments of ion-exchange membranes are expected to concentrate in Q2. For lithium-ion battery separators, we expect demand for use in ESS to recover and shipments to increase for both consumer electronics and automotive applications. Smartphone-related demand for electronic devices is also expected to recover. For Homes and Health Care, we expect firm performance to continue.

Slide 6 summarizes the forecast for the first half. I would like to come back to this later.

Please turn to Slide 8. I have already covered the key financial figures. As you can see, net sales were JPY 502.1 billion, operating income was JPY 41.3 billion and net income attributable to owners of the parent was JPY 24.4 billion.

The net sales amount was the highest ever for a first quarter, the operating income and ordinary income amounts were the second highest ever and the net income amount was the third highest ever, respectively, again for a first quarter.

Slide 9 shows the consolidated statements of income. Net sales were JPY 502.1 billion, up JPY 12.3 billion year-on-year. Positives included an effect of the consolidation of Sage Automotive Interiors. The gross profit was JPY 162.7 billion, accounting for 32.4% of sales, which was slightly lower compared to the same period of the previous fiscal year. This was due to the impact of the maintenance shutdown of the naphtha cracker and others. SG&A expenses increased by JPY 7.9 billion to JPY 121.4 billion. This was because we increased the number of personnel to strengthen marketing function as well as the increase in amortization of goodwill associated with the acquisition of Sage Automotive Interiors.

Operating income was JPY 41.3 billion, down JPY 6.5 billion year-on-year. Nonoperating income or expenses recorded an income of JPY 2.6 billion, a deterioration of JPY 1.3 billion-or-so compared to the previous fiscal year, including a slight deterioration in net equity in earnings and losses of affiliates.

The main reason was the deterioration of MMA operating performance at PTT Asahi Chemical Company Limited in Thailand. Net extraordinary income and loss was negative JPY 200 million, which represented a deterioration of JPY 6.2 billion year-on-year. This was due to the considerable unloading of strategic shareholdings during the same period of the previous fiscal year, which resulted in a year-on-year decline in the gain on sales of investment securities.

Net income attributable to owners of the parent after income taxes was JPY 24.4 billion coming from the decrease in the operating income and the decrease in unloading of strategic shareholdings.

Slide 10 shows the balance sheets. Compared to the end of March, total assets decreased by JPY 51.7 billion. The main reasons were a decrease in cash and deposits due to a reassessment of cash on hand and a decrease in operating receivables associated with the maintenance shutdown of the naphtha cracker and others.

Turning to liabilities and net assets on the right-hand side. Liabilities decreased by JPY 15.4 billion. The reason was a decrease in trade payable due to the maintenance shutdown of the naphtha cracker. Net assets decreased by JPY 36.3 billion. This was mainly due to the JPY 10 billion repurchase of shares carried out a couple of months ago and the decline in foreign currency translation adjustment, reflecting the appreciation of the yen.

Goodwill, interest-bearing debt and debt-to-equity ratio are shown on the bottom left of this slide. Interest-bearing debt increased by JPY 30.7 billion, and the debt-to-equity ratio was 0.34.

Please turn to Slide 11 for the statements of cash flows. Operating cash flows were net cash inflow of JPY 15.9 billion. Income before income taxes and depreciation and amortization, cash inflow totaled about JPY 65.4 billion, but there was an increase in demand for working capital in the Homes business and others.

Investing cash flows were net outflow of JPY 16.4 billion. The reason for this was an increase in the amount of payments associated with the expansion of capacity following aggressive expansion investments made up to fiscal 2018.

Free cash flow was net cash outflow of JPY 500 million. Financing cash flows were net outflow of JPY 5.3 billion, including JPY 29 billion raised to meet the funding requirements for the payment of cash dividends and repurchase of shares. Cash and cash equivalents at the end of the period were JPY 170.5 billion.

I will skip Slide 12, as most of what's shown there has been covered at the outset.

Slide 14 shows the consolidated operating performance forecast for the first half of fiscal 2019. As we expect the Material segment to feel the impact of slowdown of Chinese economy as well as automotive-related and smartphone-related markets, operating income forecast has been revised to JPY 94.5 billion, down 3% from the May forecast.

Homes are expected to perform as planned. In the Homes business category, we are forecasting record sales and operating income for the first half of the year.

Health Care expects firm operating performance in each business, and we expect the results for this segment to turn out better than the May forecast.

Interim dividends are projected to be JPY 18 per share.

Slide 15 shows the sales and operating income forecast by segment. The results for the first quarter and forecast by business category are described in the appendix after Slide 16.

We'll be happy to take your questions on them in the Q&A session. That concludes my presentation. Thank you for your kind attention.

[Operator]

We can now take questions. Watabe from Morgan Stanley, MUFG Securities.

[Takato Watabe, analyst]

My first question is on Basic Materials. Q1 operating income was down year-on-year, although terms of trade improved for acrylonitrile, or AN. You mentioned factors such as the maintenance shutdown and shipment declines. But can you elaborate further about shipments and also about spreads for products other than AN, please?

[Toshiyasu Horie, executive]

Horie from Basic Materials SBU. For operations other than AN, uncertainties about the Chinese economy have slowed down business across the board. For example, ethylene prices have fallen significantly relative to naphtha. Benzene prices have come down too. As market prices of monomers fell, prices of polymers, such as polyethylene and polystyrene also followed. As a result, spreads are tighter than a year before. MMA market prices have continues to decline.

In summary, the maintenance shutdown increased fixed costs and decreased shipments. In addition, spreads were squeezed across the board, except for AN. The operating income decline is a result of all that added together.

[Takato Watabe, analyst]

Can you tell us more about AN? I understand that market prices had slipped back for about a month, but have recently started to recover.

[Toshiyasu Horie, executive]

With regard to AN, the apparent decline in market prices was based more on indicative prices cited in market reports rather than real transactions. Many players were holding off purchases given uncertainties about the Chinese economy, resulting in low transaction activity.

Actual contract prices for AN destined for Asia averaged at above $1,800 per ton in July. It may be the case that real prices have yet to come down. Recently, market prices appear to be bottoming out. This is probably because some AN users, in particular acrylic fiber producers, have resumed purchasing now that a bottom is within sight and given maintenance turnaround schedules down the road.

It suggests that prices may remain relatively stable until around September.

[Takato Watabe, analyst]

My next question is about Critical Care. Can you explain the large year-on-year growth in the Critical Care sales figure, please? And can you also explain this JPY 2.8 billion negative impact on operating income due to operating cost and others, please? Should we expect something like 4x this figure over the full year?

[Yutaka Shibata, executive]

Shibata speaking. The Critical Care business growth is continuing, centered around defibrillators for professional use. On the expense side, the bulk of the increase is in SG&A to support continued business expansion. This includes R&D expenses. Such expenses are prone to quarterly fluctuations, and I certainly do not expect 4x this level of increase over the full year. These figures need to be examined quarter-by-quarter.

[Takato Watabe, analyst]

I thought ZOLL was at one point in time trying to control fixed expenses. Have they now shifted gear in light of geographical expansion opportunities?

[Yutaka Shibata, executive]

Yes. That is true for the LifeVest wearable defibrillator. In addition, ZOLL has recently made some acquisitions in the data management field. So they are definitely investing and better preparing themselves for future growth.

[Operator]

Yamada from Mizuho Securities.

[Mikiya Yamada, analyst]

First on Homes, which recorded the highest ever sales and operating income for a first quarter. Was sales growth more than you had initially expected or in line? And what about Q2? You have not upward revised the forecast for the first half, but can you tell us more about the current situation for both sales and expenses, please? And can you also provide more detail about housing-related businesses too?

[Kensuke Sakai, executive]

Sakai from Homes. Q1 sales was in line with expectation, and we expect Q2 to be in line too. Housing-related operations were also in line with expectation across the board for Q1, although some grew more than others on a year-on-year basis. We expect Q2 to be in line too.

[Mikiya Yamada, analyst]

Are costs in line too?

[Kensuke Sakai, executive]

Yes. Some are up, some are down, but generally in line as a whole. On Slide 25, there is significant year-on-year top line growth in remodeling as well as in other housing-related, et cetera, the latter, in particular.

[Mikiya Yamada, analyst]

What caused this?

[Kensuke Sakai, executive]

The other housing-related, et cetera, figure this time includes contribution from Erickson Framing Operations.

[Mikiya Yamada, analyst]

I see. Next, on Material. How is post-merger integration going for Sage Automotive Interiors? And how much confidence do you have in the recovery of lithium-ion battery separator shipments in Q2? You said you expect demand for use in ESS to recover and shipments for other applications to also increase from Q2. Also can you update us on the latest situation regarding ion-exchange membranes and electronic materials, please?

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Products. With regard to Sage, the integration is going well. In Q1, Sage had a positive contribution. Actually, Performance Products' operating income was down year-on-year, although sales went up. And that makes it a little difficult to see the Sage contribution, but it is there.

[Mikiya Yamada, analyst]

Was the Sage earnings contribution positive even after amortization of goodwill?

[Yukifumi Kuwaba, executive]

Yes.

[Hiroaki Sugiyama, executive]

Sugiyama from Specialty Solutions. The year-on-year decline in operating income was, as shown on Slide 17, mostly due to sales volume difference. As you rightly mentioned, ion-exchange membranes and battery separators accounted for much of this. Ion-exchange membrane shipments do not occur constantly such as every month and tend to fluctuate. In FY 2018, we had rather large shipments in Q1. This year, we have less in Q1, but more in Q2, which caused the apparently significant year-on-year difference.

With increased uncertainties about the Chinese economy, demand for caustic soda slowed down and that, in turn, delayed replacement demand for ion-exchange membranes. Over the longer term, however, we are not observing a decline in investment appetite among players in the caustic soda market.

Indeed, shipments of electrolyzers are still strong and contributing to sales growth, but its contribution to operating income is rather limited.

[Akira Fukuda, executive]

Fukuda for separators. With regard to dry process lithium-ion battery separators, the fire incident in South Korea did have an impact, and Q1 shipments were down significantly year-on-year. However, after the government of the Republic of Korea released an investigation report on June 11, both orders and shipments are recovering. We expect ESS-related sales to recover in Q2.

[Operator]

Shigeki Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

According to Slide 22, which shows quarterly operating income by segment, Q2 sales will be up year-on-year for Performance Products, but down for Specialty Solutions. Can you tell us which products are up and which ones are down?

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Products. Yes, Q2 operating income in FY 2018 was JPY 10.7 billion, and we expect a year-on-year increase to JPY 11.6 billion in Q2 FY 2019. Performance polymers are generally up. In addition, among consumables, we are expecting some rush demand for Saran Wrap cling film ahead of the consumption tax hike in October.

[Shigeki Okazaki, analyst]

What about synthetic rubber and engineering plastics? I believe they struggled in Q1. Would Q2 be better?

[Yukifumi Kuwaba, executive]

Synthetic rubber shipments will be slightly up, but almost unchanged. Engineering plastic shipments are expected to increase from Q1 to Q2.

[Hiroaki Sugiyama, executive]

Sugiyama from Specialty Solutions. Specialty Solutions operating income for Q2 is forecast to be down year-on-year by JPY 600 million. Performance materials are to be slightly up. As mentioned earlier, we expect shipments of ion-exchange membranes to increase, and other products are expected to be generally firm as well.

[Akira Fukuda, executive]

Fukuda for separators again. Operating income for separators will be down due to reduced shipments of dry process separators. For wet process lithium-ion battery separators, we expect shipments to increase centered around automotive application. For dry process separators, ESS-related demand would recover, as explained earlier, but total shipments will be down year-on-year due to the impact of the Chinese government's electric vehicle policy.

[Izumi Kawata, executive]

Kawata from Asahi Kasei Microdevices. Regarding electronic devices, Q2 sales will be almost unchanged year-on-year, but operating income will be down due to a difference in capacity utilization levels associated with a change in sales mix.

[Shigeki Okazaki, analyst]

Going back to separators, is it correct to understand that Q2 shipments for dry process separators will be down year-on-year, but by a smaller margin than in Q1?

[Akira Fukuda, executive]

Fukuda speaking again. Yes, that is correct.

[Shigeki Okazaki, analyst]

What about wet process separators? Is growth in line with expectations?

[Akira Fukuda, executive]

Q1 wet process separator shipments for automotive use was up, but shipments for consumer electronics applications suffered a temporary slowdown due to inventory adjustments at some users in the beginning of the period.

[Shigeki Okazaki, analyst]

Are you saying that in Q2, the adjustment impact on consumer electronics applications will be gone and that shipment will return to previous levels?

[Akira Fukuda, executive]

Yes, that is correct.

[Operator]

Umebayashi from Daiwa Securities.

[Hidemitsu Umebayashi, analyst]

My first question is about AN. Can you tell us about spreads in Q1? And in Q2, now that the maintenance turnaround in Mizushima is over, shipments should increase, but what level of capacity utilization shall we expect? I recall that you brought down capacity utilization in the latter half of FY 2018. Will it go up or stay at the reduced level?

[Toshiyasu Horie, executive]

Horie from Basic materials. First, the AN price spread for the first quarter. The spread was greater than we had expected, exceeding $900 per ton. It is not that certain demand was seriously hit by the state of the Chinese economy or anything like that, but rather, overall business was somewhat sluggish. And yet, there was a supply-side factor, specifically a plant of a competitor in the U.S. was having the hard time recovering from its production troubles. And thus, a sense of supply tightness was felt more strongly than expected, and that resulted in the greater spread than we had expected.

Your second question was on the capacity utilization. Basically, we are adjusting the operation, closely watching the demand. But as you correctly described, Mizushima had the maintenance shutdown in May and June and PTT Asahi Chemical in Thailand also had maintenance turnaround at the same time. So there is a slight shortage of inventory now, and we are increasing our operation.

But going forward, we are planning to operate, carefully monitoring the economic situations in China and other Asian countries.

[Hidemitsu Umebayashi, analyst]

I see. I have an additional question. You said that the demand for acrylic fiber is rising. How about ABS resin?

[Toshiyasu Horie, executive]

Demand situation for ABS resin is mixed. China's domestic demand is not bad so far. However, some of the ABS resin manufacturers that are exporting to China have begun to lower commodity products' production after carefully watching the latest situation.

On the other hand, manufacturers of high value-added specialty products don't seem affected. Their operations are not slowing down. So overall, ABS suppliers in Asia are maintaining capacity utilization at over 80%. So we have yet to see a clear decline in demand.

[Operator]

Takeuchi from SMBC Nikko Securities.

[Shinobu Takeuchi, analyst]

My first question is on pharmaceuticals. Slide 28 shows that first quarter sales of Teribone osteoporosis drug were lower year-on-year. Can you give us the background to that? Was there an impact of generics? Also how do you plan to recover in the second quarter and beyond?

[Masato Kashiwagi, executive]

Kashiwagi from Asahi Kasei Pharma. First, regarding the year-on-year decline, one factor was that this year's Golden Week holidays turned out to be 10 days long. So there were fewer business days compared to last year.

Another reason is that in March of this year, a new drug that competes with Teribone was launched, which had some impact on our business. For those reasons, the results for the first quarter were slightly lower year-on-year.

[Shinobu Takeuchi, analyst]

Were those negative factors already incorporated in your full year forecast announced in May? Or do you feel that the impact in the first quarter was more serious than you expected?

[Masato Kashiwagi, executive]

It was stronger than we expected.

[Shinobu Takeuchi, analyst]

I see. The first quarter operating profit for Health Care declined by JPY 400 million year-on-year. Was it because pharmaceuticals saw lower profit due to lower volume of [ mainstream ] products, while medical devices posted higher profit?

[Masato Kashiwagi, executive]

Actually, medical devices posted a slight decline in pharmaceuticals as well. No, pharmaceuticals profit was higher.

[Shinobu Takeuchi, analyst]

Will you elaborate on factors for a higher profit for pharmaceuticals then?

[Masato Kashiwagi, executive]

Pharmaceuticals profit was higher year-on-year, partly because during the first and second quarters of last fiscal year, we recorded high R&D expenses in relation to Teribone autoinjection, the formulation currently being filed. In the absence of the corresponding expenses this year, we saw the increase in profit.

[Shinobu Takeuchi, analyst]

I see. Health Care profit forecast for the first half has been revised upward by JPY 1 billion. What is the breakdown between pharmaceuticals and medical devices?

[Futoshi Hamamoto, executive]

Hamamoto of Investor Relations. The projected upside is in relation to medical devices.

[Shinobu Takeuchi, analyst]

Does that mean that sales are stronger than expected? Since the sales forecast remains unchanged, are you expecting improvement in sales mix?

[Futoshi Hamamoto, executive]

Well, all products are doing well in medical devices.

[Shinobu Takeuchi, analyst]

I see. Slide 14 shows the revisions to the first half operating performance forecast. The ordinary income forecast has been reduced by JPY 4 billion, while the net income forecast has been raised by JPY 3 billion. Can you give us the reasons, including possible changes in extraordinary income and loss?

[Yozo Sato, executive]

Sato of Corporate Accounting and Control. The difference is in relation to the unloading of strategic shareholdings, the gain on the sale recorded in the extraordinary items.

[Shinobu Takeuchi, analyst]

So I take it that there may be additional unloading of strategic shareholdings not included in the main forecast. Am I correct?

[Yozo Sato, executive]

Yes, that's correct.

[Operator]

Ikeda from Citigroup Global Markets Japan.

[Atsushi Ikeda, analyst]

My first question is on Specialty Solutions. Am I correct to understand that the first quarter shipment of LIB separators declined as a whole year-on-year, but recovered quarter-on-quarter after dipping considerably in the fourth quarter. Could you also comment on whether the prices of separators are decreasing due to supply and demand, such as the decline in demand for ESS as well as the reduction in electric vehicle subsidies in China?

[Akira Fukuda, executive]

Fukuda for separators. First, shipments increased from the fourth quarter to the first quarter. Regarding the impact of supply and demand on prices, china's EV-related market has a very policy-driven aspect. And our view is that some auto manufacturers, battery manufacturers and battery material manufacturers are beginning to go out of business.

In the meantime, we have not changed our policy of delivering to customers that find value in the quality and performance of our products and are accepting paying premium for that. Currently, we are carefully monitoring the market trends.

[Atsushi Ikeda, analyst]

Am I correct to assume that basically other than China, your demand outlook for automotive applications remain unchanged from 3 months ago, especially for Europe? Or is demand getting stronger?

[Akira Fukuda, executive]

We are under the impression that the demand in Europe is a little stronger than 3 months ago.

[Atsushi Ikeda, analyst]

But no changes to your plan to add capacity for both dry process and wet process this year. Am I correct?

[Akira Fukuda, executive]

First, capacity expansion for the wet process separators is proceeding smoothly as planned. Production lines are being started up in succession, and we are acquiring certification from customers, and trial production of new grades are being carried out as planned.

As for dry process, we started commercial operation of expanded capacity last year, also as planned. We are in the process of starting up sequentially. Given the characteristics of the dry process, production capacity can be increased in stages.

Now due to the impact of the ESS fires, demand is growing slower than initially assumed. So we are adjusting the start-up and operation of our facilities in accordance with the demand.

[Atsushi Ikeda, analyst]

I see. My next question is on fibers. It was growing relatively smoothly up to fiscal 2018, but I think that nonwovens for diapers and artificial suede for automobiles are probably slowing down. Can you describe the impact? Also, is Sage Automotive sales growing by roughly 4% to 5%?

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Products. In general, sales of apparel fibers were sluggish, particularly in China. Excluding the impact of Sage consolidation, fibers posted a declining trend in sales and profit in the first quarter.

[Atsushi Ikeda, analyst]

With regard to the trends of operating performance of Sage Automotive, higher sales and almost flat gross operating income year-on-year for the first quarter. And as for the first half, we are projecting higher sales and profit year-on-year. I think that nonwovens for diapers are declining quite a bit. Are you feeling the impact?

[Yukifumi Kuwaba, executive]

The demand is slowing down somewhat. However, we are working on it as a strategic area.

[Atsushi Ikeda, analyst]

I see. I think feedstock costs are declining quite a bit. What's the impact on the profit of fibers?

[Yukifumi Kuwaba, executive]

Actually, the decline in feedstock prices has had little impact on the year-on-year change in profit for the first quarter.

[Operator]

Miyamoto from UBS Securities Japan.

[Go Miyamoto, analyst]

First, on the quarter-on-quarter changes in Basic Materials, Slide 22 shows that profit increased from Q4 to Q1. During this period, the AN market price increased, but on the other hand, there was maintenance shutdown. From Q1 to Q2, profit is expected to increase, while AN price is expected to drop, there will be no impact of maintenance shutdown. So can you describe the changes from Q4 to Q1 and from Q1 to Q2? Please also comment on the AN spread assumption for Q2?

[Toshiyasu Horie, executive]

Horie from Basic materials. First, changes in profit from the fourth quarter to the first quarter. As you correctly described, the spread of the AN was significantly reduced in the fourth quarter of the last fiscal year due to the start of a decrease in production by AN users because of their concern over the future.

On the other hand, as for the first quarter, the supply further narrowed and did not recover, while demand began to pick up and thus the spread recovered.

For your information, the spread dropped to $519 per ton in the fourth quarter and recovered to $943 in the first quarter. With regard to the first quarter to the second quarter, the situation remains that we must carefully assess future demand, and we cannot expect the supply and demand to tighten in the future.

Based on that assumption, we are projecting the second quarter AN spread to be $800 per ton, with the selling price of $1,720 per ton and propylene price of $920 per ton.

So as you pointed out, mainly coming from the absence of cost associated with the maintenance shutdown, we expect to see a recovering profit from the first quarter to the second quarter.

[Go Miyamoto, analyst]

Should I assume that the maintenance shutdown factor amounted to about JPY 3 billion? Can you also comment on factors other than the maintenance shutdown and products other than AN?

[Toshiyasu Horie, executive]

Yes. You can assume that the effect of the maintenance shutdown was about JPY 3 billion. In terms of products other than AN, the overall situation is expected to improve as other products should also benefit from no effect of maintenance turnaround in the second quarter. However, we do not expect special circumstances such as the recovery in particular product market price or recovery in particular applications.

[Go Miyamoto, analyst]

I think the market price for MMA, for example, is expected to be lower in the second quarter. Are you incorporating this in your projection?

[Toshiyasu Horie, executive]

Yes. MMA alone expects the terms of trade to continue to deteriorate, but other products are expected to improve more or less.

[Go Miyamoto, analyst]

I see. My next question, looking at the various analysis on Slide 17, the difference in sales price was particularly positive for Performance Products and Specialty Solutions. Excluding foreign exchange, Performance Products improved by JPY 1.2 billion and Specialty Solutions by JPY 700 million. What products saw higher prices or improved sales mix? Earlier, there was a reference to the Chinese market situation relative to separators. Do I understand correctly that Asahi Kasei doesn't pursue the policy of lowering price to sell more?

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Products. As for Performance Products, the main element for the positive resulting from sales price difference was that engineering plastics had price hikes in fiscal 2018, which has been sustained into the first half of this fiscal year. That is the main factor for the positive effect from the sales price difference.

[Hiroaki Sugiyama, executive]

Sugiyama from Specialty Solutions. The effect of sales price difference came mainly from the performance materials. And this is closely related to negative effect of the cost difference. To reflect higher feedstock prices, we raised prices for performance coating materials and others. There was also a positive effect of sales mix difference. This coming from the electronic devices as well, but not much sales price effect related to separators.

[Go Miyamoto, analyst]

What products contributed to difference in sales mix?

[Hiroaki Sugiyama, executive]

That's a net effect of various products. So it's hard to say which.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]