Asahi Kasei Corp

TSE:3407

Earnings Call Transcript 2020-Q2

[Futoshi Hamamoto, executive]

[Interpreted] Good afternoon, ladies and gentlemen. My name is Futoshi Hamamoto from Investor Relations, serving as the moderator. I thank you very much for joining us in the briefing on fiscal 2019 second quarter financial results of Asahi Kasei Corporation despite your busy schedule.

Today's participants are Yutaka Shibata, CFO; Isao Satou, 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; and Masato Kashiwagi, Asahi Kasei Pharma Corporation.

We will begin with a presentation from Yutaka Shibata, the CFO.

[Yutaka Shibata, executive]

[Interpreted] My name is Shibata, CFO. I will explain referring to the presentation material slides, please look at Slide 2. Here, you can see key points regarding the results for the first half and the full year forecast, focusing on operating income. First, the first half results. Operating income totaled JPY 101.7 billion, exceeding the forecast of JPY 94.5 billion as revised in August. Two background factors are cited on the slide. First, the Materials segment performed in line with the forecast made in August. When we made a downward revision in August, we referred to the slowdown in the Chinese economy and the slowdown in the automobile-related markets. That situation continued, and the result was as is described on the slide. The Homes and Health Care segments both exceeded the forecast made in August. Part of this was due to the fact that some profit planned for the second half materialized earlier in the first half. Each business made a firm progress as planned. It is not that there are major changes taking place in the business environment between the first and the second half, but rather, as will be explained later, there was some impact of the consumption tax increase and a shift in some fixed costs, mainly in R&D from the first half to the second half. Accordingly, the operating income forecast for the full year has been revised downward by JPY 12 billion from the May announcement to JPY 193 billion, reflecting the current economic environment. More specifically, forecast for the Materials segment has been revised downward. Back in May, we assumed that, while the first half would continue to feel the impact of the U.S.-China trade war and the slowdown in the automobile-related markets that continued from the second half of last year, recovery could be expected during the second half. However, given the current situation, we now feel that no dramatic change or recovery in the environment is likely, and thus, the revised forecast reflecting that.

Two major background reasons are described here. First is Performance Products. As described here, major products and fibers, engineering plastics and synthetic rubbers were affected by the slowdown in the Chinese economy and the slowdown in the automobile-related markets. Another is that in Specialty Solutions, we revisited volume forecast for the LIB separators. Particularly regarding demand for ESS, energy storage system, applications in South Korea, there were several fire incidents last year. And due to their impact, several customers resorted to production adjustment for a while. In Q2 of this year, shipment volume temporarily recovered, but then at the end of the first half, there were ESS fire incidents again in Korea. Because another fire broke out, production is now being adjusted again. So we took account of the resulting uncertainty for the second half projection.

Forecast for automotive applications has also been revised in terms of growth rate. Demand for automotive applications is strong overall, and we have been increasing production capacity to meet this demand. Initially at the beginning of the fiscal year, we made a rather aggressive sales volume forecast, but then we took a closer look at the timing of the launch of new projects and others and slightly revised the growth rates.

For Homes and Health Care, the forecast for the full year remains almost the same, but some profits shifted from the second half to the first half due to several factors: one is the last minute demand surge ahead of the consumption tax hike; another factor is fixed costs, especially in the Health Care area, there are always a fairly large R&D cost, and this year, some of that shifted to the second half; in addition, there was a shift in some sales from the second half to the first half, partly due to reasons on the part of some customers. As a combined result of these various factors, profit shifted from the second half to the first half. In that sense, we expect some decline in profit from the first half to second half, particularly for Health Care, but it's not that there has been a significant change in operating environment on half-yearly basis.

Slide 5 shows the results for the first half and the main figures. Net sales totaled JPY 1.0686 trillion, almost the same as in the August forecast. Operating income was JPY 101.7 billion, as mentioned earlier. Net sales, which increased by JPY 27.2 billion, were the highest ever for a first half. The acquisition of Sage Automotive Interiors, Inc. contributed to sales. Operating income, ordinary income and net income attributable to owners of the parent also recorded the second highest amount to follow the record highs set in the same period last year.

Compared to the previous year, Material felt a significant effect of maintenance shutdown of naphtha cracker and plants for derivatives this year. In addition, as I mentioned earlier, market prices deteriorated, the Chinese economy slowed down, and the market for automobiles and smartphones slowed down compared to the previous year, which had an effect. Interim dividend for the first half is JPY 18 per share, in line with the August forecast.

Slide 6 shows consolidated profit and loss. I have already discussed net sales. Gross margin was almost the same as the same period previous year. SG&A increased year-on-year by JPY 12.1 billion due to IT-related investments and increased amortization of goodwill associated with the acquisition of Sage. There is a year-on-year decline in the net of nonoperating items. The decline mostly comes from equity and earnings or losses of affiliates as MMA operations at PTT Asahi Chemical Company Limited in Thailand suffered from a decline in market prices. Net of extraordinary items came to an income of JPY 5.5 billion, thanks to gain on sale of investment securities as a result of reducing strategic shareholdings. Profit for the period attributable to owners of the parent came to JPY 77.9 billion, down JPY 1.1 billion year on year.

Slide 7 shows the balance sheet. Total assets increased by JPY 15.4 billion from the end of March to the end of September. The increase comes from inventories and noncurrent assets. Inventories increased for Homes and for ZOLL on the back of strong business performance. Noncurrent assets increased in relation to M&A and CapEx. To the right side of the table for liabilities and net assets. Noncurrent liabilities increased due to a JPY 36.7 billion increase in interest-bearing debt. With regard to net assets, retained earnings after dividend payment increased, but the share repurchase and retirement had a negative impact. In addition, the stronger yen compared to end of March pushed down foreign currency translation adjustments, which is part of accumulated other comprehensive income. In the lower left-hand corner, we show goodwill, interest-bearing debt and the debt-to-equity ratio. Goodwill increased after closing the acquisition of Cardiac Science Corporation in August. Interest-bearing debt increased by JPY 36.7 billion to JPY 461.2 billion. The D/E ratio at the end of September came to 0.33, up 0.02 from the end of March.

Slide 8 shows cash flows. Cash flows from operating activities was a net inflow of JPY 77.8 billion. Net income was slightly down, but goodwill and CapEx-related depreciation and amortization increased from the same period previous year. Cash flows from investment activities was a net cash outflow of JPY 73.8 billion. Last year, we had a major cash outflow for the Sage acquisition, but such was not the case this year. The resulting free cash flow was a net inflow of JPY 4 billion. With regard to cash flow from financing activities, we increased debt to finance the acquisition of Cardiac Science and the share repurchase. Cash and cash equivalents at the end of September stood at JPY 185.5 billion.

Slide 9 describes the first half results and the differences from the equivalent period last year. Materials was down year-on-year for both net sales and operating income. Shipments decreased. We went through maintenance shutdown of naphtha cracker and plants for derivatives. Market prices deteriorated, the Chinese economy slowed down and there was sluggishness in automotive and smartphone-related markets, all had negative impacts. Homes and Health Care were up year-on-year for both net sales and operating income. For Homes, sales and income growth was driven mostly by order-built homes, thanks to increased deliveries and higher average unit prices due to increased contribution from larger homes. There was a slight rush demand ahead of the consumption tax hike. Both net sales and operating income were highest ever for a first half.

Health care results came in higher than the August forecast. Some fixed costs were pushed back into the second half, such as R&D spending for pharmaceuticals, and we booked some sales earlier than expected.

Slide 11 shows the full year forecast. We have revised the full year forecast that was announced in May. The new forecast is JPY 2.221 trillion in net sales and JPY 193 billion in operating income. Homes and Health Care performance is expected to continue strong. On the other hand, Material is downward revised, as we do not expect rapid recovery during the second half with regard to conditions that prevailed in the first half, such as weak market prices, the slowdown in the Chinese economy and sluggishness in automotive-related markets. The revised forecast for net profit attributable to owners of the parents is JPY 143 billion. The forecast assumes exchange rates of JPY 110 to the U.S. dollar and JPY 120 to the euro. Planned dividend remains unchanged at JPY 36 per share over the full year, but the final decision will depend on actual full year results.

Slide 12 shows the breakdown of the latest forecast by segment. Please look at the rightmost column, which shows the difference from the forecast announced in May. We have downward revised the full year net sales forecast by JPY 47 billion. Material is downward revised by JPY 58 billion, while Health Care is upward revised by JPY 12 billion, including the effect of the acquisition of Cardiac Science. With regard to operating income, Material is downward revised by JPY 14 billion, while Homes and Health Care are upward revised by JPY 500 million each and corporate expense and eliminations also upward revised by JPY 1 billion. Total consolidated operating income is downward revised by JPY 12 billion.

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

[Futoshi Hamamoto, executive]

[Interpreted] We will now take questions.

[Takato Watabe, analyst]

[Interpreted] Watabe from Morgan Stanley MUFG Securities. My first question is on Basic Materials. From the first quarter to the second quarter, there were such positives as the absence of maintenance shutdowns. At the same time, the price spread of acrylonitrile, or AN, obviously narrowed. Will you comment on how the profit or loss for this business category changed from Q1 to Q2? And also your outlook on AN for the second half, please?

[Toshiyasu Horie, executive]

[Interpreted] Horie from Basic Materials SBU. First of all, regarding your first question, the absence of maintenance shutdown of the naphtha cracker and the turnaround of our derivative products in the second quarter did have a positive effect quarter-on-quarter, as you have correctly described. The spread of AN narrowed somewhat, but it was not a big drop. The rest was the combined effect of individual factors, such as those related to polystyrene and polyethylene. Basically, the quarter-on-quarter change was in line with the forecast. You also asked about the projection on AN for the second half. First of all, looking back on the first half regarding demand, we had, had concerns that the ABS resin manufacturers operating rates might be affected by the U.S.-China trade friction, but it actually turned out to be relatively steady. As for the second half, we have a slightly cautious outlook. As Chinese home appliance products production began to fall towards the end of the first half, we now anticipate that the demand might be somewhat weaker. In terms of supply, as you know, some new plants of Chinese AN manufacturers started operations in September to October, while there was an announcement of a plant closure in the U.K. Overall, supply is likely to increase a little, so we foresee that the supply and demand balance will ease toward January to March. That is the basis of our earnings forecast.

[Takato Watabe, analyst]

[Interpreted] What about the market prices and the price spread, specifically?

[Toshiyasu Horie, executive]

Our assumptions for the second half are: the AN market price, $1,450 per ton; and propylene $900 per ton for a spread of $550 per ton. From April to June, the spread was $943, and the AN market price was $1,833. And from July to September, the spread was $815, and the AN price was $1,761.

[Takato Watabe, analyst]

[Interpreted] I see. My second question is on Specialty Solutions, especially LIB separators, for which you've made a slight downward revision. Is it primarily related to the dry process? Or is the wet process included as well? I wasn't very sure about automotive applications, what were the changes from Q1 to Q2? And what's your projection for the second half? And what about the sales volume metrics?

[Akira Fukuda, executive]

[Interpreted] Fukuda from Specialty Solutions SBU. First, from Q1 to Q2, LIB separators actually increased in volume, including those for ESS. Following the release of the Korean government's investigation report on the ESS fires in June, shipments were steadily recovering in July and August. However, as you are aware, there was another fire at the end of August, and shipments turned sluggish again in September. So as far as Q2 is concerned, the volume increased over Q1. Also, the wet process saw demand increase from Q1 to Q2, thanks to the typical seasonal factors in relation to consumer electronics. So overall, the total volume increased resulting in higher sales and profit. Regarding the changes from the first half to the second half, the capacity expansion of the wet process is expected to contribute, so we are projecting increased sales, mainly in automotive applications. So separators expect sales and profit to increase from the first half to the second half. At the same time, we expect uncertainty over ESS to continue.

[Takato Watabe, analyst]

[Interpreted] Did the separators account for the rather sizable recovery in operating income for Specialty Solutions from Q1 to Q2?

[Hiroaki Sugiyama, executive]

[Interpreted] Sugiyama from Specialty Solutions SBU. The separators were a big reason, but there were others. Smartphone-related products in electronic devices improved slightly toward Q2, and shipments of ion-exchange membranes and other products also concentrated in Q2. In total, an improvement of about JPY 4 billion coming from all these factors.

[Mikiya Yamada, analyst]

[Interpreted] Yamada from Mizuho Securities. My first question is on Health Care. The effect of the acquisition of Cardiac Science seems to contribute JPY 12 billion in sales in Critical Care in the second half. What about the impact on the operating income? And how about the next year? I also have a question on Teribone osteoporosis drug, which remains strong in the Health Care business category. But wouldn't it be regarded inferior in the face of the competition from sclerostin monoclonal antibody? Also, isn't there any risk of Teribone's market share being eroded by abaloparatide, currently under clinical studies and the like?

[Yutaka Shibata, executive]

[Interpreted] First, I, Shibata, will talk about the ZOLL question, and then ask Kashiwagi to talk about pharmaceuticals. While Cardiac Science does not account for all of the JPY 12 billion upward revision of full year forecast, most is, in fact, Cardiac Science. The amount of goodwill has not been fixed yet, and so we are using the provisional amount. The burden of goodwill is heavy, and we had yet to feel the full benefit of synergy at the time of closing. But going forward, synergy should be felt and contributions should realize. I think that will be for the next fiscal year onward. Resuscitation is making a steady growth.

[Masato Kashiwagi, executive]

[Interpreted] Kashiwagi from Asahi Kasei Pharma. Teribone twice-weekly self-administered auto-injector formulation has been approved, but the drug price has yet to be listed. Anti-sclerostin antibody was launched in March of this year. While the mechanism of action is different, it is intended for patients with a high-risk of fractures. So it is true that it is affecting the sales of Teribone. However, the auto-injector formulation that's been approved is scheduled to be released later this year, and it is indeed a very compelling, easy-to-use formulation.

[Mikiya Yamada, analyst]

[Interpreted] Is it fair to say that you're confident that, with the new formulation, Teribone can successfully compete against the anti-sclerostin antibodies and abaloparatide and expand sales?

[Masato Kashiwagi, executive]

[Interpreted] Yes, you can say that.

[Mikiya Yamada, analyst]

[Interpreted] My second question is on Performance Products. I think the situation in the automobile-related markets is quite uncertain, not clear. I believe Performance Products have rather high exposure to automobile-related markets. So will you comment on the current situation related to the automobile-related markets? And the outlook for the second half? Also, what actions do you have in mind in the face of this sluggishness in the final product markets? Can you also give us an update on the progress of post-merger integration-related to Sage?

[Yukifumi Kuwaba, executive]

[Interpreted] Kuwaba from Performance Products SBU. As you pointed out, the automobile-related markets are highly uncertain. First, in terms of outlook for the second half, we expect profit level to remain flat from the first half to the second half. Performance Products include consumables, such as Saran Wrap cling film for the Japanese market, for which there basically was a surge in demand in the first half, ahead of the consumption tax hike. And so it is expected that profit will decline slightly in the second half. Engineering plastics and synthetic rubber are expected to see an increase in volume, resulting in higher profit. For fibers, some are doing better than others. Lamous artificial suede is growing in automotive interiors applications, while Bemliese continuous-filament cellulose nonwoven is struggling somewhat. Overall, we expect the fibers to remain unchanged.

As for Sage, the first half results were close to the initial forecast. The second half might turn out to be more challenging in terms of sales volume compared to the initial forecast.

[Mikiya Yamada, analyst]

[Interpreted] Other than engineering plastics and synthetic rubber, I really don't see much reason for growth in the second half. And given that engineering plastics and synthetic rubber are quite dependent on the automobile-related markets, I think there is a downside risk or are you not concerned because you already have secured expanded adoptions by the automotive OEMs of your S-SBR, solution-polymerized styrene-butadiene rubber, engineering plastics and compounds?

[Yukifumi Kuwaba, executive]

[Interpreted] Yes, as you described, our forecast is based on the adoptions in new car programs and the like. So we doubt there will be a major slip.

[Atsushi Ikeda, analyst]

[Interpreted] Ikeda from Citigroup Global Markets Japan. May I ask you to, again, tell us about the growth rate in the volume of LIB separators of the Specialty Solutions for the first half? And the full year outlook. I think the risk of price erosion for the separators is emerging with some Chinese manufacturers turning more aggressive regarding European automakers. What is your take on this? Can you also give us an update on the medium- to long-term outlook?

[Akira Fukuda, executive]

[Interpreted] Fukuda from Specialty Solutions. First, overall sales volume of LIB separators in the first half dropped 14% compared to the same period of the previous year. This was largely due to the fact that, while the wet-process separators saw an increase coming from capacity expansion, the dry-process separators were reduced by half year-on-year due to the stagnant Korean ESS market, as mentioned earlier. Accordingly, in terms of shipment volume index, it was 353 in the first half of fiscal 2018, 311 in the second half and 303 in this past first half. As for the full year outlook, we expect greater contribution from the capacity expansion of wet-process separators in the second half. So the wet-process separators are projected to grow by more than 20% year-on-year. The dry-process separators depend on the ESS situation, and we expect the challenging situation to continue in the second half.

[Atsushi Ikeda, analyst]

[Interpreted] I see. What about price projection? While prices overall are trending downward, wouldn't your policy of staying outside of the price war entail a downward risk in terms of volume over a medium term?

[Akira Fukuda, executive]

[Interpreted] The price pressure is always strong, especially in automotive applications. We are told that more recently, some of Chinese competitors are offering customers fairly low prices. But still, the switch or replacement has not occurred. As far as we are concerned, we strive to contribute to reducing battery costs overall by eliminating waste throughout the supply chain. The cost benefit resulting from internal streamlining efforts can be shared with our customers. We are making such offers to our customers. Therefore, we don't believe there is a big collapse in the market price. As for the future developments, with the expectation that Europe will become a big market, we have assigned a dedicated personnel in the Düsseldorf office of Asahi Kasei Europe since October. We have had sales personnel in Europe for dry-process separators, but now, we have this full-time dedicated salesperson to engage in the marketing for dry-process and wet-process separators together and make preparations for production increase, which may be deemed necessary in the future.

[Atsushi Ikeda, analyst]

[Interpreted] I would like to ask about the medium-term view on AN in terms of supply and demand and your thoughts on the business itself. A Chinese manufacturer has announced a capacity expansion of 520,000 tons. What is the impact of this on your business? Should we assume that the way you position the business will not change? Also, can you comment on the level of profitability you assume for this business?

[Toshiyasu Horie, executive]

[Interpreted] Horie speaking. As you're aware, China is still a net importer of AN. So as long as the importer position continues, there certainly will be capacity expansions. That is our long-term forecast. Regarding the large capacity expansion that's been announced, although we don't know exactly when, we are developing our business plan on the premise that it will materialize sooner or later. The important considerations for us in doing this are, how to build a more stable profit structure in the volatile market and what part of the market we are to focus in our AN business? For example, in Europe, with the plant closure in the U.K., we are receiving an increasing number of inquiries from our customers. In that sense, we are now examining whether we can develop a business view that can be expanded reliably and stably.

[Shinobu Takeuchi, analyst]

[Interpreted] Takeuchi from SMBC Nikko Securities. My first question is on Critical Care. On Slide 29, the performance of the business is shown in U.S. dollars, and there was year-on-year growth in the first half. I understand that this includes the impact of M&As, but can you give us the breakdown between LifeVest wearable defibrillators and other defibrillators? How is business growth momentum during the first half?

[Yutaka Shibata, executive]

[Interpreted] Shibata speaking. There is not much change from what we have been saying in recent briefings. Defibrillators are continuing steady growth centered around North America and particularly those for professional use. With regard to LifeVest, now that the size of business is much larger than before, the percentage growth rate may have slightly moderated, but year-on-year growth in Q2 was in the high single digits. Going forward, the next challenge would be to achieve synergy from the acquisition of Cardiac Science in the AED, automated external defibrillator business.

[Shinobu Takeuchi, analyst]

[Interpreted] Still on defibrillators, the effect of the issue at a competitor must be mostly gone by now, so is it correct to understand that your growth is outpacing the market because you are gaining share? And would the LifeVest growth, which you mentioned is in high single digits, gradually settle down to cruising speed? Or would you invest more resources so as to boost the growth rate back into double digits? I would like to get a feel for the LifeVest business growth going forward.

[Yutaka Shibata, executive]

[Interpreted] LifeVest has more potential to grow, and there are still untapped markets. According to some calculations, we are only serving 1/3 of the potential U.S. market. But now that the business has a much larger geographical reach, SG&A expenses are also increasing. Therefore, our marketing policy of expanding the sales network with a focus on efficiency remains unchanged. The business is transitioning from short-term explosive growth into longer-term stable growth, which is exactly what we want. With regard to defibrillators, including those for professional use as well as AEDs, we are gaining market share. In fact, it is a major contributor to the increase in the consolidated overseas sales ratio. As the product offering has now been extended by the acquisition of Cardiac Science, ZOLL has access to new market channels. We intend to optimize the product offering to make the most of the opportunities still out there.

[Shinobu Takeuchi, analyst]

[Interpreted] My next question is on Homes. On Slide 24, it says that value of new orders in the second half is to decline by 3.9% year-on-year. Can you tell us what led to the downward revision of the second-half forecast? And your view on the market condition after the consumption tax hike, please?

[Kensuke Sakai, executive]

[Interpreted] Sakai from Asahi Kasei Homes. With regard to the impact of the consumption tax hike, our initial expectation was that unit homes would not be affected too much, given government support measures, whereas multidwelling homes, which are not covered by government support programs, may be slightly down. In the first half, however, the situation was totally opposite. Among order-built homes, newly built homes were not so affected, but rebuilding was affected. Taking that into account and given that second half orders were very strong in FY 2018, our forecast now expects second half orders to be down year-on-year at the same rate as the first half.

[Shinobu Takeuchi, analyst]

[Interpreted] Does that mean the current forecast is more reasonable than the initial one, which seemed rather challenging?

[Kensuke Sakai, executive]

[Interpreted] Yes, you could say that. In the second half, we will focus our efforts to boost orders, particularly for rebuilding through various training programs for our sales force and promotion campaigns for potential customers.

[Shinobu Takeuchi, analyst]

[Interpreted] Would the order backlog at the end of the year be large enough so that neither sales nor operating income would be significantly down in FY 2020? Can I take it that your order book is sufficiently large to ensure that?

[Kensuke Sakai, executive]

[Interpreted] That would depend on orders in the second half.

[Hidemitsu Umebayashi, analyst]

[Interpreted] Umebayashi from Daiwa Securities. I also have a question regarding Homes. According to slides 17 and 18, if you compare second half figures year-on-year, you are forecasting sales to be up JPY 30 billion, while operating income is to be down by more than JPY 1 billion. And you are maintaining the full year forecast. Now at the beginning of the financial year, you were expecting an increase in fixed costs. Judging from year-on-year comparison of the first half operating income, it appears that fixed cost did not increase significantly. So the question is, would that expected increase all happen in the second half so that operating income would be in line with the forecast? Or could fixed costs be pushed further down into FY 2020? Meaning upside potential for FY 2019?

[Kensuke Sakai, executive]

[Interpreted] Sakai speaking again. Much of the fixed costs that did not happen in the first half are simply pushed back into the second half. Actually, the delayed expenses were mostly related to advertisement. So in Q3, we are executing major sales promotion campaigns to boost orders with an expanded budget.

[Hidemitsu Umebayashi, analyst]

[Interpreted] Does that mean total fixed costs over the full year would be pretty much in line with initial expectation?

[Kensuke Sakai, executive]

[Interpreted] Yes. That is correct.

[Hidemitsu Umebayashi, analyst]

[Interpreted] And perhaps related to that, have your sales activities or deliveries been affected by the recent typhoons and floods that hit the Kanto region?

[Kensuke Sakai, executive]

[Interpreted] I do not think there's any direct effect on deliveries. There may be some impact going forward as there may be increased demand for post-disaster reconstruction, leading to competition over manpower. The effect may be about availability or higher labor costs. But at this point in time, we do not expect a major impact. With regard to orders, visitor counts to model homes were affected as a number of typhoon approaches coincided with weekends.

[Hidemitsu Umebayashi, analyst]

[Interpreted] My next question is on separators, the dry-process separators in particular. Earlier, you mentioned that shipments of dry-process separators in the first half was only half that of the same period previous year. That drop sounds overly large. When we visited your production site in the United States, we heard that the dry-process separator business was half for ESS and half for automotive. Does that mean shipments for ESS almost came to a standstill? Or did shipments for automotives also declined year-on-year?

[Akira Fukuda, executive]

[Interpreted] Fukuda for separators. With regard to the ESS business of dry-process separators, back when we were budgeting for the current financial year, we expected the South Korean government to release results of the investigation into the first fire incidents sometime around March so that business would be back to usual from April. However, the investigation report only came out in June. As a result, there was very little shipment for ESS in Q1. In addition, there was disturbance in the market for automotive due to Chinese government policy, which resulted in reduced shipments to China. When you all came over for the plant tour in September, capacity utilization was still high, but shipments fell just after that and the environment remains very challenging.

[Hidemitsu Umebayashi, analyst]

[Interpreted] Would that have an impact on your capacity expansion plans? Any delays?

[Akira Fukuda, executive]

[Interpreted] With regard to the dry-process capacity, we commissioned part of the additional capacity in FY 2018 as planned. With the dry process, you can increase capacity in increments. After the ESS-related fire incidents and slower-than-anticipated demand growth, we adjusted both the commissioning schedule for new capacity and utilization levels of existing capacity. Full commissioning of the planned additional capacity would be delayed by roughly a year.

[Go Miyamoto, analyst]

[Interpreted] Miyamoto from UBS Securities in Japan. I also have a question regarding separators. Earlier, you mentioned that dry-process separator shipments were down by half from the previous year. Is it possible to boost capacity utilization by selling more separators elsewhere, such as for use in EVs in developed countries? And are more separator users transitioning from single-source procuring to multiple-source procuring? Can you also give us an idea about the trend in sales prices? I understand you cannot be too specific, but for example, if you look at Slide 15 and the operating income difference for Specialty Solutions, the difference due to sales prices minus the impact of foreign exchange is a positive impact of JPY 400 million. I guess part of this would be due to sales mix difference, but can you explain this positive impact? Did electronic device prices rise, while separator prices fell? And if so, was there any difference between the wet-process and dry-process separators?

[Akira Fukuda, executive]

[Interpreted] Fukuda from Separators. With regard to the first part of your question, separators for automotive use are not general-purpose commodities, and they need to be evaluated and qualified by each customer before full scale production, and that process takes time. It's not simply about switching a shipment from one destination to another. With regard to sales price changes, as far we are concerned, there is not much difference between the dry process and the wet process. Our separators are tailored to specific customers and specific applications. Obviously, there is competition on price and/or performance to win business with any customer, but that has always been the case, and I do not think there has been any substantial change.

[Hiroaki Sugiyama, executive]

[Interpreted] Sugiyama from Specialty solutions. With regard to the positive impact of sales prices when excluding the exchange rate effect, it includes prices raised to reflect higher feedstock prices, although the extent differs by product. Therefore, the net impact, when you look at spreads, is limited. Such price adjustments happen for performance materials, but they certainly do not represent any rising trend in sales prices.

[Go Miyamoto, analyst]

[Interpreted] Are you saying that separator prices are coming down, but only at a similar pace as before?

[Akira Fukuda, executive]

[Interpreted] Fukuda speaking. In the case of separators, especially for those for automotive use, when sales volume grows, we can produce in larger batches and reduce changeovers, which has significant cost benefit. Part of such benefit is shared with customers in the form of reduced sales prices.

[Go Miyamoto, analyst]

[Interpreted] Are more dry-process separator users switching from single supplier sourcing to multi-sourcing?

[Akira Fukuda, executive]

[Interpreted] Yes, and it is not only dry-process separator users, but wet-process separator users as well. Therefore, where we are a sole supplier, we work hard to keep it that way. Where we do not supply yet, we try to become a second supplier.

[Go Miyamoto, analyst]

[Interpreted] From the outsider's point of view, your efforts appear to be quite successful.

[Akira Fukuda, executive]

[Interpreted] Well, thank you. We cannot comment on specific customers and contracts. But the reality is that we are sometimes successful, but sometimes not.

[Go Miyamoto, analyst]

[Interpreted] Now on Basic Materials, can you provide more detail about the difference in operating income between the first half and second half, please? On Slide '18, for example, the first half operating income was JPY 20.1 billion, and the second half forecast is JPY 13.4 billion. I understand that AN is a big factor for this decline, since you discussed spreads earlier, but wouldn't there be other factors too?

[Toshiyasu Horie, executive]

[Interpreted] Horie from Basic Materials. Other than AN spread, MMA is also a big negative factor for the second half. There is a maintenance turnaround and prices are very challenged now. There are other smaller factors as well, such as slower shipments of polyethylene as well as for polystyrene, whose domestic demand has been slowing down since August. They may be minor in size, but do have an impact when combined.

[Go Miyamoto, analyst]

[Interpreted] Can you tell us about capacity utilization, please?

[Toshiyasu Horie, executive]

[Interpreted] With regard to AN, our current plan is to continue running at 80% to 90% capacity, while monitoring the supply-demand balance. The naphtha cracker is running at full capacity. Derivatives will also be running at near full capacity after the maintenance turnaround in the first half.

[Go Miyamoto, analyst]

[Interpreted] Was AN capacity running at 80% to 90% capacity in the second quarter too?

[Toshiyasu Horie, executive]

[Interpreted] Actually just for Q2, utilization was very high and sometimes near full capacity.

[Futoshi Hamamoto, executive]

[Interpreted] Thank you. And with that, we would like to close today's earnings briefing. Thank you very much for joining us.