Asahi Kasei Corp

TSE:3407

Earnings Call Transcript 2021-Q2

[Futoshi Hamamoto, executive]

Good afternoon, ladies and gentlemen. Thank you for joining us in the earnings briefing conference call of Asahi Kasei Corporation. I am Futoshi Hamamoto from Investor Relations serving as the emcee.Today, we will first have a presentation on the financial results for the first 6 months of the fiscal year ending March 2021 by CFO, Yutaka Shibata, and then we will take your questions. Attending this conference call, aside from CFO, Shibata are: Yozo Sato from Corporate Accounting and Control; Takuya Takahashi from Basic Materials Strategic Business Unit or SBU; Yukifumi Kuwaba from Performance Products SBU; Hiroaki Sugiyama from Specialty Solutions SBU; Akira Fukuda also from Specialty Solutions SBU Separator Administration; Kensuke Sakai from Asahi Kasei Homes Corporation; and Masato Kashiwagi from Asahi Kasei Pharma Corporation.Without further ado, earnings presentation by CFO, Shibata.

[Yutaka Shibata, executive]

This is Shibata. Thank you for joining us. First, I would like to comment on the fire at Asahi Kasei Microdevices semiconductor manufacturing plant in Nobeoka City, Miyazaki Prefecture. We deeply apologize for the great concern and inconvenience caused to the people in the community, the government entities, business partners and many other stakeholders regarding the fire that broke out on October 20th.We are currently doing our utmost on a group-wide basis to respond to the situation and to fulfill our responsibility for supply with the support of all parties while cooperating with authorities in their investigation to identify the cause of the fire. The impact on the business performance is included in the full year business forecast that we are announcing today to the extent that can be presumed at this point in time.Please turn to Page 3, overview of the first half results. Net sales were JPY 989.4 billion and operating income was JPY 76.8 billion, both exceeding the August forecast of JPY 979 billion and JPY 66 billion respectively. This was because operating income exceeded the forecast in material and homes. The main contributing factors were that in material, demand for various products recovered with an improved market environment, especially in automotive markets, added with continued firm sales of electronic materials.And in homes, contrary to the assumption of delays in construction in order-built homes due to measures to prevent the spread of COVID-19 infection, actual deliveries proceeded more smoothly than expected.Please turn to Page 4, overview of the first half results in comparison to the same period of the previous year. Operating income increased in healthcare, driven by firm performance of the critical care business category. But due to the impact of COVID-19 pandemic, particularly on material, both net sales and operating income decreased year-on-year on a consolidated basis.By segment, year-on-year change in operating income was as follows: in material, there was an increase in shipments of lithium-ion battery, LIB, separators and electronic materials. But against the backdrop of COVID-19, lower market prices for petrochemical products and sluggish demand in automotive and apparel markets resulted in a decrease in operating income.In homes, while order-built homes and remodeling operations were affected by COVID-19, performance of real estate operation was firm. Operating income for the segment was about the same as in the previous year.In healthcare, in addition to the impact of COVID-19, there was an effect of amortization of goodwill and others, resulting from the consolidation of Veloxis Pharmaceuticals, Inc. acquired in 2019. There was also an impact of reduced reimbursement prices for pharmaceuticals and medical devices in Japan in healthcare business category, but increased demand for ventilators in the critical care business category helped to achieve higher operating income.Please turn to Page 10, statements of income. Net sales were JPY 989.4 billion, down JPY 79.3 billion year-on-year. Gross profit was JPY 322.7 billion and the gross profit ratio was almost the same as in the previous year. SG&A expenses totaled JPY 245.9 billion, an increase of JPY 1.6 billion year-on-year. SG&A expenses increased despite a decrease in travel and other expenses due to the impact of COVID-19. This was because of an increase in amortization of goodwill with the acquisition of Veloxis as well as higher labor costs and other expenses in some operations whose business expanded during this period.Operating income was JPY 76.8 billion, down JPY 24.9 billion year-on-year. Nonoperating income was JPY 700 million, a deterioration of JPY 2.9 billion year-on-year. The main reason was the worsening of net equity in earnings of affiliates, resulting from poor performance of PTT Asahi Chemical Company Limited in Thailand due to the worsening market conditions of acrylonitrile, AN, and MMA.Net of extraordinary items was a loss of JPY 6 billion, a deterioration of JPY 11.6 billion year-on-year. This was partly due to a decline in gain on investment securities as the amount of reduction in strategic shareholdings was smaller this year than in last year. Another factor was the recording of expenses related to business structure improvement at an overseas subsidiary this year.Income before income taxes was JPY 71.4 billion, down JPY 39.4 billion. Net income attributable to owners of the parent was JPY 46.8 billion, a decrease of JPY 31.1 billion year-on-year.Page 11, balance sheets. Total assets were almost the same as at the end of March. Notes and accounts receivable trade decreased following a decline in net sales. Intangible fixed assets decreased with a progress in amortization of goodwill. But due to an increase in the market value of investment securities, the total assets remained almost unchanged from the end of March.Liabilities shown on the right-hand side decreased by JPY 20.6 billion. Interest-bearing debt increased by JPY 3.8 billion. Net assets increased by JPY 21.1 billion between a decrease due to dividends payment and an increase coming from the recording of net income attributable to owners of the parent. Debt-to-equity ratio was 0.51%, little changed from the end of March.Next, moving on to Page 12, where you can see consolidated cash flow statement. Cash flow from operating activities was a net inflow of JPY 104.6 billion, reflecting a year-on-year increase in cash inflow due to the decline in working capital, including accounts receivable. Cash flow from investing activities was a net outflow of JPY 85.9 billion. Capital investments in lithium-ion battery separators, among others, have been carried out proactively.There was also cash outflow associated with the acquisition of the Automotive Fabric business of Adient PLC by Sage Automotive Interiors, Inc. in the first half. As a result, free cash flow was a net inflow of JPY 18.7 billion. On the other hand, cash flow from financing activities was a net outflow of JPY 18.5 billion, and cash and cash equivalents at the end of the period was JPY 205.8 billion.Page 14 shows sales and operating income increase and decrease by segment. First, on material, there was a big negative impact in terms of sales volume due to the decline in demand in automotive and apparel markets. A significant negative impact was attributed to sales prices as the market prices of petrochemical products deteriorated, while this benefited the operating income under others in the form of lower raw materials and fuel prices.Now if you can go back to Page 5, I will discuss the forecast using the next 3 slides. In August, our forecast for the operating income was given as a range of JPY 120 billion to JPY 130 billion for the full year. Now that the first half is over, we have decided to give guidance for the full year for all line items from sales to the net income.As we move in to winter, we need to be mindful of possible spread of COVID-19 in the Northern Hemisphere, but on the back of an improved market environment, especially in the automotive market, since around the second quarter, we foresee the trend of a gradual recovery to continue into the second half. It is based on this assumption that we have come forward with this forecast.First, on the trend from the first half to second half. Here, you can see the forecast by segment. In material, the market environment is expected to recover, especially in automotive markets. Increased shipments and improved terms of trade for acrylonitrile are expected in the second half. Net sales and operating income are expected to increase from the first half to second half.As I said at the outset, we have incorporated the impact to the extent possible for now from the fire that broke out in the semiconductor factory in October. But the investigation into the cause of the fire has not been completed in the site by the local authority, and we have not had any access to the site yet. Therefore, I'd like you to be aware that its impact on the financial result is subject to change going forward.In homes, due to the impact of consolidation of Austin of the U.S., which we acquired the other day and scheduled deliveries of multiple large order-built homes, we expect increase in sales. But sales and various other activities are expected to be resumed, which is likely to result in increased fixed costs. Moreover, in the first half, condominium business was quite strong, but it is expected to have run its course in the second half. Hence, our forecast for a decline in the operating income.In healthcare, sales of Kevzara, an agent for rheumatoid arthritis, continue to be brisk from the first to the second half. While auto-injection formulation of Teribone, osteoporosis drug, is expected to grow in sales and so is Veloxis. In critical care, however, ventilators, which performed very well in the first half, will probably see its sales taper off in the second half.The total segment anticipates an increase in SG&A expenses. The whole healthcare segment expenses have seasonality tending to be skewed to the second half, especially for R&D expenses. Thus, we expect a dip in sales and operating income from the first half to the second half.Now please take a look at Page 6. You can see fiscal 2020 full year forecast as compared to the year before, which represents a decrease in net sales and operating income for the entire group. Let me explain by segment. First, on material, the impact of COVID-19 pandemic is being felt across the whole segment, resulting in sluggish demand in automotive and apparel markets, lower market prices for petrochemical feedstocks and deteriorated terms of trade for AN, plus a decrease in the operating income is forecasted.With regard to homes, an increase in the operating income in real estate is forecasted with steady performance of rental management and firm deliveries of condominiums centered in the first half. The COVID-19 pandemic is affecting the order-built homes and remodeling operations in terms of sales activities. Therefore, a drop in the operating income is forecasted for the segment as a whole.As for healthcare, there were revisions of NHI drug prices and reimbursement prices of pharmaceuticals and medical devices in Japan and amortization of goodwill, et cetera, was posted due to consolidation of Veloxis. On the other hand, shipments increased for virus removal filters as biopharmaceuticals and plasma derivatives are on a higher demand in the midst of COVID-19 pandemic.Moreover, in the first half, in particular, traveling and other SG&A expenses decreased because of the restriction on activities. This has led to our forecast of an increase in operating income for healthcare business category. Operating income increase is forecasted in critical care as well with greater shipments of ventilators, even though there are other parts of the category, negatively affected by COVID-19.Last but not least, please take a look at Page 7. Given the situation that I described so far, total consolidated operating income is forecasted at JPY 140 billion. Ordinary income is forecasted at JPY 142 billion and net income JPY 87 billion.As I said, the market environment is gradually improving, but the business management environment remains challenging with unpredictable outlook for COVID-19 pandemic. We are committed to the efforts to grasp and improve the performance by persistently curtailing fixed costs and controlling inventories, anticipating environmental changes ahead of the time and making swift and appropriate management decisions accordingly.As for the shareholder returns, based on the forecast that I just explained, the interim dividend is JPY 17 per share. Year-end dividend forecasted at JPY 17 per share and the total annual dividend JPY 34 per share. The basic policy for stable dividends and continuously increased dividends remains unchanged. There's no change in our policy of the year-end dividend being determined based on the annual results.That's all. Thank you very much for your attention.

[Futoshi Hamamoto, executive]

We will now take questions. Watabe from Morgan Stanley MUFG Securities.

[Takato Watabe, analyst]

I have 2 questions. My first question is on material, in particular performance products and Specialty Solutions. Regarding performance products, compared to strong sales recovery, the growth in profit seems smaller. Can you comment on that? And what about the second half projection? And regarding Specialty Solutions, can you comment on why the operating income decreased from Q1 to Q2 and also projections for the second half.Now regarding the fire incident, I understand that investigation is currently underway and that you are not granted access into the facilities. But can you give us a bit more detail, including impact on your customers? What products are produced there? And how much of your production is affected? Things of that nature.

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Products. Regarding changes from Q1 to Q2, with the recovery in the number of automobiles produced and gradual recovery in demand from apparel applications for fiber products, sales increased. Whereas for operating income, recovery was slightly slower due to the time lag in reflecting price changes between material prices and product selling prices. For example, for synthetic rubber, material cost increased from Q1 to Q2, while the selling price remained unchanged.As for the second half, sales are expected to remain firm should the current market condition continue. But operating income is not projected to grow as much as sales due to inventory adjustments and maintenance turnaround scheduled in some businesses.

[Hiroaki Sugiyama, executive]

Sugiyama from Specialty Solutions. Regarding your first question on the fire incident, currently, as Shibata mentioned earlier, we are trying to assess the situation. So we cannot give you the details. But we will be making all efforts to fulfill our supply responsibility. As we try to check the inventory, we're asking customers to consider switching to substitute or accepting products to be produced elsewhere on a consignment basis. As for the products from that plant, they account for 30% to 40% of the sales of our electronic device business. Main products include analog to digital converters and digital to analog converters for audio system application, IC products for sensors and crystal oscillator ICs.What will be the impact on our profit? It's still not clear right now, but we are projecting that the impact on operating income in the second half to be in billions of yen. So for Specialty Solutions, from the first half to the second half, we expect gradual recovery for lead acid battery separators and coding materials for automotive applications and the shipment volume of LIB separators to increase. Those are the positives. However, we should keep in mind that the sales of electronic material products tend to be higher in the first half, and therefore, a decline in the second half.In addition, there will be an impact from the fire, and that is why we are projecting a significant decline in profit.

[Takato Watabe, analyst]

My next question is on critical care. What was the impact of ventilators during Q1 and Q2? And how much shipment are you expecting for the second half? I'd appreciate it, if you can share with us some figure as well.

[Yutaka Shibata, executive]

This is Shibata. I would like to take that question. The amount of orders placed by the U.S. government for ventilators, was $350 million. In terms of shipment, we believe roughly half of that was made in the first half, and the remaining half is scheduled to be shipped in the second half of the year. Now during the first half, there were orders from elsewhere as well. So roughly speaking, of the year-on-year increase in sales, most came from ventilators as well as contribution from Cardiac Science, which we acquired last year.For the second half, basically, we believe the ventilator sales will primarily be to the U.S. government. And that is the current assumption.

[Futoshi Hamamoto, executive]

Yamada from Mizuho Securities.

[Mikiya Yamada, analyst]

I also have questions on material. Could you elaborate on the projected difference between the first half and the second half? Among performance products, I believe the third quarter would be a peak season for consumables. While for the Specialty Solutions business, yes, I think that the fire at the plant will have an impact of JPY 2 billion to JPY 3 billion on profit for crystal oscillator modules and others. But still, other electronic materials products continue to perform well, and ion exchange membranes and others are also performing strongly. So why should the operating income decrease this much? Are you not factoring in what I just mentioned? Or are there any risks in this product as well? In addition, with regard to the fire at the plant of Asahi Kasei microdevices since the DA converters for audio applications are analog, digital mixed-signal LSIs and need noise cancellation. The design is extremely complex and I doubt there is a substitute. So in that respect, I'm wondering whether or not there will be compensation you'll have to pay to your customers? Do we not have to worry about such a risk? And what about the reaction from people living in the community? Anything that might get in the way of resuming the plant operations?

[Yukifumi Kuwaba, executive]

Kuwaba from Performance Products. Regarding the change from the first half to the second half, by business, we expect fiber products to see higher sales and higher profit. We are expecting recovery in automotive and apparel demand. As for former polymer or former performance polymer business, we expect increase in sales and profit.For consumables, we expect fixed cost in relation to promotional activities to concentrate and increase during the second half. And we are projecting disposable containers to continue to feel the impact of COVID-19 and remain sluggish. So we are expecting sales to be flat and operating income to decline.

[Hiroaki Sugiyama, executive]

Sugiyama from Specialty Solutions. We are expecting profit to decline from JPY 15.2 billion to JPY 10.3 billion, a decline of JPY 4.9 billion from the first half to the second half, most of which is related to electronic materials or electronic devices, as mentioned earlier. We expect electronic materials to be strong, but the usual pattern is for the shipments to be smaller in the second half. In light of these factors, we are expecting a decline in profit. Regarding LIB separators, we expect steady growth in shipments, but partly due to product mix factor, we do not expect big growth in profit.

[Yutaka Shibata, executive]

This is Shibata speaking. Let me comment on the fire. I think there were 2 questions. First, regarding local community, local residents. Investigation is still underway, but we are not aware of any movement that might get in the way of resuming the plant operation. As for products, yes, as you have correctly indicated, there are some products for which there are no substitutes. But the process of semiconductor production concerned here is a rather complex one. And Nobeoka plant is involved in just part of that process for some products. So based on the inventory survey, we will work out detailed plans of which part of the process could be contracted out, which products have substitutes, which portion should require increasing outsourcing. So that would be considered on a product-by-product basis to fulfill our supply responsibility.

[Mikiya Yamada, analyst]

I see. A point of clarification. You are projecting the profit for specialty solutions to decline by JPY 4.9 billion from the first half to the second half. Would it be fair to say that the impact of fire would account for a little over half of that? And am I correct to assume that there will be no compensation to be paid to your customers?

[Yutaka Shibata, executive]

First, regarding the impact of the fire, we are projecting the amount to be in billions of yen. Since we would not be able to use facilities for the time being, we are incorporating a decline in terms of lost opportunities in our projection for the second half. Regarding compensation to our customers, it really depends on the contract. So we will have to look at the matter on a case-by-case basis.

[Mikiya Yamada, analyst]

I see. My second question in homes, true real estate operation was firm, and the profit level was higher than I had assumed. Still, with such a big decline in orders for order-built homes, I'm afraid that that would pressure the results for the second half and the next fiscal year. But for next year, you are expecting firm business for operations other than order-built homes, for instance, real estate. And you're expecting certain level of deliveries of multi-dwelling homes, as shown on Pages 33 and 34, and therefore, you are not concerned. Can you talk about the current status of orders and projection for order-built homes?

[Kensuke Sakai, executive]

Kensuke Sakai from Asahi Kasei Homes. As you have correctly described, for this fiscal year, the order situation during the first half should have an impact on the second half on order-built homes. That is our assumption for the projection. As for next year, the orders for order-built homes received during the second half of this year and the first half of next year will translate into deliveries to be made for the year. So it really depends on what happens from here on. And therefore, we have not come up with any specific numerical forecast. We will be looking at the order situation and put together plans for next fiscal year.As for the current demand level, the first quarter posted a large negative growth from the previous year. But starting in the second quarter, we are seeing some signs of recovery. For the second half, we are assuming that the situation that we saw in the second quarter would continue. And based on that assumption, we are putting together the plan for next year.

[Mikiya Yamada, analyst]

I see. When I compare pages 34 and 32, for multi-dwelling homes, you are expecting certain level of orders during fiscal 2020. And so for next year, while there might be a decline in order backlog temporarily, we shouldn't be worried about a big drop in overall results. Correct?

[Kensuke Sakai, executive]

As you have correctly described, drop in orders for multi-dwelling homes is limited, and we expect it to pick up going forward. What happens next year would depend on what happens from here on.

[Futoshi Hamamoto, executive]

Miyamoto [indiscernible] from SMBC Nikko Securities.

[Unknown Analyst]

I have 2 questions. First is on healthcare business category. Looking at Page 36, the sales of main pharmaceutical products. I see that Envarsus XR is growing strongly year-on-year. Compared to the disclosed information by Veloxis last year, it appears sales grew 50% or so during the first half. Would that be correct? Also, it's been 10 months since the acquisition of Veloxis. So can you give us an update on the progress of PMI? If possible, can you also talk about the market share of Envarsus in terms of new patients or prescriptions?

[Unknown Executive]

Shibata will answer your question on Veloxis. You are correct in that there was a big year-on-year growth. I don't have exact figures in front of me, but the growth was significant. And we expect that momentum to continue. But there was an impact of COVID-19, the kidney transplantations had been withheld temporarily. But now it's recovering. Because its side effect is limited, number of patients and the number of prescriptions is increasing as planned, both for replacement, the patients switching to Envarsus XR and newly prescribed patients, the so-called de novo patients. For the second half onward, again, albeit with some impact of COVID-19, we expect expansion to continue as planned for both replacement and de novo patients.As for PMI, including integration with some of Asahi Kasei organizations, things are moving smoothly toward building optimal organizational framework. While we can't make business trips, we are communicating closely with Veloxis people online. And I'm told that, in fact, communication is very active and, in fact, more frequent because of online meetings. So no issues with PMI, no issues in terms of retention either.

[Unknown Analyst]

I see. It may be too early to ask this question. But last year, you said the business is planned to achieve a positive operating income after goodwill amortization in fiscal 2023. Do you see any signs of that materializing sooner? Now you expect that to be in line with the plan for now? My second question is about lithium-ion battery separators. Could you give us the usual index of monthly average shipment for the first half as well as the estimated growth rate for the full year? Furthermore, if you share with us strengths and weaknesses in performance for each of the applications, i.e., energy storage system or ESS, automotive and consumer electronics that will be appreciated.

[Akira Fukuda, executive]

Fukuda from Separator Business. As for year-on-year comparisons, in the first half, production capacity increased for wet process separators for LIB made a contribution. Dry process separators have recovered from the impact of ESS fires with numbers showing a positive growth. We reported 303 in the first half and 301 in the second half of fiscal 2019 in terms of shipment index, which has reached 390 in the first half of this fiscal year, representing a slightly less than 30% year-on-year growth, both in the first and second quarters. To give you our take on the trend from the first to second half, the downturn due to a seasonality factor in consumer electronics is being compensated for by increased sales of automotive applications, so we can maintain the high level of shipments comparable to that of the first half.

[Unknown Analyst]

If possible, could you share with us the full year growth rates on a year-on-year basis? We expect the growth rate to be slightly less than 30%. Slightly less than 30% on an annual basis strikes me as a significantly strong growth compared to the competition and other battery material manufacturers. Are you gaining a market share? Or was there not much change in prices? Could you elaborate on that?

[Unknown Executive]

In terms of the market share, as Chinese competitor is growing significantly in shipments, we do not feel as if we are gaining a market share. On the other hand, in terms of prices, it is true that competition is becoming intensified. And so we are trying to set the price by striking the right balance between the price and cost reduction.

[Futoshi Hamamoto, executive]

Umebayashi from Daiwa Securities.

[Hidemitsu Umebayashi, analyst]

First, I want to ask about the pharmaceuticals and medical devices. In light of the goodwill amortization for Veloxis and energy and drug price revisions, the profit margin seems to be quite solid. Is it partly because of the strengths of the virus removal filters in medical devices and less than expected spending on sales activities in the first half? And in the second half, you're forecasting a slight decline in profit. Is it because you expect activity expenses to increase or sales of virus removal filters to slow down from the first half? Could you explain more about the factors behind the figures?

[Yutaka Shibata, executive]

Shibata speaking. I'll answer the questions. Basically, your understanding is correct. As for the difference between the first and the second halves, virus removal filters, in particular, do not usually see their shipments evened out stably throughout the year, but see fluctuations from quarter-to-quarter depending on the orders received from our customers. From that perspective, we can say we had more shipments in the first half this year. Especially due to the COVID-19 pandemic, some customers may have tried to secure enough volumes. So I would like you to look at the business from a full year perspective, as there was no major change in terms of the demand or competition between first and second half.I will answer your question on pharmaceuticals as well. We are hoping to further expand the strengths of Kevzara and auto-injector formulation of Teribone. Having said that, however, we expect enhanced activities by MRs and other personnel in the second half, which will be reflected in the increased expenses, including those left and spent in the first half. There is also a seasonality factor where R&D spending tends to be skewed toward the second half.

[Hidemitsu Umebayashi, analyst]

Additional clarification from pharmaceuticals in the first half. Is it fair to say that if you exclude the impact of Veloxis, the profit of the conventional business would have been more measured?

[Masato Kashiwagi, executive]

Kashiwagi from Asahi Kasei Pharma. In the first half, as you said, COVID-19 has prevented us from engaging in sales promotion activities. And in the second quarter, they were just beginning to be resumed. However, while sales were short of the year before, a certain level of profit was secured. The drop in sales were partially offset by the impact of less spending on activities. In that sense, we did not see profit suffer the full extent of the damage that would have been expected from the decrease in sales.

[Hidemitsu Umebayashi, analyst]

My second question is about critical care. Could you explain once again the changes in sales of ventilators from first to second quarter and first to second half? I'm also interested to know the quarter-on-quarter and first half to second half changes in sales of LifeVest wearable defibrillator and other defibrillators in addition to ventilators.

[Yutaka Shibata, executive]

Shibata speaking. I'll answer the question. First, on ventilators. What has been incorporated in the full year forecast as the contract was $350 million with the U.S. government as well as sales to some other countries. Basically, as far as ventilators are concerned, in the first quarter from March to April, when COVID-19 spread very quickly, we received orders from governments and hospitals around the world, all in the first and second quarters. And there has not been major movements in orders since then. And the deliveries to fulfill those orders have spread out across first, second, and third quarters. And our production capacity was a limiting factor. Therefore, there was a time delay in shipments. However, obviously, when vintages are sold, not just equipment itself, but responsible attachments used with the equipment could also be sold. Therefore, from the third quarter onward, we may see sales of those disposable attachments pickup as patients actually use ventilators. We did assume a certain level of such demand in the forecast.Now for LifeVest and other defibrillators, the situation was varied somewhat from product to product. But generally speaking, in the first quarter, partly because access to hospitals was restricted, our activities were also restricted. But in terms of sales, there was some carried over from the previous fiscal year and backlogs to fulfill. Therefore, we had certain sales posted in the first quarter. In the second quarter, since summer is a low demand season, there were fewer orders. That was how things were from the first to second quarters. Having said that, however, even if we receive orders, it is not necessarily the case that the products are shipped out immediately. And therefore, sales are not always linked to demand in the first and second quarters. So it would be easier for you to look at the results not by quarter-by-quarter, but on half year or annual basis.As I said, what we assumed in the full year forecast for the products other than ventilators is mostly the same level as the previous year in light of the impact from COVID-19 pandemic.

[Hidemitsu Umebayashi, analyst]

I see. However, if you compare the profit forecast for the second half of fiscal 2020 to the same period of the year before, it does not seem to be growing that much. Am I correct to interpret that sales of ventilators will remain strong until the third quarter, but not strong enough in the fourth quarter to be incorporated in the forecast? Other products such as LifeVest and other defibrillators may grow year-on-year, but I expect it to land at those levels in the forecast, given the increased expenses in the second half.

[Yutaka Shibata, executive]

It is hard for me to disclose such detailed numbers, but in principle, as I may have said last time, profit margin for ventilators is not higher than other products, but the demand jumped roughly without us spending that much in SG&A. In that sense, we were able to do a pretty efficient job in the first half. That approach should be valid for LifeVest and other defibrillators. Under the COVID-19 pandemic, we need to be more creative to capture new demand. So we expect some increases in SG&A expenses in the second half. Therefore, because sales of ventilators will fall from the first half, relatively speaking, we will be worse off in terms of profitability.

[Futoshi Hamamoto, executive]

Mr. Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

I have 2 questions. First, I would like to know factors behind the changes in profit of basic materials from first to second quarter and first half to second half as well as the market price spread of AN in the second quarter, its assumption for the second half and capacity utilization ratio. If you can also share the prospect for supply from your competitors, that will be also appreciated.

[Takuya Takahashi, executive]

Takahashi from Basic Materials. As you can see on Page 41, the operating income for basic materials was minus JPY 1.7 billion in the first quarter, JPY 1.8 billion in the second, and JPY 5.9 billion in the second half, showing a gradual improvement quarter-by-quarter. In the first quarter, generally speaking, shipments have declined from the previous year, terms of trade deteriorated, and there was inventory valuation loss by the gross average method. Thus, a fall in the profit in the first quarter. Since then, ABS resin and other major applications for AN started to pick up in demand and are expected to gradually recover in the second half with increased shipments. The market price of propylene has been staying at higher levels, but we anticipate the spread to improve quarter-by-quarter. The spread was really low in the second quarter at 119 with the market price of AN at $958 per ton and propylene $839 per ton. This was because a new plant came on stream as a competitor and AN produced in Europe has become available in the Asian market, pushing down the price of AN, while the price of propylene remained at higher levels.As for the prospect of the second half, with demand being strong, the market price of AN has reached about $1,200 per ton, most recently, but we assume the price to be from one $1,200 to $1,250 per ton throughout the quarter. The price of propylene has now reached slightly less than $900 per ton. So the spread is expected to remain tight till the end of this year. But from the beginning of next year, the price of propylene will probably dip slightly. Our current forecast for the entire period of second half will be $850 per ton, leaving the spread at around $350 to $450.Capacity utilization ratio of our company is about 80% currently. In the second half, we will be adjusting the operation by closely watching the demand. Now on the competition, a new plant of a Chinese manufacturer became operational at the end of June. Other players have been experiencing issues in their plant operations, including disruptions or maintenance turnarounds and expected to take actions such as a cut in the production volume while monitoring the demand. Therefore, we do not believe that increased supply will result in a considerable deterioration of the market.

[Shigeki Okazaki, analyst]

My second question is about LIB separators. Could you show us changes from the first half to second half and year-on-year changes for the full year for EV and the applications other than EV.

[Akira Fukuda, executive]

Fukuda from Separator Business. For the full year, we expect to see a rise in both sales and profit, and this is mainly attributed to the increase in shipments, as was explained. The batteries for automotive use are on high demand, especially in European market, which is why we are seeing such an increase in shipments.

[Shigeki Okazaki, analyst]

In the first half, shipments went up by 30% year-on-year, but how did that split between EVs and other applications? And how do you see it in your assumptions for the second half?

[Akira Fukuda, executive]

There's no particular difference in the growth rates among different applications. Almost all applications went up by 20% to 30%, and the total growth rate reached slightly less than 30%.

[Shigeki Okazaki, analyst]

I see. As you said earlier, the price pressure is increasing and becoming slightly more challenging, as there is more competition than previously, but you were managing to cope with that through cost reductions. Is my understanding correct?

[Akira Fukuda, executive]

Your understanding is correct. Competition is especially intense in automotive applications with price pressure quite severe. And we will need to continue our efforts internally to reduce cost.

[Futoshi Hamamoto, executive]

Thank you. Thank you very much. That concludes today's conference call. Thank you very much for your attendance.