Sumitomo Chemical Co Ltd

TSE:4005

Earnings Call Transcript 2022-Q1

[Operator]

Thank you very much for participating in the Sumitomo Chemical Conference Call for Fiscal Year 2021 First Quarter Financial Results.

Today, Mr. Sasaki, Managing Executive Officer, will give you the briefing on financial results for fiscal year 2021 first quarter. Later, he will be joined by [ Mr. Tan ], General Manager of Accounting Department to take questions.

Now Mr. Sasaki, the floor is yours.

[Keigo Sasaki, executive]

Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending the Sumitomo Chemical conference call despite your busy schedule. I would like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for that.

Now, let me start with explanation of financial results of fiscal year 2021, first quarter. Please turn to Page 4. Consolidated financial results for the first quarter of fiscal year 2021 sales revenue was JPY 639 billion, up JPY 138.8 billion year-over-year.

Core operating income, which shows recurring earning power, was JPY 61.7 billion, up JPY 41.8 billion year-over-year, increase of 3.1x. Nonrecurring items not included in core operating income as losses, there were restructuring charges of JPY 1.7 billion, an impairment loss of JPY 1.6 billion. The loss was JPY 3.3 billion compared to the previous year's same period. This is a worsening of JPY 1.9 billion. As a result, operating income was JPY 58.3 billion, up JPY 39.9 billion year-over-year.

Finance income or expenses was a loss of JPY 1.7 billion, improvement of JPY 3.2 billion year-over-year. Out of this, gain or loss of foreign currency transactions improved by JPY 4.2 billion compared to the same period of the previous year, when there was a loss of JPY 4.5 billion because of strengthening of the yen.

Income tax expenses were JPY 17.8 billion, up JPY 5.6 billion year-over-year. As a result, the quarterly net income attributable to owners of the parent improved by JPY 43 billion compared to a loss of JPY 7.3 billion of the same period of the previous year, resulting in JPY 35.7 billion.

As for exchange rate and naphtha price, which influences our performance, average U.S. dollar rate during the term was JPY 109.52 to $1 and naphtha price was JPY 47,500 per kiloliter. Yen weakened and feedstock price increased year-over-year.

Next is the sales revenue by business segment. Please turn to Page 5. First is sales revenue. This increased by JPY 138.8 billion year-over-year. By segment, sales revenue increased in all business segments, excluding Pharmaceuticals. As for the changes of sales revenue compared to the previous year, analyzing by sector, sales price increased JPY 51.5 billion, and volume increased JPY 75.6 billion. Foreign exchange transaction variance of foreign subsidiary sales revenue increased by JPY 11.7 billion.

Next is Page 6. Core operating income increased by JPY 41.8 billion year-over-year. By segment, core operating income increased in all business segments, excluding Pharmaceuticals. Analyzing by sectors, price was plus JPY 7 billion and cost, minus JPY 12 billion. On the other hand, volume variance, including changes of equity and earnings from investments in affiliates, was a plus JPY 46.8 billion.

Next is our results by segment. Please turn to Page 7. Petrochemicals & Plastics segment, sales revenue was JPY 199.5 billion, up JPY 91.3 billion year-over-year. Core operating income was JPY 23.8 billion, up JPY 43.7 billion year-over-year. In petrochemical products, the raw materials for synthetic fibers and synthetical resins, both market prices and sales volume were firm.

On the other hand, in the same period of the previous fiscal year, periodic shutdown maintenance was conducted at Petro Rabigh and equity affiliate. In the addition, shipment was low, mainly for automotive use due to the COVID-19 pandemic. And so both sales revenue and income increased year-over-year.

Please turn to the next page, Energy & Functional Materials segment. Sales revenue was JPY 74.4 billion, up JPY 26 billion year-over-year. Core operating income was JPY 6.7 billion, up JPY 4.7 billion year-over-year. Shipments of lithium-ion secondary battery separator was firm and market price of aluminum and cathode metal materials went up, leading to higher selling prices.

On the other hand, in the same period of the previous year, shipments decreased mainly for automotive use due to the COVID-19 pandemic. So both sales revenue and income increased year-over-year. Next page, please.

As for the IT-related Chemicals, sales revenue was JPY 109.3 billion, up by JPY 5.4 billion year-over-year. Core operating income was JPY 13.5 billion, up by JPY 3.6 billion year-over-year. With regards to sales revenue, selling price of polarizing film declined. However, in terms of volume, shipments increased for high-purity chemicals and photoresist, which are processing materials for semiconductors as demand increased for semiconductors.

Furthermore, with the background of demand from staying-home and work-from-home, shipments of materials for display applications increased, which led to an increase of sales revenue. Core operating income increased due to the shipment volume exceeding the degree of selling price declining negative factor. Please go to the next page.

As for Health & Crop Science, sales revenue was JPY 103.1 billion, up by JPY 14.2 billion year-over-year. Core operating income was JPY 10.3 billion , up by JPY 6.7 billion year-over-year. Sales revenue was up year-over-year due to steady increase in shipments of crop protection products in North America, South America and India as well as higher market price for methionine. As a result, sales revenue was up year-over-year. Core operating income increased due to improvement in profit margin of methionine and shipment increase of crop protection products. Next page, please.

As for Pharmaceuticals, sales revenue was JPY 139.2 billion, down by JPY 1.6 billion year-over-year. Core operating income was JPY 9.6 billion, down by JPY 14.9 billion year-over-year. Increasing factors for sales revenue were Orgovyx that was launched in North America, the previous year, Gemtesa launched in this quarter and Myfembree.

On the other hand, sales decreased for Brovana due to the exclusive sales period ending and Latuda, which was impacted by the shipment increase in the second half of the previous fiscal year. Furthermore, in Japan, there was an impact from NHI price revisions. Therefore, as an overall result, sales revenue declined year-over-year.

Core operating income decreased due to the decline in sales revenue as well as increase in fixed cost in the subsidiary company of Sumitovant due to sales activities conducted in full scale. That is all for the performance outline by segments.

Next page shows the breakdown of nonrecurring items. However, as of the content and money value, it is as mentioned at the beginning. Therefore, I would like to skip the explanation of this.

Next, I will explain the consolidated balance sheet. Total assets as of end of June 2021 was JPY 4.0931 trillion, up by JPY 102.8 billion compared to the previous fiscal year-end. This is due to higher raw material prices and accumulating inventory before periodic shut down for maintenance as well as increase in trade and other receivables and inventories, which is considered as working capital due to increase in sales.

Interest-bearing liabilities was JPY 1.4209 trillion, up by JPY 69.8 billion from the previous fiscal year-end. Equity was JPY 1.5037 trillion, up by JPY 21.6 billion of the end of the previous fiscal year. As a result, equity attributable to owners of parent to total assets, namely equity ratio was 25.5%, same level as the previous term.

Next, I will explain about our consolidated statements of cash flow. Please go to Slide #14. As for cash flows from operating activities, there was a cash inflow of JPY 4.7 billion, down by JPY 50.9 billion year-on-year. As mentioned previously, the main cause was due to increase in working capital.

Cash flows from investing activities had a cash outflow of JPY 41.3 billion, down by JPY 2.9 billion year-over-year. As a result of this, there was an outflow of JPY 36.6 billion in free cash flow, up by JPY 48 billion year-over-year compared to the outflow of JPY 11.4 billion last fiscal year. Cash flow from financing activities had a JPY 41.5 billion inflow, down by JPY 85.1 billion year-over-year.

Lastly, as for the forecast, we have not revisited it from the one announced in May 13, 2021. As for the Q1 results against the full year forecast announced in May, sales revenue JPY 2.610 trillion; core operating income, JPY 200 billion; operating income, JPY 180 billion; net profit, JPY 100 billion.

Core operating income is at 31%. Operating income is at 32%, and net profit is at 36% and steadily progressing. Moving forward, we will keep a close eye on the latest performance trend and, if necessary, revise the forecast on a timely basis. That is all for the results explanation.

Now, I would like to open the floor for questions from you. Thank you for your participation today.

[Operator]

Now the first question is from Morgan Stanley MUFG Securities, Mr. Watabe.

[Takato Watabe, analyst]

I'm Watabe from Morgan Stanley MUFG Securities. On Page 17, I have a question. Lastly you said that you didn't make any revision, but as for the Pharmaceuticals it seems that in general the progress is good. But are there any individual risk factors or any special factors? Very briefly, could you tell me, if the current progress interpretation by segment?

[Keigo Sasaki, executive]

As you have mentioned, the progress is very high. I didn't mention in my presentation, but JPY 61.7 billion is the level of core income. And in the first quarter, it's the first time we achieved JPY 60 billion. That is the level. So it was at a very high level. And the factors for that, in particular, in Petrochemicals, JPY 23.8 billion. So the profit level was very high.

JPY 36 billion is the annual forecast, but already, nearly 60% is being achieved. And in particular, in the first quarter, in North America, because of the cold weather since February, some plants were stopped and that impact was seen from April to June. So there was a onetime broadening of the margin. That was such a timing. At the moment, this is already shrinking. But in the first quarter, we saw that influence. And as you know, Petro Rabigh also had very good results. So that is a positive factor for Petrochemicals.

[Takato Watabe, analyst]

So the current good situation -- will this continue in the second quarter or in the second half?

[Keigo Sasaki, executive]

We cannot say confidently that this will continue, in particular, for Petrochemicals. And in a sense, you may wonder whether there's something that make us [ inconfident ]. But that is not the case. That is how we are looking at our current situation. And about IT-related Chemicals, JPY 13.5 billion, a very high level of income. EUR 40 billion is the annual forecast and JPY 40 billion is a very high level -- a record high level, and the progress compared to that is very high.

Semiconductors were doing well and because of telework and stay-home demand, the situation was very good. So in the first quarter, that influence continued. So basically, we don't think there will be a sudden change. But, though the situation is so good, there are cases where, for instance, film price is lower than last year, so we cannot say for sure that this situation will continue. So as a result, we didn't make any revision. Did I answer your question?

[Takato Watabe, analyst]

Yes. My second question is about Health & Crop Sciences. The first quarter, JPY 10 billion. Well, first quarter is a quarter that there's not such a high profit. But how do you assess this situation? There's India and there are new consolidations. But after the second quarter, North America, in particular in the first quarter, you may not be able to say something for sure until then. But for crop production chemicals and methionine, what is the situation?

[Keigo Sasaki, executive]

First, for crop protection products, as you have mentioned, South America was added, so this is one difference. And in addition, North America, in the first quarter, we're doing good. And, of course, yen has weakened, which is another factor that made contributions. In particular, in North America, fourth quarter -- yes, we have to wait until fourth quarter to be able to say anything. But for the first quarter, I think the figures were good. And under such situation, biorational, for example, is starting to gradually show results. And some -- a negative factor of concern is the abnormal weather. Even now, for example, in California, Arizona, in these places, there is a hot wave and abnormal dry weather, so rice crops and other crops might be affected, which is another factor to be concerned about. So that is overall situation for crop production chemicals.

For methionine, methionine price at the moment is better than what we had expected. This is also because -- well, it is difficult to say until when this will continue. But as for the current situation, there is a periodic maintenance shutdown in our competitors. There may be an overlap of various factors. Because of shortage of containers there are cases, which is difficult to make procurement, which is another factor raising the market price. But in the second, third quarter, I think the situation will stabilize. And the periodic maintenance shutdown will end. So how much will the price continue? There's nothing that we can say for sure. So first quarter made a good start. But we are not that confident so that we can revise the annual forecast. This is the current situation.

[Operator]

We would like to move on to the next question, Mizuho Securities. Mr. Yamada.

[Mikiya Yamada, analyst]

This is Yamada from Mizuho Securities. I also have 2 questions. First question, right now you have given us a detailed explanation regarding Petrochemicals & Plastics and Health & Crop Sciences. But the Energy & Functional Materials, also for the first quarter, did well is what I think. However, with the increase in declining factors for the operating income, what was the cause of the negative factors? And for the lithium battery materials from last year-on-year, it is an increase, but compared to the fourth quarter, has it increased? So including these questions, can you share with us the recent situation and also the prospects you have from now and onwards.

[Keigo Sasaki, executive]

As for the Energy & Functional Materials, as you have said, the results were at a high level. Regarding the price differences, there is a negative factor that is showing. However, that is due to the separator impact. And, of course, the raw material prices are increasing, and that has a slight impact. So the price difference here is like a tight rope -- pulling rope between the price and the raw material price is what we are thinking. And volume-wise, compared to the same time of the previous year, it is a good number, and it is, as we have explained. But looking forward, the #1 cause of this increase is the automobile application purpose, which was not performing well last year. So it is showing a recovery is our understanding.

[Mikiya Yamada, analyst]

And moving forward, for example, from this first quarter, is it going to increase rapidly?

[Keigo Sasaki, executive]

We don't think it is going to be, as such. However, to a certain extent, we think that the level of the first quarter will continue. That is all -- is that all right?

[Mikiya Yamada, analyst]

So regarding the secondary battery separator, the main customer value chain, there's a new architecture that was implemented. The impact of that exist, but that was offset. And the volume is going to maintain, but that is not included, but still maintaining the status quo? Sorry, it is quite of a sensitive question, but can you answer this question?

[Keigo Sasaki, executive]

That is quite of a difficult question to answer. However, I have to repeat in a generally speaking matter. For the automobile application purposes, in a continuing way, we think that a good situation is going to continue. Of course, there are several reasons such as the major players in United States and others. And we think that the current situation is going to continue, and we're going to put our efforts to be -- so -- I'm sorry, I only can answer to -- up to this extent.

[Mikiya Yamada, analyst]

My second question is related to IT-related Chemicals. They were performing strong, too. The semiconductor-related material shipment increased is what you said. So the display material and semiconductor processing material, at the contribution level, which was higher? And EUV initiatives, what is the progress regarding that?

[Keigo Sasaki, executive]

First of all, for the IT-related Chemicals, the -- I would like to share with you the analysis of the core operating income. Overall, it was JPY 3.6 billion increase. And within that, the volume factor is JPY 8.1 billion. Well, this volume factor, the main point here is film. Of course, the semiconductor-related chemicals or resists some of them are included. However, the main part is a polarizing film, is how we are looking at this.

And of course, other than the polarizing film, semiconductor-related products are performing well and so too resist and chemicals, both in the same way, as we progress in the quarters, it is improving. That is the image we have. Fiscal year 2020, the first quarter, when we look back -- even though it was not so good, things having gradually improved. And in addition to that, there was a stay-home and work-from-home demand that increased and also 5G related demand existed. And of course, for the semiconductors, the memories and logic, the supply was tight. Therefore, in that sense, that has contributed also. It was brief, but that is the explanation.

[Operator]

And the next question is from Nomura Securities, Mr. Okazaki.

[Shigeki Okazaki, analyst]

I'm Okazaki from Nomura Securities. My first question, I also have a question about IT-related questions -- IT-related Chemicals sector, about polarizing film, TVs and mobile and touchscreen panel glass film. From Q4 to Q1, what is the volume fluctuation? And what are your views about situation from Q1 to Q2?

[Keigo Sasaki, executive]

First, for polarizing film, a quarterly movements. And basically, sales itself, Q1 is better than Q4. That is the situation. For mobile itself, in the fourth quarter that just ended, it's a season with low demand, but compared to that, there was some movement and mobile itself was not that large. But for TVs, for the fourth quarter, compared to the fourth quarter, there is a slight increase. For televisions, in general, in FY 2021, we expect a slight decline in sales, but for very large TVs, we have plus importance of that. And I believe these projects will be making contributions. And as for the future, in the first quarter the results were quite good. And going forward, will that situation continue? There may be plus or minuses, but it's very difficult to make a projection. But as much as possible, we want to make it proceed in the same manner as the first quarter.

For touchscreen panels, the glass type results were good and rigid OLED panel. Smartphones were also doing well. On other hand, for the film type, as you know, users are making in-house and the situation is getting more severe. So for existing lines, we want to shift to new items. For example, large-area touchscreen panels, we have been seeing that we will shift to that, and we are working on that right now. So we are not having immediate results, but we are taking such measures. But it still remains facing a difficult situation. And as for the future, for glass type, as much as possible, we want to maintain the current firm situation. And on the other hand, for the film-type touchscreen panels, we cannot find immediately a good measure, but we want to take measures as soon as possible. That is all.

[Shigeki Okazaki, analyst]

In addition, from the first to the second quarter, the polarizing film for TVs and for mobiles, are there any differences in the demand? For mobile, I think, the second quarter is a period with demand.

[Keigo Sasaki, executive]

Yes, for mobile, second quarter tends to increase compared to the first quarter. But first quarter was also doing well.

[Shigeki Okazaki, analyst]

So will there be a drastic increase as we saw last year or a year before that?

[Keigo Sasaki, executive]

It may not be that large from the first -- second quarter, we expect increase. And for TVs, the first quarter was doing well, and we want to maintain the same volume as the first quarter as much as possible.

[Operator]

We would like to move on to the next question, Daiwa Securities, Mr. Umebayashi.

[Hidemitsu Umebayashi, analyst]

This is Umebayashi from Daiwa Securities. The first question is related to the IT-related Chemicals. From the fourth quarter to this first quarter, the changes that have occurred, it seems that the sales -- the profit is JPY 2.5 billion, but the sales was JPY 5.5 billion (sic) [ JPY 5.4 billion ] increase. Can you explain why the sales have increased?

[Keigo Sasaki, executive]

As you have mentioned, for the IT-related Chemicals, the profit level is increasing quite a bit. And I believe there are several factors behind this. As I have mentioned before, the polarizing film, normally from the first -- fourth quarter to the first quarter, it slightly increases. Therefore, such a factor was good.

And also regarding the touchscreen panels, as I have mentioned before, the flexible type is struggling. However, having said that, this part with our efforts put in, we have been implementing measures to suppress the loss. So these type of efforts can be considered to be positive factors. And in addition to this, for the semiconductor-related products, they are in a good condition. And this part also is contributing to the profit. And because of these factors, well, the foreign exchange-wise, the yen is slightly weak, and that also is contributing.

[Hidemitsu Umebayashi, analyst]

My second question is regarding Health & Crop Sciences. The first quarter, they performed very well. South America, India and United States were performing strongly, too, is what you have explained. Especially, for South America, last year compared to the first quarter, the second quarter was stronger as a trend. But this fiscal year, in terms of seasonality, is it going to be the same way? And for the United States, the first quarter was performing well. But in terms of months, from January -- usually from January to March. But this year, the time has moved to -- into April also. And because of that, is it strong or was it other reasons that you have explained previously?

[Keigo Sasaki, executive]

Regarding the crop protection products, how we are looking at South America is, as you have mentioned, usually the peak occurs in the second quarter. Therefore, between July and September for South America it's going to be higher. And as for North America, the first quarter was at a satisfactory level, is what I have explained. Compared to last year's first quarter, it is better. The distributed inventory is starting to be sold out. And so that is one factor. And as you have mentioned, there is some of a timing difference that moved from the fourth quarter, and that may be a factor, too. Therefore, in a sense, this first quarter was better than the usual years. That was a brief explanation, but does this satisfy your question?

For the United States, the situation of this -- the quarter, you will not know till you close it. Well, for North America, the second quarter is better than the first quarter and the third quarter will slightly be lower. So I think that way of looking at it will be all right.

[Operator]

So the next question will be the last question. From SMBC Nikko Securities, Mr. Miyamoto.

[Go Miyamoto, analyst]

I'm Miyamoto. On Page 9, for IT-related Chemicals changes, more than the changes of revenue, our core operating income had a larger change and probably high marginal profit margin situation deteriorated. What is the factor for the impact of this -- in change of volume. Plus JPY 4 billion is a plan for the cost difference. And I think you were -- you had expectations of this situation, but in this quarter it was different. So could you explain the reasons for that?

[Keigo Sasaki, executive]

First, for IT-related Chemicals, compared to sales, income had a larger effect. In particular, for the volume variance, film was a factor. As I had mentioned, high-value-added products are being targeted. So there is a impact of the difference in the composition. And for the cost variance, it is true that this difference is negative. But fixed cost slightly increased and this also, we want to rationalize as much as possible going forward. For the full year, cost rationalization will have a positive effect. We will try to achieve that.

[Go Miyamoto, analyst]

So in terms of timing, was there anything, in particular, for the first and second quarter?

[Keigo Sasaki, executive]

Yes, I think we can say so.

[Go Miyamoto, analyst]

And as for the volume variance within polarizing film for TVs with a low profit margin was -- they not increased as much in -- versus mobile and OLED increased.

[Keigo Sasaki, executive]

Yes. We're within TVs, of course, there are plus and minuses. But ones with large area, there is a certain level of profit margin. And for mobile, in the first quarter last year, compared to that this first quarter has seen a large increase. So mobile has a larger profit margin. And this is one factor contributing to the higher profit.

[Go Miyamoto, analyst]

And my second question, very briefly on Page 10. I have a similar question about the cost variance, plus JPY 1 billion. In the full year plan, this was minus JPY 4 billion, so expected higher cost. So you said about the gap in timing of your recording cost. Is this because cost execution was less in this quarter?

[Keigo Sasaki, executive]

Yes, basically, there is a time lag in executing the expenses. For life science expenses are executed later. And for methionine, we are thinking of various methods and effect of rationalization. Compared to the first quarter last year, we are seeing more effects this quarter.

[Go Miyamoto, analyst]

So for cost, is that about methionine?

[Keigo Sasaki, executive]

Yes. You're right.

[Operator]

Thank you very much. With this, we would like to conclude the Q&A session. At the end, we would like to receive some remarks from Mr. Sasaki, the Managing Executive Officer.

[Keigo Sasaki, executive]

Thank you very much for participating today. As I have explained just now, for the first quarter, we were able to achieve a good result. I forgot to mention this, but exceeding -- the sales revenue exceeding JPY 600 billion is the first time. And the core operating income was a record high for the first quarter. It is -- we are still performing strongly, and we'd like to continue and maintain this performance as much as possible, and we'd like to put efforts into it. Thank you very much for today.

[Operator]

With this, we would like to conclude today's conference call. Thank you very much for participating today.

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