Sumitomo Chemical Co Ltd

TSE:4005

Earnings Call Transcript 2023-Q1

[Operator]

Now it is time to start our conference call to brief you on the financial results for the first quarter of fiscal year 2022. Thank you very much for taking time out of your busy schedule to participate today.

Today, we will have Managing Executive Officer, Mr. Sasaki, who will explain the financial results for the first half -- first quarter of fiscal year 2022 and revision of the first half results for the fiscal year. And we will ask Yamauchi, who is the General Manager, Accounting Department, to entertain the Q&A session. Now Sasak-san, could you please start?

[Keigo Sasaki, executive]

Thank you very much for participating today. I would like to take this opportunity to thank all of the investors and analysts for your continued understanding and support of our company's management. I would now like to explain the financial results for the first quarter of fiscal year 2022 and the revision of the first half earnings forecast. Please refer to Slide 4.

First, here are the key points for the first quarter of fiscal year 2022. First, a summary. To summarize our financial results, both sales and core operating income increased year-on-year due to higher sales prices and the effect of the weak yen despite the impact of cost increases due to higher raw material prices against the backdrop of prolonged conflict in Ukraine and rising inflation. In addition, the company recorded a large amount of foreign exchange gains due to the progress of yen depreciation, resulting in a significant increase in quarterly income attributable to owners of the parent compared to the same period last year.

Core operating income by segment is described with the factors listed below. Although earnings in essential chemicals decreased significantly due to worsening terms of trade in Japan and Singapore and a decline in demand for automotive applications, earnings in the other 3 segments increased due to the effect of depreciation in IT-related chemicals, higher sales prices of crop protection chemicals in Health & Crop Sciences segment. And the recording of onetime license revenue in Pharmaceuticals segment. As a result, the company was able to achieve an overall increase in profit.

Please refer to Page 5 for a summary of consolidated financial results. The consolidated financial results for the first quarter of fiscal year 2020 are as follows. Sales revenue was JPY 774.1 billion, an increase of JPY 135.2 billion from the same period of the previous year. Core operating income which represents recurring profitability was JPY 64.1 billion an increase of JPY 2.4 billion year-on-year.

Nonrecurring items is not included in the core operating income totaled JPY 2.2 billion, including a JPY 1.9 billion gain on sales of fixed assets. And as a result, operating income totaled to JPY 66.3 billion, an increase of JPY 7.9 billion from the same period last year. Finance income was JPY 47.4 billion due to the significant amount of the gain on foreign exchange rate and improvement of JPY 49.0 billion from a year earlier. And therefore, JPY 70 billion was recorded as the profit for the term attributable to the owners of the parent and which was an increase of JPY 34.3 billion from a year earlier. And also the first quarter reached all-time highs in terms of sales revenue and each line of income, an average exchange rate and after prices are shown on the slide.

Please turn to Page 6 for sales revenue by business segment. Total sales revenue increased by JPY 135.2 billion from a year earlier. In all segments, revenues increased. The year-on-year increase in sales revenue for the entire company can be broken down into the following factors. Sales price variance increased JPY 53.5 billion, and shipping volume variance increased to JPY 6.6 billion. And foreign currency conversion variance of revenues of overseas subsidiaries increased by JPY 75.1 billion.

Please turn to Page 7. Core operating income for the entire company increased by JPY 2.4 billion year-on-year. A factor-by-factor analysis of the entire company is as follows: price variance was a negative JPY 9.5 billion, and cost variance was a negative JPY 7.0 billion.

On the other hand, shipping volume variance and other factors, including changes in equity and earnings of affiliated companies contributed JPY 18.9 billion. Next, I'd like to continue to explain a summary of the results by segment.

Please refer to Page 8. In essential chemicals segment, core operating income was JPY 10 billion, a decrease of JPY 13.8 billion from a year earlier. For price variance, terms of trade have deteriorated because increases in sales prices have not kept up with the increases in raw materials and fuel prices for products such as synthetic resins, MMA and various industrial chemicals. In terms of the volume variance, shipments decreased due to a drop in demand, particularly in automotive applications, despite improvements in operations at Petro Rabigh, our equity method firm.

Please turn to the next page. In the Energy & Functional Materials segment, core operating income of JPY 6.6 billion, almost unchanged from the same period last year. As for price variance, terms of trade for aluminum and cathode materials improved due to rising market prices. On the other hand, terms of trade for other products such as resourcing and synthetic rubber deteriorated due to higher raw materials and fuel prices. As for volume variance, et cetera, shipments of separators for lithium-ion secondary bodies remained strong, and net income from export increased due to the weaker yen.

Please turn to the next page. In IT-related chemicals segment, core operating income was JPY 15.8 billion, an increase of JPY 2.3 billion year-on-year. As for price variance and display-related materials, selling prices of polarizing films and touch sensor panels declined. For volume variance, et cetera, shipments of display-related materials declined due to a low in stay-home demand and terrain consumer confidence caused by inflation. On the other hand, shipments of semiconductor-related materials increased due to growth in demand. Overall segment income increased due to an increase in net income from exports and profit from foreign currency conversion due to the weaker yen. Please see the next page.

In the Health & Crop Sciences segment, core operating income was JPY 21.9 billion, an increase of JPY 11.6 billion versus the same period last year. As for price variance, selling prices of crop protection increased in South America. Market prices for methionine also increased. However, the terms of trade deteriorated due to increased raw material and fuel prices despite improved market conditions. Cost variance increased due to expenses associated with business expansion such as the immediate launch of INDIFLIN and the development expenses for our pipeline products, for volume variance and others increased due to higher shipment of crop protection in South America and India. And the segment as a whole benefited from increased net income on exports and the profit from foreign currency conversion due to the weaker yen.

Please see the next slide, please -- page. As for the pharmaceutical segment, core operating income was JPY 14.1 billion, an increase of JPY 4.4 billion versus the first quarter FY 2021. As for the price variance, sales prices fell in Japan due to the NHI drug price revision in Japan. As for the cost variance, selling, general and administrative SG&A expenses increased due to the sales expansion of Orgovyx, Gemtesa and other products in the Sumitovant Group, a subsidiary of Sumitomo Pharma.

As for the volume variance, in addition to the sales growth of Latuda, Orgovyx and Gemtesa and other products in North America, and onetime revenues for sales license contracts for Orgovyx in Europe was recorded. This concludes the overview of the business results by segment.

Next page, it will show the breakdown of nonrecurring products and items. Let me go to the Page 14. I will skip the main items and I will explain the consolidated financial results. At the end of June, the total asset was JPY 4,669.9 billion, an increase of JPY 361.7 billion from the end of March '22. Cash and cash equivalents and inventory increased as well. Interest-bearing debt was JPY 1.4174 trillion, an increase of JPY 67 billion from the end of March '22. Equity was also increased. And therefore, there is improvement in the net income attributable owners of the parent as well as equity.

Let us go to Page 15 for the cash flow. For the cash flow from operating activity was JPY 42.6 billion, an increase of JPY 37.9 billion in cash flow compared to the same period last year. This was mainly due to the improvement in income before income taxes. Cash flows from our investing activities was JPY 46 billion, an increase of JPY 87.3 billion from the same period last year. This was mainly due to sales of investments and the collection of loans and receivables.

As a result, free cash flow totaled JPY 88.7 billion, an increase of JPY 125.2 billion from the negative number of JPY 36.6 billion in the first quarter last year.

Nextly, please go to '22 first half, revisions of the first half. Please go to Page 17. Now let me give you some highlights of the forecast revision. Now let me explain the background first. We have decided to revise our first half forecast in light of the yen depreciation against the U.S. dollar beyond our expectation at the beginning of the year and also due to the changes in the business environment.

However, we have decided to leave the full year forecast unchanged at this time because it is difficult to foresee the business environment due to uncertainties in exchange rate, raw material prices and other factors. We will review the forecast as necessary and announce it separately. And also, the first half forecast revisions assumption, the business environment is going to be explained.

From the end of last year, the crude oil prices are very high, and it will continue to stay at a high level according to our expectation. It will be difficult to raise prices for finished goods due to weak end-user demand. But Petro Rabigh is expected to have good results in the second quarter.

Nextly, we believe that the global automotive production will continue to decline due to the shortage of semiconductors and the lockdown in China. As for displays, we expect the business environment to be more difficult than we had assumed at the beginning of the year as panel demand is conspicuously declining due to the lower stay-at-home demand and weakening consumer demand with inflation.

On the other hand, for semiconductor demand, it will remain strong in the first half of the year. As for crop protection shipment, and Health & Crop Sciences, in South America and India, the shipment is very brisk. But in the -- but it's not as high of the selling price as we had in the first quarter last year. For the methionine, although the selling prices are rising due to the weak yen and improved market conditions, the raw materials and fuel prices are rising at a faster pace than the selling prices, and therefore, we expect the business environment to remain difficult.

Lastly, in the pharmaceuticals, we will continue to focus on expanding sales of Orgovyx and Myfembree and Gemtesa, which were launched last year as we took our business situation rather than the business environment.

Now I would like to go to the details of revised forecast. Please go to Page 18. So as I expressed the business conditions and environment, we decided to revise the forecast. It's going to be 1.3% increase on the revenue, sales revenue of JPY 1.578 trillion. And the core operating income is going to be 16.7% higher at JPY 105 billion, and the operating income is going to be up by JPY 17.6 billion to 206 -- 17.6% increase at JPY 400 billion. And net income attributable to owners of the parent is forecasted to rise at JPY 85 billion or 41.7% increase with sales and income higher at each profit level.

The assumption of foreign exchange rate and the naphtha prices are as shown on this price. The average of the yen-dollar rate is expected to be JPY 130 and naphtha prices is focused at JPY 80,000 per kiloliter for the second quarter. Core operating income by segment are shown on the next page. Please go to Page 19.

Now for each segment, I have given you the highlights of our forecast in the Health & Crop Sciences. In South America, the sales in the crop protection is doing very well. And also essential chemicals segment, in terms of trade in oil, refining businesses are expected to be favorable. In addition, as yen is expected to be depreciating against the U.S. dollar more than previously forecasted, and therefore, we expect revenue from the export to increase as well as overseas subsidiaries revenue and profit translated into Japanese yen.

On the other hand, in the IT-related chemicals, dispute-related material shipment is expected to go down. All in all, core operating income for the entire company is expected to exceed the previous forecast by JPY 15 billion.

This concludes the financial results. And I would like to have your question from the audience. Thank you very much for your participation indeed.

[Operator]

[Operator Instructions] I would like to introduce the first person to ask a question. From Morgan Stanley MUFG Securities, Watabe.

[Takato Watabe, analyst]

My name is Watabe. I am from Morgan Stanley. Congratulations on the good results. From the first quarter to second quarter, how should we interpret the trend in each segment? Could you please briefly explain?

[Keigo Sasaki, executive]

Yes, understood. By segment, starting from essential chemicals, for the first quarter, JPY 10 billion was achieved. As I said in my presentation, petrochemicals as a whole due to the deteriorating terms of trade. However, on the other hand, in the refined petrochemical business, which was quite strong. Towards the second quarter, we believe that our current strong performance would continue.

Inclusive of these factors, we believe that during the second quarter, essential chemicals will reach JPY 18 billion. And regarding the Energy & Functional Materials, for this segment, automotive-related demand is not strong. That is our basic assumption. Therefore, compared to the results in the first quarter, we believe that during the second quarter, there will be a slight decrease because of the increasing prices of raw materials and also logistics costs.

So all these factors are taken into account for this forecast. The weaker yen would continue. But towards the second quarter, we believe that the effect -- impact of the weak yen will be diminishing from the first quarter from JPY 6.6 billion down to JPY 3.4 billion. And IT-related chemicals for the first quarter because of the weaker yen, with the performance was very good.

And as I said in the presentation earlier, although there were various factors, the drop of the stay-at-home demand and lockdown of cities in China. And these factors were taken into account. And compared to the first quarter, the impact of a weaker yen will be less in the second quarter, therefore, it is down from JPY 15.8 billion to JPY 7.2 billion. And Health & Crop Sciences, the first quarter results were very, very good.

And because of the higher prices of the crop production chemicals in Latin America, this trend continued during this first quarter. And such situation is going to be subsiding a little bit going forward. That is our assumption, but we believe that performance will stay at the high level from JPY 21.9 billion, although there will be a slight decrease down to JPY 18.1 billion, but compared to the past history, we believe that the level will continue to be at high level. That is all for me.

[Takato Watabe, analyst]

Well, thank you very much regarding Health & Crop Sciences. Regarding the increasing selling sales prices in Latin American market. And I think that there has been a slight impact of the erosion by generics. And regarding the rising prices in Latin America market because -- do you think that increase of the price of the generics have exceeded the increase in the raw material cost, and you have been able to capture that trend? And the heat waves are hitting the North American markets. And I believe that you have a lot of inventory. And do you think that you'll be able to address inventory? I think this is related to health and agriculture.

[Keigo Sasaki, executive]

Thank you very much for your question. As you said, the prices in South America, given the increases in the materials and others. Well, the prices have been rising in line with the price cost increase in raw materials and so forth. Our customers like to secure supply of our products as soon as possible. So the prices of the crop protection chemicals that we sell have been staying at the high level. But I believe that the situation will gradually subside.

On the other hand, you asked about the North America. As you said, yes, there is an impact of the heat wave and the drought. We are concerned about the impact of the drought. Given this situation for rice, crop protection chemicals may be impacted by that conditions. So this is the area of concern for us. On the other hand, soil cultivation acreage will not be affected by this at all. I mean, acreage is expected to increase on the contrary. So we do not have much concern about that business.

The inventory is increasing. Watabe-san, you pointed out that increasing level of inventory, regarding the endeavoring, which we are going to sell going forward, the production is ongoing. Well, because of the seasonal changes, the production level has been increased and also inventory has been raised. That's why we believe there has been the increase in the inventory level but we expect that the sales will continue to rise.

Therefore, please understand the current situation. And foreign exchanges and also increase of the raw materials cost.

[Takato Watabe, analyst]

And let me clarify the impact of the erosion of the generics, don't you have any much concerns regarding the negative impact of the generics?

[Keigo Sasaki, executive]

Well, of course, INDIFLIN, we are marketing new agents. And also, we are also marketing and selling generics as well. So given the price increase in generics, we believe that there is also a contributing factor in terms of the increase in our profits. I would appreciate if you can understand that.

[Operator]

Now I would like to entertain the next person who is asking questions. Mizuho Securities, Mr. Yamada, please.

[Mikiya Yamada, analyst]

I'm Yamada. Congratulations for very good results I have 2 questions. My first question is in the Health & Crop Sciences. The price variance is plus JPY 7 billion [indiscernible] is the price is up. However, the terms of trade has aggravated.

[Keigo Sasaki, executive]

And as we have explained, the generic is also experiencing a price increase. And also -- INDIFLIN is also contributing with volume increases.

[Mikiya Yamada, analyst]

But you said the price -- any price is going to soften, but actually, in the immediate situation, is the price in South America is softening? Or are you just discounting that as a risk? What is your viewpoint towards softening the prices? Can you be more elaborate on that?

And also, methionine trade -- terms of trade. What is your view in the second quarter and onwards? And what's the current situation, please?

[Keigo Sasaki, executive]

Thank you very much for your question. Well, compared to the same period of last year, we have conducted analysis. And I believe that your question is based on the comparison. In the Health & Crop Sciences, it is up by JPY 7 billion. Now the positive impact are as follows: crop protection is contributing favorably. As I explained in South America, the price increase -- selling price increase has contributed.

And this price increase was more than the cost increase of the raw materials, which is net contributing to the better profit. But the price is going to soften as we expect going forward. But when our price opening is slightly seen but not by a large degree. But it is very likely that it's going to go down and the price is going to soften. So we are taking that as a risk. Now on the other hand, for the methionine, as a matter of fact, price is going up. But more than that, the raw material is going higher than the price increase of the sales.

But crude oil prices are stabilizing and also naphtha price is actually JPY 80,000 per kiloliter, but it's less than JPY 80,000 per kiloliter. And therefore, raw material prices is expected to be softening slightly. But with that in mind, of course, the customers are also requesting us to reduce the prices usually.

[Mikiya Yamada, analyst]

So to what extent we can keep the sales price at a high level -- at this current level? To what extent we can increase the sales price is going to be the questions going forward. Well, the price variance at this moment, if the current crop protection price is going to be kept, it's going to be upward direction. And you also have vertical integrations, and therefore, you can also produce some materials. But for other companies, they can -- other companies have to produce and purchase for the -- some materials for the final products.

And therefore, when the raw materials is going to soften the terms of trade is going to improve, especially for you. But am I too optimistic?

[Keigo Sasaki, executive]

Thank you very much for your question. Well, for the methionine, as you have rightly pointed out, we are a strong and good at some aspects. Now with regards to this area compared to the competitors, to what extent we are advantaged is going to be analyzed. I think there are many different points in the perspective. Of course, we would like to keep the selling price as much as possible. But for the methionine, this is not something -- the price cannot be decided by ourselves because there are major players, the bigger players. So we have to look at the market price trend to decide price. It's not going to go up on unilateral directions because the raw materials are going up. So we'd like to keep our sales price as much as possible, but that's the current position.

[Mikiya Yamada, analyst]

Okay. I think I understand. Now for the financial income -- for the FX. There is a contribution -- positive contributions by FX translation and conversion income. But if you look at the balance sheet, it doesn't seem that there is such a big contribution in the cash and cash equivalents. Our account receivable doesn't seem to go up as much -- exactly goes that are you going to have a redemption of the fixed income and the rolling of the fixed income because it's a big item?

[Keigo Sasaki, executive]

Yes, in the first quarter. There was a substantial FX translations and conversion profit of about JPY 57 billion. Now as of the end of March, yen-dollar rate is JPY 122 to $1, as I recall. And at the end of June, it is JPY 136. So it's about JPY 14 cheaper per dollar. So the yen depreciated under [ strength fund ], JPY 14 per dollar, and that's the contributions and the impact on the FX.

For the accounts receivable, that's -- accounts receivable is going to be impacted. But there is some eliminations in the internal trades and in-house trades. So what is going to be shown in the BS is not the only item, but there are other items that is going to be affected by the FX rate. So it's not in the balance sheet because it's eliminated, but it's going to stay in the PL, yes, that's what I mean.

[Mikiya Yamada, analyst]

Okay. So JPY 14 depreciated, so it's going to be JPY 50 billion of the differences?

[Keigo Sasaki, executive]

Yes. If we cannot recover, then -- if the yen gets stronger, the same thing will happen in opposite directions, but there is something that is realized. What is already the accounts receivables can receive, and it's going to be finalized and it's not going to go back even though the yen gets stronger. So in South America, the crop protection was extremely favorable, and you have accounts receivable that is quite large. And therefore, it is larger than usual.

However, if you exclude that impact, it is the level that you have measured. In the core operating income, I thought you have asked the question.

[Mikiya Yamada, analyst]

No, no, no. I was talking about -- it's not core operating income, but it's account receivable. You have accounts receivable. And if you go into to the translated to converted, then ForEx gain will be realized. And therefore, it's not -- I thought it's going to be recorded in the financial income. I understand because we are going to have more accounts receivables from exports to South America.

[Keigo Sasaki, executive]

Yes, your understanding is correct. Financial income, again, financial gains from the FX translation and conversion gain is going to go up.

[Operator]

Now next person to ask a question. From SMBC Nikko Securities, Miyamoto-san.

[Go Miyamoto, analyst]

My name is Miyamoto. I also have 2 questions. First question. First question is regarding essential chemicals. Regarding your forecast, could you please explain more the ethylene plant, operating rate was down 14.4% in June. And I believe that -- I understand that because of impact of the KO ethylene. And in Singapore, the operating rate may be declining as well.

And the market prices, you said that there is the weight hovering on the increase. And also MMA market prices are declining as well. So how are you incorporating the impacts of the declining market prices in your forecast?

[Keigo Sasaki, executive]

Thank you very much for your question. As you pointed out, Miyamoto-san, currently, petrochemical as a whole is hit by market price conditions. That is not favorable for us. That is our understanding. Of course, there has been factors such as lockdown of cities. Such temporary factors impacted us as well. And because of the shortage of semiconductors in automotive-related sectors.

And we know that there is a lot of news coverage regarding the production rate decrease in automotive sector. Because of these factors, we think that there has been the impact by the declining demand as well as the market price decline. And those factors are also incorporated in our forecast that we announced this time to some extent.

So to what extent we have factored in these factors, of course, there may be various opinions regarding the extent. But to some extent, I would say we have incorporated these factors for petrochemicals, and there are some in the -- to some extent, fixed prices. But we do not expect further downside from that expected price range and performance. Ethylene works operating rate is taken up in the news in Japan. And as you pointed out, during the past 1 or 2 months, there has been a decline in operating rate. And that is how we are viewing the operating rate.

Whether or not the situation would continue, we are not able to make a clearcut call, but we would like to just see and monitor closely.

[Go Miyamoto, analyst]

And the polyolefin operating rate from July to September. What is the operating rate you're assuming for the second quarter?

[Keigo Sasaki, executive]

For polyolefin, the utilization rate for polyolefin itself. For example, for Singapore, we do not think that it is going to be very low. It's about -- going to be 90% or above. That's how we are assuming. And when it comes to Japan, from KO ethylene, we are getting supply of raw materials. And when it comes to production volume, we believe that it is going to be at around 90%, quite high level.

[Go Miyamoto, analyst]

Understood. My second question is related to the revision made to the forecast for Health & Crop Sciences. I may be repeating what has been already asked. And JPY 18 billion, this is the largest variance from the previously announced forecast in this segment. So that's why I would like to ask generic price increase in South American market and also ForEx.

And I understand these are the 2 biggest factors. And the volume variance is not so large and also the prices as well. And could you please give us your assumptions for making this upward revision?

[Keigo Sasaki, executive]

Yes, you pointed out there are price variance in South American market and the effect of the weaker yen, ForEx gain. These are the 2 biggest factors for the revision. When it comes to the volume, in Health & Crop Sciences, crop protection chemicals shipping volume variance is not deviating from the original forecast. In that sense, volume-wise, we believe that the trend is almost in line with our expectation. In India and South American markets, I believe that volume has been slightly above our original forecast.

Regarding methionine, in terms of volume, we do not believe that there has been a significant decrease -- increase or difference from the assumptions. But given such a sharp increase in the raw material cost and the sales prices are not catching up with the increase in the raw material cost.

Therefore, in terms of the profitability of the business, which we believe is going to be quite tough. That is our current situation. From the second quarter onward, we have a challenge of changing this.

[Go Miyamoto, analyst]

And methionine, do you think that there will not be any big change from the original plan.

[Keigo Sasaki, executive]

In terms of volume that's correct.

[Go Miyamoto, analyst]

What about the margin forecast?

[Keigo Sasaki, executive]

In terms of margin, I think it is going to be stretched compared to the increase of the sales price. What we assumed at the beginning of the year, the sales price has increased. But when it comes to the increase in raw material costs, which exceeded the increase in the sales price, therefore, that making our profitability squeezed.

[Go Miyamoto, analyst]

Last question. INDIFLIN, it's going to be registered as the crop protection chemical in -- that was announced in May. So what about the feedback or feeling that you have obtained from the launch?

[Keigo Sasaki, executive]

Thanks to your cooperation, we have been able to obtain the registration in Latin American markets in May. And towards the original target, we are currently making utmost efforts to achieve that.

So what we have failed so far is not very bad and rather good. So we would like to continue to put our focus on this.

[Operator]

Now we are almost at the end of the session, so we'd like to take the last question. Nomura Securities, Mr. Okazaki, please.

[Shigeki Okazaki, analyst]

I have 2 questions. My first question is in the IT-related chemicals. From Q1 to Q2, there was a TV polarizing film and also the panel semiconductors are going to change in sales as well as demand. What is going to be the change?

[Keigo Sasaki, executive]

In the IT-related chemicals, in Q1, quarter -- the last quarter was very good. However, very gradually, the situation is starting to change. For example, in the TV related panel from '21 to '22, we have to -- expect to have a drop in sales. And after second quarter and onwards, we expect a decrease in the sales of the panel. Because the demand is softening for one thing, and also inflation is a negative impact to the sales of the product. the polarizing film is going to be impacted negatively because of those reasons according to expectations. And not only the polarizing film, touch sensors are also expected to be softened mainly for the mobile application use.

We believe a certain negative impact is started to be seen. From Q1 to the Q2, the forecast already reflected that slowdown. Now touching upon the semiconductor products, in the first half, we don't see there is a major change from Q1 to Q2. There is no negative impact expected.

We believe that the semiconductors continue to fare at a favorable level. But for the semiconductor materials, partially the situation is starting to change according to some forecast. So we will continue to watch the situation.

[Shigeki Okazaki, analyst]

Let me go to the second question. In the crop protection, I'm sorry that I haven't studied enough on the business. The generic pharmaceutical in South America is going up in prices. And I believe that there is a fight for the products because of the Ukraine invasion by Russia as one of the reasons. But what is your analysis on the price increase? And also in other regions in America and also Asia, is that going to have a repo effect? And do you expect the similar trend to be seen in other regions?

[Keigo Sasaki, executive]

In South America, especially in Brazil, this is the biggest agriculture country in the world with the highest production of the agricultural products. And to the Brazilian market, INDIFLIN is going to be our attention. And also, we also have generic products as well.

For the generic product per se, the purchase price is quite high because the demand is very strong. And on the other hand, the production in China is affected by lockdown and other factors with the restraints and there is some disruption and confusion. And therefore, demand is very large in South America, and there is a fight for product. And that's serving as a backdrop. As I stated and explained before, the lockdown in China is -- also have impacted.

However, the impact is going to be softening as well. So the onetime price increase is going to subside in the future. That's how we see. So in China, the raw material purchasing and procurement is going to be difficult. And therefore, there is a shortage of the agricultural crop, and that has pushed up the price because of the concern. We guess that, that is the reason. Otherwise, the price of the crop protection is not going to go as high as we see.

[Shigeki Okazaki, analyst]

How about this price hike is going to go to the other regions? Is it going to be limited in South America?

[Keigo Sasaki, executive]

No, at this moment, the prices in other regions are not going up as much as in the South America because generic products are sold by ourselves. But because the South American market is the biggest market. So other markets, there is some price increase. However, it's not to the extent of the level that is going to positively contribute to our profit because our volume is quite limited in other areas, and therefore, it's not really contributing by a substantial degree.

But we do not hear the stories that price increases is so much in other regions other than South America.

[Operator]

This concludes the question-and-answer session. Lastly, but not the least, Mr. Sasaki is going to say a few words of closing.

[Keigo Sasaki, executive]

Today, I would like to extend my hearty appreciation for your participations. As the first quarter results, we had very good results. But as I explained before, in the second quarter and onwards, the situation is still foreseeable, and the economic situation is difficult to foresee as well. And therefore, we are going to be very cautious in our analysis. And we can be agile and have a flexible responses to the changing environment.

I would like to continue to have your support and your kind concern. Thank you very much.

[Operator]

This concludes today's conference call. Once again, thank you very much for your participations indeed.

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