Sumitomo Chemical Co Ltd

TSE:4005

Earnings Call Transcript 2018-Q3

[Unknown Executive]

Thank you for joining us in the conference call for the third quarter 2017 for Sumitomo Chemical. Today, Mr. Sasaki, Executive Officer of the Accounting Department at Sumitomo Chemical will take you through third quarter results for the year ending March 2018. He will be later joined by Mr. Horiuchi, Team Leader; and [ Mr. Yanagi ], for Q&A.

Before the conference, there are some disclaimer statements to be made. In the presentation, future projections based on current forecast may be provided. Please be informed that they involve risks and uncertainties. Please be reminded that actual results may greatly differ from projections provided.

[Audio Gap]

[Keigo Sasaki, executive]

This is Sasaki speaking of Sumitomo Chemical. Thank you very much for joining our conference call in spite of your busy schedules. I'd like to take this opportunity to extend our deepest appreciation to our investors and analysts for your understanding and support to our business operations.

Now without further ado, I would like to take you through the financial results for fiscal year 2017 third quarter.

Please turn to Slide 4, financial summary. Net sales for the third quarter was JPY 1,621.3 billion. It was up JPY 231.5 billion from the same quarter last year. Operating income was JPY 131.1 billion, up JPY 44.9 billion year-on-year. Ordinary income was JPY 171.2 billion, up JPY 56.2 billion year-on-year. Equity in earnings of affiliates included in nonoperating income was JPY 40.1 billion.

Petrochemical Corporation of Singapore, PCS, ethylene center in Singapore, continued to perform well. And the performance of Rabigh Refining and Petrochemical Company, PRC, improved from continued high utilization and increase in oil refinery margin. As a result, equity and earnings of affiliates was up JPY 14.3 billion year-on-year.

Net exchange gain was JPY 1.7 billion. Since big gains were recorded same time last year due to the weak yen after the U.S. elections, exchange gains were down JPY 4.8 billion year-on-year.

Regarding extraordinary gains and losses. Extraordinary gains include JPY 6.8 billion in gains from sales of fixed assets and JPY 4.3 billion in gains from sales of investment securities. In the meantime, JPY 7.8 billion in restructuring cost was posted as extraordinary loss.

Income taxes was JPY 25.6 billion, up JPY 800 million year-on-year. As a result, net income attributable to owners of the parent was JPY 108.6 billion, which was up JPY 53.2 billion year-on-year.

The financial results for this third quarter and for the 9-month year-to-date posted record high numbers. Net income reached JPY 100 billion for the first time. ROE was 12.4%. It improved by 5.3 points compared to the 7.1% same time last year.

Regarding exchange rates and naphtha price that impact our business performance. Average exchange rate to the dollar was JPY 111.69. Yen weakened JPY 5.9 compared to same time last year. Naphtha prices was JPY 39,700 per kiloliter. Compared to same time last year, it was up JPY 7,400 per kiloliter.

Overseas sales ratio was 63.6%, mainly due to increase in shipment of pharmaceuticals in North America. Overseas sales ratio has increased year-over-year.

Next is financial results by segment. Please turn to Page 5. Net sales by business segment. Total net sales for the company was up JPY 231.5 billion year-on-year, it has increased across all segments, excluding the Others segment.

Analysis of change in sales year-over-year as -- is as follows. Sales price of IT-related Chemicals and Health & Crop Sciences were down. In the meantime, in Petrochemicals & Plastics, due to the rise in raw material prices, market prices went up. Therefore, sales price difference year-on-year contributed to a JPY 28.5 billion increase in sales.

In volume, across all segments, excluding Others, shipment increased and, therefore, pushed up sales by JPY 151.2 billion. Foreign exchange difference in sales of overseas subsidiaries contributed by JPY 51.8 billion.

Next, please turn to Page 6. Operating income of the company was up JPY 44.9 billion year-on-year. If you look at the segments, Health & Crop protection and Others & Adjustments went down in income, but the other segments improved its operating income.

If you look at the factors in the price variance, Petrochemicals & Plastics had a better margins. And also, in the Health & Crop Science, methionine market went down. And also, in IT-related Chemicals, the price went down and, therefore, it was down by JPY 3.5 billion.

In terms of costs. In IT-related Chemicals, rationalization was promoted; but in Pharmaceuticals, sales cost as well as research and development went up. And therefore, it's down at a negative JPY 15.5 billion.

As for the volume and shipping volume variance, all the segments other than Others & Adjustments, shipment went up and, therefore, it was positive by JPY 63.9 billion.

Now let me go to the business outline by segments. Please go to Page 7. In the Petrochemicals & Plastics, sales was JPY 506.3 billion, up by JPY 92.2 billion compared to the same period the last year. Operating income was JPY 38.1 billion, and it's up by JPY 20.6 billion year-on-year.

Sales due to the price increase of the raw materials, the market price of the petrochemical products, as well as synthetic resin, improved and, therefore, methyl methacrylate and caprolactam and synthetic resin enjoyed the improved market conditions with better price.

Rabigh products had an increase in shipment. And also, the Sumika Polycarbonate was included in the consolidation as a subsidiary, which also had the impact on increase. In the operating income, there was a better margin in methyl methacrylate and synthetic resin and, therefore, licensed revenue went up, which it has helped to improve the results.

Please go to the next page. In Energy & Functional Materials, sales was JPY 187 billion, which is an increase of JPY 41 billion compared to the same period last year. Operating income was JPY 15.2 billion, which is an increase of JPY 10 billion year-on-year.

With regard to sales, aluminum market improved, and the sales price also went up as well. And also, resorcinol and engineering plastic shipment improved and increased. In addition to that, the lithium-ion secondary battery separator production capacity increased. And also, Tanaka Chemical Corporation was newly consolidated, which has increased the results. The operating income went up, mainly due to the shipment volume increase.

Please go to the next page. IT-related segment -- IT-related Chemicals segment sales was JPY 286.6 billion, up JPY 16.8 billion year-on-year. Operating income was JPY 13.3 billion, up JPY 4.4 billion year-on-year.

In sales, selling prices of polarizing films and touch sensor panels were down. But in the meantime, shipment of these products increased. Weak yen contributed to the sales increase.

Operating income was positive since drop in selling prices was compensated by an increase in shipment and cost reduction measures, such as streamlining of operations.

Please turn to the next page. Health & Crop Sciences segment sales was JPY 213.8 billion. Compared to the same time last year, it was an increase of JPY 21.9 billion. Operating income was JPY 15.7 billion, down JPY 900 million from the same quarter last year.

Sales was affected by the lower market price for methionine, but ended up, thanks to Excel Crop Care Ltd., newly consolidated subsidiary, as well as the weak yen.

Operating income was down due to lower market price for methionine despite new consolidation of Excel Crop Care Ltd. and positive impact of the weaker yen.

Please turn to the next page. Pharmaceuticals segment sales was JPY 389.4 billion, up JPY 59.7 billion from the third quarter last year. Operating income was JPY 58 billion, up JPY 11.9 billion year-over-year.

Sales increased due to increase in shipment of Latuda in North America and divestiture of [ 3 ] ciclesonide products and combined with increase in shipment of Trulicity and Aimix in Japan. Operating income was up due to increase in shipment volume, while affected by increase in sales expense and R&D cost.

Next, I would like to talk you through the consolidated balance sheet. As of the end of December 2017, total assets was JPY 3,123.3 billion, which is an increase of JPY 261.3 billion compared to the end of the previous year. It was mainly due to increase of cash and cash equivalents, inventories, and other investments and other assets.

For the interest-bearing liabilities, compared to the end of previous year, it went up by JPY 73.5 billion at JPY 948.8 billion.

Total asset was JPY 1,304.8 billion. And compared to the end of the previous year, it improved by JPY 142.2 billion. Retained earnings and other -- accumulated other comprehensive income also increased. As a result, shareholders' equity ratio became 29.80%. It is an improvement of 1.1 percentage point.

Now please go to Page 13 for consolidated cash flows explanation. Cash flows from operating activities was a positive JPY 140.9 billion, which is an improvement of JPY 55.6 billion. It was mainly due to improvement of income before income tax.

Cash flows from investing activities was a negative JPY 113.9 billion, which is an outflow decrease of JPY 54.5 billion. As a result of that, cash flow was positive of JPY 27 billion. And compared to the outflow of JPY 83 billion, it went up by JPY 110.1 billion.

For the cash flow from our financing activities, it was a positive at JPY 20.2 billion, and it went down by JPY 60.1 billion.

Lastly, I would like to give you the forecast of the full year. The numbers and guideline we have provided in November 1 is expecting the highest record at each stage, and we keep the numbers that we announced.

As we look at the result of the third quarter, in terms of the progress ratios, vis-à-vis the annual target: in operating income, it's 71%; in other income, it is 80%; and in net income, it is 90%.

For the agricultural, Health & Crop Science, the fourth quarter is a peak demand and, therefore, it is a very favorable and high-progress ratio.

If you look at the P&L in a segment-by-segment basis, Petrochemical & Plastics and Energy & Functional Materials exceeded the expected annual target and, therefore, we can expect a substantial excess.

However, in IT-related Chemicals, display materials have a very slow demand in the fourth quarter and, therefore, it is expected that our actual achievement is going to be lower than what we have forecasted.

In Petro Rabigh, the equity in earnings of affiliates have improved, that's due to the high utilization ratio. And also, we are not expecting any special extraordinary loss this year. And it is expected that we can expect a substantial or excess of what we have originally expected.

However, the recent situation suggests that the yen is appreciating and also the raw materials are also moving higher. And as we look at the price movement of raw materials, we have to be careful of the most recent situations. And therefore, if it's necessary, we are going to revise our forecast of the year.

This concludes my explanations on the results of the third quarter. Now I would like to accept the questions from the floor. Thank you very much once again for your participation.

[Unknown Executive]

Thank you very much. We are now going to take questions.

[Operator]

[Operator Instructions] The first question is from Morgan Stanley MUFG Securities, Mr. Watabe.

[Takato Watabe, analyst]

I have 2 questions. One, on IT-related Chemicals. Earlier, you said that you might not be able to achieve the full year target. But for the second quarter and third quarter, sales is not growing and profit or income is dropping. I would like you to please explain that. And for the mainstay products, could you give us an update?

[Keigo Sasaki, executive]

Understood. Thank you for your questions. With regards to TV, trends on TV, I would like to start from there. TV sales, volume, sales units year-on-year is dropping, declining. In various markets, we are seeing drops. The set prices have still to go, and then the demand is not growing. It is remaining to be sluggish. And against this backdrop, as for TV applications of our product, for high-end products, the polarizing films is the area which we were focusing on marketing and sales, but it is exactly in that business area where we're not seeing growth. So for sales in the third quarter compared to the same time last year, we're seeing a decrease. With regards to the fourth quarter, high-end products are not growing, and the product mix is not improving. So for the fourth quarter, year-over-year, I think will remain flat. So for us, we need to improve the product mix and also try to improve our sales. As for mobile business, smartphones, there are reasons in which we're seeing unit growth, like Middle East or Europe we're seeing growth, but mainly these are in low-end products that we're seeing growth. For OLED, polarizing films for OLED, we have been focusing on this business. But transition to OLED from LCD, we are seeing a slowdown, a slight slowdown in this area. And therefore, we're not seeing a migration as much as we had hoped to see. And probably, in the fourth quarter, similar trend is expected to be seen. However, going forward, in the future, transition, migration to OLED is probably going to occur. I believe and I'm confident that the OLED market is going to grow. This view of the market has not changed and, therefore, we would like to focus on the OLED market. So that gives you an overview.

[Takato Watabe, analyst]

I may come back with more questions later on. And also, about Health & Crop Sciences, third quarter profit situation has risen, have gone up slightly. Methionine trend and -- for the year, you said that there are some downsides and upsides. What is your overall view for the Health & Crop Sciences segment?

[Keigo Sasaki, executive]

With regards to Health & Crop Sciences segment, I want to, first of all, talk about the methionine situation. The recent selling prices of methionine is gradually going up. May of last year, I think was bottom. And from that point onwards, we're seeing an improvement. This is something I can say for sure. Having said that, however, if you look at the annual average, it's still lower than same time last year. While there are some discrepancies across different regions, in certain regions, share increase is being the focus. And therefore, in certain regions, there seems to be some difficulties in raising selling prices. So for methionine, we may fall short of our original target. Now with regards to agrochemicals, as you correctly pointed out, we are gradually seeing an improvement. The bad weather in springtime or hurricane -- impact of the hurricanes from summer to fall, that was visible. But in the meantime, in India, Excel Crop Ltd., we acquired this company, and the business performance of Excel Crop Care Ltd. is contributing to overall business. And in Brazil, in South America, sales of some products remain quite robust and, therefore, increase both in sales and profit are expected. However, the full year target for the segment of JPY 50 billion, I think this will be a bit of a stretch for us. That is my response. Thank you.

[Unknown Executive]

Are you happy Mr. Watabe? Thank you.

[Operator]

Citigroup Securities, Mr. Ikeda, please.

[Atsushi Ikeda, analyst]

I'm Ikeda of Citigroup Securities. In the IT-related Chemicals, from second quarter, third quarter, the competitors, including your raw material providers, are enjoying the smartphone OLED increase, and the income has improved. And it seems that you are coming down in the area. So can you talk about OLED and the liquid crystal? And also, sensors in the mobile area, can you elaborate on those products?

[Keigo Sasaki, executive]

Yes. As for touch sensor, I didn't cover the touch sensor, so let me talk about touch sensor. The glass type and the film type of touch sensors are available from us. And starting from the glass type of the touch sensor, of course, OLED demand for glass-type touch sensor is not growing as expected. As a background, our competitor LCD panel price is staying at very low level. And also, full screen is now being adopted, the full-screen glass is adopted. And therefore, we are struggling and we don't really see the growth as expected. However -- so that's the situation in the third quarter. Now when it comes to the fourth quarter, it is a slow season for demand, and a similar trend is likely to continue in the fourth quarter as well. And therefore, the sales volume is very difficult to go up. However, when it comes to April next fiscal year '18, a functional enhancement is expected and the demand is expected to recover gradually. On top of that, our business to China is expected to improve and increase. Now when it comes to film-type touch sensor, shipment is quite favorable. In the third quarter compared to the second quarter, the shipment volume and the sales volume went up and also pushing up the revenue and sales as a result of that. Having said that, when it comes to fourth quarter, the trend, we expect it to continue, but there is uncertainty in that trend, in the movement. However, when it comes to FY '18, beyond April, we are going to have a new line to be starting with a new customers, new lines. And therefore, for the film-type touch sensor, I think we can have a higher expectations on the business next fiscal year. So that's the situation of touch sensor. Are you satisfied with the answer?

[Atsushi Ikeda, analyst]

So can I ask about -- there was no change in the OLED. The sales, as well as income, did not really go up in the third quarter for the circular polarizer.

[Keigo Sasaki, executive]

For the circular polarizer, in the third quarter, the business was quite favorable. Our business was quite good. So from second quarter to the third quarter, the business was relatively favorable. However, from the third quarter to the fourth quarter, as we look at what is the situation in the fourth quarter, the shift to OLED did not proceed as we expected. So the migration is slower than expected. So I think it's at the plateau stage for the moment. As we go into the FY '18, we expect that this will go up, but I think we are at plateau stage. It's a flat situation [ in the quarter in that ].

[Atsushi Ikeda, analyst]

LCD, I believe, is likely to go up with the price, so OLED might not be so much growing in the North America. What do you think of it?

[Keigo Sasaki, executive]

There are some forecasts, a different forecast available. But we believe that the migration to OLED will definitely come, but it's slower than we expected. It's not like a 1-year or 2-year delay, but it's going to be a several months of delay. I think there are different opinions with regards to the migration to OLED, but we believe that it's going to be delayed by several months, and that's really on our expectations before OLED goes up.

[Atsushi Ikeda, analyst]

Now for the Energy & Functional Materials, I think that the resorcinol and separator was moving up. For the separator, I think the production is staggering for the major customers, but can you comment on that?

[Keigo Sasaki, executive]

Yes. First of all, with regards to the separator, we had a high expectation and the actual was lower than what we expected, honestly speaking. So with that backdrop in mind, you might think that it's not growing very much. However, from second quarter to third quarter, there was a slight increase and improvement, and that was acceptable. But when it comes to third quarter, fourth quarter, we had some difficulty. Now when it comes to resorcinol, for the resorcinol, conventionally, the production was almost at the full level and utilization was almost at the full level. From the second quarter to third quarter, it looks like it's not growing much, but -- because it's fully operated and a full capacity in terms of production. However, production capacity is expected to go up. We are planning like an expansion, so that would contribute positively going forward. For the super engineering plastic, they're very favorable products. But the price of the products were showing some signs of a decline, maybe it's seasonality or maybe because demand has dropped for certain applications, which had some impact. But on the other hand, for the aerospace and the aeronautic area of application, [ test ] is a product that we can place quite a good expectation. That's all.

[Unknown Executive]

Mr. Ikeda, does that answer your question?

[Atsushi Ikeda, analyst]

Yes.

[Operator]

Next question is from Mizuho Securities, Mr. Yamada.

[Mikiya Yamada, analyst]

This is Yamada from Mizuho Securities. My first question is on Petrochemicals & Plastics. You said that there is some upside, and also the same for Energy & Functional Materials. But for Energy & Functional Materials, an earlier question was already answered, so I have a question on Petrochemicals. Third quarter, mainstay products, what's the utilization rate? And how about fourth quarter? And the situation in Singapore? And if possible, Rabigh situation, if you could give us an update on that as much as possible, please.

[Keigo Sasaki, executive]

So talking about Petrochemicals & Plastics, the situation in Singapore, if I may give you an update on that. Production situation for TPC is faring quite well. So once again, production is faring quite well. But in the meantime, when it comes to margin from the second quarter to the third quarter, margin has slightly shrank, has gone down slightly quarter-over-quarter. According to the Chinese authorities, the environmental regulations is going to stay as it has been. But launch of new plants is being awaited and, therefore, in that sense, spreads will diminish going forward. And towards the fourth quarter, if I may make a few comments, the Chinese New Year will have an impact, and it will be the slow season. And therefore, we are not seeing or expecting much of an increase or increase in margin, that is not expected in the fourth quarter. With regards to MMA, there's one unit that is not in operation, that situation will not change. With regards to the situation of MMA, margin is very high, as you may know. How long will the situation continue, I guess is your question, our view is that from the third quarter to the fourth quarter, probably spread will diminish slightly. And the reason why I say this is because, for one thing, Petro Rabigh has a new MMA plant which has started operation. And combined with that, Mitsubishi Chemical new plant, 250,000 tons in capacity, will probably start to operate successfully. And therefore, the market prices and margins will move towards the negative side.

[Mikiya Yamada, analyst]

I see. Rabigh MMA has started operation successfully. Is it at 100%, close to 100% in operation?

[Keigo Sasaki, executive]

Rabigh has 12 units, of which 10 at this point in time is on spec, and this includes MMA monomers and polymers.

[Mikiya Yamada, analyst]

My second question, sorry for taking so much time. With regards to Health & Crop Sciences, you said that Brazil is taking up, recovering. Including the herbicides in sales of agrochemicals in South America, is that going to recover this fiscal year?

[Keigo Sasaki, executive]

Well, for North America and South America, we are expecting a recovery. We're expecting things to go back up. There may be some slow ups and downs, but overall, I think it's going to be quite good. Biorationals, we're focusing on that as well. And flumioxazin, we are putting emphasis on sales of that. And therefore, gradually, I think our effort will gradually bear fruit.

[Mikiya Yamada, analyst]

Valent profits have gone down according to your handout. For the -- this is for the 9 months year-to-date, so we don't need to worry too much about that?

[Keigo Sasaki, executive]

The long rains during springtime then has had an impact.

[Unknown Executive]

Mr. Yamada, you're happy with the answer?

[Mikiya Yamada, analyst]

Yes.

[Unknown Executive]

We are coming to the end of the question-and-answer session, so the next person will be the last person.

[Operator]

Nomura Securities, Mr. Okazaki, please.

[Shigeki Okazaki, analyst]

My first question is on agricultural chemical. You said that the fourth quarter is going to have increase in the income. But third quarter, I think you increased the operating income substantially. Is it temporarily? Is there any temporary factor? I think you're operating income went up substantially.

[Keigo Sasaki, executive]

Yes, you are right. We have a very situation -- good situation in income, it went up. First quarter and the second quarter, there was very irregular weather and poor weather and, therefore, shipment was shifted in timing. And therefore, there is timing differences. And in the third quarter, actually, there was actual shipments and the sales took place. That was postponed from the second quarter -- first and second quarter.

[Shigeki Okazaki, analyst]

So because of that, the third quarter is higher?

[Keigo Sasaki, executive]

So if you look at the first quarter to third quarter in total, I think that's more appropriate as a total.

[Shigeki Okazaki, analyst]

My second question. I would like to confirm in IT-related Chemicals, from second quarter to third quarter, TV polarizer and glass-type touch sensor is down; and film and OLED, the polarizer -- polarizing film was up quarter-on-quarter. Is my understanding right?

[Keigo Sasaki, executive]

Yes, your understanding is right.

[Shigeki Okazaki, analyst]

And out of which, TV was slightly difficult and the reduction was larger than others. And also, there is a glass reduction as well.

[Keigo Sasaki, executive]

Yes. In TV area, it was a really -- it was a negative factor.

[Unknown Executive]

Thank you very much. This concludes question-and-answer session. From Sumitomo Chemical, Mr. Sasaki, like to have the final message.

[Keigo Sasaki, executive]

Yes -- today, thank you very much for your participation in our conference call. As was explained at our financial results, it was quite favorable results that we achieved. Having said that, there was a drop in the stock price yesterday and today. And as a result of that -- I mean, due to that, there's a yen appreciation, and also the price movement of the raw materials is going to have an influence on our business results. So we are very cautious in watching the movement of those factors, and we are committed and work very hard to improve our business. We would like to continue to have your support. Thank you very much once again for your participation.

[Unknown Executive]

Thank you very much. This conference call is available for 3 months at the site of Sumitomo Chemical site as an archive. You can review and play the conference call any time. This concludes the conference call. Thank you again for your participation today.