Sumitomo Chemical Co Ltd

TSE:4005

Earnings Call Transcript 2022-Q3

[Operator]

Thank you very much for joining us for this Sumitomo Chemical conference call on the financial results for fiscal 2021 third quarter.

Today, Mr. Sasaki, the Managing Executive Officer, will give a briefing on the financial results for fiscal 2021 third quarter; and he will be joined by Mr. Tan, General Manager of the Accounting Department, for the Q&A session.

Now over to you, Mr. Sasaki, please.

[Keigo Sasaki, executive]

My name is Sasaki from Sumitomo Chemical, and thank you very much for joining us for our conference call out of your busy schedules. To our investors and analysts, I'd like to take this opportunity to express our deep gratitude for your continued understanding and support to our business.

I will now start our briefing on the financial results for fiscal 2021 third quarter. Please go to Page 4, Slide #4, consolidated results for fiscal 2021 third quarter. Sales revenue was JPY 2,037.9 billion, up JPY 395.3 billion year-on-year. Core operating income, that represents recurring earning power, was JPY 205.7 billion, up JPY 99.6 billion year-on-year.

On nonrecurring items that is not included in core operating income, restructuring charges of JPY 4.3 billion and impairment losses of JPY 3.4 billion were recorded on a negative side, and it was a loss of JPY 7.7 billion. There was a gain on sale of assets recorded this period of last year from the sale of former Ibaraki factory at Dainippon Sumitomo Pharma, our subsidiary. So it was a deterioration of JPY 17.4 billion year-on-year. As a result, operating income was JPY 197.9 billion, up JPY 82.2 billion year-on-year.

On finance income or expenses, it was a gain of JPY 11.6 billion, an improvement of JPY 35.1 billion year-on-year. Of this, foreign currency transactions was a gain of JPY 15.6 billion due to yen depreciation at the end of the quarter. And compared to a loss of JPY 18.8 billion in the same period last year, it was an improvement of JPY 34.4 billion.

Income tax expenses were JPY 53.9 billion, an increase of JPY 14 billion year-on-year. As a result, net income attributable to owners of the parent was JPY 133.7 billion. And compared to JPY 20.2 billion in the same period last year, it was up by JPY 113.4 billion.

On the exchange rate and the naphtha price that had an impact on our results, the average exchange rate during the period was JPY 111.14 to the dollar, and the naphtha price was JPY 53,900 per kiloliter. The yen was weaker and the feedstock price was higher year-on-year.

Next, results by segment. Please go to Page 5. Total sales revenue was up JPY 395.3 billion year-on-year. As for segments, all segments recorded higher sales revenues. On the sales revenue change year-on-year analyzed by factor, sales price variance was a positive JPY 168 billion, shipping volume variance was a positive JPY 164 billion, foreign currency conversion variance of the sales revenues at our overseas subsidiaries was a positive JPY 63.2 billion.

Please go to Page 6. Total core operating income was up JPY 99.6 billion year-on-year. By segment, all segments, except for Pharmaceuticals and Other & Adjustments, posted higher income year-on-year. Analyzed by factor, price variance was a positive JPY 6.5 billion, cost variance was a negative JPY 32.5 billion, shipping volume variance that includes changes in equity in earnings from investments in affiliates was a positive JPY 125.6 billion.

Next, I will cover the results of each segment. Please go to Page 7, Petrochemicals & Plastics. Sales revenue was JPY 625 billion, up JPY 216.6 billion year-on-year. Core operating income was JPY 52 billion, an improvement of JPY 79.9 billion year-on-year. Petrochemical products as well as synthetic resins and raw materials for synthetic fiber saw a rise in market prices due to a recovery in demand and a rise in raw material prices. The profit margin also improved.

At the same time, in the same period last year, there was a periodic shutdown at Petro Rabigh, our equity method affiliate, and shipments for auto-related applications were low with the impact of COVID-19. And as a result, both revenue and income for the segment were higher year-on-year.

Please go to the next page, Energy & Functional Materials. Sales revenue was JPY 226.7 billion, up JPY 51.3 billion year-on-year. Core operating income was JPY 18.6 billion, up JPY 3 billion year-on-year. The shipment of lithium-ion secondary battery separator was strong. Also, with the rise in market prices of aluminum and cathode materials, selling prices were higher. In the same period last year, due to the COVID-19 impact, shipment for auto-related applications were lower. And as a result, both revenue and income were higher year-on-year.

Please go to the next page, IT-related Chemicals segment. Sales revenue was JPY 352.1 billion, up JPY 27.8 billion year-on-year. Core operating income was JPY 46 billion, up JPY 14.1 billion year-on-year. In sales revenue, for sales price, selling price of polarizing film declined. And in terms of volume, shipments of processing materials for semiconductors, such as high-purity chemical and photoresists, increased with the increase in demand.

Against the backdrop of stay-home and work-from-home demand since the previous year, shipments of materials for display applications increased, leading to higher sales revenue. Core operating income increased as increase in shipping volume was higher than the drop in selling price.

Next page, please, Health & Crop Sciences segment. Sales revenue was JPY 331 billion, up JPY 48.5 billion year-on-year. Core operating income was JPY 27.8 billion, up JPY 16.5 billion year-on-year. In sales revenue, shipments of crop protection products in North America, South America and India were firm, and market price of methionine went up. As a result, sales revenue increased year-on-year. Core operating income increased with improved margin of methionine and increase in shipments of crop protection products.

Next page, please. In the Pharmaceuticals segment, sales revenue was JPY 456.3 billion, up JPY 38.7 billion year-on-year. Core operating income was JPY 62.5 billion, down JPY 12.3 billion year-on-year. In sales revenue, in terms of volume, in the second quarter of the current fiscal year, the consolidated subsidiary, Sumitomo Dainippon Pharma, had a lump-sum revenue from a joint development and license agreement with Otsuka Pharmaceutical.

And Orgovyx, which was launched in the previous fiscal year, and the sales which started in the first quarter of this year, Gemtesa and Myfembree, related to higher sales revenue. On the other hand, Latuda and Brovana, which exclusive sales period ended, sales decreased. In sales price, there was impact of NHI price revisions in Japan. And as a result, sales revenue increased year-on-year.

In core operating income, though sales revenue increased with increase in fixed costs due to the start of full-scale sales activities at subsidiaries of Sumitovant, core operating income decreased. So this is all for the performance outlined by segment.

Next is a breakdown of nonrecurring items. As for the content of nonrecurring items, I have already explained at the outset, so I will not cover the subject here.

And next is consolidated balance sheet, Page 13. Total assets as of end of December 2021 was JPY 4,229.4 billion, up JPY 239.2 billion compared to the end of the previous term. This is because of higher feedstock price and increase in inventory before the periodic plant maintenance and, furthermore, with increase in sales inventories and trade and other receivables, which are working capital, increased.

Interest-bearing liabilities was JPY 1,416.9 billion, up JPY 65.8 billion compared to the end of the previous term. Equity was JPY 1,606.8 billion, up JPY 124.7 billion compared to the end of the previous term. As a result, equity attributable to owners of parent to total assets, so-called equity ratio, improved 1.2 percentage points from the previous term to 26.7%.

Next is consolidated statements of cash flow. Please turn to Page 14. Cash flows from operating activities was an inflow of JPY 99 billion, down JPY 174.4 billion year-on-year. As I said before, the main factor is increase of working capital.

Cash flows from investing activities was an outflow of JPY 85.1 billion, down JPY 74.9 billion year-on-year. As a result, free cash flow was an inflow of JPY 13.9 billion, down JPY 99.5 billion compared to the inflow of JPY 113.5 billion in the same period of the previous year. Cash flows from financing activities was an inflow of JPY 4.5 billion, down JPY 98.7 billion year-on-year.

Lastly, no revision was made to the full year forecast for fiscal year 2021, which was announced on October 27 last year. The third quarter progress rate against the full year forecast announced in October at each profit line for core operating income is 84% and 88% for operating income and 95% for quarterly income attributable to owners of the parent. So the business has remained steady. We will continue to monitor the latest business strength and revise our business forecasts in a timely manner when necessary.

This concludes my briefing. I will now answer your questions. Thank you very much for your attendance.

[Operator]

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

[Takato Watabe, analyst]

My name is Watabe. First, what you covered at the end, progress rate, Page 17, based on the reference material, by segment, how does it look? Petrochemicals & Plastics, market prices are coming down. But IT-related Chemicals in the fourth quarter, whether there's going to be JPY 2 billion. Pharmaceuticals, TSP has made some revisions, but if you could cover each segment and tell us how the situation is.

[Keigo Sasaki, executive]

Thank you for the question. First, fourth quarter view, our view on the fourth quarter. Now as for Petrochemicals & Plastics, as you pointed out, feedstock prices are now high, so that may be some negative factor, in our view. As much as possible, we would like to transfer and pass on prices through our formula. So to a certain extent, this could be absorbed, but there is that negative factor.

Now Energy & Functional Materials, so far, auto-related separator type of products were very good. But at the same time, depending on the trend of feedstock prices, there's the risk that this could turn negative. But in any case, it's not likely to be very big. And so far, naphtha prices are on an increasing trend. But as much as possible, we would like to reduce costs so that, that increase can be absorbed.

Now IT-related Chemicals, as you pointed out, JPY 48 billion per annum is the level. And against this level, it's already at JPY 46 billion, so we are expecting some upside.

Now Health & Crop Sciences, against JPY 43 billion, JPY 27.8 billion. So this isn't bad or, I would say, the situation is quite good. And in North America, South America as well as in India, these are our focused areas, and strong results are being produced from those markets.

Plus, foreign exchange, the yen is depreciating, which is also another positive factor for us. So our forecast in October was JPY 110 to the dollar. But right now, it's now -- if it is going to stay at around JPY 115, this could be substantial positive factor.

Pharmaceuticals, as you pointed out, Mr. Watabe, downward revision is coming in. So in total, what we say, externally, JPY 245 billion, this level is not any distance target. We believe that this is fully achievable for us in terms of the target.

And this may not be part of your question, but at the net income level, foreign currency gains or losses, there could be some gains that we could expect from those conversion gains. So we believe that, that number can be achieved at the net income level as well. Did I answer your question?

[Takato Watabe, analyst]

And IT-related Chemicals, if you could elaborate. In the second quarter, the number was quite high, but third quarter also saw increases without going down. So if you could explain the background and also your view to the fourth quarter.

[Keigo Sasaki, executive]

Okay. IT-related Chemicals, our expectations -- or actually, it was better than our expectations in terms of the performance of this segment. One reason is display-related products, more than we anticipated, our shipments are strong. Originally, TV applications, we assumed that it was going to come down gradually. That was our view. But it's not coming down as much. And conversely, where we're strong, extra large-sized applications are very, very good. So that is driving our results.

As for semiconductor materials, given the current situation, the performance is very strong. So we could see further top-ups to our expectations, a substantial upward gain could be expected.

[Operator]

And the next question is from Mr. Yamada, Mizuho Securities.

[Mikiya Yamada, analyst]

So I'd like to ask 2 questions. One is about Health & Crop Sciences. In the second quarter, analogies of changes, subtracted that from the third quarter, there's still a price variance of plus [ JPY 20 billion ]. And there may be impact of foreign exchange, but methionine is also recovering, I understand. So methionine price, after fourth quarter, we believe, will continue to be strong. And volume variance was quite large in the third quarter. In South America and India, sales expanded. So is my understanding correct about it?

Then as you have said, in the fourth quarter, North America accumulations may be something that we can further expect forward. Is my understanding correct? The price situation of methionine price and the background for the volume barriers, could you explain that?

[Keigo Sasaki, executive]

Yes. Thank you for your question. For Health & Crop Sciences, the main product for protection chemicals situation overseas, as you have just mentioned, the situation is very good. In South America and India, places which we are focusing, the situation is getting very good. So these are factors contributing.

In North America, shipments will now be starting. And so far, the concern was the inventory in the distribution process. This is not yet being solved completely, but we are seeing quite a lot of progress in terms of the solution. Our assumptions there, there are no climate instabilities are seen if we look forward to that market.

And for methionine price, as you have mentioned, in terms of price, from last year, we are seeing quite a lot of improvement. And this fiscal year, from around July, August, there was some drop. But after that, the price is rising steadily. And now naphtha is slightly expensive, so the feedstock price is a factor raising costs. But price is also going up. So this negative factor, I believe, can be absorbed. That is all.

[Mikiya Yamada, analyst]

In North America, the -- I understand the confusion of the distribution process is not -- give a negative impact. And the soft commodity prices going up, which I believe basically is positive in the fourth quarter, is that influences, I think the price may be even better. What do you think of that?

[Keigo Sasaki, executive]

Yes. Thank you for your question. The confusion in the physical distribution, yes, I believe there are many impacts in many places. Including North America, we are taking various measures. What I mean is that, well, in procuring feedstock, we are being careful in our procurement. Cost is getting higher, so as soon as possible, we will take measures such as to secure space in the ships or secure containers.

With this background, price is getting higher. For the farmers, the material cost is also getting higher. So for them, this is a negative factor in terms of their desire of making purchases. And the crop price is also getting higher, but this may be a positive factor. So including positives and negatives, this is not very clear, but I don't think there is a major negative factor.

[Mikiya Yamada, analyst]

And then my second question, with the increase in the feedstock and fuel price, petrochemicals may be having difficulties. But in terms of equity affiliates, the expansion of refining margin and -- may be a factor that we can look forward to. So in total, in petrochemicals, it may not be as bad as it looks like. But is the market price situation still tough? What is your feeling for the fourth quarter?

[Keigo Sasaki, executive]

In terms of price, as I have mentioned, factors to increase cost and, on the other hand, in particular, in Saudi Arabia, there is a valuation gain. There are both sides to that. So which is stronger? It is very difficult to say. It depends on the trend of feedstock price going forward, so it's difficult to say. But I don't think, ultimately, that will be a major negative factor.

On the other hand, in petrochemicals, negative factors is higher feedstock price. But also, for automotive-related areas, what will happen going forward is another factor. Shortage of semiconductors is influencing the volume of automotive manufacturing. This is a negative factor leading to lower production. So what will happen to that is -- could be a risk factor. So that is how we are thinking about it right now.

[Operator]

The next question is from Nomura Securities, Mr. Okazaki.

[Shigeki Okazaki, analyst]

My name is Okazaki. I have 2 questions. The first one, Health & Crop Sciences, crop protection products. In the third quarter, if you just look at the third quarter, in Latin America, revenues are up by about 50%. July, September, I believe, was rather flat. So it's recovering very quickly. Any special factors behind this? It's my first question.

In North America, soybeans selling prices, I believe, was slightly down in the second quarter, but the resolving of inventories in distribution, that positive factor was larger, allowing this growth. Is that how it should be looked at? I'd like to know about the sustainability of this trend in the fourth quarter and beyond.

[Keigo Sasaki, executive]

Thank you for the question. Now Latin American crop protection products situation was your question. And you're right, in the second quarter, if you just look at the second quarter, compared to the year before, there was hardly any impact. But in the third quarter, there was a substantial growth there. And the background behind this good trend is Latin America itself. Because of real depreciation, exports are very strong, it is said. And therefore, that may be having an impact there. And we capture that opportunity, that our team in Latin America are able to work strategically. So we believe that we can give them credit for that.

In North America, of course, grain prices are showing various movements. So yes, I do have an image that it is relatively high. And our projection going forward for North America is that, one, there was optimization of inventory in distribution, which is a good development. So negative factors, I don't really identify any, so we have high expectations in this area.

[Shigeki Okazaki, analyst]

So April, June, North America, Latin America and India, the good situation is likely to continue. That is your feel?

[Keigo Sasaki, executive]

Yes, that is right. That is how we are looking at it.

[Shigeki Okazaki, analyst]

My second question, IT-related Chemicals. You explained this earlier, from the second quarter to the third quarter, polarizing film for TV and smartphones. And for the fourth quarter, there is the Chinese New Year impact, but it's not going to go down more than what is expected?

[Keigo Sasaki, executive]

Well, basically -- thank you for the question. Basically, and to the third quarter, things are progressing quite well for TV applications, the large-sized ones, as well as monitors and such products were also very strong. And as for mobile applications, up to the third quarter, OLED-related, we were able to get orders for new models. A very good situation prevailed.

And as for the fourth quarter, basically, we are going to go into a low-demand period. And it is in these times that there is going to be some model changes. So there are difficulties there. But basically, the current trend, this good trend, we're not anticipating a sudden change of this trend. There are no such signs. So we believe that we will be able to perform in a very good way in the fourth quarter as well.

[Shigeki Okazaki, analyst]

TV and large applications, polarizing film, you're very strong in this area. So that is quite solid in your view?

[Keigo Sasaki, executive]

Right. Large TV applications, there isn't any bad signs. So I believe that the good situation is likely to continue.

[Operator]

The next question is Mr. Umebayashi from Daiwa Securities.

[Hidemitsu Umebayashi, analyst]

Umebayashi from Daiwa Securities. I have one question. In IT-related Chemicals, I believe they are faring well. But on [ June 2 ], from the second to the third quarter, when compared, sales increased, but they are not -- there was not such a large change in profit. If you calculate every quarter, the sales of the third quarter is also influenced by the exchange rate. So I know you cannot make a direct comparison. But I think that there is a influence of weakening of the yen on the profit. So I thought profit would be better. So including the foreign exchange and the product mix and the volume from the third to the fourth quarter, is it right to understand that there were no large changes?

[Keigo Sasaki, executive]

Thank you for your question. So you're saying that the profit level in the second quarter, JPY 16 billion; third quarter, JPY 16.4 billion. So this was a trend. And sales increased more than that, which is less than JPY 120 billion. Now it's over JPY 120 billion. Polarizing film, also, there was not such a large change. And I also would like to say that touch-screen film type facilities impairment was recognized. So with in-house production, there was a worsening scene, so impairment was made. So comparing Q2 and Q3, there's a slight increase in losses in the level of core operating income. So that may be one aspect. So in terms of profit, there is not such a large increase compared to the increase in sales. So there were such special factors for that.

[Operator]

Let us move on to the next question from SMBC Nikko Securities, Miyamoto-san, please.

[Go Miyamoto, analyst]

My name is Miyamoto. Energy & Functional Materials, auto-related products, there are many such products in this segment. You made some comments about Petrochemicals & Plastics lower production. What has been the impact in the second quarter and third quarter? What are your projections for the fourth quarter? As for separators, these are strong according to your comment. How much more shipments do you have there? And for LCP, you announced investments to boost production. Are they getting -- are you getting more inquiries about this LCP currently?

[Keigo Sasaki, executive]

Thank you for the question. Now separator-related topic, this is something that I have difficulty mentioning in detail because this has directly implications on our customers. From the second to third quarter, our sales revenues are up. So it's strong in our view. And this trend is likely to continue into the fourth quarter.

And auto-related applications, this is the mainstay. And LCP is also another focus of ours. It could be used in many applications, but especially in areas such as 5G. Demand from that area is likely to go up going forward. That is our anticipation, and that is why we're boosting our capacity here.

[Go Miyamoto, analyst]

How about the impact of lower production from auto-related?

[Keigo Sasaki, executive]

Well, lower auto production, how much impact would that have on our segment? It's very difficult for us to say because this has to do with a particular customer of ours. Yes, there is an impact. But in this particular segment, it's very difficult for us to say what is the size of that impact. And that is why I decided not to make a comment about that. Sorry about this.

[Go Miyamoto, analyst]

Resorcinol and for the entire segment, I believe that you have diverse customers. But in auto-related areas, it's likely to make a recovery in the fourth quarter?

[Keigo Sasaki, executive]

Resorcinol, yes, you're right, in auto applications, there is going to be an impact coming from the auto sector. But as you know, resorcinol is being shipped around the world. So lower production -- production cuts in the auto sector does have an impact. But disruptions in the physical distribution, for example, containers and space in ships, how much can we capture and how much delays will there be in our shipments? We cannot really generalize because of these various factors. But for resorcinol, yes, you're right, this is an area where we're likely to get an impact from production cuts in the auto sector.

[Go Miyamoto, analyst]

Next question is about Health & Crop Sciences. INDIFLIN's schedule in the South America, it's likely to go to the market in the fourth quarter. What are your prospects about sales in methionine? At the end of November, in Ehime factory, there was that accident. But the performance of this segment, it's not likely that, that had a major negative impact. By making shipments from inventory, I believe that you managed well, looking at the results. What is the operation level of the -- utilization level of that plant currently?

[Keigo Sasaki, executive]

Thank you for the question. As for INDIFLIN, in South America, with respect to our registration, things are progressing quite smoothly. The process of registration is going well. So in the fourth quarter, we assume that we will be able to get our registration as planned.

And on methionine, in Ehime, there was that accident. And we have caused so much inconvenience to people who are involved. And in that situation, currently, the timing of the restart of the factory has not been decided yet. And therefore, the impact on our business results, I would like to refrain from making such comments at this juncture. I thank you for your understanding.

[Go Miyamoto, analyst]

I think production capacity is about 200-plus tons. It's not that everything has been halted?

[Keigo Sasaki, executive]

That is correct.

[Operator]

It's now time to conclude. This concludes the Q&A session. Lastly, there will be some final greetings by Mr. Sasaki.

[Keigo Sasaki, executive]

Thank you very much for your attendance. The fourth quarter or even beyond that, it's very difficult to make projections. Because of Omicron variant and also the trend of the feedstock price, these are things very difficult to forecast. At the moment, in terms of demand and the environment surrounding us, there are not so many negative factors.

And now the exchange rate, unless -- if there are no large fluctuations in such assumptions, the forecast of October, I think we will be able to achieve a level close to what we announced as a forecast in October. So we will do our best so that we can achieve the forecast. We ask for your further support and cooperation going forward.

Thank you very much for your attendance.

[Operator]

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

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