Sumitomo Chemical Co Ltd

TSE:4005

Earnings Call Analysis

Sumitomo Chemical Earnings Call Insights

Sumitomo Chemical's earnings call revealed a company at a crossroads, with a strong commitment to structural reform led by an internal task force as the business faces performance challenges. Efforts to improve Petro Rabigh's profitability are complex, with refinery competitiveness and investment decisions at an impasse, affecting potential impairment losses. Despite a dividend cut from JPY 6 to JPY 3, the intent to maintain a minimum annual dividend of JPY 9 persists, signaling a dedication to shareholder value amid reform efforts. Additionally, the company anticipates more concrete reform details and strategic directions to be shared in April, with a focus on future vision and synergy between segments.

Challenging Times and a Revised Forecast

Sumitomo Chemical faces a critical period as their financial outlook for fiscal 2023 has drastically weakened. Core operating profit and loss is projected to hit negative JPY 145 billion, marking one of the most challenging crises since its inception. This deterioration is significantly influenced by two subsidiaries, Petro Rabigh and Sumitomo Pharma. As part of their restructuring plan, the company has included structural reform expenses, projecting a substantial net loss of JPY 245 billion.

Dividend Cut and the Pursuit of Recovery

In response to the financial downturn, the year-end dividend forecast has been halved from JPY 6 to JPY 3 per share. Management acknowledges the gravity of the situation and is focused on achieving a rapid, V-shaped recovery. Contributing to this optimistic outlook are improvements in sectors excluding Petro Rabigh and Sumitomo Pharma, with the company already securing a cash generation of JPY 350 billion in just three months.

Intensifying Improvement Efforts

Sumitomo Chemical intends to accelerate its improvement measures, implementing additional reform projects. Starting in April, the company ambitions to present substantive progress in fundamental structural reforms beyond just initial outlines.

Detailed Performance Forecast

The current full year performance forecast includes sales revenue at JPY 2.480 trillion and a net income of negative JPY 245 billion. This revision, announced just months after their previous forecast, shows substantial decreases at each stage of profitability. Contributing to these figures are Petro Rabigh's margin deterioration and Sumitomo Pharma's lagging sales. However, there's an upward revision for Energy & Functional Materials and IT-related Chemicals, buoyed by a sales recovery trend.

Sectoral Struggles and Improvement Trajectory

While some sectors demonstrate recovery, Petro Rabigh and Sumitomo Pharma remain significant challenges, and the company is intensively working onredirecting these areas as soon as possible. Other segments, however, have shown positive core operating income from the second quarter onward, improving consistently each quarter.

Handling Nonrecurring Items

The forecast includes JPY 140 billion for nonrecurring items, with JPY 47 billion already accounted for by the third quarter. This encompasses impairments and restructuring costs primarily in methionine and due to Sumitomo Pharma's North American subsidiaries' reorganization. Another major component of the fourth-quarter forecast relates to structural reform expenses mostly concerning Essential Chemicals operations in Chiba and Singapore.

Dividend Expectations and Shareholders Returns

Revising down the dividend forecast entails lowering annual projections to JPY 9 per share, which is below the once-asserted minimum level of JPY 12. This cutback is a consequence of the anticipated significant net loss, affecting returns to shareholders.

Immediate-Term Measures and Cash Generation

Emphasizing the need for critical immediate-term measures to improve business performance, Sumitomo Chemical outlines the goal to generate JPY 500 billion in cash by the end of fiscal year 2024. Remarkably, the company has fast-tracked this endeavor, already foreseeing the achievement of JPY 350 billion, which bodes well for an accelerated recovery.

Focused Approach on High-Value Projects

Given the current trend of downgrading its business performance, the company will dedicate more resources to accumulate projects capable of adding tens of billions of yen to the bottom line. This sharpened focus on project accumulation is aimed at reversing the downtrend in performance.

Inventory Reduction and Strategic Investments

The company plans to reduce inventory by JPY 110 billion from September levels by the end of March 2024, implementing digital transformation and grade consolidation as part of this effort. Investment plans will pivot towards growth areas such as biorational and high-performance materials, balancing the need for cautious spending with the pursuit of expansion.

Asset Sales and Reduction of Cross Shareholdings

Sumitomo Chemical has made headway in selling cross shareholdings, with sales amounting to approximately JPY 31 billion thus far, surpassing initial plans. Looking ahead, the company aims to reduce remaining cross shareholdings to zero, indicating a strategic move away from these investments.

Earnings Call Transcript 2024-Q3

[Shunji Kobayashi, executive]

It is now time, and we'd like to start the conference call. I am Kobayashi from Corporate Communications. I'll serve as the MC today. Thank you very much for joining us for this fiscal 2023 third quarter financial results conference call out of your busy schedules.

Today, Mr. Iwata, the President, will be giving a briefing, and then we will be taking questions. We plan to end at 5 minutes past 6:00. Mr. Iwata, the floor is yours.

[Keiichi Iwata, executive]

Good evening. I am Iwata, President of Sumitomo Chemical. Thank you very much for joining us for this financial results conference call. I would like to express our gratitude to you, our investors, for your continued understanding and support to our business. Thank you very much.

This is today's agenda. We want to spend as much time as possible on Q&A. Therefore, I will be brief and just focus on the highlights. Please go to Page 3. This is the summary of the message that I want to deliver today.

Full year forecast for fiscal 2023 has been revised downward due to substantial deterioration at Petro Rabigh and Sumitomo Pharma, core operating P&L is negative JPY 145 billion, projected to be the worst crisis level since the company's inception. In addition, in nonrecurring items, we have included expenses related to structural reforms, and we are projecting a huge net loss of JPY 245 billion.

Year-end dividend forecast is revised down from JPY 6 to JPY 3 per share. The management takes this grave situation seriously, and we believe we need to realize a V-shaped recovery as soon as possible.

Toward this V-shaped recovery, results, excluding Petro Rabigh and Sumitomo Pharma, are improving quarter-after-quarter, which is good news. In addition, we believe the most important is the immediate-term concentrated measures. Since its announcement in November, progress has been made ahead of schedule and a cash generation of JPY 350 billion has been secured in the past 3 months.

Furthermore, given the current performance trends, we will implement improvement measures with more speed. We will also add more reform projects. On fundamental structural reforms, we will accelerate discussions in the cross-functional team on structural reforms. We are working at full steam so that in April, we can give you more substance than just an outline that was initially planned. So this is the summary of the message.

From Page 4 are our third quarter financial results. For core operating income, excluding seasonal factors, the trend is not much different from full year figures. And therefore, I will skip over the pages on the third quarter financial results. I will discuss fiscal 2023 performance forecast. Please go to Page 9.

Page 9. This is our fiscal 2023 full year performance forecast that we announced today. Sales revenue, JPY 2.480 trillion; core operating income, negative JPY 145 billion, net income, negative JPY 245 billion. Sales revenue as well as profit at every stage had major downward revisions from the previous forecast of November 1. I will cover the core operating income from the next page onwards.

On nonrecurring items, which I will elaborate later, a negative JPY 140 billion is projected, of which about 70% to 80% are from valuation losses. In addition to impairment losses of methionine in the first half, we have factored in the risk of future expenses for structural reform. As a result, we have revised the number down by JPY 85 billion. On taxes, with the deterioration of the results, we are projecting a reversal of deferred tax assets.

This is core operating income by sector against our previous forecast on Page 10. The downward revisions are the 2 boxes indicated in pink, both are related to listed subsidiaries. One is Petro Rabigh experiencing margin deterioration. The other is Sumitomo Pharma.

As already announced the day before yesterday, sales expansion of 3 post-Latuda core products are not progressing as planned. On the other hand, Energy & Functional Materials and IT-related Chemicals are on a sales recovery trend and have been revised upwards.

Next page. This is quarterly development of core operating income. The subtotal in the blue row excludes Petro Rabigh and Sumitomo Pharma. After turning positive in the second quarter, it has continued to recover quarter-by-quarter. Petro Rabigh and Sumitomo Pharma are in the red rows. They continue to struggle.

This is a graphical representation of what I have just explained. Blue bars represent the changes in income, excluding Petro Rabigh and Sumitomo Pharma. Despite the difficult business environment and although this is not satisfactory on an absolute level, various improvement efforts have helped and it has shifted to a steady recovery trajectory. Main contributions come from IT-related Chemicals and Health & Crop Sciences, we will continue to further expand these businesses.

On the other hand, Petro Rabigh and Sumitomo Pharma are our biggest management challenges and our 2 themes of focus in our fundamental structural reforms. There are limitations as to what I can talk about at this point, but we are working intensively to be able to set the direction as soon as possible.

Next is regarding the JPY 140 billion in nonrecurring items included in the full year forecast. Although about JPY 47 billion has been incurred by the third quarter, the main items of impairment are the methionine and restructuring expenses due to the reorganization of Sumitomo Pharma's North American subsidiaries. Expenses of cyclohexanone and other initiatives that were press released by the third quarter are also included.

The major item incorporated in the fourth quarter was the structural reform expenses mostly related to Essential Chemicals such as Chiba and Singapore. Regarding Chiba, as preparation for the future domestic petrochemical reorganization explained in November, we would like to keep it as lean as possible so that we can respond in an agile manner. We would like to remove the negative factors as much as possible in FY 2023 and lead it to a V-shaped recovery in fiscal year 2024.

Next is regarding shareholder returns. This time, we have revised our year-end dividend forecast to JPY 3 per share. We had previously stated that we wanted the annual dividend at JPY 12 per share as a minimum level. However, due to our large net loss outlook beyond our assumptions to our shareholders and investors, we are afraid that we have to set the annual dividend at JPY 9 per share. We will make further efforts to achieve a V-shaped recovery in business performance and stable dividends by steadily executing the immediate-term concentrated measures to improve business performance, which I will describe next.

I would like to explain the progress of the immediate-term concentrated measures to improve business performance announced last November, which is the most important measures towards a V-shaped recovery in FY '24. This slide is the summary. The left side of the slide shows targeted numerical figures for each item. The right side shows expected progress.

Our overall goal is to generate JPY 500 billion in cash by the end of fiscal year 2024. However, the entire company is accelerating its effort. And at this point, with just 3 months after the announcement, we already have a clear outlook on achieving JPY 350 billion. I will explain in detail from the following pages.

Several of the projects have already been announced externally, and all are proceeding in a speedy manner. At the same time, we are also working on more improvement items to realize improvements that exceeds our goals.

Within those efforts, this is the progress of rebuilding business, which is at the core. Here, we are aiming for JPY 120 billion in total cash and JPY 50 billion in core operating income. Since we cannot provide explanations regarding individual progress, we will present progress in the form of images.

The vertical axis is the amount in cash basis and the horizontal axis is the time horizon to the end of FY '24. As you can see, although it's been only a short time since we started this project, we already have a clear view on about 1/3 of our goal to be achieved, including projects that will be completed within a few months.

Considering the further severe trend of revising our business performance downwards, we will place even more focus on further accumulating several 10 billions of yen projects. Next is inventory reduction and more selective investments.

Regarding inventory reduction, we are currently expecting the inventory level target at the end of March 2024 to be JPY 670 billion. This is a JPY 110 billion reduction compared to the end of September. And so far, we are on track with the schedule. We will continue our efforts to reduce inventory levels by utilizing DX and consolidating grades.

As for investments, at the end of December 2023, investments were JPY 600 billion against the JPY 750 billion based on the decision, which is in the current medium-term management plan and having done the projects for the target. There is JPY 150 billion of investment and loan facility of which decisions have not yet been made, and we will further be more selective for this portion. However, on the other hand, we will proceed in a balanced investment plan with investments in growth areas such as biorational and high-performance materials.

Although we do not disclose the individual sales of cross shareholdings, we have sold approximately JPY 31 billion so far and progressing ahead of the plan we had made in November. As for the remaining cross shareholdings, they will be steadily reduced to zero in the future.

With regards to the other asset sales, as announced the other day, we will sell Inabata & Company Limited shares. And through this, we expect to generate up to JPY 23 billion in cash. Since the strong business relationship has been established with the company over the years, we partially sold our held shares and considering the significance of holding these shares in the future.

As for the remaining equity method affiliates, we intend to decide how to hold their shares without any sanctuaries in accordance with the structural reform policy being established. In the area of surplus funds, we expect to utilize approximately JPY 70 billion of surplus funds of overseas group companies as of the end of FY 2023 through group financing and other means.

Lastly, I have not prepared slides on the progress of the fundamental structural reforms. However, various discussions are being held by the structural reform cross-functional team. I am leading the reforms as the leader of the team. And in response to the deteriorating business performance, we are having the discussions on the structural reform at a faster pace.

Therefore, in April, I hope to be able to provide you with a more detailed explanation, including not only the framework, but also an outline of the proposed structural reforms, including the review of the organization. The entire company will work as one to improve our business performance so that we can overcome this difficult situation and present you a new Sumitomo Chemical.

This concludes my explanation. Thank you very much for your kind attention.

[Shunji Kobayashi, executive]

Thank you very much, Mr. Iwata. We will now take questions.

[Shunji Kobayashi, executive]

The first question is Mr. Watabe from Morgan Stanley MUFG Securities.

[Takato Watabe, analyst]

I have 2 questions. Structural reform, yesterday or the day before yesterday, Sumitomo Pharma briefing, there were discussions about credit risk. Furthermore, in the fourth quarter, there is the possibility of impairment loss. Petro Rabigh, according to reports, refinery could be carved out. But with the methane price going up, competitiveness is being reduced. So it has to be accelerated.

Of course, you need to -- we need to wait until April and Essential Chemicals quarter 4 structural reform expenses are very high. So can you give us more detail about this? This is my first question.

[Keiichi Iwata, executive]

Thank you for the question. It's very difficult for me to answer the question. But first, Sumitomo Pharma. Core operating income was reduced by JPY 75 billion, of which JPY 62 billion has come from Sumitomo Pharma. The absolute amount is JPY 134 billion in net loss for pharma. So we need to stop the bleeding. This is the important criteria for Sumitomo Pharma as well as for the parent. That is our understanding.

[Takato Watabe, analyst]

Now stopping bleeding, how do you go about doing that?

[Keiichi Iwata, executive]

This is a listed company, Sumitomo Pharma. We cannot give them directions. But generally speaking, with respect to the profit structure, the cost has to match the profit structure, R&D as well as sales systems. I would suppose that on the Sumitomo Pharma side, this is being deliberated to take this forward.

Now this issue of Sumitomo Pharma, including Rabigh issue that I will talk about, this is 1 of the 2 major focus of ours. Now as for Sumitomo Pharma, all options must be assumed. And within Sumitomo Chemical, under what scenario this option can be taken? This may be a better option than others. We are conducting such case studies. So that is the current situation about Sumitomo Pharma.

As for Petro Rabigh, you're right in pointing that out, that from January of this year from Aramco, there is the rise in feedstock prices from Aramco. From naphtha basis, ethane margin benefit, it's not going to be reduced by that much, but still, the feedstock price increase is going to be a negative for us. And mid-December last year, Rabigh's equipment, some of the equipment had a failure. So some part of the plant of Petro Rabigh is suspended, and that is a negative for the January, March quarter.

And in terms of petrochemicals market prices, it's not just Rabigh, Asia and petrochemical markets around the world, you don't see signs of improvement. How do we go about improving the profitability of Rabigh? As you pointed out correctly, this is an imminent issue for us.

[Takato Watabe, analyst]

Until now, Rabigh itself, how much rationalization needs to be implemented?

[Keiichi Iwata, executive]

Rabigh P&L and profit improvements, we and Aramco, we're focused on that, for example, reducing the staffing number or operational expenditure to be reduced more. Those are the things that we used to look at. But not just relying on Rabigh, Aramco and ourselves, the parents must come in to implement structural reform to make performance improvements. We are now in such a stage. So both companies must work together to work on structural reform of Petro Rabigh. Finally, we are starting to have that momentum.

Finally, yes. Well, finally, it was my feeling. But that is our understanding. April, we would like to have some hopes for April and core operating profit to be in positive territory. That is what we would like to see.

[Takato Watabe, analyst]

Now as for the results. Health & Crop Sciences full year, JPY 40 billion, it remains unchanged. That is how it looks. But current Health & Crop Sciences, methionine market prices improving dramatically. What is the -- your projection and the probability of achieving this?

[Keiichi Iwata, executive]

Now on a qualitative basis, Crop Sciences, especially North America and Japan, fourth quarter is the period of demand. And every year, it is the fourth quarter that you have an aggregation of profits. Since Brazil has joined, they are in the Southern Hemisphere. So there has been a lag by half year, but still fourth quarter continues to be the center of profitability in Crop Sciences. That trend remains unchanged.

But now there is weather irregularities. Of course, when there are fluctuations in Crop Sciences business, we tend to attribute that to weather fluctuations, but there is that factor, unfavorable weather, but this segment is working very hard to make an improvement here.

As for methionine, from the fourth quarter, from January, yes, the prices have started to rise and at one time, it went down to about $2 or so, but now it's come up by about 20%. And I do not know whether we can go into profitability in the fourth quarter, but at least the downward pressure has been lifted with respect to methionine. That is our understanding. Thank you.

[Takato Watabe, analyst]

April, I look forward to your briefing on -- in April. Thank you.

[Keiichi Iwata, executive]

Thank you very much, Mr. Watabe. Beforehand, I'm not trying to make excuses. In April timing, everything is not going to be completed. April when, the date is not decided yet. But before the continuous holidays, I would like to decide on the date. Thank you.

[Shunji Kobayashi, executive]

I'd like to take the next question. Mizuho Securities, Mr. Yamada.

[Mikiya Yamada, analyst]

This is Yamada from Mizuho Securities. The listed company is the source of problem. So I'd like to know about Petro Rabigh. Petro Rabigh is the paid capital less -- slightly less than 40% is lost due to the accumulated impairment loss.

So on your balance sheet, Petro Rabigh's evaluation price, and do we not need to think about impairment loss for that? And in addition to that, you're saying that both parent companies need to think. But additional capital injection will not be made is my understanding. So I would like to know about the situation. So as much as possible, I would like to know a quantitative explanation of Petro Rabigh.

[Keiichi Iwata, executive]

There will be an announcement from Petro Rabigh regarding the capital. I think the accumulated loss is up to 38% of their capital. And if it does increase more than that, what kind of response should be taken? Rabigh, Aramco and us, the 3 companies beforehand has been conducting various case studies.

In terms of the capital injection, from Rabigh's position, that is what they would like to happen. But for Sumitomo Chemical, we have been always conveying to them that we are not going to pay even any additional penny. And that is the position we would like to maintain.

So having said that, in what way are we going to rebuild the financial situation of Rabigh? This is going to be the key point of the discussion with Aramco. Therefore, including this point, we would like to have various discussions with them. And also regarding impairment loss, I am not that conscious about that, but such a discussion is not coming up.

[Mikiya Yamada, analyst]

Currently, your balance sheet, the investment remaining amount to Petro Rabigh. In the equity method affiliate, valuated value is about JPY 150 billion. Do we have it with us?

[Keiichi Iwata, executive]

The overall exposure is about JPY 450 billion is in my memory. And out of that, the equity amount is about JPY 150 billion and equity bridge loan is JPY 180 billion, and the remaining is the loan from the parent company. That is the balance.

And of course, there are details such as interest and others. And the total is JPY 450 billion. That is Sumitomo Chemical's exposure to Rabigh, including the guarantee.

[Mikiya Yamada, analyst]

Okay. Understood. So basically, other than equities, it will not be subjected to impairment loss, correct?

[Keiichi Iwata, executive]

In a normal situation, I'm not sure, yes. The guarantee is our balance, and it's contingent liability.

[Mikiya Yamada, analyst]

Okay. And my second question is Sumitomo Pharma. It is a listed company. So it's probably an extremely delicate issue. However, up to -- it has deteriorated to this point. And regarding this company, like Rabigh, it's not that you're not going to even pay a penny or you're going to be taking a more flexible stance? Or are you going to -- is it difficult to have an additional capital injection? Can you share your thoughts with us?

[Keiichi Iwata, executive]

Regarding, well, Sumitomo Chemical's financial standing, it's not that we have plenty of room to share. So the additional capital injection to Sumitomo Pharma, we would like to suppress it as much as possible, but we do not have the policy that we're not going to pay anything.

As a parent company, well, we have the responsibility that we have been their parent company for long term. And what we need to do first is to rebuild it so that Sumitomo Pharma can stand on their own feet once again. So in order to realize that, what can we do? What is the direction that we need to take? We are thinking of what we can do.

[Mikiya Yamada, analyst]

With the acquisition of Myovant, it was a large investment. So there is some sort of a capital injection, but it's not that of a large amount. Is that correct?

[Keiichi Iwata, executive]

It is a listed company. So this is something that they need to think of. But at this point, injecting new capital and overcome the current situation normally cannot be thought. What they need to do first is to rebuild themselves within what they can do. That is the golden rule. I think that if you don't provide the support to them, they won't be able to do it because the credit was mentioned. So anyway, thank you very much.

[Shunji Kobayashi, executive]

Mr. Yamada, thank you very much. Moving on to SMBC Nikko Securities, Miyamoto-san.

[Go Miyamoto, analyst]

My name is Miyamoto from SMBC Nikko Securities. Petro Rabigh is my question. You and Aramco will work on structural reform together, you had mentioned. According to some reports, separating petrochemical or refining of oil and other structural reform, what would be possible? When the business environment is difficult, it may not be so easy to make a dramatic improvement. So toward Rabigh improvement, can you explain more about what efforts have to be made? And a related question to Mr. Watabe's question. Essential Chemicals nonrecurring items in the fourth quarter is very large. Can you go into more depths about that?

[Keiichi Iwata, executive]

Now Petro Rabigh profitability improvement is a big theme for us. It's not easy to come up with an idea of what to do to make direct improvements. The biggest problem is lack of competitiveness of oil refinery. Now separating that out and to get the burden off, well, this is a complex of petrochemical and refinery.

So to what extent can you carve that out and separate it out? Realistically speaking, it is going to be very, very difficult. And after separating that, who is going to be responsible for its operation, what is going to be the transfer of profits? That will require several years, and it's not a realistic discussion, in my view. Then how can you upgrade refining? Well, technology is available around the world. So if you give money, if you put money in, you can upgrade refining.

And the problem is that Sumitomo Chemical is not willing to put in that money. Yes, you can make progress if you agree that you put in more money. But at Sumitomo Chemical, we are seeing that we are not going to put in more money for oil refinery. So that's the deadlock.

How do you resolve that issue is one thing that has to be considered. Unfortunately, we have many ideas, and Aramco has ideas, but we cannot come to a resolution where both parties are satisfied. We have to come up with more ideas and wisdom. That is where we are.

Nonrecurring items, large amounts have been included. We cannot just allow our results to deteriorate by that much. So that is the number arrived through impairment procedures. In 1 year, 1.5 years, petrochemicals future compared to before, we are becoming more skeptical about the future prospects. So impairment checks criteria has become more stringent.

That is in the background. Based on that situation, we are looking at these businesses with a stringent criteria and we identify businesses with risk. Before the risks manifest themselves and before the risks are realized, we need to conduct impairment checks and deal with the risky ones. So this is the number that has been accumulated as a result of that exercise. Whether this would actually lead to impairment losses, that is not clear at this point.

[Go Miyamoto, analyst]

Understood. Second question, about dividends. You have made downward revision. Of course, with that level of results, I think, cannot be avoided. But there are impairment tests remaining in Sumitomo Pharma. When there is a downward revision in the results, is there going to be a further downward revision of the dividends? JPY 9 for the full year, is that going to be maintained?

[Keiichi Iwata, executive]

First, we're afraid that year-end dividend has been reduced from JPY 6 to JPY 3. March 1 is the closing date of shareholders' register, or March 31 is the closing date of register of shareholders. So this JPY 3, we don't intend to further revise downward from the JPY 3 level. Now what about the future?

JPY 12 for the full year, as a corporation, we feel that, that is the minimum level that we have to maintain. That remains unchanged. So we want to go back to that level as much as possible, as soon as possible by improving our results and implement structural reform. Whether that will be in fiscal 2024 that we go back to JPY 12 per year, I cannot say that at this moment.

In the next fiscal year, as a minimum, JPY 3 for half a year, is that going to be the base, or JPY 9 for the full year, is that going to be the base? That's a difficult question. Personally speaking, JPY 9, at a minimum, we want to keep JPY 9. Thank you very much.

[Shunji Kobayashi, executive]

Mr. Miyamoto, thank you very much. Next, from Daiwa Securities, Mr. Umebayashi.

[Hidemitsu Umebayashi, analyst]

This is Umebayashi from Daiwa Securities. The first question I have is regarding the inventory reduction. From September to December, 3 months, you have reduced it by about JPY 30 billion. And remaining 3 months, you have to reduce it further by about JPY 80 billion. It seems that the progress is slightly behind. Therefore, how are you going to reduce your inventory is what I would like to know. And if possible, if there's a particular segment that you will focus on, I would like to know. That's my first question.

[Keiichi Iwata, executive]

Well, that is the part I'm also concerned about and I constantly check the situation. First of all, January to March is the demand season for crop protection products. Therefore, at here, the crop protection products inventory will drastically go down. We can count on that.

Therefore, even though it is like this right now, it will go down. However, I briefly mentioned this before, due to the unstable weather, the crop protection products sales may not go as what we have expected. That may be a risk.

And also mainly in Chiba, we have a scheduled shutdown for maintenance. And due to that, before that shutdown, we would like to accumulate the inventory threat level. And at the end of April, we will come out of the shutdown and then the inventory will go down. So we are considering such aspects for each product's inventory. So when we consider this, we do have a sensitivity that it is going to go down by this much.

[Hidemitsu Umebayashi, analyst]

Okay. One concern is the Energy & Functional Materials, the fourth quarter, it is loss-making. And looking at the balance with the sales, I thought that you might reduce the inventory?

[Keiichi Iwata, executive]

Yes, you are right. Fourth quarter, due to the schedule shutdown for maintenance, there's 2 months of that. And there are products that we are going to stop accumulating inventory in the Energy & Functional Materials. So due to the shutdown, there -- the majority is the cause of the decline in profit. And that is why the fourth quarter Energy & Functional Materials situation looks unusual.

And also regarding the inventory, I myself, there's one thing I'm a bit afraid is the pharma. The inventory of pharma is considered to slightly go down as well, and this is the number that incorporates that. But post-Latuda, the 3 products in North America is facing this situation. So I worry that, that itself is not accumulated in the inventory. So I have to keep a close eye on that. And I tell my people, they need to keep a close eye on this. And this part, I'm not that confident yet. Thank you very much.

[Hidemitsu Umebayashi, analyst]

My second question is regarding and enhancing the financial standing measures. The utilization of surplus fund of JPY 70 billion, so utilizing the intercompany cash management system. And this also looking at your balance sheet, it seems that you're not achieving that much of an outcome. And the borrowings has increased by JPY 500 billion and the target is by end of 2023, fiscal year 2023. So can you explain about the progress in this area as well?

[Keiichi Iwata, executive]

The surplus fund utilization means that the global finance system started to work at the mid-January. And we are seeing an increase of companies joining that system. On the other hand, China has not been approved yet. Therefore, the China part may not be joining in time by the end of March. The contribution of China is quite large. Therefore, we are implementing measures in place of that.

To begin with, the global cash management system, there are countries that cannot join due to their law regime such as South Korea. For those countries, we are thinking of a way that they can utilize the surplus fund other than this global cash management system. But incorporating all this, we are having a clear view that we will be able to have a JPY 70 billion that we can utilize.

[Hidemitsu Umebayashi, analyst]

So there's inventory reduction and also this part that you have just explained is also going to contribute?

[Keiichi Iwata, executive]

Yes, that is correct.

[Shunji Kobayashi, executive]

Mr. Umebayashi, thank you very much. Next from Nomura Securities, Okazaki-san, please.

[Shigeki Okazaki, analyst]

This is Okazaki from Nomura Securities. Can you hear me?

[Keiichi Iwata, executive]

Yes, we can.

[Shigeki Okazaki, analyst]

My first question is Page 16. Just to check, so far, core operating income of JPY 50 billion. What is the level of probability that is now visible of JPY 500 billion? And in the fourth quarter, nonrecurring items in petrochemicals, is that likely to be included? And other asset sales. With the sale, I think you have gone certain ways of Inabata. Are there any possibility of upward swings in this number? Your second question is are we prepared to sell more shares of Inabata other than Inabata shares?

[Keiichi Iwata, executive]

Equity method affiliates. Within 2024, we don't eliminate the possibility of selling further in fiscal 2024. We are discussing structural reform measures. So equity method affiliates will have a lot to do with our business strategy. So in that discussion, we will look at the significance of these equity method affiliates, the significance of us owning these shares. We will check that and make decisions based on that.

At this point, we don't have any concrete plans of doing what action for which one. But as we move along with the deliberation of structural reform, that is a possibility. Next, at this point in time, in rebuilding our business, high probability, cash, about 1/3 has high probability of being secured. And the same proportion applies. Core operating income, about 1/3 of JPY 50 billion. We do have good probability, nonrecurring items, Singapore and Chiba, because of impairments, additions are not included in such impairments. Thank you.

[Shigeki Okazaki, analyst]

Let me just clarify. In the meeting 3 months before, of the JPY 50 billion in core operating income, more than half was onetime items. That was the explanation. We mentioned 1/3, that did not include it? Your position has not changed?

[Keiichi Iwata, executive]

Now rebuilding of business, many are onetime programs. And of the 1/3 that I talked about, there are some onetime items included. About 2/3 are onetime items. Well, 2/3, about 1/3 of JPY 50 billion, we do have a good prospect of accomplishing that and about 2/3 are onetime ones.

[Shigeki Okazaki, analyst]

Another question. What you will be discussing in April? You've been talking about Rabigh and Pharma. Of course, Pharma, Mr. Nomura, the President was discussing this. So you'll be talking about structural reform based on those things? I just want to know and have an idea of what we'll be covering when you talk in April or in the midst of thinking of that.

[Keiichi Iwata, executive]

Ideally, Pharma and Rabigh, to what extent can we go in further depth, I don't know. But I want to be able to show some direction, more concrete, substantial information should be included. And if possible, well, we're working toward that.

In addition, it's not just these 2 listed companies, but 10 years beyond, 20 years beyond, where is Sumitomo Chemical going into the future. That is the main focus of our structural reform. So in which area are we going to really move into?

And we have 5 segments today creating synergies to demonstrate comprehensive power. Well, maybe a different type of specialty future vision to be clarified. And towards that vision, what path are we going to follow? I want to be able to talk about that in a more clear fashion.

[Shigeki Okazaki, analyst]

Page 16. This generation of cash as well as boosting of core operating income, such additional effects can be included when you talk in April?

[Keiichi Iwata, executive]

I'm not entirely confident whether all the ideas are sorted out in April. Okay. Thank you.

[Shunji Kobayashi, executive]

Thank you very much, Mr. Okazaki. We have been getting close to the scheduled ending time, so we'd like to take the next question as the last question. And I'm afraid to tell you that due to the time restrictions, can you please ask just 1 question. So JPMorgan Securities, Nakada.

[Yasuhiro Nakada, analyst]

This is Nakada from JPMorgan Securities. Can you hear me?

[Keiichi Iwata, executive]

Yes.

[Yasuhiro Nakada, analyst]

I have 1 question. Until now, listening to your various explanations, I thought that there were things that will come to shape in April. From our perspective, the external environment is rapidly changing. We understand that.

And as your thoughts, Mr. Iwata, at what time will all the negative factors be removed and start working towards rebuilding the Sumitomo Pharma's intangible assets and goodwill that is large. But when all this got removed, your own equity capital, how much is that going to become? And how at that time are you going to become? Can you share your sense of timeline for all of these?

[Keiichi Iwata, executive]

Thank you very much for your question. That is an extremely difficult question. Even though we removed the risk assets, another risk asset shows up. So to what extent if we remove how much was going to happen, it's the balance that we need to make a revenue that will surpass that amount. So it's difficult to say to what extent of removing risk assets because it will lead to a misunderstanding.

[Yasuhiro Nakada, analyst]

Okay. Understood. How about the timeline? November, you have explained at once. And the project team was established, and you have already executed various things. Even though we cannot see the whole picture by April, but in a timeline perspective, what can we see when?

[Keiichi Iwata, executive]

Well, April, we thought it will be only the framework. But I think we will be able to share with you the -- all of the overall picture. However, we need to embody it. And so embodying it is to what extent we want to do that depends on whether we're going to embody and execute what we have planned or are we going to embody the strategy. But either way, it is going to take time. Rabigh is going to require quite a long time.

But at what timing can we show the overall direction? It's difficult how to describe it. However, by April, to a certain extent, we would like to make it in a way that you understand that we will be going towards a certain direction.

[Shunji Kobayashi, executive]

Mr. Nakada, thank you very much. So we have exceeded the allotted time. So with this, we would like to close fiscal 2023 third quarter results conference call. Thank you so very much.

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