Mitsubishi Chemical Holdings Corp

TSE:4188

Earnings Call Transcript 2021-Q1

[Hidefumi Date, executive]

Thank you for joining us. This is Hidefumi Date, CFO of Mitsubishi Chemical Holdings Corporation.

Please turn to Slide 4, Consolidated Statements of Operations. The exchange rate was JPY 107.4 to the U.S. dollar. Yen appreciated by around 2% from the previous year. Naphtha price was JPY 25,000 per kiloliter, down 45% year-on-year.

Net sales were JPY 722.7 billion, down JPY 193.7 billion year-on-year. One factor was a decline in sales volume of offerings for applications, primarily in the automobile industry, for Chemicals, including Industrial Gases, which had an impact of a decline in revenue of JPY 120 billion. In addition, market prices declined primarily for MMA, which pushed down sales by JPY 60 billion. And the appreciation of the yen pushed down revenue by around JPY 10 billion.

Core operating income was JPY 15 billion, down 79% year-on-year. I will describe the details later. As for special items, an income of JPY 8.7 billion was recorded, including JPY 7.5 billion as gain on sale of Toda property of Mitsubishi Tanabe Pharma Corporation. Operating income on IFRS basis was JPY 23.7 billion.

The financial income and expenses recorded expenses of JPY 3.3 billion, the same amount as in the previous year. With Mitsubishi Tanabe Pharma becoming the wholly owned subsidiary, interest-bearing debt increased. But with lower interest rates, the amount stayed at the same level as in the previous year.

Income before taxes was JPY 20.4 billion. Income taxes totaled JPY 12.2 billion. Effective tax rate turned out to be rather high. This was because tax effect could not be recognized for basically loss-making entities engaged in extensive R&D activities, such as Medicago in Canada, involved in VLP vaccine development; and NeuroDerm in Israel. As the revenue level dipped to where it is, this had significant impact on the effective tax rate. That was one factor.

The other was in relation to the share of profit of associates and joint ventures listed below the chart. This is income after taxes and was close to 0 in MMA-related operations due to the deterioration of MMA market conditions and thus, the element to lower effective tax rate was lost, resulting in income taxes of JPY 12.2 billion.

Net income from continuing operations was JPY 8.2 billion. And the bottom line, net income attributable to owners of the parent was JPY 5.2 billion, down 86% year-on-year.

In terms of first half forecast announced in May, as you can see on the right-hand side, core operating income was projected to be JPY 25 billion. So the progress rate for the first quarter was 60%. As for net income, we projected 0 for the first half while in the first quarter we recorded a profit.

Slide 5, Sales Revenue and Core Operating Income by Business Segment. Basically, all segments posted a decrease in sales revenue and core operating income. We have added the first half forecast announced in May for your information, and to the right of it, we are showing our estimates on the impact of COVID-19. This is approximation, JPY 38.2 billion for the first quarter. In the forecast announced on May 13, we estimated the impact of COVID-19 to be JPY 69.9 billion for the first half, and this remains almost unchanged today.

Slide 6, Analysis of Core Operating Income, year-on-year decrease of JPY 55.1 billion. Impact of price differential amounted to minus JPY 12.2 billion. One was in Chemicals primarily for MMA and carbon products, minus JPY 10.3 billion. And the other is in Health Care in relation to the NHI drug price revisions in April, minus JPY 3 billion. As for volume difference, in Performance Products primarily in relation to automobile applications, with the number of units in production dropping to half of what it was in the previous year, minus JPY 14.5 billion.

As for Chemicals, petrochemicals felt a greater impact of scheduled maintenance and repairs at Ibaraki facilities, which lasted over 2 months; and the sudden effect of lower volume, which was included in minus JPY 9.3 billion. As for Industrial Gases, a decline reflecting a general decline in demand. As for Health Care, similar situation -- or actually, for Health Care, I said similar, but basically, a decline in volume for pharmaceuticals was as a result of a drop in the number of patients visiting hospitals under the current circumstances.

Slide 7, Performance Products Segment. In functional products, sales revenue was JPY 142.7 billion and core operating income was JPY 8.7 billion, both lower than in the previous year. As described on the right, sales revenue declined as demand dropped mainly for automotive applications, with sales volumes of high-performance engineering plastics declining.

As for performance chemicals, sales revenue was JPY 82.5 billion and core operating income was JPY 1.3 billion, both recording a significant decrease year-on-year. Sales volumes were down, including for performance polymers, which consist of various compounds for automobiles and medical infusion bags and other applications primarily for automobiles. In addition, there was an impact of scheduled maintenance and repairs at phenol-polycarbonate chain material facilities. Overall, sales volumes decreased, and as a result, core operating income was down as well.

Slide 8, Chemicals Segment. As for MMA, regrettably, core operating loss was recorded during the first quarter, continuing from the previous quarter. Sales revenue was JPY 52.5 billion, a significant year-on-year decrease in revenue and profit. With demand remaining weak, sales were down amid deteriorating market conditions, including for MMA monomers, and earnings dwindled compared to the previous year as the price spread between raw materials and products narrowed due to weaker market conditions.

MMA market price in Asia during the first quarter was $1,340 on average. As for the second quarter, we expect the same level at around $1,350. As for the price of acetone, which, back in May, we projected to soar in relation to the disinfectant applications, during the first quarter, from April to May to June, the price gradually increased and currently, it is around $1,000.

As for petrochemicals, sales revenue was JPY 84.2 billion and core operating loss was JPY 13.6 billion, a significant year-on-year decrease in revenue and profit. This was due to a greater impact of scheduled maintenance and repairs, which resulted in the lower sales volumes. And product prices declined, owing to lower raw material costs and other factors. Earnings decreased due to inventory valuation losses from lower raw materials prices.

As for carbon products, sales revenue was JPY 44.4 billion and core operating loss was JPY 1.3 billion. Revenue was down amid lower prices as a result of reduced raw materials costs and a drop in sales volumes from declining demand for coke and other offerings. Core operating loss of JPY 1.3 billion was recorded due to shrinking price spread between raw materials and products.

Slide 9, Industrial Gas Segment. Sales revenue was JPY 182.9 billion and operating income was JPY 13.5 billion, lower revenue and lower income. Demand for electronics-related specialty gases remained strong as was the case with Performance Products for semiconductors and others. Still, sales revenue was down amid lower domestic and overseas demand for oxygen, nitrogen, argon and other industrial gases, thus large decrease in revenue and income. As shown in the lower graph, the volume difference had an impact of minus JPY 7.5 billion, half of which was in Europe, largely affected by COVID-19.

Let's move on to Slide 10, Health Care. Q1 sales revenue was JPY 100.2 billion, core operating income JPY 8.8 billion. Both were slightly down year-on-year. There was an impact of the NHI drug price revision. Some of the domestic pharmaceuticals suffered sales volume decline. On the other hand, costs came down too.

In addition to conscious efforts to reduce costs, under the COVID-19 environment, marketing and R&D expenses came down. This was by no means intentional and, therefore, not necessarily positive. It is simply that we were not able to spend money in marketing or R&D because of COVID-19 restrictions. This was an environmental factor. In any case, it did have a positive impact on income figures, and that's why we came in almost unchanged from the same period a year ago.

Slide 11 shows nonrecurring items. This is mostly around the gain on sale of that property in Toda that we mentioned earlier.

Slide 12 shows consolidated cash flows. Net cash provided by operating activities was a net inflow of JPY 70.1 billion. Lower feedstock prices and product prices are reflected in change in operating receivables and payables as well as in change in inventories so that there was a net increase in working capital. With regard to cash flow from investment activities, CapEx was almost unchanged year-on-year while sale of assets, which we touched upon earlier, had a positive contribution. As a result, the adjusted free cash flow during the period was a net inflow of JPY 22.8 billion.

Based on the statement of cash flows, that's towards the left of the slide, the free cash flow comes to a net inflow of JPY 92.8 billion. The difference of JPY 70 billion is related to converting MTPC into a wholly owned subsidiary. It is about simply repurposing some of the working capital used for short-term investment into intercompany financing. With regard to additional acquisition of consolidated subsidiary stocks in the amount of JPY 95.8 billion, this includes JPY 95.4 billion paid in April in relation to converting MPTC into a wholly owned subsidiary.

Slide 13 shows the consolidated statements of financial position. Total assets came to JPY 5,134.7 billion, almost unchanged from the end of March. However, because of COVID-19, in April, we decided to increase our cash on hand by about JPY 150 billion. On the other hand, there was some working capital at MTPC that was invested short term, and we repurposed that for group financing in the amount of JPY 70 billion, as we discussed earlier. In addition, changes in trade receivables and payables also had a positive impact on net cash flow.

Net interest-bearing debt came to JPY 2,194 billion. That's up JPY 104.1 billion due to the conversion of MTPC into a wholly owned subsidiary. The net debt-to-equity ratio has come to 1.88x.

Last but not least, I would like to go to Slide 16 for some additional comments. So in Q1, results were quite good, particularly around functional products. While we did not revise our forecast this time, I'd like to take this opportunity to explain our current outlook for Q2.

With regard to functional products, in May, we published a first half forecast of JPY 8 billion in core operating income. In Q1, however, we have already posted JPY 8.7 billion. For Q2, we are currently expecting JPY 3.8 billion so that the first half total would come to JPY 12.5 billion.

One reason is that in Q1 users in Korea and China apparently started to build up their inventory levels of display film and semiconductor material to prepare against the so-called Japan risk. This move would likely continue throughout the first half as there is no reason to start drawing down inventory levels given some signs of protectionism. We are therefore expecting an increase in orders here.

But then you may ask why Q2 figures are smaller than Q1. That is because users have already built up inventory levels to a certain extent during Q1. Another reason is alumina fiber, which is used for almost all gasoline based cars. We have not been able to manage inventory levels very well in Q1, and therefore, adjustment is still taking place in Q2, meaning lower capacity utilization.

Now moving on to performance chemicals. Q1 core operating income was JPY 1.3 billion. We are expecting a similar figure, JPY 1.2 billion, in Q2 so that the first half total would come to around JPY 2.5 billion, although in May we were expecting a loss of JPY 1 billion. This discrepancy is due to inventory valuation. Initially, we were expecting the price of naphtha to come down significantly to around JPY 20,000, but the decline turned out to be not that radical, fortunately.

For both functional products and performance chemicals, because of COVID-19, we were not able to execute spending for market development, et cetera, as initially planned, and that meant fixed expenses were lower than budgeted. Another factor is that bonus payments were also down as overall earning levels are down.

With regard to MMA, in Q1, the subsegment posted a loss of JPY 1.2 billion. We hope to bring this back to breakeven level on a half year basis. At the beginning of the year, we were expecting a half year operating income of JPY 6 billion. Back in May, we said that the MMA price could go up to $1,500 by September, but we are now expecting an average price of $1,350 for Q2, so we are no longer expecting that much of a rise to happen.

For petrochemicals, in Q1, there was a large inventory valuation loss in addition to scheduled maintenance and repairs. That's why the subsegment posted a loss of JPY 13.6 billion. In Q2, that impact of the maintenance turnaround and inventory valuation would be gone, but sales volume is not that strong, and we are now expecting another loss of JPY 3.4 billion, which means a loss of JPY 17 billion in the first half while the initial forecast was a loss of JPY 19 billion.

For carbon products, the initial forecast was an operating income of JPY 1 billion. However, that looks very challenging now. For Q1, the subsegment posted a loss of JPY 1.3 billion. In Q2, we expect a worsening by more than JPY 1 billion due to scheduled maintenance and repairs in Q2.

For Industrial Gas, the initial half year forecast was JPY 34 billion, which we maintain. It means that in Q2, we are expecting JPY 20.5 billion. The situation was indeed much improved in June compared with April and May when we were hardest hit by COVID-19.

For Health Care, Q1 profit was JPY 8.8 billion. Initially, we were expecting a half year operating income of JPY 1 billion. The Q2 expectation now is a loss of JPY 2.3 billion in anticipation of progress in clinical trials, et cetera. For the first half, we are now expecting JPY 6.5 billion.

With regard to others, the initial forecast was JPY 5 billion in loss. We are not in a position to revise this now.

For total consolidated core operating income for the first half, we are expecting slightly less than JPY 30 billion now. On the other hand, as we mentioned earlier, income taxes would be rather high, and that's part of why we are expecting the bottom line or the net income attributable to owners of the parent to come to breakeven level for the first half.

This concludes my presentation. Thank you very much for your kind attention. We will now take questions.

[Operator]

The first questioner is Mr. Umebayashi from Daiwa Securities.

[Hidemitsu Umebayashi, analyst]

Umebayashi from Daiwa Securities. My first question is on MMA. Price level during the first quarter was on par with the fourth quarter, and for the second quarter, you are projecting about the same level as in the first quarter. In relation to COVID-19, I believe there is a special demand generated for clear, transparent partition boards to prevent infections, but overall, you do not expect market recovery. So what are the reasons for that?

Basically, is it that demand for industrial applications, mainly for automotive, remain weak? Is that your view?

And if you -- if possible, can you talk about the level of contribution by the clear partition boards and other COVID-19-related specific applications in pushing up demand?

[Hidefumi Date, executive]

As for clear partition boards, demand amounted to 80,000 tons globally for us during this past 3-month period. But despite that, the overall volume was lower than in the previous year because demand for other applications other than partition boards remained very weak. So we were expecting that the partition boards and others will drive the demand growth, but that did not happen.

[Hidemitsu Umebayashi, analyst]

I see. My second and last question is on Performance Products as well as Health Care. I'm looking at the operating income variance analysis, and I see rather large positive figures on others. In the case of Chemicals, I can imagine that it most probably had to do with impact of inventory valuation gain or loss. But for Performance Products and Health Care, what were the factors?

[Hidefumi Date, executive]

In Performance Products, as was explained earlier, much of expenses were not spent during this period, and regrettably, the bonus payments had to be reduced quite a bit as well. In chemicals, we have a business model which would not require much human resources, whereas for Performance Products, we involve large workforce. So with changes in fixed costs, we recorded a positive of about JPY 5.6 billion in Performance Products.

[Hidemitsu Umebayashi, analyst]

So what about the negatives?

[Hidefumi Date, executive]

There was a deterioration in the profits of associates and joint ventures in polycarbonate business amounting to negative JPY 1.8 billion. As for Health Care, it's not that we were actively deliberately trying to contain the expenses, but due to COVID-19, there was little progress in R&D activities and clinical studies. And under the stay-at-home work mode, the sales activity-related expenses for marketing purposes were not used much.

Earlier, when we released the results to mass media, I stated that if we were the only one controlling expenses, then it is easy to imagine a decline in sales 6 months later or a year later. But the current situation is that economic activities are stagnant overall throughout society. And unfortunately, we were no exception. So basically, we want to spend as much as possible to grow profit. And even in a remote work setting, we are taking various actions for that.

[Hidemitsu Umebayashi, analyst]

I see. So I take it that much had to do with inability to engage in sales and marketing activities and unspent expenses. Those were included in others, and they were accounted for separately from reduction in fixed cost.

[Hidefumi Date, executive]

Yes, that is correct. I'd like to emphasize that we were not proactively deliberately reducing costs. Those were all due to external factors.

[Operator]

The next questioner is Mr. Watabe from Morgan Stanley MUFG Securities.

[Takato Watabe, analyst]

This is Watabe. I have 2 questions. First is on Performance Products segment, which consists of 2 subsegments. And you mentioned significant upside, and you said semiconductors and display-related products did well. And in relation to stay-at-home lifestyle and work style, inventories built up. Most of your peers expect the results for the second quarter to be comparable to the first quarter. Are you already seeing signs of inventories being consumed?

And in the consolidated statements of operations, I see that other operating income and expenses seem to be rather significant positive factor. Could it be that this is pushing up profit for Performance Products? That's my first question.

[Hidefumi Date, executive]

Other operating income and expenses, I'll have to check on that. With a 70% or so accuracy, I would say the following. I believe there is a gain on the sale of fixed assets and other factors included, but I'll have to check. So from our IR team, we'll get back to you later.

[Takato Watabe, analyst]

Do I take it that this is not related to the core operating income?

[Hidefumi Date, executive]

Yes, that is correct, not related to core operating income. On IFRS basis, we cannot create income statement clearly addressing the core operating income and special items. And thus, they are expressed in the form that you see here.

[Takato Watabe, analyst]

So they are included in special items and that is improving and that is the main factor?

[Hidefumi Date, executive]

Yes. Now having said that, for others, to answer your earlier question as to why the projection for the Performance Products for the second quarter is better. Well, basically, the first quarter was extremely good because customers in China and Korea built up inventories during this period. I think their inventory level has been added by 1 month as opposed to regular 3 months' worth. So I think the inventory level was worth 4 months. That's what happened in the first quarter.

[Takato Watabe, analyst]

So what did not deteriorate much compared to the previous year?

[Hidefumi Date, executive]

Semiconductors and optical films overall, they did pretty well. They did not drop much.

[Takato Watabe, analyst]

And for others, why lower second quarter projection?

[Hidefumi Date, executive]

Well, as mentioned earlier, during the first quarter -- the inventory level in the first quarter had 4 months' worth, whereas in the second quarter, it's only going to be 3 months' worth. That's the difference.

And in addition, I mentioned alumina fiber earlier, which is used in all gasoline-powered vehicles. And as we fail to grasp the overall movement, production adjustments in the first quarter turned out to be not sufficient. So in the second quarter, utilization rate will have to be reduced to adjust the inventory level. And therefore, compared to the first quarter, functional products will decline. That is the situation, and there are no special factors.

[Takato Watabe, analyst]

I see. My second question, earlier, you said less than JPY 30 billion for the second quarter and JPY 45 billion for first half, the core operating income.

[Hidefumi Date, executive]

No, no, no. A little less than JPY 30 billion is for first half. And for the second quarter, it's JPY 14 billion.

[Takato Watabe, analyst]

I see. Pardon me, I stand corrected. So first half, less than JPY 30 billion, so not much upside.

[Hidefumi Date, executive]

That is correct. For Performance Products, primarily on functional products, some upside of about JPY 4.5 billion and for performance clinicals, upside of about JPY 3.5 billion. But commodity products expects weaker quarter. And unfortunately, that is going to lessen the positive effect of better-than-expected results for the Performance Products overall in the second quarter.

[Takato Watabe, analyst]

I see. So based on that projections for the first half, my question is, the difference between the first half and the second half, you are expecting a significant improvement. And I think one factor is the impact of inventory valuation gain and loss. But it appears that the naphtha price in the second half is not going to recover as much as you anticipate, so what do you think is the level of certainty in attaining the projected level for the second half?

[Hidefumi Date, executive]

As we explained back in May, we're not factoring in inventory valuation gain for the second half. Rather than that, for October onward, we are assuming that the effect of COVID-19 will be brought under control. That was the assumption for the second half, including the automotive industry. For example, for October onward, we expect volume of orders from customers will return to the level comparable to the previous year. That is the assumption.

So what is our current view on the second half? Unfortunately, the only thing that we are rather certain about for the second half is that it's not likely that things will improve for carbon products in the second half. That's just about the only thing.

For others, at the current point in time, whether results would be in line with the forecast made in May, it's really hard to say. And therefore, for the second half, we cannot share any view with you. We regret that, but that's the reality.

[Operator]

The next questioner is Mr. Yamada from Mizuho Securities.

[Mikiya Yamada, analyst]

Yamada from Mizuho. My first question is on performance chemicals. Earlier, you indicated that not much changed from the first to the second quarters. But having said that, during the first quarter, albeit small amount, you recorded a negative figure for the impact from the inventory valuation gain and loss, and that is not likely for the second quarter. And furthermore, with the absence of scheduled maintenance and repairs, I believe that there are several factors to push up profit. Can you elaborate on the background?

Earlier, you stated JPY 2.5 billion, not much of an improvement. Are you expecting further production adjustment for smartphones and electronic materials, for example? If that's not the case, fine, but can you elaborate?

[Hidefumi Date, executive]

Within performance chemicals, there are more products for which we were not able to manage inventory levels very well, such as specialty coating chemicals and functional additives. Those are for automotive applications. For products tied to specific customers, it is pretty easy to adjust production levels in a timely manner. However, for products which are widely used in the industry, that is more challenging, and we were not able to reduce production levels quickly enough in Q1, and that is having a negative impact on Q2.

[Mikiya Yamada, analyst]

So if I got it right, while the situation does improve overall from Q1 to Q2, yet, due to those inventory adjustments, your net improvement is only equivalent to the impact of inventory valuation and scheduled maintenance and repair.

[Hidefumi Date, executive]

Yes, I'm afraid so.

[Mikiya Yamada, analyst]

By the way, I forgot to say how many questions I have at the outset, but I'd like to ask another question here, plus 1 more question on Health Care.

[Hidefumi Date, executive]

That's fine.

[Mikiya Yamada, analyst]

My second question is about petrochemicals and the inventory valuation difference as well as inventory levels. I had expected more through my calculations for about JPY 20 billion. Would there be some negative impact on petrochemicals in Q2 related to inventory? I thought you said there won't be any such impact in Q2. So if you could clarify that and perhaps elaborate a little more, please.

[Hidefumi Date, executive]

In Q1, there was JPY 14.3 billion in inventory valuation loss for petrochemicals, of which about half came from polyolefins -- slightly more than half, I should say. We keep a pretty large inventory of polyolefin, and there will be still some negative impact in Q2 as well. Having said so, the net negative impact on Q2 would only be in the amount of JPY 1.5 billion or about 10% of that in Q1.

Now why did I explicitly mention that half of the inventory valuation loss came from polyolefins? That is because, as you would know very well, with polyolefins, due to the way prices are agreed with our customers, price adjustments come into effect with a quarterly delay. Inventory valuation loss is usually accompanied with such a delay, meaning there will be an apparent gain on the pricing side which counterbalances the valuation loss.

What inventory valuation loss that has a real net impact comes from the remaining half or olefins, such as naphtha and monomers, although we do not really have much inventory for monomers. That was in the amount of about JPY 7 billion or roughly half of that JPY 14.3 billion. That part was the major driver of operating income decline in Q1.

[Mikiya Yamada, analyst]

Now on pharmaceuticals. Now that MT-6548 has been approved for production and marketing, can you tell us about your sales expectations?

[Hidefumi Date, executive]

Let me defer that question to Mr. Yoshihiro Kobayashi from MTPC.

[Yoshihiro Kobayashi, executive]

This is Kobayashi from MTPC. Yes, we were granted domestic approval in June, but we have yet to get it on the NHI price list. As such, we are not in a position now to provide details about the timing of launch or peak sales.

[Mikiya Yamada, analyst]

I understand. Is it correct to assume that this new drug would be used by the same type of physicians that use CANAGLU and Tenelia so that even though it is difficult these days for medical reps to work as they normally do, that would not be a problem in driving awareness of this new drug? Or would the current situation mean there would need to be more time after approval and NHI listing before sales can actually take off?

[Yoshihiro Kobayashi, executive]

It is true that medical reps still cannot visit medical institutions in the way they usually did, but they are contacting physicians remotely through phone calls and video conferences so as to proactively raise awareness of the drug and promote its use now that we have successfully got it approved.

[Mikiya Yamada, analyst]

Is it correct to understand that the target market overlaps with the diabetes and kidney disease areas where you already have a strong presence and that would, therefore, be a positive factor?

[Yoshihiro Kobayashi, executive]

Yes, that is correct. The new drug is indicated for renal anemia and fits nicely into our focus areas. It can be used for renal anemia in both dialysis-dependent and non-dialysis-dependent patients. Up to now, the only drugs available were injections, whereas this new one is an oral drug, which is more convenient and has good clinical results.

[Mikiya Yamada, analyst]

Oral drugs will certainly be desirable in the face of COVID-19, so I have high expectations.

[Yoshihiro Kobayashi, executive]

Thank you for that.

[Operator]

The next question will come from Mr. Shigeki Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

This is Shigeki Okazaki from Nomura Securities. I have one broad question and another one focused on Health Care. Firstly, can you tell me about petrochemical capacity utilization in general, including MMA cracker, polyolefins, phenol chain? How was the April to June quarter? And what do you expect for July, September? And for carbon fiber under functional products and for battery material, electrolyte and anode material under performance chemicals, what volume growth are you expecting on a quarter-on-quarter basis?

[Hidefumi Date, executive]

With regard to MMA, capacity utilization in Q1 was almost the same as the previous quarter at 60%. Currently, capacity utilization has risen to around 75%, and we believe that will continue throughout Q2.

With regard to other more general petrochemicals, our ethylene capacity is running at full capacity as we are a net purchaser of olefin. Among others, the polypropylene capacity went through a scheduled maintenance and repair in Q1, but ran at full capacity otherwise. We expect very high utilization to continue in Q2 as well.

For polyethylene, utilization was low in Q1. Against the backdrop of sales volume decline, we adjusted production. But since July, inventory levels have come down considerably and utilization has recovered to high levels.

[Shigeki Okazaki, analyst]

Were you also interested in the phenol and polycarbonate chain?

[Hidefumi Date, executive]

Yes. Those are also running at full capacity, except for the capacity in Kashima for bisphenol A, just for the duration of the scheduled maintenance and repair.

[Shigeki Okazaki, analyst]

Excuse me, but on MMA, is it correct to understand it this way, that spreads have improved significantly for the C4 process but not so much for the ACH process? So in total, spreads in Q2 would not improve too much from Q1. Nevertheless, since capacity utilization is recovering, operating income will be up quarter-on-quarter?

[Hidefumi Date, executive]

Well, capacity utilization is part of the picture. But more importantly, we are trying to optimize our operation by increasing the use of C2 and C4 processes while reducing the use of the ACH process.

[Shigeki Okazaki, analyst]

Now on Health Care, you attributed the decline in Q1 domestic sales to the NHI price revision. What about the impact of COVID-19 or any change in market share? And with regard to the VLP vaccine for the coronavirus, my understanding was that you were not going to use adjuvants. Why have you changed that this time?

[Hidefumi Date, executive]

I will again defer the question to Mr. Kobayashi. But before that, let me respond to your question about the COVID-19 impact. There has actually been a positive impact on our 3 biologic drugs. Sales of Simponi, for example, is increasing, thanks to more cases switching to auto injection. So the COVID-19 impact is not necessarily all negative.

[Yoshihiro Kobayashi, executive]

This is Kobayashi from MTPC again. With regard to the COVID-19 impact on domestic pharmaceuticals, as was mentioned earlier, the medical reps can only conduct marketing activities in a restricted manner. Medical institutions are also restricting their outpatient services. We therefore anticipate some negative impact on sales as a whole.

And with immunosuppressive drugs, in particular, physicians are more cautious about their use so there is that additional impact. On the other hand, with regard to oral drugs for chronic conditions, such as for diabetes, in order to reduce patient visit frequency, medical institutions are prescribing larger amounts than usual, and that has pushed up sales volume of some drugs.

Have I answered all of your questions?

[Shigeki Okazaki, analyst]

Actually, what about the VLP vaccine adjuvant, please?

[Yoshihiro Kobayashi, executive]

Yes. Adjuvants have been included in some vaccines from before. Adjuvants serve 2 purposes, which are to enhance efficacy and to reduce total dose through enhanced efficacy. For example, suppose there is a vaccine that works at 5 milligram without adjuvants. The same effect may be realized at reduced amounts of 2.5 milligrams or 1 milligram with adjuvants.

If that is the case, that would facilitate production of vaccine for more people more rapidly. And therefore, in the face of a pandemic, it is common practice to consider such options. At the moment, we are working on both possibilities with and without adjuvants and will choose whichever is more suitable when the results are out.

[Operator]

The next question is from Mr. Nishihira from Okasan Securities.

[Takashi Nishihira, analyst]

This is Nishihira from Okasan Securities. My question is about petrochemicals. You mentioned the impact of scheduled maintenance and repair in Q1. Can you put a yen amount on that impact, please?

You also mentioned inventory valuation loss likely due to LCM, lower of cost or market method. Here again, can you tell us how much that negative impact was in yen amount, if possible?

[Hidefumi Date, executive]

The scheduled maintenance and repair impact is estimated to be JPY 7 billion. And I'm sorry, what was your other question?

[Takashi Nishihira, analyst]

What about inventory valuation loss according to LCM, lower of cost or market?

[Hidefumi Date, executive]

Is it LCM adjustments specifically that you are interested in?

[Takashi Nishihira, analyst]

Yes.

[Hidefumi Date, executive]

Well, I don't think they were LCM adjustments, but let me double check. Actually, prices were rising in the quarter to June, so LCM adjustments would not have been necessary. And we did get reports from MCC, but I do not think LCM was an issue there either. So even if there was some, the amount must have been very small.

[Operator]

Ladies and gentlemen, thank you very much. Before we conclude this briefing, I would like to give the floor to Mr. Date again. Mr. Date, please.

[Hidefumi Date, executive]

Once again, thank you, everyone, for joining us for this web conference. We ask for your continued support. Thank you very much.

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