Mitsubishi Chemical Holdings Corp

TSE:4188

Earnings Call Analysis

Strong Q1 performance with challenges ahead

In Q1, Mitsubishi Chemicals saw a 6% year-on-year rise in sales revenue, reaching JPY 1,129.4 billion, while core operating income surged by 63% to JPY 82.6 billion, driven by robust demand in display-related markets and effective price management. However, net income attributable to owners dropped 7% to JPY 39.7 billion due to a decline in special items. Despite this strong start, the company maintains a cautious outlook for Q2, anticipating weaker demand in displays and food-related products, and highlighting the need for ongoing business restructuring, particularly in the carbon products sector.

Overview of Financial Performance

In the latest quarterly earnings report, the company displayed a 6% year-on-year increase in sales revenue, amounting to JPY 1,129.4 billion. Notably, core operating income surged by 63%, reaching JPY 82.6 billion. However, net income attributable to the parent company saw a slight decline of 7%, totaling JPY 39.7 billion. Despite this, the results exceeded the initial half-year forecast as core operating income for the first quarter already covered 75% of the projected JPY 110 billion for the first half of the fiscal year.

Segment Performance

The Specialty Materials segment saw a 5% rise in sales revenue and a 16% increase in operating income, helped by strong demand in display-related markets. The Industrial Gases segment reported a 7% increase in revenue and an 18% jump in income, benefiting from price management efforts. The Pharma segment's strong performance in North America, particularly with Radicava, pushed its revenue up by 10% and core operating income by 85%. The MMA and derivatives segment boasted a remarkable 27% increase in sales revenue and a significant JPY 11.2 billion increase in operating income.

Cost Management

Overall, cost reduction efforts brought a positive impact of JPY 12.1 billion. The company aims to achieve JPY 47 billion in cost reductions for the full financial year and seems to be on track. Inventory valuation improved by JPY 3.5 billion, although increases in fixed costs, including labor expenses, had a negative impact.

Projections and Future Outlook

Looking ahead to the second quarter, management anticipates a mix of challenges and opportunities. The demand in display-related and food-related markets remains uncertain. Additionally, ongoing business restructuring and reform projects are projected to influence future earnings. Despite these challenges, the company's strategic measures and strong first-quarter performance provide a positive outlook for the coming quarters.

Special Items and Impairment

Special items resulted in a JPY 2.4 billion gain, but this was JPY 16.5 billion lower than the previous year. For the second quarter, the company expects a JPY 7 billion impairment loss related to property, plant, and equipment in its carbon products business as part of its structural reform initiatives. This is expected to make the carbon products business profitable by the fiscal year ending March 2026.

Cash Flow and Financial Health

Operating cash flow stood at JPY 73.9 billion with a positive working capital impact of JPY 15.6 billion. Investment activities led to a cash outflow of JPY 80.5 billion, mainly due to periodic maintenance and growth investments in Industrial Gases and Specialty Materials. Free cash flow was positive at JPY 6.6 billion. The company’s net interest-bearing debt increased by JPY 80.5 billion, but the net debt-to-equity ratio improved marginally to 1.14 from 1.16 at the end of the previous fiscal year.

Strategic Initiatives

The company’s strategic efforts include ongoing business structural reforms, especially in the carbon products segment. They plan to reduce capacity by 40%, rationalize their sales portfolio, and improve cost management. While these measures are expected to drive long-term profitability, they will incur restructuring costs and impairment losses in the short term.

Earnings Call Transcript 2025-Q1

[Operator]

Thank you very much for participating despite your busy schedule for the Mitsubishi Chemicals first quarter of this year ending March 31st 2025 earnings call. So today, we have the Executive Officer, CFO, Minoru Kida will explain about the operational summary for the first quarter of fiscal year ending March 2025. Going after we go into Q&A session, and we are planning to spend 60 minutes for this meeting. Before we go into the conference, there's some asking matters that we have to offer to the investors. There are some disclaimers that we are going to have.

So we are making some forward-looking statements in this presentation, but this entails risks and uncertainties and there are some cases that the actual results will be diverse greatly from our forecast, we ask for your understanding. For those conferences, including the Q&A, this will be posted on our website.

Yes, we understand it beforehand. So we'll start the conference is, Minoru Kida, please.

[Minoru Kida, executive]

Good afternoon. This is Minoru Kida, CFO. Let me present the financial results for Q1 FY 2024. First, as you can see, we have the summary. The business environment generally remained stable despite some different levels of strength in demand among regions and industries. Display related sales remained brisk on the back of demand spurt by large-scale shopping events in China and international sporting events and semiconductor-related sales recovered moderately driven by demand related to generative AI. On the other hand, sales were sluggish in some regions and sectors such as automotive and food-related markets.

Compared to the same period of the previous fiscal year, price gap improved significantly as a result of efforts to promote price management in each business and an increase in market prices for MMA monomer. In addition, cost reduction efforts continue to bear results in the first quarter. On the other hand, carbon products continued to post a loss.

And for some products in Specialty Materials and Industrial Gases, sales volume decreased. As a result, for the group as a whole, sales revenue increased 6% year-on-year, and core operating income went up 63% year-on-year. Net income attributable to owners of the parent decreased 7% year-on-year due to a decline in the net of special items. Core operating income for the first quarter was 75% of the first half forecast announced at the beginning of the current fiscal year, meaning the progress is exceeding the initial forecast.

Going forward, for Q2 and onwards, there is uncertain outlook for demand in displays and food-related products. In addition, there is a need for further review of several business restructuring and reforming projects.

[Mikiya Yamada, analyst]

Since it is difficult to incorporate such impact on earnings at this time, we maintain our previous forecast at the beginning of the year. And today, we made a release on the structural reform of the carbon products to improve earnings and to optimize our production scale of Coke business. And if you could refer to that release, too, and I will come to this and provide more detail later on in this presentation.

On the consolidated statements of operations. For Q1, the average currency exchange rate was JPY 158.2 to the dollar. The yen was weaker by 13% compared with a year ago. The price of naphtha was JPY 79,000 per kiloliter. That's up 17% from a year ago. Sales revenue came to JPY 1,129.4 billion. That's up 6% from the same period last year. Core operating income came in at JPY 82.6 billion. That's up 63% year-on-year. We provided a first half forecast of JPY 110 billion for the first half Q1 results are 75% of that figure.

Special items came to JPY 2.4 billion in gain, and that's down JPY 16.5 billion from a year ago. Operating income came to JPY 85 billion, pretax income JPY 77 billion. Net income attributable to noncontrolling rather to all of the parent came to JPY 39.7 billion, and that's down JPY 2.8 billion year-on-year. But if you compare it against the first half forecast we published in May, that's actually exceeding the JPY 10 billion figure. Now let's look at the breakdown by segment.

Specialty Materials, sales revenue was up 5% year-on-year, and operating income was higher by 16% as I said at the beginning, there are differences depending on geography or the actual business. But in general, things were firm. In particular, demand related to display-related markets were strong. As a result, the Q1 results exceeded the first half forecast of JPY 10 billion in core operating income.

For industrial gases, things are good and revenue was up 7% year-on-year. Income was up 18% year-on-year. For pharma, Sales of Radicava in North America continued its strength. Revenue was up 10% year-on-year. Core operating income was up 85% year-on-year. And in comparison to the first half forecast, the progress is quite high. MMA and derivatives now, sales revenue, up 27% year-on-year for operating income, JPY 11.2 billion up.

MMA modern market prices are higher and that pushed up both sales revenue and core operating income. With the wider spreads, the result was that the core operating income exceeded the first half forecast of JPY 7 billion. Basic Materials & Polymers sales revenue, up 1% from a year ago, and the loss was reduced by about JPY 2 billion. The improvements include from inventory valuation.

In the subsegment materials and polymers This was up with regard to core operating income from a year ago, there was a scheduled maintenance turnaround at Ibaraki Ethylene Center, but profit was secured. For carbon products, the coke market remained sluggish and posted a loss of JPY 8.3 billion. This is a breakdown for the analysis of the core operating income year-on-year difference.

The price factor had a positive impact of JPY 20.1 billion, particularly for MMA and derivatives, the MMA monomer market price is coming up had a great contribution. For specialty materials and industrial gases, our continued effort for price management yield bore fruit and the effect was positive. The volume factor was a positive impact of JPY 8.1 billion.

For Specialty Materials and Industrial Gases, this figure was actually negative, but that was more than offset by the positive from pharma Basic Materials & Polymers suffered from a different and challenging business environment, but the volume factor was positive. Cost reduction had a positive impact of JPY 12.1 billion. For this financial year, full year, we have a target figure of JPY 47 billion, and we believe that things are in line with that plan.

Others had a negative impact of JPY 8.5 billion. Inventory valuation improved by JPY 3.5 billion, but in various businesses, fixed expenses such as labor expenses increased. Now let's look at the breakdown by segment. First, on Specialty Materials. This segment had a core operating income increase of JPY 1.6 billion. The price factor had a positive impact of JPY 4.8 billion. Demand is still weak, but in each subsegment, efforts were made to retain or improve pricing, and that led to this improvement.

On the other hand, the volume impact was a JPY 2.5 billion negative impact. For advanced films and polymers, in China, there was this major shopping event, and there were international sports event. And there was anticipation of the demand for television increasing and the panel makers increased their capacity utilization that drove up the demand for polyester film and OPL film. But for the barrier packaging material, EVOH the things pared down compared with the Q1 in the previous year where things were very strong. For advanced solutions for display-related materials, just like the films business, demand increased.

For semiconductor-related products, again, there is some difference between product or area. But overall, things are on a recovering trend and volume increased. For advanced composite and shapes. The high-performance engineering plastic used for semiconductor production equipment, recovered and volume increased. For carbon fiber, volume increased for use in wind power stations, but if you look at the higher margin products such as the use in pressure vessels, that volume fell. So the volume factor actually came in negative.

With regard to cost reduction, we are exiting from the acrylic fiber business and other business structural reform and right sizing our procurement and improving productivity, all those effects came to a positive JPY 2.8 billion. Others had a negative impact of JPY 3.5 billion. That includes the fixed expenses such as labor. It also has the impact of the CPC, which we made a consolidated subsidiary last year, and they led to an increase in the intangible asset amortization.

For Industrial Gases, core operating income increased by JPY 7.3 billion from the same period previous year. Volume-wise, there was some softness but thanks to price management efforts in various areas, the volume factor was positive JPY 5 billion and productivity improvements led to cost reductions. And that had a positive contribution of JPY 5.7 billion. As a result, we were able to post a higher core operating income than the same period previous year.

Now on pharma. Pharma came in up JPY 8.5 billion compared with the previous year. With regard to the price factor, in Japan, there was an NHI drug price revision and that had a negative impact but the foreign exchange impact was positive. So there was a net positive impact of JPY 800 million. With regard to volume, that had a positive impact of JPY 10.4 billion.

In North America, the RADICAVA Oral Sales grew. In addition, domestically, Mounjaro sales is strong as well as a 5-way combination vaccine go-big sales. And therefore, this volume factor was a large significant positive. Now on MMA and derivatives. Compared with a year ago, core operating income increased by JPY 11.2 billion from a loss in Q1 a year before, so this Q1, we posted a profit of JPY 10.5 billion.

The price factor was a positive JPY 10.7 billion. The MMA monomer market prices are higher. So this price factor came in quite large. With regard to the volume factor for coating and additives business, demand for use in adhesive inks and additives recovered. Now on Basic Materials & Polymers. This posted a smaller less by JPY 2 billion compared to a year ago. The price factor was a negative JPY 1.7 billion.

Materials & Polymers saw some improvement here, but carbon products were down because of the coke market weakness. And so the net total was a negative impact. With regard to volume, for materials and polymers, this year, we have scheduled maintenance and repair turnaround in Ibaraki at the ethylene center and that had a negative impact. But this was offset by what we suffered a year ago with regard to the onetime trouble. The cost reduction impact was a positive JPY 1.5 billion.

For petrochemical derivatives, we had a structural reform, and we added some benefit of that. Others came in at positive JPY 1.9 billion. This includes JPY 3.5 billion from inventory valuation. For carbon products, the coking coal prices are down, so inventory valuation was pushed down. But for materials and polymers, naptha prices are rising, so that has a positive impact. Now today, we made a release about our carbon business and how -- and our policy about improving the earnings or the profit margin and profitability and the optimization of the production of coke. So let me add some description here.

Back in 2021, in December, we announced our management policy. And in line with that, we have been looking at the possibility of carving out our carbon products business. On the other hand, currently, we have a very difficult business environment particularly around China, there is this weakness in steel product demand and international coke market is very sluggish.

Against that backdrop, rather than focusing on carve-out, we judge that it is more urgent to look at our production setup and sales policy. So at Kagawa, we have a number of coke ovens, and we decided to reduce the size of our capacity. Again, we are also reviewing our sales portfolio, both domestically and outside of Japan. We are also implementing additional rationalization measures so that the business is less susceptible to market fluctuations. So we made a resolution on this structural reform.

We will steadily implement that so that the carbon products can be profitable from the year ending March 2026 or FY 2025. In conjunction with the reduction in the capacity, we will post a special loss of about JPY 7 billion in Q2. That will be an impairment loss for property, plant and equipment. And in addition, from Q2 or sometime later, we will have to book removal expenses.

But we have yet to establish an amount. And once we know that and once a disclosure is due, we will make an announcement on that. We are also looking at the long-term positioning of Carbon business within the group portfolio, and we will continue to review this. This is the consolidated special items. In the first quarter, the consolidated special items was in total, plus JPY 2.4 billion.

During this April to June period, we have had some sales gains and losses due to the sales of the fixed assets and reversal provision. So this was accumulation of small items. There was no major structural reform cost that has been booked. In the previous year in the pharma business, JPY 15 billion impact was coming from and having to return the upfront payment with the form pharma, which we see through a [indiscernible] supply contract.

So there was a plus JPY 15 billion of positive impact in terms of the special items. Compared to this year, the special items has been declining. Next is consolidated cash flow. In terms of the operating cash flow, it was received JPY 73.9 billion. In terms of the cash flow for operating receivables and payables, the JPY 3.2 billion of cash in inventory cash flow was JPY 14.6 billion of cash out.

For the working capital in total, it was a JPY 15.6 billion receivable of cash. So the periodic repair, there has been some ups and downs. But on each of the businesses, we are strengthening the management of working capital and we -- I think that this effect is showing up steadily. In terms of the cash flow related to investment activities, this was a cash out of JPY 80.5 billion for industrial gas, specialty materials, mainly in these areas.

So we have conducted investment for growth in the Basic Materials & Polymers, at the Ibaraki, we have conducted a periodic maintenance and we have conducted a maintenance renewal investment. In terms of strategic shareholding and through the sales of unnecessary assets, we had a cash inflow of JPY 4.4 billion due to asset sales. As a result, free cash flow was JPY 6.6 billion of cash. In terms of the financial cash flow, it was a cash out of JPY 17.3 billion.

Next is a consolidated statement of financial position. The total asset was JPY 6,291.1 billion. Compared to the previous year, it was an increase of JPY 186.6 billion. The major reason behind this is due to the foreign currency that has been an impact of JPY 187 billion of the increase impact. Most of this impact is coming from foreign currency.

Net interest-bearing debt compared to the end of last fiscal year has increased by JPY 80.5 billion, but the net D/E ratio was [ 1.14 ] this is 0.02 point improvement compared to the year-end of last fiscal year is [ 1.16. ] In this slide, this is about the quarter-on-quarter comparison of the operating income of the segment of core operating income by business segment. Comparing the fourth quarter of last year and then putting in some insight in terms of the direction of the second quarter.

The first quarter core operating income was JPY 82.6 billion, compared to the fourth quarter of last fiscal year, it has increased by JPY 58.4 billion. In May, we have disclosed the first half guidance and the core operating income was JPY 110 million. So if we simply calculate from the first quarter results, the second quarter should be JPY 27.4 billion. But we think the second quarter will be over this calculation.

And in Specialty Materials, the first quarter, JPY 11.5 billion compared to the JPY 12 billion loss that we have booked in last fourth quarter, there was an improvement of JPY 23.5 billion. In the fourth quarter of last fiscal year, we have adjusted the utilization aiming to adjust the inventory to a profit level. We have proactively conduct ops and they had some impact of the end of the year book closing. So there was JPY 8.5 billion negative one-off factors because it's one of the factors for the year-end has been moved.

And on top of that, as I have been saying from the initially, the polyester film for display applications and OPL films and high-performance engineering plastic for our semiconductor [indiscernible] equipment and the cotton fibers used for wind power generation and sports. And each of the products, the demand has started to recover, and this led to increased income.

For the second quarter, in terms of the display market, because the panel makers has conducted a high level of utilization in the first quarter, we are anticipating that again, we're going to adjustment stage. And based on this, our polyester film and OPL film these display-related products man is anticipated to soften. And each of the businesses in the United States and Europe, there are some holidays in place, and this will impact our business.

Compared to the income level of the first quarter, the second quarter will be a bit weaker. With industrial gas in each of the regions, we are promoting price management, and this has started to show effect, and the SG&A cost has gone down and there has been some impact come for currencies compared to the fourth quarter last fiscal year, which was JPY 40.5 billion. So this first quarter was JPY 47.4 billion. So we saw an increase in core operating income.

The second quarter, we anticipated this continued robust trend. In Pharma, for the domestic pharma business, so the last fourth quarter last year, there was a decline in trend in sales revenue. We saw a rebound through the sales growth of Mounjaro and GOBIK has shown a very smooth ramp and [indiscernible] to increased sales. For the overseas ethical drugs business, the North American Radicava sales has continued to be strong. On top of that, the SG&A cost and R&D costs, which has been concentrated at the year-end.

But going to this first quarter, it has declined due to this situation, this JPY 90 million operating income was opposed for the last fiscal year, but we saw a JPY 17.6 billion of increase. The first quarter, the core operating income was JPY 18.5 billion. For the second quarter, normally, the SG&A compared to the first quarter tends to increase. Compared to the first quarter, this means that the operating income will decline. For MMA and derivatives the fourth quarter of last fiscal year was JPY 1.5 billion. So this first quarter was JPY 10.5 billion. We saw a JPY 9 billion of increase.

MMA monomer due to supply-side elements, the demand-supply balance in Asia has been tight. And in terms of the market prices, it has gone up, the price differences has improved. For the coating and additives demand is on a recovering trend. For the second quarter, the spread of MMA monomer more or less, we think we'll be able to maintain the current condition at the Hiroshima SCH MMA, [indiscernible] that will be -- would be terminated, and this will start to show its impact in terms of income improvement.

Compared to the first quarter, we think that the direction is on an improvement on the operating income. For Basic Materials and polymers, this has been a JPY 2.3 billion improvement of the loss. For the petrochemical business, there has been an impact of the periodic maintenance of Ibaraki. But in the previous fourth quarter, [indiscernible] business, we have booked a impairment loss on the fixed costs and due to the increase of the inventory valuation losses, we have seen excuse me, gains of JPY 3.7 billion of improvement.

In terms of carbon products, coking of course, has dropped, so the cokes or price deficits has improved. But [indiscernible] in the inventory valuation, the loss has expanded by JPY 1.4 billion. For the second quarter for the petrochemical business, there will be less impact on periodic maintenance but the inventory valuation will worsen. On top of that, [indiscernible] additional booking of the impairment loss coming from this business, such one-off factors will come into play.

For the common products as of the first quarter, we see -- we anticipate a tough situation in terms of the profit. In the second quarter, we will try to improve our profit by reviewing our sales portfolio. With this, I would like to end my explanation.

[Operator]

And we would now like to take questions from the floor from Morgan Stanley in AFG Securities, Mr. Watabe.

[Takato Watabe, analyst]

This is Watabe from Morgan Stanley. So only one question. So my question would be on Specialty Materials. So thank you very much for your detailed explanation. And so confirming Q4 and Q1 and you see that there was this one-off of JPY 8.5 billion was gone, but things are off. And then you have this increase in the top line by JPY 10 billion plus, what was the impact?

So maybe the cost down efforts. I understand that the films are strong, but it appears better than that. So if you could perhaps elaborate on that, please?

[Operator]

The question will go to Kida-san.

[Minoru Kida, executive]

Thank you very much for the question. demand is recovering. So it's not just sales volume increasing, but capacity utilization is coming up. And so that's actually pushing down cost, and that is significant. Earlier, you talked about the one-off items in Q4. And we really focused on inventory reduction or rightsizing. So we actually chose to control capital utilization to reduce inventory. And that's having a positive impact.

So capital utilization is going up and for specialty materials overall, JPY 8.5 billion or JPY 9 billion, that's the scale that we're looking at. And expenses are also going down. So that's part of cost reduction perhaps like the corporate or allocating or R&D. Well, R&D, we are more selective as to what we do and what we don't.

And so we do invest when we have to, but we don't invest where we think we don't have to. So we're taking that more seriously than before. So that has an impact of about JPY 5 billion or JPY 6 billion. I hope I'm answering your question. So that will bring us to JPY 15 billion. So that's effectively what we have now.

[Takato Watabe, analyst]

Well, so inventory is actually increasing. At the end of June. Is that too much? Or is it mostly because of the foreign exchange rate and volume wise, it's not so much?

[Minoru Kida, executive]

Volume-wise, no inventory hasn't rarely increased. With regard to inventory from the end of the previous financial year, there has been an increase. That's mostly not specialty materials. But the maintenance turnaround at Ibaraki so we had to build inventory upfront. And that's why we have higher inventory levels there. But then yes, things may be a little up than before. But the largest factor is the foreign exchange. JPY 40 billion actually was increase in inventory valuation due to the currency exchange. And then if you look at the whole group, for example, if you look at Pharma, Mounjaro is really selling well, so we are building up inventory.

And then for carbon products, bad things come all together. The coking coal arrival was kind of delayed and that kind of coincided with others. But it's really about the foreign exchange.

[Operator]

Next question would be Daiwa Securities, Umebayashi-san? Please ask your question.

[Hidemitsu Umebayashi, analyst]

Umebayashi from Daiwa Securities. Well, I would like to ask about MA the first quarter seems to be showing a good performance. On the consolidated utilization rate, how has this been trending? So the first quarter results and second quarter outlook, would you please refer to that.

And by region, so the new Ethylene methodology. I think this are getting a lot for SDH, SC4 used to be tough. I think basically, they are turning profitable. In the U.S. product the MMA situation has become much better. And by September, I think the interest rate in the will start to go down in terms of the investment, the environment seems to be more friendly for investment. So in terms of the final decision, how are you proceeding towards that decision?

I would like to ask that question.

[Operator]

So this is about utilization of MMA and the U.S. project progress. So Kida-san please answer.

[Minoru Kida, executive]

Thank you very much for your question. So I think all of you are aware is that on the supply side, specifically in Asia, they have become tight. So the market [indiscernible] is good. So we were thinking that maybe this will be a one-off. So we were looking at the situation very carefully, but I think this trend is going to continue for the time being. And other peers, I do not know in detail what's happening.

But more or less in the first quarter, utilization was about 70%. So maybe people will say that is that high. However, so this first quarter with Saudi Arabia has gone to [indiscernible] has gone to the periodic repairs. So this had a low utilization rate. They weren't able to work. So that's to the reason we have 70%. Going forward, so we have terminated Aerosim. So we basically, we don't rely on the byproducts of other plants.

For the second quarter onwards, maybe 80% utilization, I think, more or less, we can secure at that level. Against this backdrop, so the U.S., I think basically, you're seeing an active environment. I won't go to specifics in terms of numbers. But for each our size in. So I think basically, we have high utilization rate. So if you look at the MMA in the U.S. compared to before, the performance has turned to the better.

So going forward, towards the decision-making of the future CapEx, this will be a tailwind for us. So with the potential customers in the United States, we started talking with them. So sooner or later, I think basically, we can communicate whether we're going to conduct this CapEx or not.

[Hidemitsu Umebayashi, analyst]

So one follow-up. So in the loss-making sites, do you have loss-making sites in this business?

[Minoru Kida, executive]

Currently, if you -- I may confirm, I think the number has gone down a lot. In the first quarter, maybe just so in the first quarter, to be frank, there's no size that is loss-making for the first quarter, that is understood. So if the current market condition continues, it means that it will be sustainable. The situation is sustainable. Yes, I think so. Because well, let me put it this way. So we've set down the U.K. site.

The business overall, I think that was a positive factor.

[Operator]

Next, from SMBC Nikko Securities. Miyamoto-san please.

[Go Miyamoto, analyst]

Miyamoto speaking. I have a question on pharma. So Radicava. [indiscernible] has suspended sales. What impact would there be? I mean some patients may have just been using [indiscernible] so how much has -- how much switch has been among the users and in Q1 and what would happen going forward? And Mounjaro, on a Q-on-Q analysis, you mentioned that. And in Q4, I think you said that Mounjaro sales was JPY 2.3 billion. This time, you are not mentioned that figure. If you could share with us with that share with us that figure.

And then with Parkinson's disease, I understand that you actually get the completion. But what about the impairment less and risk also work in process R&D. And the voluntary retirement program that you just released, how many? And are you expecting to be part of that? And how much cost reduction would that deliver?

[Unknown Executive]

Thank you very much. Okay. First, on RADICAVA. So with regard to RADICAVA, with regard to the administration and the trend. So [ Amylyx ] decided to withdraw [indiscernible] We haven't seen much change, and so sales is steady. And as Kida-san mentioned earlier, there is this impact of the foreign exchange, pushing the profit figures up. And maybe I said this before on a previous occasion, Radicava and [indiscernible], some patients actually use good drugs in combination.

And so those patients would probably continue to use RADICAVA but then [indiscernible] will be withdrawn from the market now. So there will be some patients considering a switch to RADICAVA. There should be a considerable number. So for us, we need to be prepared to supply to such people, and we are preparing in that way. So that would be about Radicava.

And then with regard to Mounjaro in this Q1, we had the supply restriction lifted. And then rather, the administration restriction was lifted in April, and the supply restriction was lifted in June. So we have more hospitals and clinics adopting the drug, and there are more new patients using Mounjaro. As Kida-san mentioned, we see sales growing steadily.

But then with regard to Q1 sales figure, I'm afraid according to our agreement with Eli Lilly. We are not in a position to release that. With regard to the voluntary retirement program, I think that was the next part. And your question was how many are you expecting to apply for this program?

We do not really have a specific target number. Then about ND0612 and the situation around that. So we received a complete response letter. And since then, we have been studying and discussing what to do, we are in discussion with FDA as we speak. So with regard to the future development plans and the agreements with the FDA on ND0612. We haven't come to that. So in the absence of that I can't really provide any numbers.

So we will just continue our consultation in due form. I hope I've answered all of your questions.

[Go Miyamoto, analyst]

One follow-up question on RADICAVA. So some patients potentially switching to Radicava from [indiscernible] and you said you are preparing to supply to that people. So towards Q2, that might push up a sales figure in Q2. Is that the right understanding?

[Unknown Executive]

Well, the currency exchange, as I've been saying, is actually much larger, perhaps so it really depends on how the foreign exchange goes. But then as of now, comparing -- we are expecting a similar amount in Q2. Actually, back in the 15th of May, we actually published a full year outlook, and it's really the same.

[Hidemitsu Umebayashi, analyst]

So you don't really have much benefit from this discontinuation of [indiscernible] Is that correct?

[Unknown Executive]

As of now, if you look at the number of patients that are administered the drug, we don't really see any significant uptick. So as of now, the answer is No, it's just continuing the trend that we were on before.

[Operator]

Okazaki Shigeki, please ask your question.

[Shigeki Okazaki, analyst]

This is Okazaki from Nomura. So [indiscernible] good performance. So this is about the structural reform. I would like to ask by that. For the carbon products, you said that you're going to review our sales portfolio and then cost reduction is one of the factors you've given. And is it the way I understand they're going to start discussing about that? And inclusive of that from the March fiscal 2026, the first quarter making profit at that level under current business condition, can you turn profitable?

In the first quarter of March 2026. And 3 months ago, when you conducted the earning call. So the CEOs towards autumn, various structural reforms is going to take place. even before autumn, he said that he would like to announce these initiatives. So up to now, in terms of carbon products and pharma and the voluntary retirement, I think these are the 2 initiatives that you released.

But for this autumn, can we expect that more is going to come.

[Operator]

First, about the structural reform about carbon products. Kida-san, would you please answer the question?

[Minoru Kida, executive]

Thank you. Well, in terms of cost initiatives toward cost reduction, we have already started that initiative. So this time around, 40%, around 40% capacity is going to be reduced. For instance, this is inclusive of the cost reductions, 40% of capacity reduction. You may know that the coke plant, we have to operate that or else the facility will break down. Even if you don't sell.

Well, this is a hypothesis, but even if you can only sell under the cost, we have to continue manufacturing. So to be frank, in last fiscal year, the coking market was very, very bad. So this was temporary. But even more than the coking coal, the cokes was lower in terms of the cost. So it was short, but that happened. So in terms of the cost reduction, we have been doing very steadily.

But this 40% with reducing 100 furnaces, I think maybe this will be able to accelerate this cost reduction. That is the reason why we have made this decision. In FY March '25, this is FY '25 from the very start whether we're going to start this year and being profitable or we can say. But for -- so for March '26, as a full year, we will put in measures so that we can be profitable during this one year.

And towards November, we have been announcing about the cokes and pharmas.

[Shigeki Okazaki, analyst]

Do you have any other things to announce?

[Minoru Kida, executive]

Well, we were announced when we are ready with the strategy about the initiatives, the main portion will be announced in the November financial results meeting but this is a repetition. But if something is decided and in time with manner, we will communicate that to the market.

[Shigeki Okazaki, analyst]

So this is a confirmation. So in that sense, using [indiscernible] reducing that 150 million as an impact that's quite meaningful. In terms of the vision of the sales portfolio, do you have any specific things that you could talk about that?

[Minoru Kida, executive]

Well, I think this is quite impactful. In terms of the revision of the sales portfolio, I cannot because basically these are some trade conditions that we have with the customers, so we can release this today. But as you know, basically, we have done a lot of consigned baking. And gradually, it has gone down, meaning that a major portfolio revision is being conducted.

So exporting coke that is. So we have been continuing that activity. But if you export, exporting is a quite different environment, meaning that based on various requirements, we have been doing visibly to our customers but these trade conditions by customer, we are starting to review or negotiate the terms with the customers, and I hope you can do that. That's all.

[Operator]

Let's go to the next question. The next question would be from Mizuho Securities, Yamada-san.

[Mikiya Yamada, analyst]

This is Yamada from Mizuho Securities. I have a question about pharma. If you look at Slide 9 and the ups and downs, volume was up JPY 110.4 billion. And so that [indiscernible] increased JPY 2.8 billion should be part of this. So if you subtract that, then you get JPY 7.6 billion. And so if you look at that JPY 7.6 billion, that would include JPY 8.2 billion from RADICAVA and domestic. There has been some increase that should be part of all part of that. Is that correct?

That's my analysis, but am I correct? And with regard to the plus JPY 800 million in prices, in Japan that NIH revision, I think that was about -- affected to be about a negative impact of JPY 9 billion over the full year. Is that correct? It's happening, but then the foreign exchange generis pushing things up. And that's why you came in a net positive impact with regard to pricing and [indiscernible] I understand that prices are coming down as expected, and that's only natural.

But I just want to [indiscernible] from that because there should be a larger impact from the NIH price revision, but is that offset by the impact of ForEx? And then with regards to the ND0612 and the balance, there should be some related intangible assets and the work in process R&D, how much is still on the books?

[Akihiro Tsujimura, executive]

This is Tsujimura speaking. So first, about the JPY 10.4 billion. Yes, your analysis is correct. The next part about the domestic, the price factor difference of JPY 800 million. You mentioned the NIH price provision. But the Mounjaro, and we touched upon this briefly. We have this administration periods and restriction as well as supply restrictions lifted. So that's an impact. And then we have Gobi that was launched in March, and the sales is good.

Against that, the NIH revision in Q1, the impact was about JPY 4.5 billion. So if you add a subject as appropriate, you come to JPY 800 million. And your last part about ND0612 and the outstanding amount or the balance, I'm afraid I don't have that on hand. So we will check that and get back to you later.

[Mikiya Yamada, analyst]

I think you have about JPY 40 billion.

[Akihiro Tsujimura, executive]

I'm not so sure. So thank you very much for checking. Yes, we will contact you later.

[Operator]

Going to the next question. UBS Securities, Omura-san go ahead, please.

[Shunta Omura, analyst]

Omura-san from UBS. From my side, I would like to go to Page 7 in terms of dynamics of the different history of the elements. So in terms of the volume difference, you talked about the display-related business is quite strong. So for your display-related business, the PET film, OPL, [ Clearfield, ] 3 product. So in terms of the volume trend in the first quarter, how much better was it? How good did they do year-on-year on a year-on-year comparison in total and the volume is a difference is negative.

So where was the negative seen in term product wise, which was that you saw a decline in volume.

[Operator]

So Kida-san, would you please answer the question?

[Minoru Kida, executive]

Well, thank you. So specifically, OPL, was very strong. This is a display related product. On top of that, we can't give you the exact numbers, but polyethylene film that was a big contributor. On the other hand, in terms of the negative side of the volume differences, so the major [indiscernible] that was the major contributor, EVOH. Because last year, for the -- this is a barrier film package film, we had more volumes and there was some decline in demand.

This is a one-off. We thought that in the first quarter, we're going to start a recovery, but this relatively speaking, these films are used for more high-end food, and it seems to be the case that the European U.S. market, more high-end food products are not selling well because inflation is in place. They are suffering a very harsh national has been slow to recover. Another negative side is the carbon fiber.

In terms of value and depending on the field, so that pure net sales maybe not been going down, but if the margin with the high-margin products go down means that basically, this will have a huge impact. So were speaking, the high-margin areas in the U.S., pressure vessels, we have struggled. So resident demand is more than a fresher competition is the story behind us.

So the volume has declined due to the factor and that led to the first quarter results.

[Shunta Omura, analyst]

So as a follow-up question. The display-related products has been strong. So in terms of magnitude, in terms of the vitalization, how much was your utilization under this situation? And the second quarter, with this, I think you said that it's going to slow down a bit in the second quarter. So how far is this slow then going to be in the second quarter?

[Minoru Kida, executive]

As [indiscernible] carbon fiber for those type of products on the second quarter onwards, what will be the recovery trend. In terms of the utilization rate, well, it's very difficult to give you a clear number or we can't be the clear number specifically for the [indiscernible] film overseas in Asia, specifically in Asia. Sites in Asia. They are supported by display and the utilization rate was quite high. That's what we feel. And the part of your question was [indiscernible]?

For the second half, we are expecting that this will start to recover because for the high-end food has -- in terms of customers, they have a higher ratio. So in capsule [indiscernible] so this basically was selling well. But for the second half, we anticipate we are expecting that these type of products will start to recover.

And you also asked about the carbon fiber volume trend. Are you anticipating a recovery for carbon fiber in the second quarter onwards? Well, carbon fiber may be whether that it's going to recover, and that's difficult to say, basically with the windmill blades, there's a lot of strong demand. I think from the second quarter onwards, we're going to see a recovery for those type of applications.

But for the U.S. pressure vessels, well, this is more than is competition. So we have to close the books and see whether the volumes are going up or down. At this point, it's very difficult to say. But in terms of the volume, in terms of sales volume, carbon liver that's happening in the second half, maybe the window blade is going to recover in the second half onwards.

[Operator]

This will be the last question. Ikeda-san from Goldman Sachs Securities.

[Unknown Analyst]

This is Ikeda from of Goldman Sachs. SoarnoL and EVOH, I have an additional question. So you talk about feedstock is coming up, the price coming up. So what about that impact? And what about the volume of SoarnoL? In the United States, there is a recovery, but it's Europe weak, so if you could talk about that, please?

[Minoru Kida, executive]

First with regard to pricing, yes, we are conducting right pricing. So it's not really a [indiscernible] acid, but it's more a [indiscernible] And so regardless of that, we are making sure that the price is factored in the correct right level of feedstock costs. But then it's really about the volume and sales that we are focusing on. With regard to Q4, so from Q4 and how much difference there has been in Q2?

Well, maybe 5%. Maybe that's just a ballpark figure.

[Unknown Analyst]

You mean volume of [indiscernible]

[Minoru Kida, executive]

Yes.

[Unknown Analyst]

Well, on an annual basis, that was double-digit in terms of volume. So you're not fair? And there is some recovery in volume, but not so strong.

[Minoru Kida, executive]

On a year-on-year comparison, that's on thing. And then Q-on-Q, that's another thing. Maybe I've got things a little mixed up. Compared with a year -- on a year-on-year basis, we are down significantly. But compared with Q4, Q1 is actually recovering, and we believe that there will be stronger recovery. So this 5% is compared with Q4.

So compared with Q4, we think roughly, there has been a 5% recovery in volume, and we were expecting more. So we are kind of disappointed about that.

[Operator]

With this, I would like to close the Q&A session. [indiscernible] like to say a word for closing, please.

[Unknown Executive]

Thank you very much. So in April, the new organization has kicked off. And luckily, for the first quarter, I think we have been able to make a good start. And I have been saying this and repeated this. But still, there big customers, whether it be the region, the situation is different. But I think we have been able to come from the risk situation. I think by the second quarter forward, we'd like to keep up this business.

So in terms of the current business structural reform, we had made an announcement. This is a big step for us. We will try to improve our capital efficiency for the group with restructure reform, rationalization, maybe some surgical [indiscernible] unnecessary. By doing so, we want to enhance the corporate value. And I would like to ask for your support going forward. Thank you very much for your participation.

[Operator]

Thank you very much. This will end the meeting. This conference will be archived in the website and you can view this any time we want. So with this, we're going to end today's conference. Thank you very much for your participation.