Mitsubishi Chemical Holdings Corp

TSE:4188

Earnings Call Transcript 2019-Q2

[Hitoshi Ochi, executive]

I'm Ochi of Mitsubishi Chemical Holdings Corporation. Thank you for your consistent support and cooperation, and thank you for your joining the web conference today despite your busy schedule.

I'd like to present on the business results for the second quarter of fiscal year ending March 2019.

Please turn to Page 4. Consolidated statements of operations. In the first half of FY 2018, exchange rate was JPY 110.7 to $1 with yen's appreciation of JPY 0.6 year-on-year. Naphtha price increased by JPY 13,500 year-on-year to JPY 51,100. As a result, sales revenue was JPY 1,922,100,000,000 up 6% or JPY 117.3 billion year-on-year.

As for the reason of revenue growth, despite the negative effects impact of JPY 2.7 billion by appreciation of yen, price impact was plus JPY 89 billion and volume impact was plus JPY 31 billion.

On price, selling price increased along with the naphtha price increase and MMA market price improved. On volume, despite the impact by scheduled maintenance and optical film sales declined due to the weaker smartphone demand. Sales volume increased in high-performance engineering plastics, battery materials and industrial gases. Sales revenue of JPY 1,922,100,000,000 is a record high for the first half.

Core operating income was JPY 188.2 billion, down JPY 4.1 billion year-on-year. Business overview by segment will be presented later. Special items in this first half were minus JPY 1.6 billion as expenses. As minus JPY 2.4 billion was booked in the previous year for the consolidation of 3 chemical companies, expenses went down by JPY 5.4 billion year-on-year.

I'd like to give you more details later on. As a result, operating income was JPY 186.6 billion, up JPY 1.3 billion year-on-year. Financial income and expenses was minus JPY 2.5 billion with improvement of JPY 2.6 billion over the previous year. It is because dividend received from outside the group increased JPY 0.8 billion year-on-year. And FX loss of JPY 0.7 billion was booked in the previous year, whereas, FX gain of JPY 0.8 billion was booked in this first half. Because of these factors, financial income and expenses improved JPY 2.6 billion year-on-year. As a result, earnings before taxes were at JPY 184.1 billion, income taxes was minus JPY 37.2 billion and compared with the earnings before taxes, tax ratio is about 20%, which is lower than the effective tax rate. This is because of the strong results of offshore subsidiaries in lower tax rate regions and equity method companies. It has resulted to the decreasing income taxes by JPY 11.7 billion year-on-year.

At the end, net income was JPY 146.9 billion. Net income attributable to owners of parent was JPY 120.2 billion, up 20% or JPY 19.7 billion year-on-year. Net income attributable to owners of the parent JPY 120.2 billion was a record high for the first half.

Core operating income includes equity income of JPY 16.2 billion, up JPY 4.6 billion and it was mainly contributed by affiliate companies of MMA and high-performance engineering plastics.

Next page, please. Sales revenue and core operating income by business segment. Sales revenue increased in all segments year-on-year, except Health Care business. Core operating income trend varies by segment. MMA, carbon products and performance chemicals profit increased with better market price. Functional products profit decreased due to raw material cost increase and lower demand for smartphones. Petrochemicals profit decreased due to the different size of scheduled maintenance. Industrial Gases profit went down due to the recognition of acquisition cost of European business. Health Care profit decreased due to NHI price revision and increase of R&D cost.

Business overview by segment will be presented later. As we received a question and answered in the previous web conference, I'd like to explain the core operating income change from the first to the second quarter as a follow up.

Functional products core operating income decreased from JPY 14.3 billion to JPY 10.6 billion, down JPY 3.7 billion. In addition to the seasonality concerning summer holidays in high-performance engineering plastic business in Europe and America, the slowdown in semiconductor-related business and fire broke out in optical polyester film business and the raw material costs increased in packaging films.

In performance chemicals, scheduled maintenance of phenol-polycarbonate chains is completed and battery material sales increased, but due to the weakened market price of polycarbonate, profit increased slightly quarter-on-quarter. In MMA, we had a number of scheduled maintenance in the first quarter and they were completed and the market improved and that led to the profit increase.

Petrochemical profit increased from JPY 0.3 billion in the first quarter to JPY 8.5 billion in the second quarter, up JPY 8.2 billion. It is due to the completion of scheduled maintenance in Kashima Plant and the diminished impact of polypropylene trouble that happened in the previous year. In carbon products, core operating income remained unchanged from the first to the second quarter as JPY 5.6 million.

Needle coke price was revised in the second quarter in Japan and the spread improved. But in the second quarter, needle coke had the maintenance and coke business was affected by the torrential rainfall in the western Japan, that plus and minus factors in profit mutually offset. In Industrial Gases, revenue increased in the second quarter. But as I said before, as the acquisition-related cost of European business was booked, profit increased slightly.

In Health Care, domestic pharmaceutical sales partly decreased and R&D and SG&A expenses increased and profit went down. Next page, please, for the analysis of core operating income. Total consolidated core operating income decreased JPY 4.1 billion year-on-year because of price impact minus JPY 6.3 billion, volume impact minus JPY 7.3 billion, fixed cost reduction plus JPY 14.1 billion and others, minus JPY 4.6 billion. Price impact in total is shown as minus JPY 6.3 billion. But in chemicals, due to the MMA price increase, price impact was plus JPY 5.7 billion, whereas, in Health Care, due to NHI price revision, price impact was minus JPY 8 billion.

And in Performance Products, the spread contracted due to the raw material cost increase and the price impact was minus JPY 3.8 billion.

As for volume impact, in Health Care, due to the sales contribution by Radicava in the U.S., it was plus JPY 2 billion. But in chemicals, due to the difference size of scheduled maintenance and the trouble at the polypropylene Kashima Plant, it was minus JPY 8 billion. And in Performance Products, with smartphone demand decrease, optical film sales decreased and the impact was minus JPY 1.4 billion. In total, volume impact was minus JPY 7.3 billion. Cost reduction impact was plus JPY 14.1 billion and mainly driven by the reduction of SG&As through the reform to boost operational productivity in the Health Care business. We have been proceeding even to exceed the full year target of JPY 20 billion.

Others impact is minus JPY 4.6 billion and in Performance Product, it was minus JPY 4.8 billion. This is due to the maintenance cost with the scheduled maintenance for phenol-polycarbonate, expense for the electrolyte production in U.K. and the increasing outsourcing and labor cost. Chemicals plus JPY 11.6 billion is due to the inventory variation gain and loss. Industrial Gases, minus JPY 1.3 billion is due to the acquisition-related cost of European business.

Health Care and others increased mainly because of R&D. Business by segment. In Performance Products segment sales revenue was JPY 582.5 billion, up JPY 21.8 billion year-on-year. Core operating income was JPY 44.4 billion, down JPY 6.4 billion year-on-year.

As for subsegment, functional product sales were JPY 388.8 billion. Core operating income was JPY 24.9 billion. Sales were up JPY 4.2 billion, but core operating income was down JPY 8 billion year-over-year.

In functional products, although sales volume in high-performance engineering plastics increased, due to raw material cost increase, spread contracted. And especially in China, part of optical film sales volume decreased affected by the market slowdown of smartphones.

And in optical films, plants in Indonesia and Wuxi, China, fire occurred in the second quarter, profit was down year-on-year.

Let me add some comments on the fire incidents in optical films plants. In July at polyethylene, our plant in Indonesia, fire occurred and in August, in polyester film plant in Wuxi, China, fire broke out. As of today, both plants suspended production and shipment. In order to minimize inconveniences for customers, we are making steady adjustments through the inventory use of other plants and substitute production.

Performance chemicals sales were JPY 193.7 billion. Core operating income was JPY 19.5 billion. Sales were up JPY 17.6 billion and core operating income was up JPY 1.6 billion. As for the overview of performance chemicals, despite an impact of scheduled maintenance in the phenol-polycarbonates chain, with the market price rise, spreads widened and the sales volume of battery materials for automobiles increased, profit increased year-over-year accordingly.

I'd like to add comments on various analysis of core operating income in Performance Products. Price impact is minus JPY 3.8 billion because of product spread contraction due to material cost increase in functional products, which was about minus JPY 5.5 billion, but market prices were up in phenol-polycarbonate chain and its impact was plus JPY 2 billion.

Volume impact is minus JPY 1.4 billion. This is because of reduced sales of optical films in functional product with the smartphone demand weakness. In performance chemicals, impact of scheduled maintenance in the phenol-polycarbonate was offset by sales increase in battery materials. In others, despite the positive factors of inventory variation gain/loss and equity earnings, maintenance cost increased with scheduled maintenance, the cost to relaunch the electrolyte business in U.K., the labor cost and bonus payment made some impacts.

Chemicals segment. Sales revenue was JPY 645.8 billion. Core operating income was JPY 83.5 billion for Chemicals segment in total. And revenue increased JPY 74.2 billion and core operating income increased JPY 11.6 billion.

As for subsegment, in MMA, sales revenue was JPY 218.9 billion. Core operating income was JPY 63.5 billion, up JPY 34 billion and JPY 11.3 billion, respectively. Amid continued strong demand, sales and production declined due to a series of scheduled maintenance, but a new plant in Saudi Arabia began to contribute from April this year and improved market price increased profit.

As for MMA market price, in the first half of the previous year, it was $2,246 on average. And in the first half this year, it was $2,651 on average and our latest price was around $2,570.

As for force majeure and sales control in the United States, due to lower inventory level and scheduled maintenance and repairs in October, we had applied sales control since June 1 in order to secure inventory, but it was lifted on September 30. In Europe, scheduled maintenance took longer time than originally planned and resuming operations was delayed. Then announced force majeure on May 10, and it was lifted on June 14 after that sales control where applied, but in October, sales operations are back to normal.

Regarding petrochemicals, sales revenue was JPY 289.7 billion, up JPY 31.3 billion year-on-year and core operating income was JPY 8.8 billion, down JPY 5.7 billion year-on-year. Sales increase was mainly attributable to sales price increase due to rising naphtha price despite decreased sales volume because of scheduled maintenance at ethylene production facility in Kashima.

Major reasons for decreased profit are the difference in scale of scheduled maintenance during the period, a trouble of polypropylene production facility of Japan Polypropylene Corporation Kashima plant occurred in September last year and reduced price difference between raw materials and products reflecting higher naphtha price for olefin.

Sales revenue of carbon products was JPY 137.2 billion, up JPY 8.9 billion and core operating income was JPY 11.2 billion, up JPY 6 billion. This is mainly attributable to higher market prices of needle coke with firm demand for coke and other products.

Next, I will explain about Industrial Gases segment. Sales revenue was JPY 325.7 billion, up JPY 23.5 billion year-on-year and core operating income was JPY 26.9 billion, down JPY 1.2 billion year-on-year. Sales increased due to establishment of a new domestic on-site gas plant. Core operating income decreased year-on-year despite stable demand continued because of increased costs from rising raw material and fuel prices, a large-scale project posted in the same period of the previous fiscal year as well as recognizing JPY 1.3 billion for European business acquisition, as I explained earlier.

Next is about Health Care segment. Sales revenue was JPY 269.5 billion, down JPY 3.7 billion year-on-year and core operating income was JPY 35.3 billion, down JPY 5.7 billion year-on-year. Sales decreased due to the impact of NHI price revision and generic drug business transfer, despite sales contribution of Radicava in the U.S. and domestic sales growth of priority ethical pharmaceutical products including Simponi, even though the impact of NHI price revision was compensated by sales increase of Radicava and Simponi, and cost reduction by improved productivity, profit decreased due to increased R&D expenses, due to acquisition of NeuroDerm Limited.

Let me move on to the next page about consolidated special items. Total special items for the first half under review was negative JPY 1.6 billion, which was a JPY 5.4 billion decrease of expenses year-on-year. Gain on sale of property, plant and equipment increased by JPY 2.4 billion. Loss on sale and disposal of fixed assets was negative JPY 2.6 billion and impairment loss were negative JPY 900 million.

Major reason for the gain on sale of property, plant and equipment were sales of unused land for company housing, loss on sale and disposal of fixed assets was for expenses of scheduled removal of redundant facilities in Krosaki, Yokkaichi and Naoetsu plants. Impairment loss was for expenses of structural reform for Aqua solution business.

Next page shows consolidated cash flows. I'll refer to the adjusted cash flows indicated in the middle. Free cash flow for the first half under review posted net cash inflow of JPY 121.9 billion with following breakdowns. Net cash provided by operating activities was JPY 221.5 billion. Net cash used in investment activities was posted as cash outflow of JPY 99.6 billion. In net cash provided by operating activities others is recorded as cash outflow of JPY 48.5 billion. This was due to increased tax payment because of strong performance of the previous term.

In net cash used in investing activities, capital expenditure was recognized as negative JPY 102.4 billion. There were no large investment projects and investment was mainly for securing production capacity and rationalization. About JPY 32 billion was spent for Mitsubishi Chemical and about JPY 31.2 billion for Taiyo Nippon Sanso Group.

Sales of assets of JPY 11.6 billion includes sales of unused land I explained earlier, and sales of shares of cross-shareholding. Net cash used in financing activities includes year-end dividend payment and share buyback of JPY 20 billion and we posted negative JPY 60.4 billion and interest-bearing debt decreased by JPY 64 billion.

Next page is consolidated statements of financial positions. Total assets for this first half under review was JPY 4,796,700,000,000, which increased JPY 95.3 billion from the end of the previous fiscal year. This is mainly because of the foreign exchange rate. In the end of March 2018, it was JPY 106.21 to the $1. And in the end of September 2018, it was JPY 113.60, which was about a JPY 7.40 depreciation to record exchange gain of JPY 66 billion. Increase of assets in real terms mainly came from inventory increase of JPY 1.9 billion.

Interest-bearing debt in the end of the first half were JPY 1,566,900,000,000, which decreased JPY 39.2 billion from the end of the previous fiscal year. However, it increased by JPY 24.8 billion, affected by the foreign exchange rate and the real decrease was JPY 64 billion, as explained for the cash flow.

Net interest-bearing debt were JPY 1,095,600,000,000. Net -- the ratio as of the end of the first half was 0.78, down 0.11 from the end of the previous fiscal year. And ratio of equity attributable to owners of the parent was 29.1%, improved by 1.8 percentage point from the end of the previous fiscal year. That is all for the overview of financial results for the first half of FY 2018.

Now I'd like to explain about revision of the consolidated financial results forecasts for FY 2018 announced on November 1.

Please turn to Page 15. This page shows full year forecast for consolidated financial results of FY 2018. Regarding assumptions used for the forecast, exchange rate for the second half is JPY 110 to the $1. Naphtha price may decline for a short term due to excessive naphtha in the market. However, we estimate its price will be increasing gradually after completion of scheduled maintenance of other companies cracker plant in Korea toward winter and the estimated price is JPY 58,000. For full year, we estimate JPY 54,600, which is an increase of JPY 4,600 from the original naphtha price estimation.

Sales revenue is forecasted as JPY 4,040,000,000,000, about JPY 110 billion increase from the original forecast. This is because of naphtha price increase and expectation of higher market prices of MMA and carbon products than the original forecast.

Core operating income is estimated as JPY 368 billion, revised upward by JPY 13 billion. I will explain about each segment later.

Net income attributable to owners of the parent is forecasted as JPY 213 billion, an increase of JPY 29 billion or 15.8% from the original forecast. This is slightly higher than the previous year result of JPY 211.8 billion. If these forecasts are achieved, we will be able to mark record-high results both in sales revenue and net income attributable to owners of the parent. I'm going to explain the overview by business segment on the next page. This page shows forecasts of consolidated sales revenue and core operating income by business segment.

Let me explain by subsegment. Forecast of functional products was revised downward due to expected increase of raw material prices, which will result in smaller price difference between raw materials and product, decreased demand in optical film for Chinese smartphones and impact of fire accidents in Indonesia and Wuxi, China.

Let me explain the impact of the fire accidents in the 2 plants for optical polyester film. They account for about 15% of our total production capacity of optical polyester film. It is estimated that both plants need to take some time to resume operations and difficult to make a recovery by the end of this fiscal year. So we expect sales decrease, that is reflected in the forecast over the second half. We revised the forecast for performance chemicals segment because market prices for phenol-polycarbonate chain was higher than our expectation in the first half despite its current market price is declining and strong unit sales are expected for automotive battery materials.

MMA forecast was revised upward as market prices are estimated to be higher than the original forecast. MMA market prices had been high until August as $2,700. Then it started to decline gradually in September through October, and the current market price is lower to $2,570. We revised our forecast based on the estimated market price for the second half as $2,500.

In China, even though we see stable demand among end users, conservative buying attitude is observed in China due to uncertainty about trade conflict between the U.S. and China and customers seem to try to reduce their inventories. This makes us think that it is highly likely to have slower sales this year. Therefore, we started to adjust operations in Asia in order to optimize our inventory level. We review the forecast based on such business environment.

Forecast of core operating income of MMA reflects estimated profit decrease due to declining sales caused by lower demand caused by market price decrease, Christmas holidays and Chinese New Year and earlier mentioned conservative buying based on concerns about U.S./China trade conflict. We revised the forecast for petrochemicals downward as price difference between raw materials and product is reduced for polyolefin with higher naphtha prices and the impact of the polypropylene trouble in September last year is estimated to be larger than the original forecast. Carbon products forecast was revised upward because demand for coke is expected to be strong and needle coke market price is higher than the original forecast.

Forecast for Industrial Gases is unchanged from the original plan. The impact of acquisition of the European business is not reflected in the forecast. Health Care is anticipated to be in line with the original forecast. However, as we are making progress in R&D of Muse cell-based product, which is a regenerative medical product, and its R&D expenses are estimated to increase slightly from the original forecast and that is reflected in this forecast.

Lastly, I'd like to explain about cash dividends. At today's board meeting, we decided to raise the interim dividend with a record date on September 30, 2018, by JPY 3 per share from the previous forecast in consideration of our policy for the dividend payment and future businesses. The year-end dividend was also raised by JPY 3 from the previous forecast to JPY 20.

Accordingly, the forecast for the annual dividend will be increased by JPY 8 per share from the fiscal year 2017 to JPY 40. And the consolidated dividend payout ratio is expected to be 26.7% based on the revised forecast. That is all for my explanation.

[Operator]

Thank you very much. Now we'd like to proceed to Q&A session.

[Takato Watabe, analyst]

I'm Watabe of Morgan Stanley MUFG Securities. First of all, thank you very much for the very detailed explanation about the strong results. My first question is about MMA. You referred to the sentiment or the mindset. That said, also it has peaked out still -- it still remains at a very high level, whereas some other petrochemical product markets are rather weak. How do you view the background of sustaining such a high level of price? You also said that you started to take supply control, so can you comment on the volume impact as well?

[Hitoshi Ochi, executive]

First of all, end demand continues to be very solid. But currently, mainly in China, in order to squeeze inventory intermediary, we observe some partial self-restraint. And usually, this is some lower demand period. So we expect about $2,500 in the second half. As for the volume, and in Asia, to respond to the part of self-restraint, we would lower the utilization slightly to achieve the optimized inventory level. In the U.S., demand for coating continues to be robust and tight balance is sustained and market price has been picking up. In future, the strong demand wouldn't last forever, but we assume strong demand in the U.S. will continue for some more time. It seems that other competitors are planning to postpone the scheduled maintenance from autumn to spring. So in America, robustness will continue. On the other hand, material costs will rise. So we will continue to revise the price in the U.S. In Europe, supply and demand improved in July to September period, partly due to the products inflow from Middle East. Market price continues to fall from the peak in the first quarter. In the second half, there is no plan for the scheduled maintenance within the region and some companies are offering to cut price, while material cost will be up, so we will try to sustain our price. In Asia, due to reluctance to buy, supply-and-demand balance has been easing, in Europe as well, but in the U.S., tight balance still continues.

[Takato Watabe, analyst]

Latest $2,570, and in the second half of $2,500. So there wouldn't be substantial drop and what's your utilization in the Middle East?

[Hitoshi Ochi, executive]

In Middle East plant SAMAC, fully utilized situation continues. Market price is hard to foresee. But as of today, our company's assumption for the second half is about $2,500.

[Takato Watabe, analyst]

Second question is about the functional products. You referred to the impact of fire incidents. But in the last few years, growth was suspended, and I have assumed this is due to the optical films. And it seems that you are struggling to be the group winners in smartphone business. So what is your future prospect?

[Hitoshi Ochi, executive]

Yes, we are struggling for smartphone application. However, the polarizers for TV application has been increasing. We do acknowledge that we are having difficulty for smartphones, but optical films have other applications. For example, TV. So we will grow with the trend in TV for the shifting to larger size.

[Shigeki Okazaki, analyst]

I'm Okazaki of Nomura Securities. My question is also on functional products, electronics and display, carbon fiber and engineering plastics. Would you comment at the comparison of the profit in the first half of this year and the previous year? You said that PET film was affected by the fire incidents. How about the change in profit?

[Hitoshi Ochi, executive]

Your question is about the first half result of the functional products year-on-year, right?

[Shigeki Okazaki, analyst]

Yes.

[Hitoshi Ochi, executive]

Core operating income of the previous year was JPY 32.9 billion. This year's projection is JPY 24.9 billion, down JPY 8 billion year-on-year. So are you asking about the contents of that change?

[Shigeki Okazaki, analyst]

Yes, can you tell me about the features by products?

[Hitoshi Ochi, executive]

By products, in volume, high-performance engineering plastics have been growing.

[Shigeki Okazaki, analyst]

Do you mean profit in engineering plastics increased?

[Hitoshi Ochi, executive]

Yes. Sales of engineering plastic have been increasing, so you are right.

[Shigeki Okazaki, analyst]

How about the carbon fibers?

[Hitoshi Ochi, executive]

On carbon fibers, the raw material acrylonitrile price has been kept high. So year-on-year, I would say slightly tough.

[Shigeki Okazaki, analyst]

Right. And on impact of fire on PET film business, can you comment quantitatively on the impact in the first half and the potential impact in the full year?

[Hitoshi Ochi, executive]

Since this is about a specific product, so let me refrain from making a quantitative disclosure. It takes more than half a year for restoration. And 15% of optical film production capacity was suspended for more than 0.5 year, so the impact was no less than several hundred million yen.

[Shigeki Okazaki, analyst]

Secondly, I remember carbon products price for export in April through June quarter increased by 20% to 30% quarter-on-quarter. Can you give us update on this? And second half prospect? And also, the price for domestic market, I heard increased in July to September period. So would you comment quantitatively? I'm asking about needle coke.

[Hitoshi Ochi, executive]

As for needle coke in Japan, with the consent of customers, we raised the price from the second quarter. I cannot comment on specifics, but the earnings would improve. As for the export, it is also hard to disclose the specific price, but our export price in the second quarter was in line with that of the first quarter.

[Shigeki Okazaki, analyst]

Towards the second half, what is the assumed change in the second half vis-a-vis the second quarter on both fronts?

[Hitoshi Ochi, executive]

As of today, we don't incorporate major change in export price in our forecast. As for the revision of domestic price, as you may know, that is applicable for a July through December period. Therefore, although there is some time lag, if the current price is kept unchanged, the profit in the second half will be up half-on-half.

[Shigeki Okazaki, analyst]

Overseas tight supply still continues, so is the price potentially getting higher? Or is there any particular reason for the second quarter price kept almost flat?

[Hitoshi Ochi, executive]

It is driven by the negotiation with customers. But up to the second quarter, price has been in line with the first quarter. And our forecast in the second half is based on the assumption that the second quarter price kept intact.

[Shigeki Okazaki, analyst]

Finally, how about the utilization as of today?

[Hitoshi Ochi, executive]

Utilization of needle coke is approximately from 80% to 90%. So it is almost a full utilization of the production capacity.

[Atsushi Ikeda, analyst]

I'm Ikeda of Citigroup Securities. My first question is on functional products from the first to second quarter and from the first to second half. I think there is some profit drop due to fires and the material cost increase in the first half. But in the second half, Chinese New Year and the decline of smartphone demand is anticipated. But your profit forecast of JPY 24.1 billion is rather strong and the significant improvement of PET film is not expected. So what improvement do you expect especially from the first to the second half?

[Hitoshi Ochi, executive]

On functional products, change from the first to second half is your question, right? As explained before, polyester film fire was a cause of considerable profit decline. And besides this, OPL film will be growing and infrastructure-related business tends to grow, it says, towards the end of fiscal year and earnings will be improving. We have some businesses skewed to the second half. So when you compare the first and the second half, as you can see, the profit decrease is rather minor, but the polyester film profit decline is included in our budget.

[Atsushi Ikeda, analyst]

Will the smartphone demand recover in the second half or will it be concentrated in the third quarter? Or is there any special matter expected? And will the price hike due to the material cost increase spread? Or the -- if material cost is down, is the margin widening?

[Hitoshi Ochi, executive]

Sales began to recover. In the first half, due to the weak demand for smartphone, it was sluggish, but volume is picking up. OPL, that I just mentioned, is growing volume in the second half as well. Polyester film is slow to grow due to aforementioned trouble.

[Atsushi Ikeda, analyst]

Understood. As for performance chemicals, in the second half, the market price of polycarbonate will be falling and what's your assumption? And battery materials are showing strong growth. So would you quantify the annual growth of electrolyte? Would you comment on the second half forecast for the performance chemicals?

[Hitoshi Ochi, executive]

As for polycarbonate market price in the second half. For the second half, we assume $2,725 per ton in our current business forecast. This is slightly higher than now or almost flat. Although you don't expect to dip. The price in the middle of October was around $2,670 or so. So our assumption is around [ doable ].

[Atsushi Ikeda, analyst]

As a follow-up question, don't you expect the price will fall further, though from July to September, it fell rather substantially? So do you think that it almost hit the bottom?

[Hitoshi Ochi, executive]

Looking at the past market price trend, it's hard to say how far it would fall. But from a business perspective, this would be our assumed level.

[Atsushi Ikeda, analyst]

Could you elaborate on battery materials such as the first half results or full year estimate or expenses required for restarting U.K. operations?

[Hitoshi Ochi, executive]

About 40% year-on-year increase was recognized in the first half for sales, including both electrolyte and anode, yes, that is total sales. We estimate the sales increase will continue in the second half.

[Atsushi Ikeda, analyst]

I assume you're increasing the production of electric vehicles and that will increase compared to the first half?

[Hitoshi Ochi, executive]

Your question is, if battery production will be higher in the second half?

[Atsushi Ikeda, analyst]

Yes.

[Hitoshi Ochi, executive]

Yes, that is our expectation. Resuming U.K. operations will improve the profit in the second half. As it resumed operations in September, it has a positive effect on the second half.

[Mikiya Yamada, analyst]

I'm Yamada from Mizuho. I have 2 questions. I might have missed this information, but my first question is about the analysis of core operating income for Health Care segment. Others is indicated as negative JPY 7.7 billion, but I remember, it was negative 1 point something billion yen in the first quarter. What is reflected in this item of others? The expenses for the exploratory clinical trial by LSII should not be so high. So can you explain what it is?

[Hitoshi Ochi, executive]

About JPY 5.8 billion was recognized in R&D expenses of the second quarter, mainly for MPPC. I think that is the major factor in it.

[Mikiya Yamada, analyst]

I see. The expense related to the Muse cell-based product you mentioned earlier not so large yet, right?

[Hitoshi Ochi, executive]

Not yet. But going forward, it is expected to post higher expenses for studies, et cetera.

[Mikiya Yamada, analyst]

You mean the clinical trial starts in October and the plant starts operations in January. So the expenses will increase after that timing?

[Hitoshi Ochi, executive]

Expenses for new CPC facilities in Kawasaki will be recognized in the second half and that will increase the expected costs slightly than the original forecast.

[Mikiya Yamada, analyst]

Okay. My second question is about the upward revision of the cash dividend to JPY 40, as described on Page 17. Your policy is to make stable dividend payments using 30% of the medium-term profit level as a guideline. So can I assume this revision is the proof of your confidence? I mean, you're sure to achieve the profit level calculated back from JPY 40 based on the 30% guideline, even if business situation of MMA or polycarbonate get worse? Or do you think this is an overstatement? Can you elaborate more on the decision-making process of the dividends?

[Hitoshi Ochi, executive]

I really want to say yes, we are confident. But as you know, business outlook is getting increasingly uncertain day by day. Having said that, we publicly announced the revision forecast this time and this means, this is a vision we strive for. Therefore, we decided to raise dividends this time.

[Mikiya Yamada, analyst]

I see. Taiyo Nippon Sanso is forecasted to spend much money. And I think, in general, financial strategy would require prioritizing financial health over dividend payment. I thought you dared to raise dividends because you have certain confidence. Do you think this is my overstatement?

[Hitoshi Ochi, executive]

Taiyo Nippon Sanso is a listed company and their financial activities, including borrowing increase, is managed independently. So we consider they are independent from the dividend payment decision. Our financial condition is substantially improving. So we decided to return profits to our shareholders.

[Mikiya Yamada, analyst]

So this decision was made based on your financial health?

[Hitoshi Ochi, executive]

Yes.

[Hidemitsu Umebayashi, analyst]

I'm Umebayashi from Daiwa. My question is also about the polyester film. I understand about 15% of production capacity in total is lost in those 2 locations, and you said you intend to cover the lost capacity by other sites. I understand it would take some time to make other sites ready with required production specifications, but I'd like to know how much physical capacity is available for it? Also, as raw material prices are increasing for polyester, do you think it is possible to raise prices for industrial products, even if you cannot do so for optical products because the accidents were caused by yourself?

[Hitoshi Ochi, executive]

Alternative production sites we can think of are Santo plant in Japan or Sichuan plant in China, but they do not have much unused capacity left as they are both used for production of various products. We can use idle production lines, if available, but they are not enough to cover the loss. So we assume certain sales decrease is inevitable. Regarding the possibility of price increase, it is difficult to do so because the price of optical products is decided based on the added value. As you know, they are the terephthalic acid and EG, or ethylene glycol, and their prices go up with naphtha price increase. We think we may consider price increase when new product function is added in the future.

[Hidemitsu Umebayashi, analyst]

I understand. You mean, it is also difficult to raise prices even for general industrial products?

[Hitoshi Ochi, executive]

Well, we cause inconvenience to our customers. So it is difficult to raise prices. Still, the possibility of price hike of industrial products would be explored in the future. But we do not do that now.

[Hidemitsu Umebayashi, analyst]

Okay. My second question is about carbon products. They are forecasted to generate higher profit in the second half than the first half. Their price was raised and some costs were recognized in the second quarter, considering such costs will not be recognized in the second half. I assume more profit should be expected. Do you have any specific factors which could negatively affect the profit in the second half?

[Hitoshi Ochi, executive]

We are operating at almost full capacity and such negative factors are not found.

[Hidemitsu Umebayashi, analyst]

Okay. And then, roughly speaking, expected quarterly performance is half of the second half forecasts, which are higher than the first half?

[Hitoshi Ochi, executive]

Yes.

[Operator]

We are running out of time. So we'd like to take the next question as the last question.

[Shinobu Takeuchi, analyst]

I'm Takeuchi from SMBC Nikko. My first question is about capacity utilization of major petrochemical products such as ethylene, polyolefin, phenol-polycarbonate chain, MMA, et cetera. Can I assume their production were basically operated at full capacity in the second quarter?

[Hitoshi Ochi, executive]

Yes. Their production is at almost full capacity after scheduled maintenance.

[Shinobu Takeuchi, analyst]

Full capacity utilization is reflected in the second half forecast, except MMA?

[Hitoshi Ochi, executive]

That is correct.

[Shinobu Takeuchi, analyst]

About how much capacity utilization decrease of MMA should be expected?

[Hitoshi Ochi, executive]

About 10% capacity utilization will decrease in Asia from the current level.

[Shinobu Takeuchi, analyst]

10% reduction only in Asia?

[Hitoshi Ochi, executive]

Yes.

[Shinobu Takeuchi, analyst]

Okay. My second question is about the forecast of petrochemicals on Page 16. Can you elaborate on the profit increase from the first half to the second half in relation to the difference in scale of scheduled maintenance and the polypropylene trouble?

[Hitoshi Ochi, executive]

Are you talking about the reason for profit increase of JPY 1.9 billion from JPY 8.8 billion in the first half to JPY 10.7 billion in the second half?

[Shinobu Takeuchi, analyst]

Yes.

[Hitoshi Ochi, executive]

In the first half, scheduled maintenance was executed in Kashima and completion of the maintenance will contribute to an increase of about JPY 7 billion. The polypropylene trouble negatively affected the first half profit. Fixing the trouble will increase the profit by about JPY 2 billion. As you know, market prices for EG and terephthalic acid rose sharply in the first half and they are expected to decline in the second half and this will be about negative JPY 3 billion. Also, as petrochemicals plants are aging, so we are spending much repair expenses. Recognition of the repair expenses will be concentrated in the second half and that is forecasted as JPY 3 billion to JPY 4 billion.

[Shinobu Takeuchi, analyst]

Can I assume you are conservative about forecasting market prices of PPA compared to the current market prices?

[Hitoshi Ochi, executive]

The spread of PPA was significantly improved in July and August, but we expect its market price will decline in the second half.

[Shinobu Takeuchi, analyst]

Naphtha price for the second half is estimated as JPY 58,000 and the polyolefin price is determined by the formula, which is linked to the naphtha price and also by negotiations. Can I assume your forecast is based on the assumption that the naphtha price increase will be decided and implemented?

[Hitoshi Ochi, executive]

Is your question about price negotiations?

Yes, for that, JPY 58,000 is already reflected as an average for the second half.

Recently, naphtha price is fluctuating. We cannot see clearly yet if such fluctuation will be reflected for sure, because this is a matter for negotiation.

[Shinobu Takeuchi, analyst]

Okay. Can I assume that polypropylene trouble is already fixed?

[Hitoshi Ochi, executive]

The trouble occurred in September last year, affected the financial results in the first half, but it is almost under control.

[Operator]

Lastly, Mr. Ochi from Mitsubishi Chemical Holdings will make a closing remark.

[Hitoshi Ochi, executive]

This is the end of the web conference on the second quarter financial results. Going forward, we'd like to continue this as an opportunity for sincere communication with you to gain your understanding and support. Thank you very much for your participation today.