Mitsubishi Chemical Holdings Corp

TSE:4188

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, everyone. Thank you very much for joining the earnings presentation of Mitsubishi Chemical Group. We would like to start the meeting now. First, our CEO, Jean-Marc Gilson, will give you greetings and Executive Vice President, CFO, Yuko Nakahira, will give you operational summary for the first half of fiscal year 2022. We will have a Q&A session then. And the total meeting will last about 60 minutes.

Before starting the presentation, please note that the presentation may contain forward-looking statements, which are based on the expectations and information available now and are subject to risks and uncertainties. Actual results could differ materially from what is stated here. Today's conference call, including Q&A, will be posted on our website later. Now we start the conference. Jean-Marc Gilson, please.

[Jean-Marc Gilson, executive]

[Foreign Language] So good afternoon and good evening, and welcome to our second quarter of fiscal year 2022 earnings conference. So my name is Jean-Marc Gilson. I'm the CEO of the Mitsubishi Chemical Group. And like usual, let me make a few brief introductory comments before handing over to Nakahira, CFO. And she will follow up with an in-depth review of our first half financial performance.

A few comments first. So overall, the first half of fiscal year 2022 delivered financial results in line with our forecast. But this was not easy, and it was accomplished by our teams showing extreme discipline, a great ability to raise quickly prices and to react decisively to very difficult trading conditions.

It must be noted that our teams delivered best-ever sales for the company in the first half of the 2022 fiscal year. Sales stood at JPY 2,270 billion, about 20% higher than first half last year. It is worth noting that the sales momentum from the first quarter continued in the second quarter with a 5% sequential growth versus the first quarter. All business segments recorded strong positive sales growth ranging from 28% for industrial gas segment to 7% for our pharma business.

The net income attributable to the owners of the parent company was JPY 73.9 billion. It was above our initial forecast, but was unfortunately 13% down compared to last year. The difference between record sales and the decline in net income was directly attributable to a combination of factors, ranging from extremely high input costs, namely energy and raw materials, the continued lockdown in China, a noticeable slowdown in our display segment, a very tough market and pricing environment for our MMA business and generally, cost inflations around the world.

Despite our best efforts, we were not able to pass 100% of the cost increase to our customers. As we look into the near future, we do not see many reasons for improved conditions in the second half. Accordingly, we have reduced our yearly forecast to a COI of JPY 240 billion. As you can imagine, we are doing everything in our control to push sales higher and our cost and expenditure down in the second part of the year.

We are also accelerating the implementation of our strategy forging the future and are confident in our ability to continue to deliver growth and to improve profitability when market conditions improve.

Thanks for your attention, and I'd like to hand it over now to Nakahira, CFO.

[Yuko Nakahira, executive]

[Interpreted] This is Nakahira from CFO. I would like to explain operational summary for the first half of the fiscal year and the guidance for the year.

Please jump to Page 4. In the second quarter, the yen depreciation further advanced, JPY 139.4 to the dollar. In the first half, it's JPY 135.3. Compared to last year, it is 23% cheaper. Compared to the initial rate, there is a difference of JPY 14. The initial forecast was JPY 125. So in the second quarter, Naphtha price was JPY 81,400. The first quarter was JPY 86,100. Compared to that it's lower. But for the first half, it is JPY 83,700.

Year-on-year, it is higher by 65%. Initial forecast of the price was JPY 81,000. It's much higher than that, pressuring our operating income. In this business environment, in the second quarter, we continued our pricing activities. And as a result of that, sales revenue was JPY 2,269.8 billion up 20% year-on-year. It was a record high for the first 6 months.

Core operating income was JPY 122.6 billion. Year-on-year, it was down 21%. Material and fuel prices stay high, and we still maintain the initial forecast of JPY 125.0 billion. For the operating income, it was JPY 118.4 billion, down 23%. Income before tax with the financial positive income was JPY 122.0 billion, down 17%. Net income attributable to owners of the parent was JPY 73.9 billion, down 13%.

Compared to the initial first half forecast of JPY 61.5 billion, it is up JPY 12.4 billion or 20%. Here are the sales revenue by business segment and core operating income. For the second quarter compared to the first quarter, sales increased. However core operating income was down in all the segments, excluding the subsegment in Performance Products, especially in Chemical business, the demand slowed down, spread deteriorated and inventory valuation was much lower, especially petrochemical and the carbon contribution of inventory valuation compared to the first quarter was down JPY 34 billion.

For the first half as a whole, all the segment achieved an increase in sales revenue. For the core operating income for the Performance Product, it was down 8% year-on-year, Chemicals down 63%. Industrial Gases, up 12%. Health Care was also up about 200%.

Core operating income was down JPY 33.5 billion year-on-year, and you can see the breakdown analysis here. Price difference was minus JPY 4 billion. And as you can see on the right, Performance Products in this area, we promoted price transfer, and we achieved JPY 17.3 billion price difference. But in price in Health Care, there was minus JPY 3.5 billion because of NHI price revision and Chemical spread deteriorated, we could not offset all the declines.

Volume difference was minus JPY 18.5 billion, especially in Chemicals, demand for MMA sharply dropped in demand, petrochemicals demand also declined and the size of maintenance and repair impacted to give significant decrease. Cost reduction is JPY 15.7 billion. For the year, we expect JPY 32.0 billion, and that is a 49% achievement.

In the first quarter, the progress was 19%, so this is a big improvement. We optimized repair cost and business exiting and scale down and production restructuring, those activities are in line with the plan. Already, we announced exit from melting fiber business and API Corporation stock transfer in Health Care, all those activities progressing according to the plan, they will be reflected in the second half and because of the lack of visibility of business environment, we need to further make efforts to reduce cost.

Others, a decline of JPY 26.7 billion and this is related to last year's alumina fiber business transfer and the difference from repair and the maintenance scale and labor cost increase, including bonus and overseas R&D cost and SG&A cost and FX impact.

For the Performance Products segment, we have a decline of JPY 3.5 billion. Alumina business transfer excluded then we are able to have an increase from last year. Pricing activities are ongoing, not only the material cost, but fuel price also to secure margin, we have worked very well.

Volume difference is related to delayed recovery in automotive sector demand and in Q2, display demand is significantly -- demand declined. However, U.S. market is relatively good in semiconductor and food applications. Through those areas we try to minimize the impact. Others include the impact from alumina fiber business transfer.

For Chemicals profit went down by JPY 39.5 billion year-on-year. MMA profit was down JPY 20.4 billion, petrochemicals down JPY 17.0 billion, carbon down JPY 2.1 billion. For price difference Naphtha price went up by 65%. And overall, we worked on formula and price negotiation to achieve price transfer. And Bisphenol A and MMA spread deteriorated to result in decrease of JPY 18 billion.

For MMA, market price declined sharply. In June price was $2,100 for ICIS Asia, which went down in September to $1,600 putting pressure on the first half results. We think we are hitting the bottom now, but we don't have clear visibility of recovery going forward.

For volume difference, MMA demand got worse more than expected, especially acrylic sheets for construction and displays and clear resins for home appliances had a sharp drop in demand. There was a decline, particularly in Europe and Asia. We reduced utilization rates to less than 60% and now to adjust production so that we can maintain cost competitiveness by each plant. We also work on controlling investment in repair and other costs.

The decision for North America's investments announced the other day was also postponed, which was in line with this effort. In petrochemical, we don't see strong automotive sector recovery and sluggish demand in home appliance and displays and the impact of repair and maintenance side all reduced our sales volume.

Inventory valuation gain was JPY 9.5 billion in the first half, but the second quarter was much lower than the first quarter. For the second half, considering the naphtha price and coking coal price trajectory, we expect inventory valuation to be going to the negative direction. And for Industrial Gases, we deal with a sharp fuel price hike in all regions to promote price transfer. High fuel price and inflation pressure will continue going forward.

And therefore, for the second half, we will prioritize making efforts in this area. For volume, especially Europe and [ Asia ] grew contributing to increased core operating income. Cost reduction is also in line with the plan.

On the other hand, in the U.S., labor cost and logistic costs increased, impacted by inflational pressure. We need to make further effort for pricing and cost reduction. For Health Care, it was an increase of JPY 2.0 billion in income. In [ H1 ], price impacted and the price difference was minus JPY 3.5 billion, but the volume difference there was a contribution of JPY 7.0 billion.

In North America, we launched Radicava oral formulation, which showed a great pickup more than expected. And for domestic pharmaceutical products, key products STELARA and Dysval, those are showing good growth. Others in the negative territory is because of overseas R&D costs in overseas due to the yen depreciation.

Gilenya litigation is still ongoing. Loyalty revenue is not included in our numbers. And for the Medicago, we still have an issue for production, and there is no contribution to the revenue and profit. Environment surrounding COVID-19 vaccine is changing. And Medicago is having a new business plan. And based on that, we will decide our future direction.

Consolidated special items amounted to net expense of JPY 4.2 billion. Loss on arbitration award in the U.S. of Nippon Sanso Holdings totaled JPY 3.5 billion. We also recorded several impairment losses related to Health Care and Performance Products.

In terms of cash flow, operating cash flow was net inflow of JPY 93.2 billion. Investing cash flow was net outflow of JPY 117.7 billion. Free cash flow was net outflow of JPY 24.5 billion. Free cash flow improved quarter-on-quarter from net outflow of JPY 39.1 billion in Q1, still cumulatively for the first half it resulted in a net outflow.

Negative impact of cash flow from inventories largely came from the difference in inventory unit prices due to rising raw material costs. At present, we are working on the reduction of working capital including operating receivables and payables as the most important management item toward the reduction target set for the end of the fiscal year.

We are also implementing measures to improve cash flow, such as restraining capital investments and accelerating sale of assets. Financing cash flow was net inflow of JPY 15.6 billion with the effect of foreign exchange changes totaling JPY 16.8 billion. Cash and cash equivalents amounted to JPY 253.7 billion, an increase of JPY 7.9 billion from the beginning of the period.

Next, the consolidated statements of financial positions. Total assets were JPY 6,004.2 billion, an increase of JPY 430.3 billion year-on-year of which JPY 269 billion was the impact of exchange rate. Liabilities totaled JPY 3,960.8 billion, an increase of JPY 231.2 billion. Equity totaled JPY 2,043.4 billion, an increase of JPY 199.1 billion. Net debt-to-equity ratio declined to 1.34.

Next, I will explain the revisions to the full year forecast for the fiscal year ending March 31, 2023. Assumptions for the second half are: exchange rate of JPY 145 to the U.S. dollar and naphtha price of JPY 73,000. Core operating income in the first half was roughly in line with the previously announced forecast.

For the second half, we are not likely to see recovery from the slowdown in display-related demand in the Performance Products segment and the softening of market conditions and demand centered on MMA in the Chemicals segment.

In addition, in the Health Care segment, there are issues with the commercial production of COVID-19 vaccine. In light of these factors, we foresee that each level of profit and loss, starting from core operating income to fall short of the previously announced forecast figures.

Revenue is expected to be JPY 2,455.2 billion in the second half and JPY 4,725 billion for the full year. This is an increase of JPY 289 billion from the forecast announced in May. The weaker yen and the price pass-through activities are the main drivers of the revision. Core operating income is revised to JPY 117.4 billion for the second half and JPY 240 billion for the full year which is JPY 35 billion lower than the May forecast and down 12% year-on-year.

Operating income is JPY 242 billion, down JPY 35 billion from the initial forecast and down 20% year-on-year. Earnings before taxes is revised to JPY 234 billion, down JPY 32 billion from the initial forecast and down 19% year-on-year.

Net income attributable to owners of the parent has been revised downward from the initial forecast by JPY 21 billion or down 26% year-on-year. This is the revised revenue and core operating income forecast by business segment.

The segment with the largest revision in core operating income is chemicals with JPY 32 billion decrease, which includes the JPY 30 billion revision in M&A. Under the continuing uncertain business environment, we will strive to improve our business performance through focused efforts on price pass-through, cost reduction and reduction of working capital. We will also steadily progress on the growth of Performance Products, portfolio management, petrochemical and carbon carve-outs and cost structure reforms as set forth in forging the future.

Last but not the least, some comments on dividends. The company's policy is to pay stable dividends targeting a consolidated dividend payout ratio of 30% of the medium-term profit level. In accordance with this policy, the Board of Directors resolved today, on November 8, to pay an interim dividend of JPY 15 per share, the same as the previously announced forecast for the fiscal year ending March 31, 2023.

We are forecasting a year-end dividend of JPY 15 per share. We will continue to strive to improve our corporate value to enhance shareholder returns. This concludes my presentation. Thank you for your kind attention.

[Operator]

Now let's start the Q&A session. Morgan Stanley MFUG Mr. Watabe, you can start your question.

[Takato Watabe, analyst]

[Interpreted] Watabe from Morgan Stanley. Thank you very much for your presentation. First, the question to Jean-Marc Gilson. This is a great opportunity. The first half you showed in line performance in spite of the challenging business environment, you have made effort for cost reduction and price transfer.

On the other hand, December last year, you explained forging the future, and you have strong against wind, including inflational pressure and you are accelerating structural reforms you mentioned. What are to be further accelerated, cost reduction or exiting some businesses? Can you explain that first?

[Jean-Marc Gilson, executive]

Thank you for the question, Watabe-san. Yes, as you mentioned, we had 5 elements in forging the future last year. The first one to simplify the organization has been done. You were asking a specific question about cost and divestiture. I think both are really important for us. And in the upcoming meeting in February, we will detail into a lot more granularity. The cost cutting that we are looking at and the status of the divestiture and on the latter, on divestiture, I really do not have anything to report today.

[Takato Watabe, analyst]

[Interpreted] Second question is Performance Products in the first quarter and the second quarter, the profit is flat and you must have worked very hard to achieve that. Subsegment Q1 to Q2 and from the first half to the second half, what are your assumptions? Can you explain that? This is a question to CFO, Nakahira-san.

[Yuko Nakahira, executive]

[Interpreted] First, from Q1 to Q2. The biggest negative factor includes display business. Mainly films and molding subsegment, there was a negative impact. Additionally, a significant factor includes carbon business and coking coal price went up compared to the first quarter.

In the second quarter, the price went down significantly. And that is about minus JPY 10 billion impact. For petrochemical business, there is a difference in inventory valuation, and those are some of the major factors. Regarding the Performance Products, what the positive change and negative changes from Q1 to Q2 in Performance Products, okay.

So for the performance product area, displays, that's the biggest factor, films and moldings mainly, that was much pressured. And regarding first half to the second half we think recovery in display business would be rather challenging in this fiscal year. So we expect negative result for that. But outside that, compared to the initial forecast, performance business would not have a significant negative results. So overall, it's not going to be much impacted. That is our forecast.

[Takato Watabe, analyst]

[Interpreted] Lastly, about Health Care, Medicago was mentioned. And when there is a new business plan, you will consider further directions you mentioned. But for the annual plan, the vaccine contribution is not included at all. And when do you expect to have the new business plan? When can you announce that?

[Yuko Nakahira, executive]

First, COVID-19 vaccine revenue contribution for this fiscal year. Well, in the revised forecast, it's not included. The cost of the issue is being investigated. So the revenue contribution is excluded from the second half. And for the business plan -- revised business plan, we hope to have soon, but latest sometime in this fiscal year, we hope to share the information.

[Operator]

Next from Mizuho Securities, Mr. Yamada, please.

[Mikiya Yamada, analyst]

[Interpreted] Two questions. And I can ask another question on Health Care, right?

[Yuko Nakahira, executive]

Yes.

[Mikiya Yamada, analyst]

[Interpreted] Okay. So it's 2 plus 1. My first question, regarding MMA in the U.S. You decided to postpone that investment. The new Alpha-method to be implemented in the U.S. does that include the long-term possibility of scrap and build? I think you were talking about improving the productivity over a long term. So has that thinking in itself changed and would MMA be part of carve-out and maybe that is the reason why for that decision to postpone. Is there a strategic reason in the background?

And under the current situation, you cannot -- you can't tell whether this could be profitable or not? Is that the reason? So over a short term, I don't think construction cost is going up. So I would like to know the background to your decision to postpone this.

[Yuko Nakahira, executive]

[Interpreted] This M&A investment timing, we decided to postpone this. This is in relation to the demand. We just decided to just postpone it. It's not that we changed the strategy, the new Alpha-method that we have for MMA, we will continue to -- in order to maintain our leadership in MMA, we believe that is really needed.

But looking at the current demand is very weak and looking at the overall supply and demand balance, we see oversupply. And therefore, we decided that this is not the right time to make that investment. That is the biggest reason.

[Mikiya Yamada, analyst]

[Interpreted] Having said that, looking at the very current situation, the new Alpha-method, your investments in Saudi Arabia, joint venture in 2014 and 2017, the operations started. So it took more than 3 years before you could start the operation. So in terms of trying to fundamentally change the strategic position of the U.S., I think you need to invest now. So are you saying that in terms of the strategic advantage, you are confident, but you decided to postpone anyway.

[Yuko Nakahira, executive]

[Interpreted] Yes, that is correct. There are many uncertainties regarding the external factors. So by slightly postponing this, we thought it made a better sense management-wise.

[Mikiya Yamada, analyst]

[Interpreted] Is it related to the fact that your leverage is not going down? Or is it just a pure business strategy decision?

[Yuko Nakahira, executive]

[Interpreted] Of course, we are looking at the overall financial position as well.

[Mikiya Yamada, analyst]

[Interpreted] I see. My second question, carbon, the coking coal price has gone down. And so you are recording a loss on inventory valuation gain and loss. I'm afraid that can't be helped, but JPY 6.4 billion difference, and you are recording the JPY 800 million loss, still carve-out, spin-out possibility is still being pursued. Is that really feasible? I personally think that maybe you should postpone that a little bit? What do you think?

[Yuko Nakahira, executive]

[Interpreted] Well, regarding the carbon chemical business, the coking coal price has plummeted worsening the price spread for us. We are impacted by that. But several years ago, we changed the strategic direction and decided to export and not captive, but supply to particular customers or rather make sure that we would not be affected by the changes in the market prices, fluctuations in the market prices.

And as a result, we feel that our profitability is less affected by the fluctuations in the price -- market price as well. In other words, in terms of our -- considering the carve-out, we believe that this strategy makes sense.

[Mikiya Yamada, analyst]

[Interpreted] Looking at the results for the first half, there was almost no difference in inventory valuation gain or loss. So return on asset seems to be low, given the segment asset. But you don't see a problem there, correct?

[Yuko Nakahira, executive]

[Interpreted] That is correct.

[Mikiya Yamada, analyst]

[Interpreted] I see. My third question, a question on Health Care, Radicava sales projection has been revised upward. ASL -- ALS, the oral formulation being launched. I understand -- to understand that this is going very smoothly. And about inventory, do I understand correctly that there is no inventory building up in the market? In which case, what will be the growth rate projection for next fiscal year? This is about Radicava ORS.

[Yuko Nakahira, executive]

[Interpreted] The Radicava oral formulation, of course, will contribute to improved quality of life of the patients. So we had been really expecting a lot from this. And in fact, it is doing much better than our anticipation, our forecast, resulting in our upward revision.

Of course, there are patients who have been waiting for the launch of this product. So we cannot expect this momentum to continue, but overall, we believe we can expect good growth. And Kobayashi-san, I think can add some comments on that.

[Yoshihiro Kobayashi, executive]

[Interpreted] Injection versus oral formulation given that this is being administered every day, this convenience is resulting in acquiring more patients and $120 million for this year and $200 million, these are the growth that we are projecting.

[Mikiya Yamada, analyst]

[Interpreted] Okay. $120 million for oral formulation this year. So when we subtract that from last year's actual figures, it means that no decline in injection, even considering the exchange rates factors. So am I correct to understand that the injection is not going to be declined?

[Yuko Nakahira, executive]

[Interpreted] Well, patients that are using the injection type will continue to use injection, whereas those that will be using the oral formulation will be an increment. So over a long term, there will be a replacement, and we are expecting an increase in patients on oral formulation. So as a total, the sales are to go up.

[Mikiya Yamada, analyst]

[Interpreted] So JPY 41.4 billion and using the current exchange rates, I think we're talking about an increment of around JPY 100 million. And so for this year, you're expecting this momentum to continue?

[Yuko Nakahira, executive]

Yes.

[Operator]

Next question from Daiwa Securities, Umebayashi-san.

[Hidemitsu Umebayashi, analyst]

[Interpreted] From Daiwa Securities, I'm Umebayashi. My first question is pharma business. On Page 28, you have the comparison from the previous forecast, sales does not change very much and core operating impact -- core operating is JPY 8.0 billion difference. And when I look at the numbers, the development, sorry, development cost increased by JPY 8 billion and that is pushing down the profit. It looks like that's the case.

So Page 29, overseas sales, well, Radicava was covered already, and you have increased but vaccine is lower. So this is how you end up with in your thinking. But vaccine, COVID-19 vaccine is gone and this development cost increase and the profit is like this is down JPY 8 billion. Can you explain the relationship of those factors?

[Yuko Nakahira, executive]

[Interpreted] So your question is for the second half and the forecast for the second half and what are our assumptions, is that it?

[Hidemitsu Umebayashi, analyst]

[Interpreted] No, May 13, you announced your plan shown on Page 28, and you have the guidance for the year, announced today. Sales has not changed very much. But for overseas, Radicava increased and reduced demand for COVID-19. Therefore, the sales revenue number does not change very much. On the other hand, R&D costs increased by JPY 8 billion. And that is impacting core operating income. This is a negative factor. So the sales mix is not much influenced and the -- because of the increased R&D cost, it is pushing down the profit, is that due to ForEx? Can you explain that relationship?

[Yuko Nakahira, executive]

[Interpreted] Okay. First, as for the Health Care business, we revised our performance revision. And the biggest factor is COVID-19 vaccine. That revenue is excluded from our thinking. That's the biggest factor. Totally, minus JPY 8.0 billion, but the expectation to vaccine was much larger than that amount.

So the COVID-19 vaccine was excluded from our plan and Radicava or domestic products, priority products or key products are covering that decline or deficit. That is the overall relationship.

[Hidemitsu Umebayashi, analyst]

[Interpreted] I see. I understand that but R&D costs increased by JPY 8 billion. Can you explain that?

[Yuko Nakahira, executive]

For R&D cost, as you know, there are overseas activities and FX impact is a factor here like NeuroDerm and Medicago. Those developments are overseas. So that portion is increased.

[Hidemitsu Umebayashi, analyst]

[Interpreted] I see. The second question is Performance Products area, polymers and compounds. In the first half, you had good result. In the second half, you have only JPY 10 billion, and you have JPY 9.3 billion in Q2, but the second half profit is not going up. What's the reason here?

[Yuko Nakahira, executive]

[Interpreted] Yes. First, polymers and compounds business, in the third quarter, there is a concentration of scheduled maintenance and repair in polymers that is a very big negative factor that is included in this plan.

And also, polycarbonate spread is another factor. Those are negative factors in polymers and compounds. The difference between the first half and the second half can be explained by those factors.

[Hidemitsu Umebayashi, analyst]

[Interpreted] I see. And last question, about postponement of decision-making of MMA. Well, we can't say -- nobody can predict the market price goes -- going forward. But construction cost, well, there are some inflationary pressures, and I personally think construction costs are going to go up going forward.

And maybe the increase in cost, maybe more than you had thought, isn't that true? For CapEx, maybe you try to carry this out by borrowings and how do that? I wonder if you borrow some money and there's interest going up, you will have heavier burden. And so you are revisiting this plan on how the situation. Can you explain a bit more?

[Yuko Nakahira, executive]

[Interpreted] Yes. construction cost and so forth, yes, there will be some impact from inflationary trends and on the yen base, of course, it is inflated and how we fund this project, basically, it would be done on a local basis. And the important point for postponement of decision-making is for the short term, there is a change in demand, supply and regarding visibility of recovery, we want to be more confident for projections. And we hope to have flexibility financially. That's the biggest reason.

[Hidemitsu Umebayashi, analyst]

[Interpreted] Market prices and that -- those factors you mentioned, I don't think they are very much related. As Yamada-san asked, the actual construction or the operation would be far ahead in future, sorry for my persistence in asking questions.

[Yuko Nakahira, executive]

Well, that may be true, but maybe we can make investment where we can have quick return by postponing. So considering overall situation, we decided to postpone.

[Operator]

Next question from SMBC Nikko Securities, Mr. Miyamoto.

[Go Miyamoto, analyst]

[Interpreted] Thank you for the presentation, Miyamoto from SMBC Nikko. I have a question on MMA, Q2 market price and the operating rates, the utilization rate? And what are the assumptions for the second half? And from Q1 to Q2, market price plummeted, but you were able to maintain the profit which I think reflects your capability. So why is it that you did better than the market? And regarding JPY 600 million for the second half, can you talk about that as well?

[Yuko Nakahira, executive]

[Interpreted] First, about the market price. In Q1, $2,100 from July, it continued to decline and in September, down to $1,600. And then from there, we see a bottoming out, partly due to seasonality. So $1,600, we believe, was the bottom.

So for Q3, the projection is $1,700, Q4, $1,800. Our projections, assumptions, and we would like to secure profitability in that environment. But as you know, from SAMAC in Saudi Arabia to Europe, we are exporting to maximize the price spread.

And overall, utilization rates is as low as below 60%. But if you look closer, you will find that the utilization rate differs greatly from plant to plant. For example, in Cassel, it hasn't resumed the operation yet for the lowest cost, with the lowest productivity price. We have not yet resumed.

[Go Miyamoto, analyst]

[Interpreted] Okay. Utilization rate for Q2 and projection for second half. And so $1,800 would be the average for the second half?

[Yuko Nakahira, executive]

[Interpreted] Yes, we're a little below that, I think.

[Go Miyamoto, analyst]

[Interpreted] How about the utilization rates?

[Yuko Nakahira, executive]

[Interpreted] Q2, 68%, for second half projection is 63% is our current projection.

[Go Miyamoto, analyst]

[Interpreted] Follow-up question. In Europe, energy prices are soaring, affecting MMA market and Cassel is not operating as you said. And the same is true for 2 other plants. So over a medium to long term, the non-operating period has extended.

So I think the restart cost is going to be rather high. So is there a possibility that you're going to shut down the Cassel plant?

[Yuko Nakahira, executive]

[Interpreted] In the U.S., we are to make the investment. So including that, we will take a global view in optimizing our production capacity. So it's not just Cassel. We'll be looking at our other plants to see what will be the optimal production scheme.

We have not made any final decisions on anything at this point in time. But of course, we are looking at different possibilities. The major items would be in terms of the production process method, ACH method to ethylene. That shift is taking place. So we would like to make decision along that shift.

[Go Miyamoto, analyst]

[Interpreted] I see. My second question is on petrochemicals. JPY 2.8 billion second quarter and for second half, you're expecting JPY 15.5 billion in core operating income. So looks like this jump up is going to be a rather challenging factor. So what will be the factors that give you confidence that you can make an improvement towards the second half?

[Yuko Nakahira, executive]

[Interpreted] First, for petrochemicals, the scheduled maintenance and repair in the first half, especially in the second half or the second quarter, there were many projects. And so a change in that would make a lot of difference. And in terms of the inventory valuation in loss Q3 negative is being projected, but in terms of volume, we expect improvement. And for some areas, especially in relation to polyolefin, we are expecting improvement in price spread.

[Go Miyamoto, analyst]

[Interpreted] I see. So maintenance and repair, lots of concentration in Q2 or Q1, I think. Am I not right?

[Yuko Nakahira, executive]

[Interpreted] You are correct. It was concentrated in the first quarter.

[Go Miyamoto, analyst]

[Interpreted] So I don't think that will be a factor for improvement in second half. So do I understand correctly that polyolefin recovery will be the major factor?

[Yuko Nakahira, executive]

[Interpreted] Yes, for the maintenance and repair, there were some factors remaining in July as well, but price spread difference is a major factor for polyolefin, I think that will be the biggest factor.

[Operator]

Next question from Nomura Securities, Okazaki-san.

[Shigeki Okazaki, analyst]

[Interpreted] Okazaki from Nomura Securities. I have 2 questions. The first question related to the prior questions, polymers and compounds, Q1 to Q2, the profit increased, and there is upside to the forecast. What's the background? Is Soarnol or EVOH may be related? Can you explain that? In the second half, because of the scheduled maintenance, the number will be lower, but can you explain the demand trend for key products?

[Yuko Nakahira, executive]

[Interpreted] Yes. For polymers and compounds increased profit projection, our performance polymers price difference will improve. And Soarnol, last year, we had trouble from North American supplier, but that's another factor this year. So the volume improved. That is a significant factor.

Especially for Soarnol the volume of sales. In the second quarter, compared to the same period last year, there was an increase of more than 10%. So there was a significant improvement.

[Shigeki Okazaki, analyst]

Soarnol in the second half will continue to be good business wise?

[Yuko Nakahira, executive]

[Interpreted] Yes, we expect the second quarter to be very good.

[Shigeki Okazaki, analyst]

[Interpreted] The second question, Performance Products and for the key products, what's the outlook for the second half? And OPL and also carbon fiber and battery materials regarding those 3, what are volume trends for Q2 and the second half? Can you explain that.

[Yuko Nakahira, executive]

[Interpreted] For OPL film, we have -- we think it could be challenging, especially in the second half compared to the prior year, maybe there is a decrease of about 20%.

On the other hand, for carbon fibers, in the first half, it was very good. We had good growth. And in the second half, we think there will be increase of about 20%.

[Shigeki Okazaki, analyst]

[Interpreted] About battery materials?

[Yuko Nakahira, executive]

[Interpreted] Yes, for battery materials, it would be flat from last year.

[Shigeki Okazaki, analyst]

[Interpreted] That was also the trend in the second quarter?

[Yuko Nakahira, executive]

[Interpreted] Yes, that's right.

[Operator]

That was Okazaki-san. That concludes our Q&A session. And now I will give the floor to Nakahira-san for the closing remarks.

[Yuko Nakahira, executive]

[Interpreted] Yes, Q2 we are focused on implementing the forging the future measures. There were some external factors that negatively affected us. But in terms of price, we had discipline and capability being strengthened.

And regarding the cost control, we were able to make a progress as well. For second half, external environments are expected to continue to be challenging, but we will focus on what we can control.

I ask for your continued support and understanding, and thank you very much for participating today. Thank you. We will be archiving today's conference call, so you can visit and watch them repeatedly. Thank you for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]