Mitsubishi Chemical Holdings Corp

TSE:4188

Earnings Call Transcript 2022-Q3

[Unknown Executive]

Thank you. Thank you very much for joining us. Let me start my presentation. Please turn to Page 4. The consolidated statements of operations. We saw the depreciation of the yen during this period, 6% depreciation of yen year-on-year. As for naphtha price, 87% increase year-on-year at the average price of JPY 53,900. As for sales revenue during the 9 months JPY 2,900.3 billion, JPY 544.9 billion higher year-on-year, of which yen depreciation contributed JPY 77 billion. And as for the sales price factor, JPY 280 billion, increasing the profit -- or the revenue, of which Chemicals close to JPY 230 billion contribution; for product -- performance products, JPY 30 billion; industrial gas, close to JPY 30 billion consecutively.

As for Chemicals, the market prices for Performance Products and Industrial Gases the higher raw material prices translated into higher selling price. These are the factors contributing to the increase in sales revenue. As for Health Care, close to JPY 10 billion impact due to the revision of the NHI drug prices, the revenue was lower. Overall, over JPY 180 billion increase due to volume increase. As for core operating income, JPY 218.2 billion, which is up JPY 217.5 billion year-on-year. I will give you the details later. As for the Special Items, negative of JPY 0.7 billion. Last year, it was JPY 112.9 billion.

That is because in FY '20, we recorded the impairment in relation to NeuroDerm, the working process impairment, JPY 84.5 billion as well as the closure of the Beaumont plant in MMA close to JPY 20 billion. And operating income was JPY 218.2 billion and financial income and expenses of JPY 10 billion expenses. Increase in dividend as well as improvement in foreign exchange gain and loss were recorded. But -- and therefore, JPY 3.5 billion, that's in terms of expenses. Income and loss before taxes, JPY 208.2 billion. As for the net income attributable to owners of the parent, JPY 122.1 billion. Last year, we recorded a loss, but we saw a major improvement at a profit of JPY 122.1 billion during this period.

Next, Page 5. As you can see, overall, last year, we suffered from the impact of COVID-19 seriously both in price and volume, we saw improvement. And as a result, for core operating profit, we saw a general improvement, except for advanced solutions. Last year for semiconductors and panels, the business was brisk. Whereas this year, we saw the impact of the higher raw material prices and therefore, a slight decline year-on-year. And as for Health Care, with the aggressive promotion of developing the COVID-19 vaccine, which was concentrated during this 9-month period and therefore down JPY 18 billion. For others, increase in profit.

And as you can see, for inventory valuation gain and loss, we saw an increase in the raw material prices. And -- or we saw increase in selling prices while we were able to source at lower price, and therefore, the gain was recorded. And for total consolidated core operating income improvement of JPY 105.3 billion. For Chemicals, we saw an improvement in spreads for MMA, petrochemical and carbon. On the other hand, we saw the price spread narrow in other areas. And the utility cost increase has resulted in the selling price revisions. So we recorded some positive Health Care, as I mentioned earlier. The NHI drug price revisions in April of last year had a negative impact.

As for value, overall volume increase and cost reduction. At the beginning of the year, we were expecting reduction. And we are seeing progress as planned, and we are getting close to achieving the annual target of JPY 20 billion reduction. For others, JPY 48.9 billion positive in terms of the inventory valuation gain and loss. And we saw JPY 8.4 billion plus as well. Whereas for fixed expenses, bonus payments increased with a better business results, JPY 20 billion -- close to JPY 20 billion. And Medicago and others with the development of COVID-19 vaccination development and other R&D, we saw an increase in fixed costs as well as increase in the distribution cost.

So altogether, minus JPY 5.5 billion. Page 7, Performance Products segment. For polymers and compounds, like in Q2, sales volume for products use in automobiles increased. And in some polymers for PBT particular, we saw an upturn in market prices following some of the disruptions on the part of our competitors. Due to these factors and others, we were able to record increase in core operating income for films and molding materials. The sales volume increase, particularly for automobiles. And primarily for the first half, films used for optical applications for displays increased.

Due to these factors and others, despite higher raw material prices, which shrunk the price spread, we were able to see an increase in core operating income, thanks to the rise in sales volumes. For example, the molding alumina products and carbon fibers. We recorded the core operating income increase. As for advanced solutions, as was mentioned earlier, sales volume increased to a certain extent, but with higher raw material prices, the profit declined year-on-year. Moving on to Chemicals segments. That's Slide 8. For MMA in Q3, again, the ICS price remained at $1,900 level. The average was $1,937, and the spread was good.

And therefore, the segment was up both sales revenue and core operating income. For petrochemicals, the raw material prices were up and revenues also increased in tandem. And we had a scheduled maintenance and repair at Mizushima. And so -- but the impact was smaller this year. So that means that sales volume was higher. And naphtha prices are just continuing to rise. And that means that inventory valuation with regard to naphtha and the intermediate monomers were also up. For carbon products, again, demand has recovered and sales volume is increasing.

A year ago, the Japanese steel makers went through restructuring wave. And we also repurposed production for expert -- exports rather than domestic needs. And fortunately, we are doing well there. And volume-wise, we are back to 90%. And the export coke sales prices are also reasonable. And so in the Q3 -- in the first 3 quarters, we were able to record a profit for that period. Now Slide 9 and Industrial Gases segment. Same as Q2, particularly in the United States and Europe, there is a strong recovery from the pandemic, and therefore, the results are strong.

Slide 10 and the Health Care segment. For the COVID-19 vaccine, we are increasing R&D expenses. So the income is down. But if you look at the bottom of the slide for core operating income, volume is up by JPY 12 billion. The volume factor had a positive impact of JPY 12 billion. And half of that is related to the third quarter volume increase. And later, I would like to talk about the outlook we published in November, but even -- in November, we were not expecting this much of a volume factor contribution. So things are very strong there.

Slide 11, special items. I think we went through this. So let me skip this. Slide 12, the consolidated cash flows. Up to Q2, the free cash flow only went to about JPY 58.8 billion. But after Q3, we stand at JPY 107.4 billion. Last year, after the pandemic, the free cash flow was down to JPY 53.4 billion. But this time, the raw material prices went up and therefore, there is cash-out related to inventory. But then work in process -- work expenses, and there are a number of things that would actually be gone by the end of financial year. And so about JPY 42 billion is related to volume. But those will be canceled out in Q4. But this work expense related to work in process at the end of March, this will return to accounts payable. And only in Q1, we will be able to convert it into cash.

So this is a factor to consider. Moving on to Slide 13. Consolidated statements of financial positions. At the end of December, total assets came to JPY [ 5,457.8 ] billion compared with the end of March last year, it's up JPY 170.6 billion. A weaker yen has an impact of JPY 59 billion at the end of December in Japan, is a holiday. So there's a calendar factor. So some of the trade receivables were left over and carried over to January. That has an impact of JPY 32 billion. And with -- after COVID, we are recovering. So we are actually reducing the extra cash on hand that we have been keeping for a while. So we are repaying that. And so that will -- that increases -- so that means the cash and cash equivalents are coming down. But then the higher prices and the inventory has pushed up the inventories paid in receivables.

And to the lower right-hand side, the net D/E ratio, at the end of December, that came to 1.57%. Compared with the end of March, this has improved by 0.16. At the management briefing on the 1st of December, a target was set for the end of March, and that was 1.43%. And in Q4, we are expecting proceeds from the sale of the alumina fiber operation and the -- some of the inventories and trade receivables would also moderate. And therefore, we believe that we are on track to deliver this target of 1.43%.

Now today, the stock prices are actually quite down. According to one theory, that's because the bottom line is less than 75% of the full year forecast, that's the about less than 70%. But then in Q4, because of that proceeds from -- that will be in the amount of more than JPY 60 billion. So that sale proceeds from that alumina fiber business will bring us back to track. So for the core operating income, I will add some more descriptions later. Now from this time, we have added some material. So Slide 18 to 21, that shows the a number of KPIs that we highlighted at the management briefing, and we talked about affording the future the new management policy.

And so we wanted to excessively mention them in this earnings briefing material too. And so that's why we have new slides. Last, but not least, let us talk about quarter-on-quarter sequential developments and the forecast for the full year. Let's look at Slide 16. So sequentially from Q2 to Q3, polymers and compounds. Q2, JPY 3.8 billion and Q3 was JPY 1.1 billion, and there are some concerns, but that's because also of the maintenance turnaround, that impact was JPY 1.5 billion. And there are higher raw material prices, and the sales prices hikes aren't catching up with that pace.

That's another factor. And then -- perhaps you could just squabble in additional figures. For Q4, we are expecting JPY 6.4 billion. So that large sequential increase from JPY 1.1 billion to JPY 6.4 billion. That's because we don't have any maintenance and repair that accounts for JPY 1.5 million. And Mitsubishi Engineering-Plastics that equity method affiliate. And there is a sales affiliate there located across the world. And so quarterly consolidation is a little difficult for those entities. So they are paying dividends. And so the equity method accounts used the dividend payment for the profit -- the share of profit, and that comes in Q4. And that's in the amount of JPY 2 billion. And for Soarnol, we have raised the price from January. And other products are also raising prices one after another. So the price spreads in 4Q would be better, although we expect naphtha prices to continue to rise.

And so that's why we believe we can deliver this JPY 6.4 billion figure. For films and molding materials, Q2 was JPY 11.8 billion, Q3 was JPY 7.2 billion. And particularly in Europe and the United States, the high performers in the plastics and molding products. They were largely affected by the Christmas season, and there was a maintenance and repair turnaround in autumn. And so those had a negative impact of about JPY 2.5 billion in Q3, and then raw materials were higher. That has an impact of about JPY 2 billion. That's a negative impact in Q3 too. In Q4, currently, we are expecting about JPY 6.9 billion.

In Q4, obviously, we don't have Christmas, so that's good. But then, TV, there could be industry adjustments, which would affect the film business. And then there's also the Chinese New Year in Q4. So those seasonal factors cancel out with each other. So that's why the figure is almost unchanged sequentially. With regard to advanced solutions, Q2 JPY 3.6 billion, Q3 JPY 3.4 billion, so almost unchanged. And Q4, sequentially, we have secured JPY 4.2 billion. So acceptance of some of the works. Aqua-related services, those are included.

And then we are also dealing with some machinery that used for those operations. And all of those included comes to JPY 4.2 billion. So JPY 6.4 billion, JPY 6.9 billion, JPY 4.2 billion in total comes to JPY 17.5 billion and altogether comes to JPY 75 billion. We used to say that we may have JPY 20 billion. But automotive volume or automotive applications -- or volume for automotive applications coming down and raw material prices are higher. And so even with some revenue increase at results. Now in November, we were expecting an average price of JPY 60,000, but naphtha prices continue to rise every month.

And for Q4, I would like to give you the assumptions. So JPY 115 for the dollar; for naphtha, JPY 63,500 [indiscernible] assumptions. So that was also performance products. For Chemicals and MMA, Q2 JPY 20.5 billion, Q3 JPY 4.7 billion. Those were the core operating income. There is a major sequential decrease, and there was JPY 3.4 billion in impairment loss in Q3. That's related to a works in U.K., and we are -- we have been implementing a utility upgrade that's CapEx. But that project, as it progressed, cost started to run up, and it's now at about double the originally expected cost. And that means that additional investments may not be net present value additive.

I mean we can accept all the past costs and second cost, but there's no more accretive impact going forward. So we decided to put a hold on that upgrade, although it's halfway. And as a result, we have had to write off JPY 3.4 billion in the construction account -- in construction and progress accounts. So that's an improvement on fixed assets, and that has had a major impact. Other than that, there have been maintenance and repair. Most of them are in the second half. In the United States, we had some maintenance in Q3. And then prices also coming down to $1,937.

And so that's why the quarterly income is coming down. Now for Q4, we're now noting at JPY 5.3 billion. We still have more maintenance and repair to happen in Europe as well as in Saudi Arabia -- or maybe not? Yes, Saudi Arabia. And so with that there won't be any more impairments in Q4, but there will be a series of maintenance and repairs. And then the prices -- selling prices currently, it's about $1,850. But Q4 average, we are budgeting $1,900. After the Chinese New Year, we believe that there will be more. And we are actually shipping from Asia to Europe to U.S. -- and U.S. And so Europe and U.S., supply demand balance is tight, but our competitors are also doing that.

So globally, I think we can say the supply and demand are well balanced. And so after the Chinese New Year, we believe that the demand will be stronger, and we hope that will bring the average price during the quarter to $1,900. So the selling price is having some negative impact. Including that, for Q4, we are expecting JPY 5.3 billion. For petrochemicals, Q2 was JPY 10.5 billion and Q3 was JPY 7.1 billion. For bisphenol A, prices came down, among other factors. And for Q4, we are currently expecting JPY 10.4 billion in core operating income. The polyolefin in Q3, there was a lot of loss but that was only a factor of recording and that will -- or timing of recording and that will be canceled out.

And that's why we're expecting a sequential increase. for bisphenol A, the current price -- we believe or assuming that the current price levels are maintained. And then the spread will be at around $1,500, and we hope that we can maintain that spread level, and that's in the assumption. For carbon products, in November, we have rather gloomy outlook for this. In Q2, JPY 4.4 billion. Q3 results were JPY 9.5 billion. So it turns out that Q3 was strong. Coking coal prices are much higher, but export prices -- we were not so optimistic about raising or having higher selling prices, but selling prices are actually much higher in line with the higher coking [ coal ] prices.

And so the inventory valuation gain of JPY 3.3 billion was part of this. And so we were able to book JPY 9.5 billion in Q3. But then in Q4, for our coking coal, the prices will be flat. And so for Q4, we are only expecting JPY 4.5 billion, but then there won't be inventory valuation impact, and then we'll have to look at capacity utilization. And so the total for performance products, where the chemicals will come to JPY 20.2 billion, JPY 103.7 billion. JPY 11.9 billion was the forecast back in November. So JPY 5.3 billion difference still remaining as a negative. And JPY 7 billion in Performance Products and Chemicals, JPY 7 billion.

Last year, for Industrial Gases, the results were announced and JPY 5 billion upside to the guidance. So the JPY 5 billion had guidance in Chemicals. It will be canceled out there. For Health Care, as mentioned earlier, for the second quarter, JPY 3.6 billion loss. In the third quarter, this is kind of rare, but the profit of JPY 3.5 billion was recorded, especially for the priority products in Japan. We were able to see profit coming from larger sales. So we see an improvement over the forecast. For the fourth quarter, we don't find any factors for revision. So for this JPY 6 billion, we believe this upside will be maintained. So the negative for performance products of EUR 7 billion will be canceled out here.

They are about JPY 1.6 billion difference in others. So altogether, JPY 300 billion core operating income guidance on a full year basis, as we made back in November. We are maintaining that overall value. So we decided not to revise our guidance. So I ran over that, but that concludes my presentation. Thank you for your attention.

[Operator]

[Operator Instructions]. Mr. Watabe from Morgan Stanley MUFG.

[Takato Watabe, analyst]

So I have 2 questions. First one on Health Care. On MMA, JPY 3.4 billion impairment. Do I understand correctly that was not included in your original forecast? And after the Chinese New Year, you expect the market price to recover. How confident are you on that? And the gas price in Europe in the third quarter what was the implication and what about on the fourth quarter? So that's for MMA.

[Unknown Executive]

JPY 3.4 billion impairment loss back in November? No, that was not included in our full year guidance forecast. Cost overrun amount became more clear in the ensuing days, and we decided that we should record this. That decision was made during the month of December. Now market price returning to $1,900. We are rather confident of that, looking at the current situation. And as far as our company is concerned, we are sourcing in Asia, sending to Europe and U.S. markets, the same with the Chinese peers. For Europe, between January and March, most of our operations are suspended due to the maintenance and repair.

So with the higher gas prices, natural gas prices, the variable cost fluctuation impact will not be felt because we are not operating due to the maintenance and repair. So our competitors, they are moving towards raising their prices, and we want to maintain the price spread, and we are moving towards the price revision as well. So given that, we are rather confident that the market price would recover in Asia as well. That is our projection.

[Takato Watabe, analyst]

I see. How about the impact of natural gas price?

[Unknown Executive]

The gas price impact? On a continuous basis, we are raising the prices. So the selling price in Europe are going up as well. But the impact of raw material price increase is significant to begin with. And therefore, the plant in Europe is the least competitive.

[Takato Watabe, analyst]

In the second quarter, you -- so do I understand that the impact is more moderate compared to the situation back in Q2?

[Unknown Executive]

Yes, you can say that.

[Takato Watabe, analyst]

As for molding and compounds, you said minus JPY 1.5 billion? No. JPY 6.4 billion and an improvement. PVT and polycarbonates as well, there are market prices remain rather weak, but you are adding up all those factors. Could you elaborate on that?

[Unknown Executive]

Elaborate? Well, third quarter was a bit poor. How should I put it? We are trying to raise the prices -- revise the prices. But during the third quarter, there was a timing issue. The loss coming from the timing in recording was rather significant. We'll have to admit that. So I understand that the price translation or the transfer is taking place, yes.

[Takato Watabe, analyst]

And for Health Care, MT-2766. The filing was made in December. It's been 2 months or so since. I think the approval is forthcoming. And 1186, I understand that the priority filing was accepted in the U.S. So in the last quarter of the fiscal year, how would these developments impact the Health Care results? I have a feeling that maybe there's some delay in the vaccine development. And also any update on what the Canadian government is going to purchase from you, the vaccine.

[Unknown Executive]

Correct me if I'm wrong Kobayashi-san, but let me give it a stab. The filing is currently being reviewed and the approval is, of course, what we are waiting for, and we are rather confident that it will be approved. So the situation remains the same from the projection we were made since on November 2. No change. I can guarantee you that Watabe-san. I hope that answers your question. Kobayashi-san, anything to add?

[Yoshihiro Kobayashi, executive]

Yes. This is Kobayashi from Mitsubishi Tanabe. The Canadian government purchase. As Date-san said, it is being reviewed and we are talking with the authority for the earliest approval. As for commercialization, we are hoping that we can achieve that by the end of this fiscal year.

[Takato Watabe, analyst]

The overseas pharmaceutical sales. Currently, I think the approval is forthcoming. Even without the approval, you think that you can attain sales as projected.

[Unknown Executive]

Whether I can guarantee you the amount that we shared in November. Well, that's really dependent on the approval.

[Takato Watabe, analyst]

Yes, I know that. But earlier, you said plus JPY 6 billion would be remained. But that takes -- that doesn't take into consideration the vaccine sector.

[Unknown Executive]

As far as vaccine is concerned, the situation remains the same from what we shared with you back in November.

[Operator]

Let's go to the next question. Miyamoto-san from SMBC Nikko Securities.

[Go Miyamoto, analyst]

I have 2 questions. First one for pharma. The first is about petrochemicals. So Q4, you are expecting JPY 10.4 billion in core operating income. And so sequentially, that would be up JPY 3.3 billion. And for polyethylene, you said that the recording timing is an issue. I understand that. But for inventory valuation in Q3, there was about JPY 9 billion for petrochemicals. And if that all goes, I would worry that the quarter-on-quarter sequential figure in Q4 could be down. So why is it not the case? Are you expecting more demand recovery? Why you're expecting sequential income growth for petrochemicals?

[Unknown Executive]

What I said it earlier, we are factoring a price of JPY 63,500. So there's still inventory valuation gain. And as we explained in the past, half of the gain -- inventory valuation gain is related to polyolefin. For polyolefin, there is this timing factor. So when you have valuation gain, there will always have been some valuation loss before so they will be always canceling out. And once the prices are factoring in the cost levels, the inventory valuation difference will obviously go.

But then the spreads are improving, naphtha prices are really raised -- came up in Q3. And once that is [indiscernible]in Q4 selling prices, things would be much better for us. For bispinol A, the situation is almost unchanged. So from Q3 to Q4 sequentially, that's why the polyolefin-related inventory valuation losses are now turning to a positive factor.

[Go Miyamoto, analyst]

So for polyolefin and the timing and the valuation -- inventory valuation, if they are canceling out with each other, I wouldn't think that will automatically lead to a sequential income gain.

[Unknown Executive]

Well, the income growth, so the loss due to the inventory valuation is smaller. In Q3, there's a negative impact of valuation -- inventory valuation. In Q3, naphtha prices are rising. If you could perhaps refer to Slide 15, it's easier to understand. So JPY 63,500 went to JPY 60,900 and then to JPY 63,500. And with all that, this JPY 7,000 difference in price -- selling prices will have an impact. So the spread will be wider. And so for Q4, that will more than offset the impact of inventory valuation.

[Go Miyamoto, analyst]

So in Q4, that's the negative impact of inventory valuation is larger?

[Unknown Executive]

Yes, because there's -- when there is a rapid rise, it always happens.

[Go Miyamoto, analyst]

And I have a question about capacity utilization. Can you tell us about Q3 and Q4? And for the Singapore, I understand there are reports suggest that you are controlling output. And you said that you are looking at the market conditions. So are you controlling output to make sure that prices are maintained, selling prices that is?

[Unknown Executive]

Thank you for the question. For October 12, 63%. And same for Q3. In Q2 -- Q3, rather, there were some maintenance. And then in the current quarter, we have some also maintenance in Europe and Saudi Arabia. So for us, we have -- managing all those things worldwide for more than 3 years now. And so as part of KAITEKI management, it's really about producing where it's the cheapest and selling where it's most beneficial. With regard to Singapore, we are using the Alpha-method. But because of the location, the benefits of the Alpha-method was not really leverageable.

And so when we think about cost competitiveness, this plant was not really the best. And so there are other site, which use a different method, but can produce at lower...

[Go Miyamoto, analyst]

You mean the C4 method in Thailand, for example?

[Unknown Executive]

Yes.

[Go Miyamoto, analyst]

Now about the vaccine. On Slide 31, you have this slide. And the time line suggests that the schedule for Japan is delayed than before. And then towards the next financial year, how much contribution are you expecting? You may find difficulty giving us numbers. But then in Canada, 40% are vaccinated with the booster shots as well. And so I don't think you can expect much demand in Canada. So what are you going to do in the next financial year?

[Unknown Executive]

Thank you very much. I'd like Kobayashi-san to this question.

[Yoshihiro Kobayashi, executive]

This is Kobayashi speaking. First about the clinical trial in Japan, is this a delay? Well, given that the general public are largely vaccinated, we are having some difficulty recruiting the subjects for the clinical trial. So that is taking a little more time than initially planned. So it's a little delayed, but things are actually on track, making good progress. And we have already administered the vaccine -- the test vaccine to the subjects. So we are in the analysis phase. So we have been able to recruit enough patients or subjects.

With regard to Canada, as we have explained, we have been working with the Canadian government. And so the agreement is for a maximum of 67 million doses. But then obviously, the situation changes over time. So we are trying to address the needs of the Canadian government. Obviously, we would like to get to commercialization as soon as possible. But with regard to the sales volume or value at this point in time, we cannot really discuss that.

[Go Miyamoto, analyst]

And with regards to the minimum amount -- for this amount as the optional part, no change there?

[Unknown Executive]

No change so far.

[Operator]

[Interpreted]. Next from Mizuho Securities, Ms. Yamada.

[Mikiya Yamada, analyst]

Yamada from Mizuho. For the performance product, I have a question the basic policy. During the second half, I think the conditions or the terms of trade are working against you, JPY 17.5 billion x4, which is JPY 70 billion plus in the fourth quarter and the third quarter. With the worsening of the terms of trade, if you can regain that JPY 80 billion, JPY 90 billion operating profit can be secured, but improvement of terms of trade or price increase, how much can we expect that?

Unless this could be realized, unless the naphtha price goes down, I'm afraid the JPY 70 billion would be the annual profit level, which I think -- I'm afraid would be different from what you are imagining. So improvement in terms of trade as well as higher selling price or new product launches? What would be the factors?

[Unknown Executive]

Yamada-san. I think, for example, 3 years ago, in the food packaging films, we were maintaining the price. And so when -- regardless of the raw material price level, either going up or going down, we were maintaining the selling price. I think you remember that. But now the Japanese society is changing. So with higher raw material prices, the worsening of the spread is being addressed. We are talking with the customers about the price revision to reflect the higher raw material prices.

Some would be the cost-plus formula where the prices will be raised in accordance with higher material prices. And also with regards to the logistics issues, all those factors being reflected in the price. There are many ways to do this. So in many segments, efforts are being made to raise the prices, revise the prices. So you asked the question of what will be the major thinking or policy. I think you will see by looking at what we are doing that our efforts are being well accepted by our customers.

Compared to last year, I think the terms of trade were temporarily improved as a matter of formality, but aside from that, for this fiscal year, we see a significant deterioration in terms of trades. We're actually talking about the JPY 10 billion or JPY 15 billion price increase. I think that is going to be needed on a full year basis. So although that is the major direction or thrust as far as the fourth quarter is concerned, that cannot be factored in yet. Well, the price increase for some products have already taken place. So some of the price revision are being factored in for Q4, but not on a full year basis. So JPY 15 billion or JPY 20 billion so worth of price increase will have to be implemented as you suggested.

And in the meantime, we are going to have to present the very solid honest track record to gain the trust.

[Mikiya Yamada, analyst]

I expect the price increase to progress going forward. My second question. Films and molding materials. The third quarter and the fourth quarter, I understand that the special factors are going to cancel each other out. The structural factors, the films increase, I think, would continue the expansion. So towards the next fiscal year, the first half, can we expect the volume increase to continue? Packaging and -- carbon fibers and packaging materials.

[Unknown Executive]

For carbon fibers, and advanced solutions. The capacity utilization is around 90%, I think; for packaging, 86%. And therefore, we still have some capacity remaining. The Chinese companies are beginning to produce the carbon fibers as well, although we are selling a better, higher-end products. So we will sell the compound of products or the composite products even at the cost of securing materials from outside. And what else?

[Mikiya Yamada, analyst]

The packaging.

[Unknown Executive]

Okay. For packaging. Also not full capacity operation yet. So basically, we still have the capacity left to absorb increase in volume, especially the 7-Eleven Salad Chicken packaging. We have a plant built for that so we can ship more if need be.

[Mikiya Yamada, analyst]

My last question on Health Care -- one more question on Health Care. R&D expenses in the third quarter and the fourth quarter, a big decline. Is that because some products went into the filing? But given that the development efforts continue for Parkinson's treatment, I'm surprised to see such a big decline. Can you tell us about the Parkinson's treatment -- Parkinson's disease treatment development efforts? Are you progressing as planned? And what about the preclinical status? So can you elaborate on the R&D expenses.

[Unknown Executive]

Kobayashi-san, can you take that question?

[Yoshihiro Kobayashi, executive]

Thank you. This is Kobayashi speaking. First, Parkinson's disease, 0612. The schedule has changed slightly. But since then, we do see progress as planned. So no change there. And for R&D expenses overall, the Medicago COVID-19 vaccine development. In the areas -- for example, in South America, like Argentina and others where the infection level is high, because we included these countries, the R&D expenses increased. But now that we are in the filing phase, the cost is not going up. And after Radicava, 1186, already, we are in the filing stage.

So for the fourth quarter, we expect the R&D expenses to go down. So it's not that the amount is going to go down due to any of the disruptions, no. Rather, because things progressed as planned, we are going to see a decline.

[Mikiya Yamada, analyst]

So 2654 and the 3921, when their phases change, that's when the R&D would go up, right?

[Yoshihiro Kobayashi, executive]

Yes. From the early stage to late stage, that's a phase change would mark an increase in R&D expenses. So there is -- so that you mentioned, when they go into the late stage, the R&D will go up.

[Operator]

[Interpreted]. Next would be Mr. Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

Okazaki from Nomura Securities. I also have 2 questions. First one for pharma. First, on carbon products. In Q3, even considering the inventory valuation gain, I think it was strong. So coal cokes and needle coke. Can you tell us what the supply-demand picture would be?

[Unknown Executive]

Thank you. For coal coke, it's only outside of Japan. We don't have any domestic production. And the demand is strong and prices will remain high -- sales prices. With regard to needle coke, the electric furnaces are coming back online. So prices as well as volume are on the recovery. At one point in time, we had a very good business. The prices are not that strong, but we are much better off than at the trough that we were in.

[Shigeki Okazaki, analyst]

So the supply demand picture for the time being, you're expecting good -- I mean, strong demand?

[Unknown Executive]

Yes.

[Shigeki Okazaki, analyst]

My second question, during the management briefing on the first of December, you said that towards 2025, the group will like to improve costs to a certain amount -- and JPY 100 million. And so what has happened to that?

[Unknown Executive]

Well, this JPY 100 billion plan, you have to look at our operating company, Mitsubishi Chemicals and Mitsubishi Tanabe, et cetera. And we added up those figures on the bottom of way. And then on the 1st of December because we are going to be a one-company formation, we should be leaner and -- but then this JPY 100 billion was -- the figure was before this reorganization or regarding the group. And we are implementing measures to deliver on that target figure.

For FY 2022, we are looking at JPY 20 billion to JPY 25 billion in cost reduction that factored into the budget that we are formulating. And coming May, when we announce FY 2021 results, we intend to announce that together with the outlook for the FY 2022. That's the plan, and we are holding weekly meetings for about 2 hours every week. And I'm also a part of that. My successor, [indiscernible], isn't officially with us yet. So I'm standing in. And we are discussing how to make that happen and deliver on our target figures.

[Shigeki Okazaki, analyst]

So for 2020, you are reducing costs year-on-year by JPY 20 billion to JPY 25 billion?

[Unknown Executive]

Yes, that's the intent.

[Shigeki Okazaki, analyst]

Now on Health Care, what about the clinical trial for the COVID-19 vaccine for use as a booster shot? Where are you going to do that? When? For how long? What are you going to do with regard to the Omicron variant?

[Unknown Executive]

Kobayashi-san, please.

[Yoshihiro Kobayashi, executive]

With regard to the clinical trial for the use as boosters, we are thinking of that, including the potential for mix and match vaccination. So we are trying to prepare for that. So if you could look at Slide 31, it does look at the booster vaccination studies, et cetera. So this is our current schedule. With regard to the Omicron variant, this -- the Medicago conducted this Phase III before the Omicron variant came around. So we haven't been able to test the efficacy against the Omicron variant, but we are actually looking at that.

We are looking at the neutralizing antibody performance against the Omicron variant. So in due course, we will be able to discuss about that too with you all.

[Operator]

The next question will the last. Umebayashi-san from Daiwa Securities.

[Hidemitsu Umebayashi, analyst]

Umebayashi from Daiwa Securities. Just one question on Health Care, especially STELARA the level improved since Q3. Can you give us the backdrop to that? And I think Simponi is doing well as well in Q3. So can you explain the reason why the pharmaceutical business in Japan are so good?

[Unknown Executive]

For STELARA, it's good because Crohn's disease and ulcerative colitis are the indications for our product today. And it really met the -- for the ulcerative colitis, it really hit the meet.

[Hidemitsu Umebayashi, analyst]

I see. [indiscernible] doing better than expectation. What do you think is the reason for that?

[Unknown Executive]

Well, the clinical efficacy through the actual administration, the use has been well understood and that is driving the growth. The Janssen Pharma -- we licensed in from Janssen Pharma, not just in Japan. I think within JJ STELARA I think is one of the best-selling products within the JJ group. So I think its benefits -- its effectiveness is well understood, which is driving the sales.

[Operator]

Thank you very much. This brings us to the end of the briefing. I'd like to invite Date-san to say some final words.

[Hidefumi Date, executive]

Well, ladies and gentlemen, this will probably my final opportunity to speak to you in this forum. So for about 8 years, I've been doing this. Thank you very much for your cooperation and support. Going forward, we will be implementing our growth strategy. And by autumn, we will have more details honed out so that we can respond to your questions. Again, enhancing transparency is one thing we are working on so that we can allow you to have a better understanding of our company and group. And so we will ask for your continued support to the group. And thank you very much for your support. It was a pleasure working with you all.

[Operator]

Thank you very much.

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