Mitsubishi Chemical Holdings Corp

TSE:4188

Earnings Call Transcript 2023-Q3

[Operator]

Thank you very much for joining our earnings presentation for Mitsubishi Chemical Group's financial reports starting to start. First, CEO and President, Jean-Marc Gilson, will give you our presentation; followed by Yuko Nakahira, Executive Vice President and CFO, reporting on financial results for the third quarter of the fiscal year 2022. After the presentation, we will have Q&A and the meeting will last for about 60 minutes.

Before we start, we would like to remind you that the presentations may contain forward-looking statements, which are based on the expectations and information available as of now and are subject to risks and uncertainties. Actual results could differ materially from what is stated here. And Q&A, including over the presentation will be posted on our website later. Now the conference should start. Jean-Marc Gilson, you can start now.

[Jean-Marc Gilson, executive]

[indiscernible] and welcome to our third quarter earnings presentation. So my name is Jean-Marc Gilson, the CEO of Mitsubishi Chemical Group. So let me first start by highlighting briefly what you probably have heard several times during the quarterly earnings announcement from other listed companies and other chemical companies.

So after an acceptable first quarter of fiscal year 2022, we witnessed an accelerated deterioration of the global economy in the second quarter and had gained even more speed in the third quarter. A combination of rising raw materials, high energy price, high inflation started to drive a significant slowdown in demand across industries but with a more pronounced effect on our commodity product lines. Pretty much all geographies were affected with the U.S. being affected to a lesser extent.

To come out as a winner as a company after a recession in the chemical industry, we need to do 3 things correctly. Number one, we need to cut cost rapidly. Number two, we need to ensure the solidity of our balance sheet. And number three, we must get ready for when the economy turns around. These are the reasons why we continued our disciplined and fast implementation of our Forging the Future strategy.

As we have realized in the last quarter, we strongly accelerated our cost reduction efforts across the company. As communicated, we implemented difficult decisions, including business restructuring, plant closure, outsourcing of activities and consolidation of legal entities. While these measures resulted in large impairment charges, they will also reduce significantly our expense base going into fiscal year '23.

As of now, we are expecting that 80% of our initial cost reduction target of JPY 1,000 that we have described in our strategy Forging the Future. will be delivered over the next 7 months. And it is now likely that we will push our overall cost reduction target to JPY 1,500. We expect that these measures will contribute quickly, better earnings and cash flows. And that, combined with our strong focus on working capital reduction, will drive our deleverage at even faster pace.

But we do also have a rise on growth. In order to accelerate our earnings recovery, when the economy turns around, we are also continuing to invest in our most promising opportunities. Our CapEx spending has not been curtailed as it is directed towards the business that has been the least affected by the latest downturn and our key businesses for the future. I am talking here about projects directed to our performance products, gas business and also to support licensing deals for our pharma business.

As you can see, despite tough trading conditions, we are doing everything in our control to ensure a very strong step change in our results, when the global economy turns around later this year, we hope. I'm resolutely optimistic that all these efforts and refocus around cost cutting, portfolio management and business growth investment will result in a better company with stronger earnings in a not-too-distant future.

Let me turn it over now to Nakahira, CFO, for a detailed review of our financial results for the last quarter and an explanation of our forecast for year-end.

[Yuko Nakahira, executive]

Good afternoon, everybody. I'm Nakahira, CFO of Mitsubishi Chemical Group. I'd like to present our financial results for the third quarter of the fiscal 2023 and outlook for the full year. The yen continues to depreciate as in the second quarter with an average rate of JPY 136.9 for the third quarter. Although naphtha unit price peaked in the first quarter and has been on the downward trend, it reached JPY 72,500 in the third quarter averaged JPY 80,000 for the year-to-date period, a 48% higher level than the previous year, putting pressure on operating income and the cumulative third quarter price pass-through activities and foreign exchange effect offset the decline in sales volume due to the drop in demand resulting in sales revenue of JPY 3.462 trillion, up 17% from the last year.

Core operating income was JPY 177.9 billion, down 19% from last year. The breakdown will be explained later, but we work to mitigate the impact of following demand in the current market conditions, particularly in chemicals to the company with efforts to tap-through on prices and reduce costs.

Performance Products other than display application, Healthcare and Industrial Gas has contributed steadily to operating income. Special items totaled JPY 125.1 billion in the third quarter. indicating folding the Future management policy, we are proceeding with structural reform spend in the third quarter. We record impairment losses and provisions due to the closure of MMA Castle plant and winding up of Medicago, subject to the completion of labor management talks.

The closure of the Castle plant amounts to JPY 70.7 billion and the mining up Medicago amounts to JPY 48.0 billion. Operating income totaled JPY 48.6 billion, down 78% year-on-year. Income before taxes was JPY 39.2 billion, down 31% year-on-year, partly due to the change in accounting treatment of deferred tax asset associated with Medicago. The net income attributable to owner of the parent was JPY 7 billion, down 86%.

Revenue and core operating income shown for each business segment. Revenues increased in all segments due to the price pass-through and foreign exchange effect. In the subsegments, revenues increased in all segments except MMA. In terms of core operating income, films and molding materials posted lower income in the Performance Products segment due to a sharp drop in demand for displays, a key market, while Polymers and compounds and Advanced Solutions reported higher income.

Overall, Performance Products recorded slightly higher earnings than last year, excluding the impact of the sales of alumina fiber business. On the other hand, Chemicals reported lower earnings due to softening demand and deteriorating spreads in all subsegments, including MMA, petrochemicals and carbon, industrial gases and Health Care reported higher earnings.

Core operating income decreased by JPY 41.0 billion in the third quarter. The breakdown is shown here, the price difference was a positive JPY 17.9 billion. As shown on the right, Chemicals was down JPY 20.4 billion and Health Care was down JPY 5.4 billion due to the NHI price revision, but we were able to significantly improve the price difference in Performance Products and Industrial Gases.

Volume difference was significantly negative in performance products mainly due to the impact of falling demand in the display market and in chemicals. In Health Care, volume growth was achieved in key products. Cost reduction totaled JPY 30.3 billion, 95% of the annual reduction of JPY 32.0 billion projected for the current fiscal year. We are proud of the results of our accelerated company-wide efforts amid the deteriorating market environment. Although there were periodic maintenance and repairs in [indiscernible] this fiscal year, it was to optimize repair costs through the use of the favorable results, we will expand this -- to this to the periodic retears in Okayama in the next fiscal year.

We will further promote these activities portfolio review and operations as one company. Others include a decrease of about JPY 10 billion in inventory valuation a decrease of more than JPY 10 billion in equity in earnings of affiliates and sales for alumina fiber business assets and other factors such as an increase in labor and logistics and other costs due to inflation noticeable in U.S. and Europe and foreign exchange effect on R&D in various activity cost overseas.

As for core operating income or performance products, price pass activities were strong, contributing JPY 32.4 billion. Volume difference was minus JPY 14.8 billion due to lower demand in the automotive and display market. We saw a drop in demand versus last year by subsegment polymers and compounds and Advanced Solutions reported higher earnings while firms and molding materials reported a decline of JPY 12.5 billion due to the impact of the sales of alumina fiber business as well as a significant decrease in demand for this place in optical applications, earnings declined, particularly sharply for then polyester films and OPL films.

On the other hand, engineered in the plastics, mainly in Europe and the United States performed well. In polymers and compounds, demand was driven by recyclable food packaging and other applications, while in Advanced Solutions, the semiconductor-related business continues to perform well. Excluding the impact of sales of alumina fiber business, cumulated core operating income for performance products increased 6% compared to the same period last year, even after taking into account the decline in the display market.

In Chemicals, the overall decline in earnings was due to a combination of factors that reduced profits across the board in terms of both demand and spreads with profit down by JPY 64.2 billion year-on-year, JPY 25.9 billion for M&A, JPY 24.2 billion for petrochemicals and JPY 10.5 billion for carbons. Market conditions for M&A continue to deteriorate with ICIS prices falling further from $1,600 in September. At the time of the second quarter earnings report, we had expected a gradual recovery after bottoming out in September, but both demand and market conditions remained sluggish throughout the third quarter.

Some customers demand for clear resin applications for home appliances was less than half of last year's year-to-date demand and demand for sheets for building materials and displays was about 2/3 of last year's year-to-date demand indicating a significant cooldown of demand chemicals were particularly affected by a sharp drop in the market for bisphenol A which had sold in the first half of the previous fiscal year and demand was also generally weak. The inventory valuation for petrochemical in the carbon was positive in the first half of the year, that turned negative from Q3.

Industrial gases grew steadily. At the NSHD's Earnings briefing, President, Hamada said that the company is focusing on growth, improved productivity and price management. Indeed, revenue expansion through price management and cost reductions through productivity, improvement contributed significantly to the increase in core operating income.

In health care, the impact of NHI drug price revisions was offset by volume growth and cost reductions, resulting in an income increase of JPY 13.9 billion. Radicava overall formulation in North America has shown a very strong start. And sales priority products such as STELARA are growing. Cost reduction measures are steadily implemented such as streamlining operations and facility consolidations. Due to the ongoing legal dispute over Gilenya, a portion of the royalty income is not recorded in revenue.

Special items amounted to the expense of JPY 129.3 billion. In the third quarter, we recorded a loss of JPY 70.7 billion related to the closure of the MMA cash flow plan and a loss of JPY 48 billion related to the wrapping up of Medicago. These 2 measures will reduce costs on a scale of JPY 40 billion next fiscal year.

In terms of cash flow, operating cash flow was a net inflow of JPY 174 billion. Cash flow used for investments amounted JPY 174.4 billion and free cash flow was an outflow of JPY 400 million. Asset cumulative for the first half was an outflow of JPY 24.5 billion. The quarter-on-quarter improvement was achieved, but still a net outflow as of the end of 9 months. 90% of the increase in inventories was due to an increase in the unit price of inventories. We have been working to reduce inventories overall and have reduced since the second quarter. But we were unable to achieve a significant reduction due to a greater-than-expected drop in demand for petrochemicals and display applications. These businesses are fairly adjusting production towards the fiscal year-end.

Financing cash flow was an income of JPY 8.8 billion due to an increase in interest-bearing debt and dividend payments. The balance of cash and cash equivalents at the end of the term increased by JPY 11.2 billion at JPY 257 billion primarily due to exchange rate differences. Total assets were JPY 5,864.7 billion, an increase of JPY 290.8 billion year-on-year, of which JPY 135 billion was the impact of exchange rates. It decreased by about JPY 140 billion from the end of the second quarter.

Total liabilities were JPY 3,964.6 billion, an increase of JPY 235 billion year-on-year. Equity totaled JPY 1,900.1 billion, reflecting the recording of impairment loss. As a result, the net debt-to-equity ratio increased to 1.45. Towards the end of the fiscal year, we will work on improving the free cash flow as a top priority through price management, cost reductions and working capital reductions, we will enhance our financial strength.

Next, revisions to the full year earnings forecast. In the previous earnings briefing, we revised the full year forecast in light of the business environment of the Chemical segment and the display-related business and the issue of the commercial production of the COVID vaccine. Situations in relevant markets worsen more so than our projection. In addition, in light of our recent decisions to close MMA Castle plant subject to the completion of labor management consultations and to wrap up Medicago in the health care business, we have revised the full year forecast.

Sales revenue is expected to be JPY 4.514 billion, down JPY 211 billion or 4.5% from the forecast announced on November 8. Core operating profit is JPY 200 billion, a decrease of JPY 40 billion from the previous forecast. As a result of factoring in a loss of JPY 129 billion from special items, operating income is now projected to be JPY 71 billion, down JPY 171 billion. Profit before tax of JPY 57 billion, down JPY 177 billion and profit attributable to owners of the parent will be revised to JPY 28 billion, down JPY 104 billion.

This is the breakdown of the full year core operating income forecast of JPY 200 billion, which has been revised downward by JPY 40 billion. Films and molding materials down JPY 11 billion, Chemicals down JPY 31 billion, of which MMA will decrease by JPY 8 billion and petrochemicals down JPY 19 billion and health care, up JPY 1 billion. This is because the recovery of the display applications market cannot be foreseen during this fiscal year and the market outlook for MMA, petrochemicals and carbon is worse than the previous forecast.

On the other hand, selection and concentration of our portfolio are progressing, and we expect significant cost reduction in fact, next fiscal year. The year-end dividend forecast remains unchanged at JPY 15 per share, the same as the interim dividend for a total amount of JPY 30 for the year. This concludes my explanation.

[Operator]

Now we will move into the Q&A session. From Morgan Stanley MUFJ Securities, Mr. Watabe. Please go ahead with your question.

[Takato Watabe, analyst]

This is a Watabe. Thank you very much. I have 2 questions. First, regarding cost reduction. In the beginning, Mr. Gilson mentioned JPY 100 billion cost reduction. And in a few months, you are able to achieve that. And for this year, 95% or 90% achieved maybe annually JPY 300,000 million or so. And regarding the 2 business exit and JPY 40 billion, it was mentioned, is that included so you are able to achieve JPY 100,000 million in a few months quite quickly?

And regarding next year's cost reduction, there are 2 business base that you will eliminate I suppose there are some revenues also eliminated from your book. So what is the net effect? Can you explain that, please?

[Yuko Nakahira, executive]

Nakahira speaking. Let me answer to the question. In the beginning, Gilson mentioned, 80% of JPY 100,000 million to be within next fiscal year, it's not that we will achieve JPY 100,000 million within a few months. So that is the clarification. So in the next fiscal year, about JPY 80,000 million, that's our estimate. And as was mentioned, we have impairment losses and that covers about 50% of that number and other activities include repairs and maintenance and unified purchasing activities. And in each region, we have cost reductions altogether will be put into that number.

And regarding the net impact and as for Medicago and also MMA Castle for this fiscal year, there is no profit coming from those 2 entities. And the cost reduction can be counted as fuel cost reduction in our calculation.

[Takato Watabe, analyst]

Second question is regarding M&A. You are top manufacturers and still, you have a deficit situation and is very challenging. What is the assessment for the market going forward in 6 months? And U.K. MMA for this fiscal year core operating loss was the amount. And with that next year, it's going to disappear. So I want to know the improvement of MMa from this year to the next.

[Yuko Nakahira, executive]

Yes. First, regarding the market condition and our assessment, we saw in September would hit the bottom, which was not the case.

As of now, regarding the price, it is over 1,500 and as the market price is it going to be stronger or not, we don't have good visibility. China and in some Asian countries, demand seems to be picking up. But as of now, by this summer, this calendar year, we don't think we can expect a significant recovery. On that basis, we are considering our actions.

As for the U.K. core operating income or loss, operating loss, we do not disclose that information. And the impairment loss that we have posted. We would be able to recover, I think, in 3 to 4 years.

[Operator]

Next from SMBC Nikko, Mr. Miyamoto please.

[Go Miyamoto, analyst]

Miyamoto from SMBC Nikko Securities. I also have 2 questions. First, related to the earlier question. You're going to seize the operations of 2 businesses, JPY 40 billion. Could you elaborate on what consists, for example, MMA, when you closed the Vermont [indiscernible] plant in U.S., I think the several billions of yen were the effect. So could you elaborate on this JPY 40 billion, which sounds to be rather large?

[Yuko Nakahira, executive]

As for the Castle plant. Well, I think you know for the amount at Vermont. So in comparison, in terms of the production capacity and the number of workforce, Castle plant is larger. So I think you can do the math. And 200,000 tonnes are the capacity, respectively. And 150 versus 400 is a total workforce. So I think that should give you an idea of the difference between the 2.

As for Medicago, the amount is not very small. So in the case of Medicago, I think the workforce was about 600 and the labor cost related would disappear. Medicago bear a loss JPY 48 billion. And as for IFRS basis, the goodwill will not be included. So I think depreciation is going to be a big factor. Am I correct? JPY 48 billion. The breakdown is as follows. Fixed asset impairment loss is the largest portion. JPY 41.3 billion and the goodwill portion, or JPY 6 billion and the goodwill MTPC, JPY 8 billion or JPY 800 million.

[Go Miyamoto, analyst]

I see. My second question relates to films and molding materials for the Performance Products, JPY 4.3 billion decline quarter-on-quarter and core operating income is expected to go down by JPY 1.1 billion further. So I understand that display applications, the suffering, engineering plastics and others, could you talk about those businesses as well from Q2 to Q3 as well as projections for Q4?

[Yuko Nakahira, executive]

From Q2 to Q3, Polymers and compounds had the impact of the concentrated maintenance turnaround in the third quarter that had in fact for films and moldings, it was most affected, especially for display application as I stated during my presentation. From Q3 to Q4, polymers and compounds maintenance turnaround impact would be litigated somewhat. So that will be a positive. For films and moldings, the display applications have yet to recover and also some impact of semiconductors as well.

[Go Miyamoto, analyst]

For carbon fiber and engineering plastics. How about those? And if possible, can you also talk about the OPL film, which you said that the volume reduction impact was rather large?

[Yuko Nakahira, executive]

For carbon fibers in Q3, Demand remained strong year-on-year, around 10% increase in sales. However, for Q4, because sports leisure applications, which have been strong, are showing some signs of softening. But overall, we don't expect a big drop. The polyester film for optical applications in Q3 like in Q2 year-on-year, around 30% reduction in volume. And in Q4, we expect some recovery over Q3. But on a full year basis, negative 25%, down 25% is our current projection. So there are ups and downs, but the greatest impact was display applications, especially polyester films for optical applications.

[Operator]

Next question from Mizuho Securities, Mr. Yamada.

[Mikiya Yamada, analyst]

This is Yamada from Mizuho Securities. I got 2 questions. In Forging the future, sales of JPY 130 billion in 4 fields and Medicago vaccine will be gone and JPY 130 billion, that would be -- could be lower. What's the risk there and MT-7117 to be planned in launched next year. But now your Phase III preparation for submission is ongoing according to the plan. And is it that we expect? And regarding MT-1186 are not much worried but regarding MT-7117, can you give some update, please? This is a question related to pharma.

[Yuko Nakahira, executive]

As we mentioned in Forging the future, we have 4 compounds in that should amount to JPY 130 billion. And considering the current situation in February 24, we have an [ IRJ ]. And at that occasion, we will give you more detail in vaccine will be gone from our plan. And other than that, Radicava is more than our plan and the start has been very good. That is quite encouraging. MT-7117, we are in global Phase III that is an ongoing activities. By FY '23, we plan to launch this NeuroDerm business. Also launching over 2024 is our plan.

[Mikiya Yamada, analyst]

So regarding the other 3 products, that is in line or better than our plan. And including that, we would incorporate into our midterm plan, and we will show you a specific ND0612 qualitative disclosure was the MT-7117. I don't really see news. I think ongoing okay, 26-week post study to be completed. And with the next fiscal year, you are confident that you can launch this product on to the market.

[Yuko Nakahira, executive]

Regarding that, Kobayashi will answer.

[Yoshihiro Kobayashi, executive]

I'm Kobayashi, thank you very much for your question. MT-7117, let me explain that. As of now, since moving in line with plan, there are no changes to the plan. And we can give you more detailed information when the timing is right, [ 26% ] for that period, right?

[Mikiya Yamada, analyst]

That's right.

[Yoshihiro Kobayashi, executive]

And considering that, you can make it in time for some mission, you're confident. Right regulation for submission is ongoing because we need to negotiate with FDA. That is also an ongoing activity.

[Mikiya Yamada, analyst]

Second question, the Performance Products segment fourth quarter forecast is my question. Can you give more details?

In the third quarter to the fourth quarter shift from 3 and Q4 film and compound outside that, you expect an increase in revenue and profit but -- and you expect -- I suppose the material cost and fuel costs are coming down compared to the previous quarter, you think the market price can be maintained or you think improve what you can expand sales? Overall, automotive sector recovery is delight. And regarding home appliances according to other companies' qualitative compound, the same market is still challenging. What's the reason why you think there would be improvement. It can be a qualitative comment, please?

[Yuko Nakahira, executive]

Thank you for your question. First of all, in the fourth quarter, our forecast and our forecast rather than strong recovery in quantity. We do not expect that in terms of the market environment. It's not yet strong. Therefore, regarding sales volume forecast, we are reflecting the short-term results so far. In the third quarter, this was true, so price management is a key. This is not related or linked to formula. Naphtha ,energy prices go down and the price go down accordingly right away. That's not the case. And our talk with business leaders is going up and the price went up and some customer wants the price to be lower. But basically, our value should be accepted.

So for pricing activities, we continue to do our best for performance product pricing and cost reduction and management that is important for margin. That's the focus of fourth quarter. That did not change from the third quarter. 3 segments, would open Q3 versus Q4, you expect revenue increase and volume is not increasing. If that's the case, the material cost and fuel cost overall is coming down. And there are some areas where you can increase prices further more right price and the mix. That's the basis for this forecast.

[Mikiya Yamada, analyst]

You think price and mix will improve?

[Yuko Nakahira, executive]

That's right.

[Operator]

We'll move to the next question. Okazaki from Nomura Securities.

[Shigeki Okazaki, analyst]

Okazaki from Nomura. I have 2 questions. First, MMA third quarter market price and projection for fourth quarter as well as rate of operation. And you briefly mentioned signs of recovery in China and some parts of Asia. Can you elaborate on that?

[Yuko Nakahira, executive]

Q3 results on ICIS-1573, ICIS price Q4 production, slightly lower than $1,600. And the current level is between $1,500 and $1,600. And the rate of operation, defense from planted plant, but overall, approximately 50%. Earlier, I mentioned some signs of pickup in Asia, but it's not a strong recovery. Still in some countries, some markets in Asia and China. For example, in India, we see some growth in demand or at least that is what we are told. But our current projection does not expect major improvement during the fourth quarter. Rather, maybe in the middle of the second quarter of next fiscal year, we may be able to expect some recovery. That is our current assumption.

[Shigeki Okazaki, analyst]

I see. In Q2, I think the rate of operation was about 70%. Now is it 50% both for Q3 and Q4?

[Yuko Nakahira, executive]

In Q3, around 50%. And for Q4, even with a slight increase, maybe 60% at best.

[Shigeki Okazaki, analyst]

I see. My second question, I'm also looking at the JPY 40 billion cost improvement expected for next fiscal year as a result of 2 operations being ceased. Do understand correctly that the majority comes from Medicago? And also, what will be the cost constraint? What are the factors, elements in Castle plant and Medicago? What will be the major items?

[Yuko Nakahira, executive]

Earlier, of course, earlier I mentioned that I can't give you the detailed amount, but it's larger for Medicago than MMA Castle. For our Castle plant, it will be larger than per amount given a larger size, and so the cost reduction effect will be larger. But Medicago will have major larger impact, related to labor costs and also in relation to R&D expenses as well, which had been large. We have been spending a lot in R&D. And therefore, that will be the biggest reduction item.

[Shigeki Okazaki, analyst]

So R&D expenses will go down, labor cost and the fixed cost will go down as well. Am I correct?

[Yuko Nakahira, executive]

Yes, that is correct.

[Operator]

Next question, Mitsubishi UFJ Morgan Stanley Securities, Ryoichi Watanabe.

[渡邉 亮一, analyst]

Watanabe from Mitsubishi UFJ. Continuation from the previous question. Regarding impairment effect in the third quarter year posted impairment. So you would have the result of that in the fourth quarter. Maybe it's difficult for you to mention next fiscal year, but I want to know the effects from that for this fiscal year? And regarding R&D cost in pharma business, I believe the number has increased than the expectation in general. Can you explain that in relation to the impairment losses?

[Yuko Nakahira, executive]

Yes. MMA and the plant closure that reduces fixed costs in the fourth quarter, billions of yen cost reduction can be reflected in our numbers right away.

[渡邉 亮一, analyst]

As for Medicago, what about Medicago impact?

[Yuko Nakahira, executive]

We haven't finalized yet, we are calculating, so within this quarter, how much effect it can be, we are still calculating that. Some operations are still ongoing. And in the fourth quarter, how much we can calculate. Well, as of now, yes, we can include as a factor but before impact will be in the next fiscal year. As for R&D expense is going up. Well, we think that is an issue. And we had been spending much effort and time, but the yen depreciated very much to FX impact was rather significant, that is a big factor for this fiscal year. That is another factor.

[Operator]

Next from Daiwa Securities. Mr. Umebayashi, please.

[Hidemitsu Umebayashi, analyst]

Thank you. Umebayashi from Daiwa Securities. I have 2 questions. First, MMA project in the U.S. The final decision has been postponed. That is what you mentioned about 3 months ago with MMA plant closure in Europe. Any changes to the project, expected project in the U.S.?

[Yuko Nakahira, executive]

The investments in the U.S. for MMA to continue to be a winner. We regard this investment to be a must. And this decision to close the Castle plant. This closure is not going to have a direct impact on revisiting the North American project. Rather, we want to increase the production volume from the locations where we have the cost competitiveness. So as to enhance our overall cost competitiveness, it's part of that strategy.

[Hidemitsu Umebayashi, analyst]

I see. My second question, as of January 20, you announced a new leadership and some of the executive officers are going to be replaced, petrochemical, carbon, pharma and our current advanced solutions and supply chain and HR, all these leadership is going to change. So especially the changes in the 3 business areas. What is the purpose? What is the expected effect of this change, especially regarding pharma from SanBio, you are inviting a new leader. So your strategy on muse, maybe that's one expectation that you have. Can you elaborate on that?

[Jean-Marc Gilson, executive]

I will take the question. And so thank you for the question. We -- for sure, there has been a lot of question about this one. And so we generally do not comment on management changes. And I think we really want to thank all the departing leaders and the business leaders who will take other jobs or will lead the company and we are welcoming the new leaders coming in. And I think we have a really strong team now to further accelerate our strategy Forging the Future.

[Operator]

From Mizuho Securities, Mr. Yamada.

[Mikiya Yamada, analyst]

This is my second round. Yamada from Mizuho Securities. Financial position improvement is my question. What's the time line for that? Net debt equity, 1.45x is rather high and net debt to EBITDA is about 4x more -- 4x. And I think you need improvement short term. That's my personal opinion. Is my understanding right? And what would be the time line? Normally, Specialty Chemicals would have 2.5x. What is your goal for that ratio?

[Yuko Nakahira, executive]

Thank you very much for your question. Again, the Q2, the net DE ratio was 1.34 and then it went down from 1.4 in the beginning of the year, we made an improvement. It was a very good direction. But this time, it is 1.45x, and there are 2 major reasons. One is FX impact that worked negatively and special items, equity areas. It got more than 1.45x as a result. In Forging the Future, we mentioned it should be below 1x and in the midterm plan, that idea does not change.

Free cash flow should improve, and that is our focus, inventory [ ARPs ] and asset sales, including all that, we are working on that. In Q4, by the end of Q4, how much improvement we can achieve that is, of course, important every year, we need to improve. That direction does not change. In the Forging the Future, you mentioned your commitment was below 1. And as long as that is still okay, then okay then for details and our members.

[Operator]

Next from Morgan Stanley, Mr. Watabe, please.

[Takato Watabe, analyst]

Thank you for the second round. Just one question. You are keeping the dividend forecast, great news. But towards the end of the year, is there a possibility of a decline in dividends or in the next fiscal year, do I say it correctly that, that risk does not exist?

[Yuko Nakahira, executive]

Yes. You didn't make a commitment right now. Am I correct? And Jean-Marc, you are nodding. So you are committing to that as well, correct?

[Jean-Marc Gilson, executive]

As long as the economy doesn't go into a complete crash. I think that we have all the necessary actions from cost savings to improvement in performance that we are committed to keeping our dividend intact. And we will talk more about it on February 24.

[Operator]

Thank you very much for your question. With this, we would like to close Q&A. Mr. Nakahira, do you want to provide closing remarks?

[Yuko Nakahira, executive]

Thank you very much for your participation. And as Jean-Marc said in the beginning, visibility of the market is lacking. We can't be optimistic, but with all of our efforts, we will forecast on cost reduction, strengthening our financial state. And after the economy turns around, then we are ready to pursue further growth, we will be preparing ourselves and thank you very much for your support.

[Operator]

Thank you very much. After we close, this conference will be archived on our website. Thank you very much. This is the end of the meeting. Thank you for your participation.