Sumitomo Chem Co Ltd Ord

Thank you for your participation. Mr. Sasaki, Managing Executive Officer, will give a briefing on the financial results for fiscal year 2023 and outlook for FY 2024. Later, he will be joined by Mr. Yamauchi, Executive Officer and General Manager of Accounting Department, to take questions. We will conclude the call at 5.20. Mr. Sasaki, over to you. Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending our conference call despite your busy schedule. I'd like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for that. Now, let me start with explanation of financial results for fiscal year 2023. Please turn to slide page 4. Consolidated financial results for FY2023. Sales revenue was ¥2,446.9 billion down ¥448.4 billion year over year. Core operating income expressing recurring earnings power. Thank you very much. and our Chiba Plant Essential Chemicals Manufacturing Facilities and Ehime Plant Misayuni Manufacturing Facilities and the Singapore subsidiary MMA Manufacturing Facilities totaling 269.4 billion yen. In addition, restructuring costs of minus 48.4 billion yen including reorganization of Simitomo Pharma's North American subsidiary Sumitomo Pharma Co Ltd Keigo Sasaki, Hirokazu Murata, Koichi Ogino, Juan Ferreira and income reduction of 457.8 billion yen year on year. Finance income was 26 billion yen, a worsening of 5.2 billion yen year on year. Out of this, there was a gain on foreign currency transactions of 32.5 billion yen because of a weakening of the yen. A worsening by ¥3.3 billion year-on-year Income tax expenses was ¥2.7 billion down ¥44.4 billion year-on-year As a result, net income attributable to owners of a parent posted a loss of ¥311.8 billion The exchange rate and NAFSA price which affects our performance, the average US dollar rate during the term was 144.59 yen to a dollar and NAFSA price was 69,100 yen per kiloliter. Yen weakened and feedstock price decreased compared to the previous year. Next is the sales revenue by business segment. Sales revenue in total decreased by 448.4 billion yen year-on-year. Looking at the situation by segment, sales revenue declined in all segments. As for the year-on-year change of sales revenue, analyzing by factors, sales price went down by 143 billion yen and volume dropped 395.9 billion yen. Foreign exchange transaction variance of foreign subsidiary sales revenue increased by 90.5 billion yen. The total core operating income decreased by 241.8 billion yen year on year. Analyzing these changes by factor in terms of price, this was minus 76 billion yen in cost plus 119.5 billion yen on voucher hand. Volume variance including changes in equity in earnings of affiliates was minus 285.3 billion yen. Next, let me talk about the performance by segment. Essential chemicals and plastic segment. Core operating income was minus 90.7 billion yen, down 56.5 billion yen year-on-year. For price variance, profit margins deteriorated mainly due to declining overseas market prices of synthetic resins. In volume variance, there was a deterioration in the performance of PetroRabic, an equity method affiliate, due to deteriorating refining margins and worsening profit margins for petrochemical products. Next is energy and functional materials segment. Core operating income was 7.8 billion yen, down 7.4 billion yen year on year. Demand declined mainly for automotive applications and shipments of resource null and separators declined. IT-related chemical segment, core operating income was ¥44 billion, down ¥3.6 billion year-on-year. Price variance in displays-related materials, selling prices fell for polarizing films. For volume variants, shipments for photoresists and processing chemicals declined with a drop in semiconductor demand. On the other hand, shipments for polarizing films and touchscreen panels increased. Next page. Health and crop sciences segment. Core operating income was 30.9 billion yen. Down 26.4 billion yen year on year. Price variance. In addition to decline in the selling prices for generic products, post-pattern products in South America, profit margins deteriorated due to decline in market prices of methionine. For volume variance, there was an increase in methionine shipments. Next page. Pharmaceutical segment. Corporate income was minus 133 billion yen, down 149.2 billion yen year-on-year. Price variance. Sales prices declined due to the impact of National Health Insurance drug price revisions in Japan. Cost variance. Selling costs and SG&A expenses decreased due to the reorganization and rationalization of Sumitomo Pharma's North American subsidiaries. Volume variance shipments decreased due to the expiration of exclusive marketing period of Latuda, which was larger than the This is all for the performance by business segment. Next page is consolidated statement of financial position.

Page 12, please. Total assets at the end of March 2024 were 3,934.8 billion yen, a decrease of 230.7 billion yen from the end of the previous year. The main reasons were a decrease in cash and cash equivalents, reduction in inventories to improve working capital, and decrease in PPE and goodwill and intangible fixed assets due to impairment losses. Interest-bearing debt is ¥1,563.5 billion, The equity was ¥1,164.4 billion, down by ¥324.8 billion from the previous year. Next, I will explain consolidated cash flows. Operating cash flow was ¥-¥51.3 billion, This is mainly due to the increase in loans to Petro Arabic. As a result, free cash flow was negative 163.6 billion yen, down by 255.8 billion yen from the positive 92.2 billion yen in the previous year. Financing cash flow was 49.2 billion yen, a 227.7 billion yen increase from the previous year. Next, I will explain the revised full-year forecast for FY24. First, I will explain the business environment surrounding our company that is the premise for our full year forecast for FY24. This is page 15. Regarding economic conditions, inflation is expected to slow down worldwide and the global economy is expected to stabilize. but low growth rate is expected. I will only mention some distinctive points of FY24 forecast compared to FY23 actuals. First, Regarding the petrochemicals and raw materials at the top, we believe petrochemical market bottomed out in FY23 and will gradually recover toward FY24. But the extent of the recovery is limited and the low margin will continue. Next, regarding the semiconductors, fourth from the top, the demand is headed for a gradual recovery and full-scale recovery is expected towards the second half of the year. As for the crop protection, third from the bottom, overseas distribution inventories are being eliminated and, as a result, We expect the recovery of sales volume, especially in South America. This has been the main business environment for FY24. Next, I will explain consolidated business forecast on page 16. For FY24, Our focus has not changed from what we announced on April 30th. Sales revenue will be 2 trillion 670 billion yen up by 223.1 billion yen from the previous year. Co-operating profit will be 100 billion yen, up by 249 billion yen from the previous year. Operating income will be 70 billion yen, up by 558.8 billion yen from the previous year. Net income attributable to owners of the parent will be 20 billion yen, up by 331.8 billion yen. Thus, we expect increase in sales and profits. The assumptions for exchange rates and NAFTA prices are as shown on the slide. We will make utmost efforts to achieve a V-shaped recovery in FY24. I will discuss the sales revenue and core operating income by segment from the next page. We expect increase in operating income and net income attributable to owners of the parent thanks to the improvement of core operating income as well as the reduction in impairment losses and expenses for business restructuring. As for the dividend for the current year, We will pay an interim dividend of ¥3 and year-end dividend of ¥6 per share. Thus, the annual dividend will be ¥9, the same as the previous year. Next, I will explain the sales revenue and core operating income by business segment on pages 17 and 18. Revenue focus for FY24 is 2 trillion 670 billion yen, up by 223.1 billion yen from FY23. By segment, we focus to increase in revenue in all segments except energy and functional materials and IT-related chemicals. Looking at the analysis of Ariath, Sales price is plus ¥79.5 billion, volume is plus ¥168 billion, and foreign exchange for the sales revenue of overseas subsidiaries is minus ¥24.7 billion. Please turn to page 18. Focus for core operating income is ¥100 billion, up by... 249 billion yen from FY23. We expect increase in profits in all segments. By variance analysis, positive 19 billion yen for price, positive 141 billion yen for cost difference, and positive 89 billion yen for volume, etc., including changes in equity in earnings of affiliates. Let me now explain the consolidated cash flows. Focus for operating cash flow is 160 billion yen increased by 211.3 billion yen from FY23. Investment cash flow will be 110 billion yen up by 222.2 billion yen over FY23 due to the short-term intensive business improvement measures. This will result in positive 270 billion yen in free cash flow. Interest-bearing debt balance at the end of FY24 is expected to be 1 trillion 320 billion yen. That is all regarding the forecast. And for the first half, We decided not to disclose that at the focus because it is difficult to expect. And so we will make company-wide efforts to achieve a V-shaped recovery. Because this is the top priority items and that will include the restructuring or the rationalization. But it is difficult to expect the timing or it is not appropriate to actually disclose the timing. So we decided not to disclose the interim forecast. And thank you for your understanding. And as for the FY24, the performance, we will still see the loss in the first quarter. But after that, towards the end of the fiscal year, we expect the gradual improvement. And that is all I have to say on business report. I would like to take your questions now. Thank you.

Now let's receive your questions.

Now, we would like to receive the first question from Morgan Stanley, MUFG Securities, Mr. Watabe. Thank you. This is Watabe speaking. My first question is about your measures to improve your revenue in a short period of time, the last fiscal year and this fiscal year. You include about $20 billion in the previous year. but that is not allocated by segment. So what was that influence and what is your forecast for this year? The immediate term concentrated measures to improve business performance in FY23 implemented some measures and already they have been announced. For example, in the health and crop sciences sector Post-harvest business sales, that was one thing that was done, and some businesses. We withdrew from some businesses. In FY23, the influence was not that large. And already, We have announced, for example, in the pigment business or China, LCDO chemicals, in FY24, towards FY24, there are some businesses that... Thank you for watching. It was mentioned that for FY23 and 24, comparing those two years, the immediate term concentrated measures, about 3 billion was the figure described. By segment, is that being included? Yes, to a certain extent they are included. And under others, also some items are included. and others, plus which includes others, is 20 billion. So by segment, it would be about 10 billion? Yes. Under others, yes. In FY23, you said there was not much influence, but for IT-related chemicals, there was a profit in the fourth quarter. So that was based on your actual real capability and also from crop sciences, right?

Yes.

In some areas for IT-related chemicals, they were doing well. And I think it's right to say that that is our capability. But for health and crop sciences, we didn't achieve the forecast. So fourth quarter didn't grow as much as we had expected. to consume the inventory in the distribution process didn't proceed as we had expected. And in FY24, there may be a reaction to that. We expect positive shipments. For health and crop sciences, the current environment in Brazil, trend of generic price. You expect higher prices, mainly for methionine, Is that the factor you expect for this year? Yes, this year, for health and crop sciences, we are assuming positive price. As you mentioned, methionine, and also for crop protection chemicals, generics or post-patent products. Price is declining quite a lot in FY23. Compared to that, price itself will be recovering. That is what we expect. Besides price, in terms of volume in South America, we expect expansion of sales. So inventory in the distribution will gradually decline. In North America and South America, we expect expansion of sales. Understood. Thank you very much. This is not a question, but for confirmation, you can answer later. The SG&A in your fourth quarter is increasing by about $200 billion compared to the third quarter. I hope you can answer that to me later. Thank you very much.

Thank you, Mr. Watabe. Let's move on to the next question from Mizuho Securities. Yamada-san, please. This is Yamada from Mizuho. I have two questions. Thank you. The first question. I don't know how much you can answer. But I would like to know the situation of the improvement of the situation for essential chemicals and loan to Petrolabic. And for the essential chemicals, there is the major decline of the loss, and it's a plus 22.7 billion over FY23. And so how much of that is thanks to the receipt payment difference? And how much is due to Labic loan? and receiving the payment difference. And so looking at the others, there is the increase for the fixed assets. And so if it's a loan, it's like 100 billion yen. And of course, the Forex, the changes may be affecting. And so if, am I correct to assume that it's a large amount of cash outflow? and that is that like investment or the loans is that does it play a major role or is it for the TAVIC? Thank you. Well, your question covers a quite large scope. So let me try to answer one by one. The first of all, it's regarding the earnings of the essential chemicals. And for the price difference or the cost difference, yes, we expect a certain amount, but also we expect some difference in volumes. And so regarding the pedographic, I am not able to answer to your question, but it is included to some extent. On the other hand, for the usual expansion of the cells, in our explanation, I talked about the business environment. Overall, we do not expect rapid growth, but compared with FY23, we believe that there will be some improvement. and also for some products for example there may be a little increase for licensing and those are may have some impact and that will result in the difference of the volume and for the the receiving payment difference it's not including well The price of NAFTA is like 75,000 yen, so we do not expect a very large difference. This is a comparison from the previous year. Last year, the difference was negative because the recline of the NAFTA price. But this year, it's the positive. So there will be some kind of some billion yen. But the amount itself is not a very large one, right? That's correct. And for the loans to Petrolabic. So there may be some impact of the foreign exchange, but currently we have the loan of $750 million, and so that's the amount, and if they We have hit the ceiling. And this is the subject of the JBIK. What I mentioned is the loan from our company. And so it's on our BS. But what you say, JBIC, is that it's a project finance. You are mentioning project finance, right? Regarding the project finance itself, not only for the JBIC, but for others, if there is the guarantee, we will join. And as for the project finance, There is the termination, and so we will not guarantee the whole amount, but what is put on the footnote is for one-time payment, actually for June and December, Petrolabic is making the payment in those cases, and so one-time payment, We guarantee the 50% of that for one time. And so the deposit and finance related amount is not a very large one. I see. I didn't have a good understanding. Thank you very much for your explanation. And next question, please. The second question is also probably it may be difficult for you. to answer, but this is a pharmaceutical. And the price difference is zero for the FY24. What is the impact of the price reduction impact of the price cut reduction? The impact of the price cut is not a very major one. And so in our analysis, it's zero. That's the impact of the price cut. It may not be exactly zero, but the amount is not a very large one. The amount is so small that it can be absorbed from other items. It's not really meaningful in terms of the analysis. Is that correct? Yes, that's correct. Thank you.

Thank you very much, Mr. Yamada. Next question is from SMBC New Coast Securities, Miyamoto-san. Thank you. I'm Miyamoto from SMBC Nuclear Securities. I have two questions. One for health and crop sciences sector performance. The fourth quarter, post-harvest related were sold and a certain level of profit was recognized. And where is that included in the cooperating income on page 10? Is that included in the volume of variance? And on the page 29? Volume variance, 42.4 billion plus 9.6 billion in terms of volume variance. In terms of marginal profit, the volume variance increase seems to be mild. Is that related to post-harvest? And related to that, for the new fungicide, endocrine and biorational, what is the trend in the last fiscal year and your forecast for the next fiscal year? For FI23 Q4, business divestiture, as I mentioned, that would be included in the volume variance. So for comparing FI24 and 23, for health and crop sciences, volume variance may seem small. So, that factor is included partially. So, you are right. And, for Indiferin, it was launched. NFI24 will be the third year since the launch. The situation in South America in the last one or two years was not as good as we had expected. For FI24, distribution, inventory issues we expect will be resolved. So we expect sales to be very aggressive. So we include a certain level of expansion of sales. Thank you very much. I am not in position to answer your question about the actual amount, but in differing in others, sales scale, I can say that we can expect a certain level of revenue increase. For biorationals, I cannot tell you the actual amount, but in terms of growth, somewhere from about 10% to 20% increase is expected. We ask for your understanding of that. Thank you very much. My second question is about hydro-related chemicals. Three months ago, in the forecast, you said you expect the core operating income to increase by about $6 billion. Could you give me the details? And on page 28, you have figures for the new fiscal year. Cost variance is plus $2 billion. And for display materials, polarizing films... There has been quite a lot of restructuring, so I expected a large increase, but cost of semiconductors may be increasing. What is your forecast for the new fiscal year? First, in Q4, more than we had expected, the result was better. From what we had forecasted, major factors is display-related materials, OLED-related, and touchscreen panels, glass touch, increased more than we had expected. Growth was not that large, but compared to our forecast, it was not that large, but semiconductors, materials, were better than our forecast in the fourth quarter. On the other hand, this fiscal year, FY24, compared to FY23, as increase in profit income, we expect about 3 billion increase. So there is quite a lot of negative in the price variance for films. Certain price decline is expected. And for cost variance, it's 2 billion, which is not that large. That may be your impression. But with rationalization, we went through reorganization. And for polarizing panels, plants were stopped and were shifted to automotive use. There were a lot of restructurings taking place. So the effect of rationalization will be reflected. On the other hand, as you know, our semiconductor materials, EFI 23 and 24, they are plants that will be starting. So for a new plant, depreciation will increase. So cost variance... Because of that, it will not be that large. That is how you should interpret. And expansion of sales is expected, which is reflected in the volume of variance. Photoresist, polarizing fuel, semiconductor fumes, which areas will have larger increasing sales? Fumes are included, semiconductor materials are also included. Both are included. Understood. Thank you very much.

Thank you very much, Mr. Miyamoto. And next question from Daiwa, Umebayashi-san, please.

Thank you.

My question is about the essential chemicals that Japan and Singapore, other than rabbit, Could you share your image about the market situation and the operating rate? In Japan and Singapore, first of all, Japan and Singapore, yes, and both and others. In FY23, there was a periodic shutdown maintenance and compared with that, FY24 the situation is different. And for others, in FY23, the Chiba plant and Singapore MMA had the have booked the impairment loss and so FY24 the depreciation will be less. And in addition to that and so annum business giving up the annum business that is one of the restructuring and the impact can be expected for the FY24. And Also, the improvement of the trading conditions and some business environment improvement can be expected, although the actual extent is not a very big one. And based upon those, we have come up with the forecast. Thank you. The second question, maybe it's difficult for you to answer. Earlier, you mentioned that it's difficult to disclose the first half, but you gave us the idea that Q1 is the loss, but it will be the improvement later on. and for the Q1 in terms of the segment the essential chemicals and the pharmaceuticals are the difficult segments is a correct understanding and then after Q2 you would expect the improvement and do you mean that from the Q2 do you think you will see some profits? Thank you for your question and yes it's true it's difficult for us to As you mentioned, or as you suspected, for the Petrolabic, the impact from January to March, and that is included. And other than that, It's difficult to say, but we have been taking various measures such as, for example, in the pharmaceuticals, we see the gradual improvement. Especially for the North America, the business restructuring or the structural reform was implemented, and we will see the impact gradually. And in Q1, there may be not the full-fledged effect as seen, but after Q2 and later, we expect improvement. But in terms of the amount or the extent, it's difficult to explain now. In addition to that, there are some The selling of some business and others, the reorganization could take place. And that may have some impact, a potential impact, and so we don't want to mislead or have them... Thank you very much. Thank you very much, Mr. Miyabayashi.

We are approaching the time to conclude, so the next question will be the last question. And please leave me to one question from Nomura Securities, Mr. Okazaki. Thank you, I'm Okazaki from Nomura Securities. On the 30th of April, the material on page 6, cost reduction rationalization 33 billion, is written, but in this material, this time, from pages 26 to 29, Thank you for your question. First, as for your first question, yes, you are right. And for the middle-term concentrated measures, yes, you are right. Basically, each segment, it is reflected in the volume variance. And the scale, whether it is large or small, At the moment, I'm sorry I cannot mention that. Thank you very much. That is all from me. Thank you.

Thank you very much. Now this concludes the Q&A. So Mr. Sasaki has a few words at the end. Thank you very much for your participation. The performance in FY23 was quite poor and compared with that for the FY24 we determined to achieve the V-shaped recovery and also we will strengthen our damaged financial position and we appreciate your continuous support. Thank you very much. This concludes today's conference call thank you very much for your participation.