Sumitomo Chem Co Ltd Ord

It is time to start. We will now begin the conference call for the presentation of the financial results for the first quarter of fiscal year 2024. Thank you very much for your participation. Today, Mr. Sasaki, Managing Executive Officer, will give a briefing on the financial results for the first quarter of fiscal year 2024. Later, he will be joined by Mr. Yamaguchi, Executive Officer and General Manager of Accounting Department to take questions. We plan to conclude the call at 5.50. Mr. Sasaki, over to you. Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending our conference call despite your very 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 the first quarter of fiscal year 2024. Please turn to slide page 4. This page shows a summary. The core operating income in the first quarter was a profit of 5.7 billion yen, a significant improvement from the 53.6 billion yen lost in the same period of the previous year. This is the first time in six quarters that the company has returned to profitability since falling into the red in the fourth quarter of FY 2024. Net income attributable to owners of a parent for this quarter was ¥24.4 billion, a significant improvement from the loss of ¥33.2 billion in the same period of the previous year. This is the first time in seven quarters that a company has returned to profitability since falling into the red in the third quarter of FY 2022 by a segment. As I will explain the details later, all segments reported year-on-year increase in profit. The consolidated results for this first quarter include petro-rabic results announced locally for the period of January to March with a lag of three months. The loss was approximately ¥20 billion in terms of our shareholdings, which is a big loss. After fully absorbing these losses, we were able to achieve profits. IT-related chemicals had a profit of ¥18.5 billion in core operating income, a record high, as the first quarter thanks to strong shipments of display materials and semiconductor-related materials with a tailwind from the yen's depreciation. Symptomopharma is working to stop the bleeding as soon as possible through sorrel rationalization. The plan is to reduce SG&A and R&D expenses by 108 billion yen per year. And in the first quarter, This fiscal year, 28 billion yen reduction was achieved. Core operating income has recovered to a level where losses have almost disappeared. Looking at these factors as a whole, we feel that the first quarter for this fiscal year got off to a very good start towards achieving the V-shaped recovery of our business performance in FI 2024 that we have set as our goal. Now, please turn to page 5, which is the business environment surrounding us. First, economic conditions. Still, low growth is expected in terms of exchange rate. So, currently, yen is appreciating in this first quarter. Profitability improved in exports and overseas businesses due to the weakening of the yen. And below shows the business environment of our major business areas using weather marks. Let me introduce the business areas that we saw changes. First, the second from the top, automobiles. The first quarter saw a decline in production volume, which had an influence. Under that, displays. There was a strong demand for mobile device-related components. And at the bottom, pharmaceuticals. For the three key products compared to the plan, the performance performed strongly. Business environment of the first quarter was introduced and next, on page 6, let me introduce the outline of the consolidated financial results. Consolidated financial results for first quarter FY2024. Sales revenue was 612.1 billion yen up 49 billion yen year-on-year. Core operating income expressing recurring earnings power was 5.7 billion yen up 59.3 billion yen year-on-year. Non-recurring items not included in core operating income was 5.8 billion yen, improvement of 24 billion yen year-on-year. In addition to ¥10.1 billion gain on sales of fixed assets from sales of land for dormitories and company housing, restructuring costs including reorganization of Simtomo Pharma's North American subsidiary narrowed from ¥19.3 billion in the same period of a previous year to ¥-¥3.5 billion. As a result, operating income was ¥11.5 billion, a large improvement of ¥83.2 billion year on year. Finance income was ¥26 billion, increase of ¥4.1 billion year on year. Out of this, there was The gain of foreign currency transactions of 29 billion yen because of a weakening of a yen, an increase of 5.3 billion yen year on year. As a result, the net income attributable to owners of a parent for this quarter was a gain of 24.4 billion yen, improvement of 57.5 billion yen year on year. The current exchange rate is For 29 billion yen financial income includes a gain of foreign currency transactions that will be eliminated under the current rate, even if this is eliminated because of the The majority is a symptom of farmers' gain of foreign currency transactions, which influences the non-controlled shareholding. But at one moment, even if this foreign currency transaction difference disappears, still 5 billion yen would remain. Next is sales revenue by business segment. I will explain the segments with large changes. Let me skip to page 11.

In the IT related chemical segment, the co-operative income was 18.5 billion yen up 11.9 billion yen year on year. For the first quarter, this was a record high. In the analysis of IONIU comparison, in terms of price variance, selling prices of polarizing films declined in the display-weighted materials. In terms of cost variance, depreciation expenses got higher due to a new semiconductor-related plant coming online at overseas subsidiary. In terms of volume variance, etc., in addition to the increase in shipments of polarizing films and touchscreen panels, recovery trends in the demand for semiconductors led to increased shipments of processing high-purity chemicals and photoresist, Resulting in a significant increase in profits. Please go to the health and crop science segment. The cooperating income was 5 billion yen up 12 billion yen year on year. In terms of price barriers, despite lower selling prices for crop production products in South America, Profit margin improved due to higher market prices for methionine. In terms of volume barriers, the backlog of distribution inventories is being resolved in each region and due to the recovery from extreme weather, shipments increased mainly to India. Now in the pharmaceutical segment, the cooperating income was Minus 0.5 billion yen, an improvement of 32.7 billion yen year-on-year. In comparison to the previous fiscal year, in terms of price variance, selling prices declined due to the impact of NHL drug price revisions in Japan.

In terms of cost variance,

Due to streamlining business operations through combination of group companies of Sumitomo Pharma in North America, SG&A expenses decreased, resulting in a significant improvement in profitability. As for volume barriers, shipment of three key products increased. That's all for the business results by segment. The next page is about the consolidated statement of financial position. Total assets as of June 30, 2024 were ¥3,949.7 billion up ¥14.9 billion from the end of the previous fiscal year. While Sumitomo Pharma sold investment securities, due to seasonal factors, there was an increase in inventories of crop protection products and of yen converted value of assets owned by overseas subsidiaries due to weaker yen, resulting in mostly flat total assets. So there was only an increase of 14.9 billion yen. Interest-bearing liabilities totaled ¥1,518.7 billion down ¥44.8 billion year-on-year. Equity was ¥1,226.9 billion up ¥62.6 billion year-on-year. As a result, the debt-to-equity ratio improved to 1.24 times. which was an improvement of 0.1 point. Moreover, we are disclosing for the first time the status of strategic shareholdings which is of high interest to investors. If you look at the right bottom corner of this slide, the ratio of cross-shareholdings of Semitomo Chemical and Semitomo Pharma to consolidate total equity is shown here, and as of the end of March 2024, it was 15.6%, but that was reduced to 4.9%. Details will be explained on the next page. We have been reviewing the significance of our strategic holding of shares every year and selling them as necessary, but as we facilitate cash generation as part of short-term intensive performance improvement measures, we have been accelerating the reduction in recent years. This graph shows the balance of strategic shareholdings by Semitomo Chemical on a parent basis and Semitomo Pharma. which have recently decreased significantly due to the sale of Roivant shares by Sumitomo Pharma this year. Now, the dark blue part shows the Sumitomo Chemicals non-consolidated balance. Since 2021, the balance has been declining because of the sale. Due to the transfer of about 18 billion yen worth of shares of Inabata & Co., which was excluded from equity method affiliates as a result of partial sale of its shares last year, the decrease may appear small, and that is about 18 billion yen, so the decrease may appear small, but If this factor were excluded, in this graph as you can see on the right hand side corner, the balance would be about one third of that in fiscal 2021. The graph below shows the balance as percentage of consolidated total equity. In fiscal 2023, Due to a decrease in total equity, the denominator caused by the posting of large deficit, the ratio rose to about 16%. But this year, because of accelerated sale, it is now below 5%. Now the last page. In the first quarter of this fiscal year, we achieved a significant improvement in profits at all levels year on year. And as a first step, we were able to return to profitability. As we reported in May, when we announced our financial results for the fiscal 2023, we had expected to start the first quarter in this fiscal year in the deficit. About 20 billion yen or more than 20 billion yen in deficits were assumed, but our performance improved more than expected, especially in IT-related chemical segment. The net income attributable to owners of the parent for the quarter exceeded the annual forecast due to a strong core operating income and foreign exchange gains from a weaker than expected year. 24.4 billion yen, which is exceeding the 24 billion yen, which is the annual forecast. As indicated in the table, the progress of core operating income against the annual forecast is not that large, but on our part, We feel that we were able to return to profitability at the early stage, so we feel a strong sense of confidence. From the second quarter onward, the contribution of crop protection business, which is highly seasonal, will be added. So we expect that the probability of achieving the announced forecast has increased to a considerable degree. We appreciate your continued support for our company. That is all for the financial results. We'd like to start entertaining your questions. Thank you.

Thank you. We will now receive your questions. Now, the first question is from Morgan Stanley, MEFG Securities, Mr. Watabe. Thank you, Mr. Watabe, from Morgan Stanley. Congratulations for achieving profits. I have two questions. One, on the 30th of April, there was an announcement of the structural reform. About the progress, the cash flow, 600 billion to be created or short-term concentrated improvement of performance, what is the point of progress? The Q1 core operating income, does that include the sales of assets or not? Thank you for your question. Thank you very much for your words of congratulation about your question. On the 30th of April, we announced our structural reform or the immediate term concentrated measures to create cash of 600 billion. At the moment, it is advancing quite smoothly. We will be increasing the amount and at quite a fast pace I think we are able to catch up. In some areas there are some points that we are not yet able to announce but we are starting to get quite sure. And your other question? We've seen this profit. Sales of businesses, only a few is included. There were some announcements we have already made in China, LCD chemical related assets or and other businesses which don't have such a big impact. Thank you. Then, the large increase in profit items related to chemicals is nearly based on your ability, there's nothing particularly included. Yes, in that sense, some one-time asset sales are not included, and actually, As I explained, display and semiconductor materials demand increased, so shipments also increased. That is the major impact. I see. and the plan is a core operating income of 100 billion, but each segment. In IT related chemicals, I think they are having good results, but essential chemicals and the health and crop sciences, what is that situation? Arabic seems to be difficult for the April to June period. So, what is the current market situation? Thank you for your question. Yes, first of all, for IT related chemicals, as I mentioned, I expect their good performance will continue for a while. And for health and crop sciences, first quarter usually is not that large. South America would be in the second quarter, and North America also. Profit concentrates on the fourth quarter. That is the situation. So at the moment, I cannot say anything in particular. I don't have any information at the moment, but I believe we can move forward to achieve a plan for essential chemicals, as I mentioned, petro-rabic financial results, You have to wait for a while. We are waiting for their financial results. And after that, MMA market situation is recovering, for example, but polyurethane, polyethylene is a little better, but polypropylene is in a very difficult situation. So, centred on China, production capacity is increasing, but demand is not increasing that much. This situation is continuing. I understand. Thank you very much.

Next question, please. Mr Yamada from Mitsuo Securities. Yamada from Mito Securities. Confirmation on the previous question by Watabe-san. In the first quarter, the one-time factor like business transfer is not included. Is it only for IT-related chemicals or for the whole company? The whole company. There is not much included in the whole company. So this is a real earnings power that is shown for the whole company.

Yes.

Thank you. And then my first question. In essential chemicals, the cost variance plus 10, so depreciation cost may have been lower, but in the first quarter in the last fiscal year, there is a large non-recurring losses and 70% were from essential chemicals, that's what is said. Depreciation cost decline from that has not manifested itself that much. Has there been any reshuffling of the items? Thank you for the question. For the essential chemicals, cost variance that you mentioned, the gain on this part, well, large portion of that is From the last fiscal year's impairment loss that has resulted in the increased gain, but there is an increase in fixed costs, so it may look a bit smaller. So what has increased? And from the second quarter, would those items see decline? Well, in the first quarter, there is not large item, but there is repair and maintenance expenses that was in a lump sum manner that was incurred in the first quarter, but we will not expect this to continue. You don't think this to continue? Does that mean that The impairment loss effect from the last fiscal year would be manifesting more in the second quarter. Yes. Okay. Thank you. And the third question, the balance sheet. The other asset items, There is no breakdown that is seen here. So with this yen depreciation in foreign exchange adjustment item, I think there will be larger number, but that is not the case because investment securities valuation amount has been declined. Is that the reason? Yes, exactly. Yes, thank you.

Thank you very much. The next question is from SMBC Nuclear Securities, Mr. Miyamoto. Thank you. I am Miyamoto from SMBC Nuclear Securities. Congratulations on returning to profit about health and crop sciences on page 12. First, there is a price variance of plus 9 billion on Volta Hand on page 22 in analyzing Sales revenue, there's volume variance of plus 800 million. What's the background of this difference? And on page 25, by region sales. In general, there's an increase of 4.4%. If you exclude foreign exchange impact, maybe there's a reduction. So how would the volume fluctuate if you exclude foreign exchange influence? And also you... South America, you mentioned about impact of competition, but in South America, generic price compared to previous year, I think you expected increase, but is the situation changing? So, what is the impact that you feel? What is the situation of health and crop sciences? Thank you for your question, and thank you for expressing your congratulations. For health and crop sciences, For sales revenue, volume variance, and in the profit and loss analysis, volume variance, there are discrepancies. I think that is what you meant. In profit and loss, it says volume variance and others, so there are other factors also included. For example, the weakening of the yen for internal transaction that is written off, but If there is a gap in terms of foreign exchange rate influence, that would be included in the volume of variance. So there are different factors included. And also, in terms of sales revenue, there is a decline, but profit is reflected in a higher figure. The gross profit with things of High unit price or low unit price depends on composition, there may be differences. What was good this time, as I have mentioned, is India was doing well, and in general, for the inventories, They are recovering in each region. North America, South America, we are seeing improvements. In particular, India was doing well. On the other hand, as I mentioned, in South America, in the beginning of the year, we expected improvements. However, the current situation within the first quarter, competition was severe. So price was not raised that much. That was the result of the first quarter. I see. About the volume of shipments of crop protection chemicals, was there an increase? For shipment volume and the sales revenue, Looking at the data of sales revenue, which I think was disclosed, in South America, centered on herbicides, there are declines. That is a major factor. So there is a decline. And in terms of volume, it's not that different, but price was difficult. And in Asia, excluding India, There was a recovery in the weather and it's growing quite a lot. In particular, there was no impact of sales of businesses in this segment. There is an influence of an exchange rate and non-realized gains, right? Yes, no asset sales are included. I understand. Thank you very much. My second question is also about health and crop sciences. The situation of indiffering, how much is that growing? You mentioned that the composition has improved, and the new herbicide, Nucleosil, which was registered in Argentina, what is the situation? You can expect a lot of increase in sales of those products, so could you tell me about the situation of those products? Thank you for your question. First about Indifilin, in South America or in Brazil, It was launched in 2022. And in this season, this is the third season, and gradually there are increases, and this season we expect increase in shipments. But in the first quarter itself, still we are not seeing those effects yet. So after the second quarter, I believe we can expect such effects. And your other question about rapid diesel. In Argentina, as I mentioned, we were able to get registration. The main market is Brazil, but we are not yet able to get a registration in Brazil. So going forward, I believe Argentina will also grow, but the main market, Brazil, we hope we can get an early registration. And as I mentioned, the peak sales, we expect about 100 billion, so I hope that at an early stage we will be able to launch in each region. I understand. I'm looking forward to that. Thank you very much.

Thank you. Thank you very much. Now I'd like to move to the next question from Daiwa Securities. Mr. Umabayashi, please. Thank you very much. Umabayashi from Daiwa Securities. I have a question about IT-related chemicals. In the first quarter, things were quite well. and maybe you can continue this momentum in the second quarter, that's what you said. But the first quarter may have been too good. That were some of the views that were expressed. So with regard to displays and semiconductors in first quarter and second quarter, any changes in between those different quarters? Any changes that you are expecting? Can you explain more on that? and with regard to sensitivity to foreign exchange, it may be difficult to calculate now, but with ICT, what is the sensitivity for foreign exchange? How are we supposed to look at that? Thank you for the question. For the last question, the sensitivity to the foreign exchange fluctuations, so the whole company, 1.5 billion yen to the 1 yen change, and as for IT-related chemicals, about 10 for fiscal 2034, or 1 billion. So with the yen depreciation and appreciation, there is some difference in the impact, and so on. As for IT-related chemicals, in the first quarter, as I explained, but in particular, as for display-related products, in terms of polarizing films, Perhaps in the second quarter, there are some that have been moved up to the first quarter, partially. There may have been some front-loading, but in general, we are looking at the demand being quite strong, so this status is expected to continue in the second quarter. Obviously, this We believe that we can do As for the touch screen panels, things are not bad and that is expected to continue in the second quarter. As for semiconductor related materials, depending on the products, there are some variances. But high purity chemicals is performing quite well. That is how we see it. And AI related products like products for data centers, for instance, we have high expectation on those types of products. I think it is a fair statement to make, even now. So it's not just high purity chemicals, but including photoresist, going forward, things are expected to go quite well. Thank you very much. Just for clarification, on year-on-year basis, 12 billion yen in profits increase. Display and semiconductor related. Which one is larger? The display is larger. Is that correct? Yes, that is correct. Thank you. And then I have a question about the restructuring initiatives. As you have been saying, there are various projects that are ongoing, and you are just implementing those initiatives steadily. And if you do that, then you can achieve the target for this fiscal year. Is that correct? Thank you for watching. What has been initially planned has been already achieved, so there is no additional sale that you are planning. Is that correct? Can you elaborate more on that? Thank you for the questions. Well, the short-term intensive improvement initiative for profitability, it does include a sale of businesses and some of the assets sale, including the related companies. and what has been already announced is only part of those efforts and now of course we have the counterpart that we have to deal with and we are now under negotiation intensively with some partners Some may be a bit challenging, but in other deals, things look better. So there are those projects. So 100 billion yen does include some sale of businesses. That's what we said at the beginning of this year. of course we have to achieve those but in addition in terms of profitability the IT related chemicals and other segments profitability could make more progress than we expected so the probability of achieving 100 billion yen has been increased that's what we said so we have to steadily and meticulously implementing those initiatives but some have higher probability of success in terms of restructuring of the businesses than others. If you can understand that way, that would be appreciated. Thank you.

Thank you very much. The next question is from Nomura Securities, Mr. Okazaki. Thank you, I'm Okazaki from Nomura Securities. Congratulations for a very good performance in Q1. My first question is also about IT-related chemicals. In particular, from Q1, display was doing very well for television use or for mobiles. For mobiles, for the Chinese companies, the large companies, which were the companies doing well? And towards the second quarter, the direction of display, what would you assume? Thank you. And about your question for display, Let me talk about displays. The large-sized products for televisions. In this area, sometimes we see recoveries, but then it turns bad again. It goes up and down. On the other hand, for monitors, I believe it will be doing well going forward. But what was better is for mobiles. OLED, polarizing film was doing very well. And to a certain extent, I believe this may continue going forward. As I mentioned, in Q1, There was some demand carried forward from the second quarter, so this may not be a straight increase from Q1 to Q2. That is polarizing films. For less touchscreen panels in the first quarter, I think it was doing well. And compared to the fourth quarter, it was quite good. And I hope this situation will continue towards the second quarter as well. There may be some demand carried forward, so it may not be growing immediately, but I think the growth will continue at a certain pace. That is for this place. and for semiconductors, it will be difficult to say. Usually, towards the second half of a year, we expected full-fledged recovery. But first quarter was good, but going forward, I believe, That situation will continue in a stable manner towards a full-fledged recovery. Thank you. For confirmation, for mobiles, an OLED was good. Is that centered on the China area companies? What is the situation for major companies? Rather than Chinese companies, well, Sales to China is growing quite steadily, including for smartphones. That is my understanding. And also for large companies, is that going well? Yes, you are right. Basically, you are strong for OLEDs. So in total, does it mean that you are increasing your share? I cannot disclose information about the individual customers, but in principle, OLED is doing very well. Thank you very much. My second question, the core operating income for this year, sales of businesses, one-time gains of 30 billion is included, but at the moment, Does that remain unchanged? And in Q1, they are not yet included. It may be difficult to say what is the timing, but do you think there will be influence from the sales of businesses in the second half? Thank you for your question. Some level of sale of businesses are included in these figures. And to do that, we are now working There is a counterpart to that, so it is difficult to say when this is going to be realized, but after the second quarter, I hope we can realize. So we are now doing our efforts to do that. Basically, the amount that you had remains unchanged. Within the 100 billion, a certain amount is included. But we are not yet in a situation that we have to change the figures. That is all. Thank you very much.

Thank you very much. We are approaching our scheduled ending time, so we would like to take the last question. JP Morgan Securities, Nakada-san, would you please submit your question to Juan.

Thank you.

Congratulations on being profitable. I had not expected this, so congratulations. Petrolabic, there is a cumulative loss that is building up. Petrolabic Thank you for the question. As we explain every time, since this is a listed company, there is a limit to what we can say, so I hope you can understand that. And for the first part of your question, the task force has been formed, and petro-rabic profitability improvement is being discussed, including various initiatives. That is how we are. And that's exactly what we said on April 30th. And that situation has not changed. That has been continuing. And also for April to June performance, we're not privy to that. So probably they will make an announcement as part of earnings call and we have to wait for that. and because of laws in Saudi Arabia for the capital or equity if there is a certain level of losses accumulated then you have to make announcements or you have to take action that is part of the regulation or laws so in terms of compliance with the laws there will be certain procedures that they would follow but at this moment There is nothing that we can say because we have no idea. So we are just waiting for the information to come. Thank you. So if they are in a situation where action is required, would that facilitate and accelerate the discussion for a solution? Is that the expectation that we can have? Well, originally, Regardless of the situation, we are aware of this challenge and we have been going through various discussions already. So they may not be exactly or directly linked with the actions required by the law, but if the initiatives can be presented as soon as possible, that would be better. Thank you. That's all.

Thank you very much. This concludes the Q&A session. Lastly, I would like to invite Mr. Sasaki for the final remarks. Thank you very much for attending the conference call today. The first quarter, as I explained, we were able to make a good start, but we should Thank you very much. This concludes today's conference call. Thank you very much for your participation.