Sumitomo Chem Co Ltd Ord

I'll be a facilitator today. My name is Kobayashi from Corporate Communications. Thank you very much for attending our investors' meeting for FI 2024 First Half Financial Results, Management Priorities, and Business Strategies. First, the President, Mr. Iwata, will make a presentation, and later we will receive your questions. We plan to conclude at 5.45. Now, Mr. Iwata, over to you. Good afternoon. I'm Iwata, the President. Thank you very much for attending our investors' meeting despite your very busy schedule. I'd like to thank the investors for your daily support and understanding to our management. Thank you very much for that. This is today's agenda. I will try to focus my explanation as much as possible and leave As much time as possible for Q&A. Please turn to page 3. First, this is today's executive summary. It is divided roughly into three sections. One is business performance. Core operating income of the first half of 2024 achieved a V-shaped recovery of more than 120 billion yen year-on-year, with IT-related chemicals reaching a record high for the first half and pharmaceuticals resolving the losses. Unfortunately, there was a net loss of 6.5 billion yen falling short of a positive income due largely to one-off factors such as foreign exchange losses and debt forgiveness of RABIC. But there was significant improvement of about 70 billion yen from the previous year. For FI2024 full year, we forecast core operating income of 100 billion yen and net income of 25 billion yen, an increase of 5 billion yen over previous forecasts, including the one of loss of RABIC. First, we will focus on achieving a V-shaped recovery in the current fiscal year and then aim to achieve core operating income of 100 billion yen in FI2025 based on actual performance. Thank you very much. Thank you very much. and expanding sales of its three core products. RABIC is implementing the improvement measures announced in August. With regard to the domestic petrochemical restructuring, we have made one step forward. We agreed with Marusen Petrochemical to consider operational optimization at Keigo Esalen. In October, we launched the new business organization and we are now in the process of formulating a medium-term management plan towards next March. That is all for the executive summary. Now I would like to explain the financial results. Please turn to page 5. Financial results for the first half of FY2034, sales revenue 1,241,400,000,000 yen, core operating income positive 29,500,000,000 yen, net income minus 6,500,000,000 yen. Core operating income will be explained in the next page. A significant V-shaped recovery was achieved with an increase of 126,100,000,000 yen from the previous year following a profit in the first quarter. Unfortunately, the net income was slightly negative due to the significant impact of foreign exchange losses and the one-off loss from the debt forgiveness of Petro Rabic, which was recorded in the second quarter. But there was great improvement compared to the previous year. Co-operated income by segment is shown on page 6. As you can see, all segments improved from the previous year. Segments with large improvements are as follows. Pharmaceuticals will be explained in details later. With sales expansion of three core products and cost reductions, symptom of pharma losses are almost eliminated and there has been improvement of 66 billion yen year on year, which is plus 500 million yen. Agilited chemicals. Thank you very much. Revision of FI 2024 sales revenue is 2,600,000,000 yen corporate income, 100,000,000 yen which is the same as the previous forecast. Net income includes a large one-off loss. 46 billion yen consisting of foreign exchange loss due to the assumed exchange rate of 145 yen per dollar at the end of fiscal year, which yen is about 6 yen higher than the end of FY2033 and the expenses related to debt forgiveness of petrol robbing. But we still expect a profit of 25 billion yen, an increase of 5 billion yen. Co-operating income by segment compared to the previous forecast. We expect the total to remain flat at 100 billion yen, but there are some ups and downs by segment. In essential chemicals, we expect a decrease of 24 billion yen from the previous forecast, mainly due to the downturn of Petro-Arabic's Thank you very much. Although we are unable to provide the details at the moment, we expect an increase in business sales and increase of 10 billion yen in profit. Page 9 is a breakdown of core operating income by segment into first half actual, second half forecast, and full year forecast. Although the first half results account for about 30%, We expect core operating income of 100 billion yen for the full year, including gains on sales of businesses in addition to the usual seasonal nature of the health and crop sciences business. As of the first of this month, we have reorganized our organization from five business divisions to four business divisions. This is an overview of a reorganization and an image of a corporate income after the reorganization. Health and Crop Sciences will be agro and life solutions excluding CDMO business. ITO-related chemicals is integrated with mobility-related business of energy and functional materials into ICT and mobility solutions. Essential chemicals is integrated with a part of energy and functional materials into essential and green materials. CDMO business of energy and functional materials and the part of pharmaceuticals will be reorganized into advanced medical solutions. Symptom of pharma, small molecule drug discovery will be included under others. Page 11 is the image of FY2025 core operating income. FY2024 core operating income include one-time gain of business, Thank you very much. In case of FIA 2023 results, as an example, based on simple calculations, 60% reduction in share equivalent to losses of 1.3 billion yen result in a turnaround of about 40 billion yen. So 40 billion basis and 40 billion yen basis of RABIC. In addition, it's not yet time for the FI25 budget, but we believe that the level is sufficiently attainable, including the increase in income from the growth drivers of agro and life and ICT and mobility. Page 12 is shareholder returns. Despite the upward revision of earnings forecast, For FY2024, our policy is to prioritize the strengthening of our difficult financial position, and therefore we maintain our previously announced dividend forecast of ¥9 per share for this year. Next is the immediate term concentrated measures to improve business performance. This is an update of the overall picture of this measure. The left-hand side shows the target figures set in April this year. The right-hand side shows the current revised targets. In general, we are making progress in almost all items exceeding our previous targets. The cash generation target was originally set at 500 billion yen but was revised upward to 600 billion yen in April this year and now to 700 billion yen. With regard to rebuilding business, we are accelerating the sale of non-core businesses from the viewpoint of the best owner, including the sale of aluminum smelting business in New Zealand and the sale of shares of Sumitomo Big Light. Inventory reduction will continue to be based on 150 billion yen with the aim of further reducing inventory. In the area of selective investment, we are aiming for a reduction of 200 billion yen, up 50 billion yen from the previous 150 billion yen reduction through further reduction efforts. In the area of asset sales, we plan to further increase The amount of sales to be sold, including the sale of wellness facilities. We are on track to achieve our initial cash generation target of 500 billion yen. We will continue to work with a sense of speed without loosening our grip to reach our new target of 700 billion yen in the next five months. We are now conducting rebuilding of various businesses. These will contribute to a V-shaped recovery and cash generation in the short term, but it's not about shrinking. We believe it is important to shift to higher value-added business and upgrade our business portfolio. As shown on the right-hand side column in the agro area to launch new drugs in the large pipeline and biorelease Relational Related M&As in ICT-related areas, expand our semiconductor materials facilities, next-generation displays, and also strengthen our CDMO business, develop technologies that reduce environmental impact. In general, investment has been reduced, but we are investing in management resources in a selective and focused manner. Page 16 is an image of the progress of business rebuilding. The newly announced project since the last The following presentations are indicated in the bottom right in red. As already explained in the executive summary, the cash generation target is now 185 billion yen against 150 billion yen in the previous presentation. Currently, we are on track to achieve about 95 billion yen out of that amount. We are proceeding with many projects simultaneously. and with a sense of speed, including those that could not be made in time for today's presentation due to the partners' circumstances. This is a progress of inventory reduction and selective investment. Inventory was 712.4 billion yen as of the end of September 2024. We will work to further reduce inventory to below 650 billion yen by the end of March 2025. We will reduce investment to less than 500 billion yen over the current three-year period, a reduction of 200 billion yen from the plan. This is a further reduction of 50 billion yen from the previous announcement. Sales of cross-share holdings are progressing well, with about 50 billion yen sold as of September 2024. Thank you very much. Interest bearing liabilities at the end of FY2024 is expected to be 1 trillion 270 billion yen, a decrease of around 300 billion yen from the end of the previous year. Cash flows from operating activities is expected to be 160 billion yen, while cash flow from investing activities is expected to be negative 190 billion yen. Against this, we will generate 340 billion yen through short-term measures such as the sale of businesses, which will be used to repay interest bearing debt. DE ratio as of end of FY23 was 1.34, end of FY24 will go down to 1.12. Next is fundamental restructural reforms. This slide shows the overall picture of fundamental structural reforms that was introduced in April. Revival strategy centered on rebuilding semi-thermal pharma and petrochemicals and growth strategy to remain a company with a global presence 10 to 10 years from now. These are the two strategies. Let me start from a revival strategy.

Please turn to page 23. First is Sumitomo Pharma. In the first financial results section earlier, I mentioned that the company achieved solid results in the first half of the year. Let me explain one of the factors behind this, namely sales revenue trends for the three key products. The combined sales revenue for the three key products in the first half increased 70% year on year to 66.7 billion yen, showing steady progress. In particular, Sales volume of Orgovix, a prostate cancer drug, has increased more than expected due to factors such as a reduction in patient co-pay for high-cost medical care in the U.S. and Orgovix becoming a first-line drug for combination therapy in revised standard treatment guidelines. Gemtesa, an overactive bladder medication, has so far been largely unaffected by the launch of generic drugs. Thank you very much. and the cost-cutting measures implemented with the involvement of corporate restructuring experts are proving to be effective as expected. As of the first half of this fiscal year, SG&A and R&D expenses were reduced by approximately 55 billion yen year-on-year. We plan to achieve a positive core operating income for the full year by steadily reducing costs until the end of the financial year along with the expanding sale of the three key products I just explained. In addition, the effects of the domestic restructuring will emerge from December this year onwards, which will increase our financial results by over 10 billion yen over the course of FY25. Next, let me talk about the progress of Petro-Rabig Rebuilding Plan, which was announced in August this year. As for debt forgiveness, Under the Financial Improvement Plan, out of the total $1.5 billion, $1 billion has been forgiven and the remaining $500 million is scheduled in January 2025. However, as explained earlier, the full amount has been treated in the first half of the fiscal year. Regarding the change in capital structure, we are currently in discussions with relevant parties to implement it in April next year. The method for re-contribution of the proceeds from the sales shares is currently under discussion with the local regulatory authority, Saudi Capital Market Authority. And depending on the outcome of the discussions, a method for the contribution of a total of $1.4 billion from both companies will be decided. As for the plan to strengthen earnings power, we are currently accelerating our consideration of both mid- to long-term measures, including upgrading our old refining facilities, as well as measures that will produce immediate results in close cooperation with Petro-Arabic under the leadership of Aramco. Next page 26 please. This slide is an update from last time and summarizes the status of reorganization in Japan and Singapore. In the domestic upstream ethylene plant, we are aiming to rationalize existing ethylene plants and convert into a complex with reduced environmental impact. And we have now reached an agreement with Maruzen Petrochemical to study the optimization of Keigo ethylene operations. I will explain this later in the next slide. Behind the scenes discussions are ongoing on the downstream side as well, and an agreement is likely to be reached soon. As for Singapore, we have decided to reduce MMA production capacity, which I will explain in the next slide. As for PCS and TPC, I think it will take a little more time. We are currently in discussions with parent company Shell and others and are considering the matter from a long-term perspective, including production capacity optimization. As we announced in a press release the day before yesterday, Let me explain the rebuilding of our domestic cracker business. As you know, utilization of NAFTA crackers continued to decline in Japan due to capacity expansion in China and other countries. We are currently being forced to export surplus low-profit ethylene and commodity resins in order to maintain minimum utilization rates. As rapid improvement in the supply and demand balance cannot be expected in the future, optimizing the domestic supply system has become a common challenge for petrochemical manufacturers. In this environment, Maruzin Petrochemical has decided to study capacity reductions, including shutting down a NAFTA cracker. and SCC and Maruzen agreed to begin considering ways to optimize Keigo Ethylene's operations. Currently, the two crackers at Maruzen and Keigo Ethylene have a combined capacity of 1.3 million tons and are operating at 80%. But if one is shut down, the production is consolidated... We plan to reduce low-profit products and operate at 100% utilization rate. This will improve operating efficiency and reduce unit fixed costs, which is expected to significantly improve our performance. Next page shows the capacity reduction of Singapore MMA announced in September. Before the reduction, our MMA monomer production capacity was approximately 300,000 tons, ranking fourth globally. Like ethylene, expansion of production capacity is expected to continue, mainly in Asia, and various rationalization efforts alone have made it difficult to operate. Therefore, we decided to shut down two of the three monomer and polymer plants, respectively. Thank you very much. Thank you. that contribute to reducing environmental impact and their social implementation including licensing and focus on solutions business as MMA division. Next, I will explain our growth strategy. As mentioned last time, this is an image of what our company aims to achieve in the long term. In the four areas of social issues that we consider important, food, ICT, healthcare, and environment, we will utilize our unique core technologies and important assets of green, GX, digital, DX, and bio, BX. Our four newly established business divisions will contribute to solving social issues with innovative technologies. By so doing, we hope to remain a company with a global presence as an innovation solution provider. These are the long-term goals for each sector. I will skip this as I explained it at the strategy briefing in April. Each segment is currently working on fleshing out and considering medium to long-term action plans in line with this goal. From here, I will introduce the growth strategies and topics of each segment. We are planning to hold a business strategy briefing for agro and life solutions and ICT and mobility solutions on December 4th of this year, so I will leave the details to that meeting and limit today's explanation to just a brief overview. First is agro and life solutions. The vision of this segment is to contribute to the realization of a society that includes regenerative agriculture based on the two pillars of our organic agrochemical technology that we have cultivated over many years and chemicals with natural matter such as biorational and botanicals. We will continue to expand our business with both chemical and biorational agricultural materials armed with our world-leading capabilities in developing new agents with low environmental impact in our unique biorational product range and a global footprint that covers key customers' regions such as South America, North America, India and Japan. We have previously introduced South America, which has the largest market size, so today I will provide an overview of our strategy for Europe. The size of the European market is approximately $15 billion, which is actually larger than North America, as shown in the line graph on the left. The region is characterized by longer registration evaluation periods and higher cost due to strict regulations, and the hurdles for maintaining registration of products with a high environmental impact are increasing. This situation can be seen as an opportunity to expand sales of new agents with a low environmental impact and to increase opportunities for biorationals. In addition to the fungicide Indifilin, which is growing its sales in South America, ICT and Mobility Solutions Business Strategy In next generation EUV resists. We aim to achieve the top share in the market with its proprietary organic molecular resist while expanding its semiconductor materials business by actively introducing semiconductor back-end process materials where technology is transitioning. The newly established Texas base for semiconductor chemicals in the U.S. is scheduled to start operations at the end of this financial year. and we aim to use this as a foothold to expand our semiconductor materials business in the US. In existing business areas, display materials will shift its portfolio to OLED and automotive applications. In semiconductor materials, we will strengthen our supply infrastructure in advance of demand growth, which will be explained on the next slide. Regarding photo resists, our ARF resist plant in South Korea began mass production in February of this year as planned. Over the past few years, we have invested a total of approximately 20 billion yen in Japan and South Korea, and the overall production capacity next year will be roughly double that of FY 2021. In semiconductor chemicals, following our base in Texas, we secured land in South Korea for a new plant of the same size as our current main factory With an eye toward the 2030s. Regarding the semiconductor back-end process, we are focusing on targeted development, which will be elaborated in December. The semiconductor materials revenue currently stands at around 100 billion yen, and we aim to grow it 2.5 times higher by 2030. Next is advanced medical solutions. The strength of this segment are the comprehensive capabilities developed in the life science business, strong organic synthesis capabilities that can handle small and medium-sized molecules, and synthesis technology in high-purity long-chain nucleic acids. Under our business strategy, we will continue to develop and nurture regenerative medicines and cell therapies while actively expanding our CDMO business. Page 37 is our CDMO business. CDMO market enjoys abundant demand for small molecule drugs CDMO due to the horizontal specialization of pharmaceutical companies, multi-sourcing at customers, and increased need for stable supply. In order to meet the growing demand, we are expanding our production regime, positioning Oita Works as the third manufacturing base for our small molecule drugs Thank you very much. We will combine the knowledge and know-how of both Sumitomo Pharma and ourselves on CDMO business for regenerative medicine and cell therapies and will maximize group synergies to expand the business through SRACMO, whose investment structure has now been revised. Finally, essential and green materials. We will make a major shift away from conventional petrochemistry and focus on creating value through technologies that reduce the environmental impact. Thank you very much. Next is an update on the development of the Green Innovation Fund business on chemical recycling, a future pillar of the sector. Today, let me briefly explain the technology for olefin production from alcohols shown at the bottom. Bioethanol is one of the important biomass raw materials. Producing ethylene and propylene from ethanol using existing technology requires multiple reaction stages, resulting in huge capital investment. On the other hand, by using the catalyst we developed, it is possible to easily produce ethylene and propylene in a one-step reaction. An yield of 80% has already been achieved on a bench scale. A pilot facility is currently under construction at Chiba Works. and is scheduled for completion and start of trial operation in the first half of 2025. We want to quickly implement these environmental impact reduction technologies in society and develop them into pillars of our essential and green material sectors business. A new research building Innovation Center Meguru which will serve as the development base for technologies that reduce such environmental impact was completed in the Chiba region and completion ceremony was held in June. Our Chiba region has traditionally been a manufacturing and research base for petrochemical related businesses and in addition to technologies such as polymer design and catalyst, we also have scale up facilities for commercialization in the laboratory which is a key point. In the future, Meguru will use these technologies as a foundation to accelerate the development of innovative chemical recycling technologies that reduce the environmental impact. Finally, outlook on our long-term business performance. Over the past six months, we have set a direction for the restructuring of Sumitomo Pharma and Petro Rabig and have also been pursuing various business reorganization efforts. As a result, I believe you can see that there is a high degree of certainty that we will achieve a V-shaped recovery in FY 2024. Going forward, in order to increase the likelihood of returning to growth in 2030 and 2035, our performance in 2025 will be an important point. As I explained in the first part of my presentation, in order to achieve core operating income of ¥100 billion in 2025 based on our actual real-term organic capabilities without one-off gains, We will work to formulate a new medium-term corporate business plan under a new structure starting in October with the aim of improving profitability of each of our four sectors and at the same time building a new growth model. That concludes my presentation. Thank you for your attention.

We would like now to start the Q&A session. So, the first question is from Morgan Stanley, MEFG Securities, Mr. Watabe. Thank you. I'm Watabe from Morgan Stanley. Thank you for your presentation. Profit in terms of corporate income, congratulations for that. First is on page 11 of the material, FY 2025, corporate income to achieve 100 billion, I have impressions that this is still low, increased profit of non-petrochemical business. Does that include pharma or not, as pharma has moved under others, and 600 billion of one-time gain on sales of business by segment? I think there are such impacts, In terms of valuations, what are the major components and what's the difference between first and second half? And for Rabig, $1.3 billion in negative figures. You assume this negative figure will continue, but still you aim at a total of $100 billion. Could you explain further details? That's my first question. Thank you for your question. For FI 2025, cooperating income 100 billion may still be a little low, as you have mentioned. But FI 2025, we have not yet made our budget. From now, we will include the various factors and come up with the figures for FI 2025. On extra performance cooperating income, 100 billion is the minimum level that we want to achieve. On the page 11, the non-petrochemical business, pharma is included for non-petrochemical business, but how much is that included? I don't have such figures, but the concept is that this is included here. And for Rabig, in FY2023, based on that, there was a loss of $1.3 billion. This starts from the figures of FY2034. One time gain of sales of businesses, then excluding that corporate income is 40 billion. That is the starting point. And from there, how much RABIC's change in the share, how much will that be impact? I have explained that as an example. In FY24 compared to 2023, if the same performance continues by reduction of our share, about 40 billion yen burden will be reduced. Original 40 billion plus reduced burden of RABIC, which is 40 billion, and in addition to that, plus 20 billion or so will come from other areas. and FI24 Performance. How much is a one-time gain and how are they included? It is quite difficult. By each sector, there are not so many one-time gains included. As for the actual figures, maybe that can be provided later. Yes. Well, in the current forecast, in the sector, in the segment, for each sector, a few hundreds of millions are included. For pharma, It may be slightly more than 10 billion, but for others, it is at the level of a few billions, and there's also some included under others. So I see under others, compared to last year, it's not that large. I understand the point. Thank you. So my second question is about health and crop sciences. Now, from next fiscal year, I believe this is a growth driver for next fiscal year onwards. Results of the first half, is it growing or not, is not very clear. Looking at the financial results material, not this material, but on page 22, increasing sales, volume variance is negative and operating income volume is positive. So could you explain this difference and indifferent current situation and rapid distillation, including the market of methionine in health and crop sciences? What is the current situation? And for these two products, what is the potential? Page 10, Health and Crop Sciences, results compared to the previous year. Still it's not increasing, but profit is increasing. Even compared to page 22. Could you explain that? I don't have the detailed figures with me right now, but the methionine, Thank you very much. Thank you very much. Usually South America, the southern hemisphere is the demand season and in South America there was quite a widespread drought. But timing to solve seeds and at the same time agrochemicals are used But there seems to be a few months delay in the first half. So results of the first half was supposed to be higher but was not that high. The man responsible for South America is here today. It seems that finally there's rain and the market has started to move. With a delay of a few months, the South American market has started to move. That is the situation of health and crop sciences for the first half. This is one of the reasons for the instability. And about indifference and rapid diesel, I don't have the figures with me right now. But registration in each region is proceeding and following that, volume will increase. The main market is North America. Registration of North America will be 2026, so it will take a few years. For indefinite and rapid situation, I would like to send you a memo later at a separate occasion. Yes, thank you very much. Thank you.