Earnings Transcript for 4005.T - Q2 Fiscal Year 2024

Shunji Kobayashi: I will be your facilitator today. My name is Kobayashi from Corporate Communications. Thank you very much for attending our Investors Meeting for FY 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 45 past 5. Now Mr. Iwata, over to you.

Keiichi Iwata: 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 3 sections. One is business performance. Core operating income of the first half of 2024 achieved a V-shaped recovery of more than ¥120 billion 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, falling short of a positive income due largely to one-off factors such as foreign exchange losses and debt forgiveness of Rabigh but there was a significant improvement of about ¥70 billion from the previous year. For FY 2024 full year, we forecast core operating income of ¥100 billion and net income of ¥25 billion, an increase of ¥5 billion over previous forecast, including the one-off loss of Rabigh. 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 in FY 2025 based on actual performance. Secondly, immediate-term concentrated measures to improve business performance, we are further accelerating the upgrading of our business portfolio and our cash generation target has been revised upward to ¥700 billion, while interest-bearing liabilities is expected to be reduced by about ¥300 billion from the end of previous year. Lastly, fundamental structural reforms. Sumitomo Pharma is making progress as planned in reducing costs and expanding sales of its 3 core products. Rabigh is implementing the improvement measures announced in August. With regard to the domestic petrochemical restructuring, we have made one step forward. We agreed with Maruzen Petrochemical to consider operational optimization at Keiyo Ethylene. 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'd like to explain the financial results. Please turn to Page 5. Financial results for the first half of FY 2024 sales revenue, ¥1,241.4 billion, core operating income, positive ¥29.5 billion, net income, minus ¥6.5 billion. Core operating income will be explained in the next page. A significant V-shaped recovery was achieved with an increase of ¥126.1 billion 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 Rabigh which was recorded in the second quarter but there was great improvement compared to the previous year. Core operating 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 3 core products and cost reductions, Sumitomo Pharma losses are almost eliminated and there has been an improvement of ¥66 billion year-on-year which is plus ¥500 million. IT-related Chemicals; display materials and semiconductor materials were strong and income increased ¥20 billion year-on-year to ¥37.5 billion. This is a record high for the first half of a year. Health & Crop Sciences improved significantly from the previous year due to recovery in the methionine market, increased shipments of crop protection chemicals in South America and the effect of a yen depreciation. Next is the full year forecast revision of FY 2024. Sales revenue is ¥2,600 billion, core operating income, ¥100 billion which is the same as the previous forecast. Net income includes a large one-off loss of ¥46 billion, consisting of a foreign exchange loss due to the assumed exchange rate of ¥145 per dollar at the end of fiscal year which is about ¥6 higher than the end of FY 2023 and the expenses related to debt forgiveness of Petro Rabigh. But we still expect a profit of ¥25 billion, an increase of ¥5 billion. Core operating income by segment compared to the previous forecast. We expect the total to remain flat at ¥100 billion but there are some ups and downs by segment. In Essential Chemicals, we expect a decrease of ¥24 billion from the previous forecast, mainly due to the downturn of Petro Rabigh's second quarter or April to June results due to deteriorating refining margins and an expected decrease in the gain on the sale of the business from the initial forecast. On the other hand, in IT-related Chemicals, we expect an increase of ¥10 billion for the full year, mainly due to strong first half results in display materials and semiconductor materials. In Others, although we are unable to provide details at the moment, we expect an increase in business sales and increase of ¥10 billion in profit. Page 9 is a breakdown of core operating income by segment into first half actuals, second half forecast and full year forecast. Although, the first half results account for about 30% of our full year forecast, we expect core operating income of ¥100 billion for the full year, including gains on sales of businesses in addition to the usual seasonal nature of the Health & Crop Sciences business. As of the first of this month, we have reorganized our organization from 5 business divisions to 4 business divisions. This is an overview of a reorganization and the image of our core operating income after the reorganization. Health & Crop Sciences will be Agro and Life Solutions, excluding CDMO business. IT-related Chemicals is integrated with mobility-related business of Energy & Functional Materials into ICT and Mobility Solutions. Essential Chemicals is integrated with a part of Energy & Functional Materials into Essential & Green Materials. CDMO business of Energy & Functional Materials and the part of Pharmaceuticals will be reorganized into Advanced Medical Solutions. Sumitomo Pharma's small molecule drug discovery will be included under Others. Page 11 is the image of FY 2025 core operating income. FY 2024 core operating income, including one-time gain on sale of business is ¥100 billion. In FY 2025, we aim at ¥100 billion based on actual performance. Core operating income is expected to be around ¥40 billion in FY 2024 based on actual performance. The financial improvement plan announced in August by Petro Rabigh is expected to have a positive impact by reducing our share by 60% from 37.5% to 15%, thereby reducing the losses. In case of FY 2023 results, as an example, based on simple calculation, 60% reduction in share equivalent to losses of ¥1.3 billion result in a turnaround of about ¥40 billion. So, ¥40 billion basis and ¥40 billion basis of Rabigh. In addition, it's not yet time for the FY '25 budget but we believe that the level is sufficiently attainable including the increase in income from the growth drivers of Agro & Life and ICT & Mobility. Page 12 is shareholder returns. Despite the upward revision of earnings forecast for FY 2024, 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 overall picture of this measure. The left-hand side shows the target figures set in April this year. 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 but was revised upward to ¥600 billion in April this year and now to ¥700 billion. With regard to rebuilding business, we are accelerating the sale of noncore 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 Bakelite. Inventory reduction will continue to be based on ¥150 billion and with the aim of further reducing inventory. In the area of selective investment, we are aiming for a reduction of ¥200 billion, up ¥50 billion from the previous ¥150 billion 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. We will continue to work with a sense of speed without loosening our grip to reach our new target of ¥700 billion in the next 5 months. We are now conducting rebuilding of various businesses. This 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 biorational-reated 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 the image of the progress of business rebuilding. The newly announced projects since the last presentation are indicated in the bottom right in red. As already explained in the executive summary, the cash generation target is now ¥185 billion against ¥150 billion in the previous presentation. Currently, we are on track to achieve about ¥95 billion 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 the progress of inventory reduction and selective investment. Inventory was ¥712.4 billion as of end of September 2024. We will work to further reduce inventory to below ¥650 billion by the end of March 2025. We will reduce investment to less than ¥500 billion over the current 3-year period, a reduction of ¥200 billion from the plan. This is a further reduction of ¥50 billion from the previous announcement. Sales of cross shareholdings are progressing well with about ¥50 billion sold as of September 2024. We expect to generate a cash inflow of around ¥60 billion during the remainder of FY 2024, including those that are scheduled to be sold. In the use of surplus funds, we have already generated around ¥70 billion through group financing and other means. In asset sales, sales of other assets is ¥38 billion, up from the previous target of ¥30 billion due to additional sales of welfare facilities. Interest-bearing liabilities at the end of FY 2024 is expected to be ¥1,270 billion, a decrease of around ¥300 billion from the end of the previous year. Cash flows from operating activities is expected to be ¥160 billion, while cash flow from investing activities is expected to be negative ¥190 billion. Against this, we will generate ¥340 billion through short-term measures such as the sale of businesses which will be used to repay interest-bearing debt. D/E ratio as of end of FY '23 was 1.34. End of FY '24, will go down to 1.12. Next is fundamental structural reforms. This slide shows overall picture of fundamental structural reforms that was introduced in April. Revival strategy is centered on rebuilding Sumitomo Pharma and Petrochemicals and growth strategy to remain a company with a global presence 10 to 10 years from now. These are the 2 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 3 key products. The combined sales revenue for the 3 key products in the first half increased 70% year-on-year to ¥66.7 billion, showing steady progress. In particular, sales volume of Orgovyx, 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 Orgovyx 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 which was a cause of concern. Next is on cost reductions. We expect to achieve a reduction of approximately ¥108 billion in FY 2024 year-on-year. The measures already taken last year, such as restructuring in North America, shrinking clinical trial costs and impairment of intangible assets are taking effect. 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 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 3 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 over the course of FY '25. Next, let me talk about the progress of Petro Rabigh 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 sale of 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 oil refining facilities as well as measures that will produce immediate results in close cooperation with Petro Rabigh 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 Keiyo 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 naphtha crackers continue 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, Maruzen Petrochemical has decided to steady capacity reductions, including shutting down a naphtha cracker. And SCC and Maruzen agreed to begin considering ways to optimize Keiyo Ethylene's operations. Currently, the 2 crackers at Maruzen and Keiyo Ethylene have a combined capacity of 1.3 million tonnes 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 tonnes, 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 2 of the 3 monomer and polymer plants, respectively, in Singapore and reduce the scale of operations to a profitable level which will result in a reduction of approximately 70% to 80% of Singapore's production capacity. This will enable significant reductions in fixed costs, such as equipment and labor costs and the effects of this improvement are expected to contribute to business performance from the second half of this year. From a medium- to long-term perspective, we will advance recycling technologies development 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 4 areas of social issues that we consider important; food, ICT, health care and environment, we will utilize our unique core technologies and important assets of green, GX, digital, DX and Bio, BX. Our 4 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 & Life Solutions and ICT & Mobility Solutions on December 4 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 & Life Solutions. The vision of this segment is to contribute to the realization of a society that includes regenerative agriculture based on the 2 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 and 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, INDIFLIN which is growing its sales in South America, we will focus on launching biorational fruit thinner, Accede. And in Europe, where we have relatively small presence, we will also use M&A to further expand our biorational business. Next is ICT & Mobility Solutions. In terms of 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 U.S. 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 photoresists, 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 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 and we aim to grow it 2.5x 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, CDMO business after Okayama and Gifu and are strengthening the production infrastructure. This year, in addition to taking over Sumitomo Pharma's drug multi-plant, we constructed a new small molecule drug plant and held the completion ceremony just yesterday. In addition, a new CDMO plant for nucleic acid medicine was built and started operation at the Oita plant last year. Furthermore, 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 S-RAMCO, whose investment structure has now been revised. Finally, Essential & Green Materials. We will make a major shift away from conventional petrochemistry and focus on creating value through technologies that reduce the environmental impact. Leveraging our strength in the development of environmental impact reduction technologies such as chemical recycling and material recycling, we aim to stabilize earnings by expanding our licensing and catalyst business while also advancing GX technology development with the aim of commercializing the technology and licensing it by around 2035. 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 but 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 and 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 & Green Materials 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 6 months, we have set a direction for the restructuring of Sumitomo Pharma and Petro Rabigh 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 the profitability of each of our 4 sectors and at the same time, building a new growth model. That concludes my presentation. Thank you for your attention.

Operator: We would like now to start the Q&A session. So, the first question is from Morgan Stanley MUFG Securities, Mr. Watabe.

Takato Watabe: I'm Watabe from Morgan Stanley. Profit in terms of core operating income, congratulations for that. First is on Page 11 of the material. FY 2025 core operating income to achieve ¥100 billion. I have impression 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 but in terms of valuations, what are the major components? And what's the difference between first and second half? And for Rabigh, $1.3 billion negative figures, you assume this negative figure will continue but still you aim a total of ¥100 billion. Could you explain further details? That's my first question.

Keiichi Iwata: Thank you for your question. For FY 2025, core operating income, ¥100 billion may still be a little low, as you have mentioned. But for FY '25, we have not yet made our budget. From now, we will include various factors and come up with the figures for FY 2025. On actual performance, core operating income, ¥100 billion is the minimum level that we want to achieve. On 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 Rabigh, in FY 2023, based on that, there was a loss of $1.3 billion. This starts from the figures of FY 2024 one-time gain on sales of businesses, then excluding that corporate income is ¥40 billion. That is the starting point. And from there, how much Rabigh's change in the share, how much will that be impact. I have explained that as an example. In FY '24 compared to 2023, if the same performance continues by reduction of our share, about ¥40 billion burden will be reduced. Original ¥40 billion and plus reduced burden of Rabigh which is ¥40 billion. And in addition to that, plus ¥20 billion or so will come from other areas. And FY '24 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. And for pharma, it may be slightly more than ¥10 billion. But for others, it is at the level of a few billions and there are also some included under Others.

Takato Watabe: So, I see under Others compared to last year is not that large. I understand the point. So, my second question is about Health & 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 that growing or not? It's 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 INDIFLIN current situation and Rapidicil situation, including the market of methionine in Health & Crop Sciences, what is the current situation? And for these 2 products, what is the potential? So on Page 10, Health & Crop Sciences results compared to the previous year. Sales is not increasing but profit is increasing. On Page -- even compared to Page 22, could you explain that?

Keiichi Iwata: I don't have detailed figures with me right now but the methionine market price increase is greatly affecting the price variance. And in terms of cost, the depreciation of methionine has reduced and that is another factor. And there's also volume variance and increase of shipment of INDIFLIN is a major factor. However, in the first half, one negative factor is that in the first half, 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 started to move. With a delay of a few months, the South American market has started to move. That is the situation of Health & Crop Sciences for the first half. This is one of the reasons for the instability. And about INDIFLIN and Rapidicil, I don't have the figures with me right now. But registration each region is proceeding. And following that, volume will increase. The main market is North America. Registration in North America will be 2026. So, it will take a few years. For INDIFLIN and Rapidicil situation, I would like to send you a memo later at a separate occasion.

Operator: Thank you very much, Mr. Watabe. So next, Mizuho Securities, Yamada-san.

Makio Yamada: Yes. This is Yamada from Mizuho Securities. And congratulations for turning profitable and the progress of the structural reform. So, I have 2 questions. First is a rather long-term perspective of the business portfolio strategy. So, in your presentation today, you said Sumitomo Pharma's growth strategy. You did not touch on the growth strategy of Sumitomo Pharma and allocation is in others. So, it is positioned as non-core. It will not fall under Advanced Medical Solutions. And Essentials & Green Materials expected ROIC is 4%. And so it is lower than WACC. So, what is your view on the long-term perspective, especially on Essential & Green Materials. In the past, with the actinium, caprolactam production and propylene oxide these very low environmental impact products have been launched but you've not made much profit out of it. And I personally think that is not needed by the society. People think they want these low environmental impact products. If they are low cost or free but not if it's expensive, will ROIC exceed WACC in the long term? So, what is your view on the Essential & Green Materials?

Keiichi Iwata: Thank you for the question. So, both questions are very much to the point. First of all, pharma, it is categorized as Others. This may be a disrespect to the pharma people. But in the long run, we have 4 priority business areas and it is not included in the 4. And as I've mentioned in the past, the regenerative and cell therapy, the group is doing R&D and cultivated as a growth business. As a group, we will cultivate this business. But for the small molecule drug discovery, Sumitomo Pharma in drug development and the in-licensing, we did not have the discerning eyes, unfortunately. And so it is difficult to find the target. And introducing a new drug costs money. And so given our financial position, that is difficult. And so given these circumstances, the pharma, small molecule and drug discovery, we made this decision. The sustainable long-term growth of pharma, as I mentioned in April, we will consider the most desirable form for the pharma and explore all options and continue studying various options. Next, Essential & Green Materials. You said return may be too low and you are exactly right. There are 2 reasons. One is the low environmental impact product business. We do not have a clear view on what business this will be like. And as you mentioned correctly, Yamada-san, the technology that we thought is effective were not implemented in the society on a full scale. So, the return from the new technology cannot be foreseen yet. And there are businesses that we need to retain and sustain. So for those 2, the target profitability is a difficult challenge. So first, we need to maintain this level. Otherwise, there is no point of having this business. So, this is the minimum level that we plan to keep as this business division. So that is the line of thinking.

Makio Yamada: I mean no disrespect but your chemicals strength is precision synthetics [ph] and high purity and the molecule modification and life science. So, the bulk type polymer science may not be so meaningful for you. Other companies, I would not say this to other companies like Mitsubishi, Mitsui. And Mitsubishi, I would not say this. But you can sufficiently survive and transform into specialty chemical. But am I wrong? So bio and fine chem, Sumitomo has strength there. That's for sure. But Essential and Petrochem, Sumitomo Chemical has strength in the catalyst. And one example is ethanol, ethylene, propylene from ethanol and the other 2 green innovation, GI Fund catalyst is the key technology in both. And so it is still promising. Essential & Green Materials is part of Sumitomo Chemical. And if this leads to lower environmental impact, there is ample value for the company to hold on to this business. But what is the probability for this low environmental impact product to unlock its value, we need a little more time to ascertain that? I'm sorry. This is long, so I will just keep this one question.

Keiichi Iwata: In your case, catalyst technology is great. Inorganic, I know I understand this from the inorganic technology but other life science and the precision synthesis and the high-purity chemicals and the regenerative medicine and cell therapy, it seems that there's little synergy between the other businesses. Is there bio, agro, not much synergy there but the IT-related chemicals, for example, film, IT-related chemicals, semiconductor and display, it's a key technology. So, it is strongly linked with petrochemical. So, from that raw material, we produce films or coating. So, there is linkage there. But the precision synthesis and bio, you are right.

Makio Yamada: I look forward to your reasonable decision and your upgrading of your business.

Operator: Thank you very much, Yamada-san. Next from SMBC Nikko Securities, Mr. Miyamoto.

Go Miyamoto: I'm Miyamoto from SMBC Nikko Securities. On Page 33 and 34, I want to ask questions on growth strategy. As for details, I hope I can hear for your business briefing. But related to M&A, you mentioned about agro, you referred to M&A in Europe. The new farm South American business was acquired before which was a scale less than ¥100 billion. Is that the scale that you assume? What is the overall image of M&As? And for ICT, you say great shift of portfolio. The polarizing film business, a peer company is trying to sell that business. So, what is your view about the polarizing film business? What is your view about this business?

Keiichi Iwata: The first point, in the crop protection chemicals centered in Europe, M&A, in particular, biorational business, I'm not specifying any actual company. But generally speaking, in biorationals, there are not major large companies in this industry. Large-scale company of a level of ¥100 billion do not exist in terms of the size of a deal. It's not that large. If you combine several deals, it may be different but we are not even thinking about combining several deals. So, the level might be about tens of billions of yen. And for polarizing film, in particular, in China, panel manufacturers of China, there's an increase of such manufacturers in China and Chinese polarizing film manufacturers supplying to these companies are increasing. In particular, for large displays, competition, I know is getting more severe. Centered on smartphones, OLED type which are small in size and the technology, not LCD but OLED. Centered on this, we intend to promote our optical business. And in accordance with that, we are steadily proceeding with a change in organization in Japan, South Korea and Taiwan, large-scale lines are being shifted to smaller-sized products. We are steadily proceeding with that. And as a part of such efforts, what is the best format in China, we are also considering that. We hope we can -- we need a little more time. Yes. So M&A for agrochemicals in Europe rather than to increase the footprint, it is mainly to approach by rationals for R&D purpose. Yes, that is one reason. But also in Europe, presence of Sumitomo Chemical is not that strong in terms of our presence, not only the share but governance management compared to other regions, we are smaller. So, I think it is possible to enjoy synergy. It is up to the counterparty.

Go Miyamoto: My second question is about the dividend. On Page 12, you said you aim at more than ¥24 per year. And it says here previously, it was ¥24 and corporate income at the time was about ¥235 billion. And if it is ¥100 billion actual performance for the next fiscal year, it may take time to reach a profit level that you can provide ¥24. ¥24, is it possible to achieve by 2027 to the next medium-term plan, not only improvement of income but are you also trying to raise the payout ratio? What's the background of trying to achieve ¥24 per year?

Keiichi Iwata: What is the probability of achieving ¥24, it's very difficult to say. 30% dividend payout ratio is our basic stance. Looking at the data, there are many years that the level was higher than 30%. So, it looks as if the minimum level is 30%. So, the basis of a dividend payout ratio is 30%. And core operating income, ¥200 billion, then net income is about 70%, ¥150 billion. And core operating income, if it is at a stable level of ¥200 billion, then ¥24 is not a mere dream. This is something that we can aim for. We are aiming at more than this level. It is more than ¥200 billion based on 30% rule, it is possible to have a higher dividend.

Operator: Thank you, Miyamoto-san. Next, Daiwa Securities, Mr. Umebayashi, please.

Hidemitsu Umebayashi: This is Umebayashi from Daiwa Securities. I have 2 questions. First is the latest financial results. ICT, the IT-related Chemicals in first -- Q1 and Q2 and first half and second half, the change is there. Q1 and Q2 was flat on a profit basis because -- so what was display on a Q-on-Q basis? So, if you could give us the status there. And from the first half to second half, FX yen appreciated by around ¥8 but profit will go down by 50%. So, from first half to second half, display and semiconductor, what is the image of the volume?

Keiichi Iwata: Thank you. So in ICT, we have semiconductor display. There are 2 main groups. For semiconductor, FY '24 first Q1 -- from Q1, the market is coming back again, picking up. Chemicals, regardless of the utilization rate, there are materials that we need stability. So, the utilization rate and the sales are not directly linked but resist is strongly correlated with the utilization rate. So, as time goes by, resist sales is becoming stronger. Of course, some clients are fast. Some clients are still struggling. And so depending on which raw material we supply to, it depends. But in general, as time goes by, semiconductor is becoming stronger on a Q-on-Q basis. Display, on the other hand, has seasonality. And in the end, it's the Christmas season. So, how we ramp up towards Christmas season is the key. After Christmas season, sales season, January, March quarter; by December -- by October, we will complete for the Christmas season. And so October, December, January, March, display in Q3 and Q4 have low financial results. So this year, in IT-related Chemicals, first half display was strong. It was record high. But in the second half, it's not a reactionary fall but there is seasonality and we will see lower numbers in the second half. So that is the general situation. So, from first half to second half, will decline but you are looking at the decline in display. And in semiconductor, volume-wise, it should not drop much.

Hidemitsu Umebayashi: You're right. My second question is on the Keiyo Ethylene reorganization that you announced the other day. So, as much as you could share information with us, according to what's disclosed? So, 3EP and 4EP [ph] of Keiyo will be consolidated. So, given the age of the plant and the size, the older, smaller size EP will be closed and will be consolidated to 4EP. I think that is the general trend or the flow. What I want to know is the timing. According to the mass media, they said FY '26, as early as '26. But Maruzen Petrochemical's next scheduled plant shutdown is 4 years later and Keiyo Ethylene is FY '26, 2 years later. So, 3EP of Maruzen is going to be closed. On that basis, FY '28, scheduled shutdown, it's more understandable. If it's FY '26, I don't -- not sure if you can make it in time. I know this is not decided yet. But if you can do it in '26, Idemitsu is taking 3 to 4 years. So, if you can do this in such a short time frame, what is the background?

Keiichi Iwata: Nothing really has been decided yet. 3P, 4P, 3E, 4E [ph] which will be what has not been decided yet. And it's not us that decide. Maruzen Petrochemical will decide and then think of what to do with Keiyo Ethylene. So that's the order. And we're before that. So, the scheduled shutdown in which year has not been discussed yet. So that is subject to our discussion going forward.

Hidemitsu Umebayashi: One related question on your thinking. Singapore compared to Keiyo, compared to Japan, olefin, polyolefin is still slow. But in the future, when the capacity in Japan declines, will you bring the product from Singapore to Japan? Is that an option?

Keiichi Iwata: So the progress in Singapore compared to Japan or Saudi Arabia is low. You're right. And we are trying to aggressively push this forward. So as an option, can we bring Singapore monomer to Japan? Depending on the grade of polyolefin, yes, it's possible. But we cannot bring a large volume to Japan. The scale will not be that large. But we have not done a full-scale study on that. So it's still early to make a decision or come to a conclusion.

Operator: Thank you very much Mr. Umebayashi. So next, Nishihira-san from Okasan Securities.

Takashi Nishihira: I'm Nishihira from Okasan Securities. I have one major question. In terms of selection and concentration of business areas, Advanced Medical Solutions for CDMO and pharmaceuticals, I understand the point that you mentioned. But looking at the trend of other companies in this business area to keep achieving appropriate level of profit seems to be difficult. There is also a lot of CapEx needed depending on whether it is possible to get big projects that may affect the performance. So, do you consider this to be an attractive business sector? And do you believe you can win in this sector? And about ICT, the electronic materials, are you going to look for an exit in terms of selection concentration from that perspective, could you tell me?

Keiichi Iwata: Thank you for your question. For Advanced Medical CMO and regenerative cell, well, after 2030, I believe regenerative cell will come in a full-fledged manner. Until then about ¥10 billion will be needed for development. But I think that is for the future. Within Sumitomo Chemical Group, we want to develop this business sector. Organization may change. Pharma and Sumitomo Chemical jointly will keep developing this business. And for CDMO, Sumitomo Chemical is engaged in this business for a long term. This is called custom synthesis before. This is a CMO. We are ordered to do this business but now it is CDMO [ph]. In case of CMO, it is true that we manufacture based on orders. So, it may not be that profitable if there's profit. The counterparty will be manufacturing by itself. So, it's not such an attractive business as a business model. But now with the -- in case of CDMO, it is possible to differentiate and also engagement with the customer will be deeper. It's not only to manufacture based on the orders by the customer, it's no longer such a relationship. CDMO is an area that it is possible to enjoy profit. But in that case, then what is D? Most of the D is done by the pharmaceutical companies. As a chemical manufacturer, how can we contribute to the D? You must think in depth about it to make it a profitable business, as you have mentioned. And in case of CDMO, we are engaged in small molecules for a long time but we are not engaged in antibodies. CDMO of antibodies, many companies are entering this sector. That is the situation. So in nucleic acid, the most advanced areas and regenerative cell CDMO, that's a very niche area. The customers are mostly academia and startups. That is the type of CDMO that we are starting. And academia of start-ups, when this turns into drugs, they say this will be a big business. That is the type of CDMO that we are starting with. This is a difficult path but this is something we want to try.

Takashi Nishihira: In case of battery materials, what is the situation?

Keiichi Iwata: For battery materials, this is also a difficult area. For cathodes, we tried very hard. But as a latecomer, we were not able to have a unique technological development. So, we gave up. So that is an area of very difficult cathode materials. But the next-generation solid or the soft materials for batteries, direct recycle for cathodes, we are developing next generation for the surrounding materials. But for the actual cathode materials, it is no longer our domain. And for separators, base films, we gave a base films at an early stage. And for coating, we have a business model for coating. This area don't need so much CapEx. It is possible to increase capacity by increasing the line. So, there's not so much risk. It's possible to increase the line if a business increases. I don't know how long this will continue but for instance, companies like Asahi Kasei which is investing a lot of resources to separators, it's not like that. We have to think more about our engagement. That is all. Thank you.

Shunji Kobayashi: We still see some more questionnaires but we've come to scheduled time. So with this briefing, we would like to bring this to a close. Thank you very much for your attendance.

Keiichi Iwata: Thank you.

Operator: So, this briefing video will be streamed including the Q&A session portion on our website from tomorrow onward.