Earnings Transcript for 4005.T - Q4 Fiscal Year 2023

Operator: As it is time to start, we will now begin the Conference Call for the Presentation of our Financial Results for Fiscal Year 2023. Thank you very much for your participation. Today, Mr. Sasaki, Managing Executive Officer, will give a briefing of our financial results for fiscal year 2023 and outlook for FY 2024. Later he will be joined by Mr. Yamauchi, Executive Officer and General Manager of Accounting Department, to take questions. We will conclude the call at 5

Keigo Sasaki: Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending our conference call despite your busy schedule. I'd like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for that. Now, let me start with explanation of our financial results for fiscal year 2023. Please turn to Slide Page 4, consolidated financial results for FY 2023. Sales revenue was ¥2,446.9 billion, down ¥448.4 billion year-over-year. Core operating income expressing recurring earnings power had a loss of ¥149 billion, which is down by ¥241.8 billion year-on-year. Non-recurring items not included in core operating income posted an impairment loss for Sumitomo Pharma's patent rights and goodwill and our Chiba plant Essential Chemicals manufacturing facilities and Ehime plant methionine manufacturing facilities, and the Singapore subsidiary MMA manufacturing facilities totaling ¥269.4 billion. In addition, restructuring costs of minus ¥48.4 billion including reorganization of Sumitomo Pharma's North America subsidiary led to a loss of ¥339.8 billion. Last year also Sumitomo Pharma had an impairment loss of patent rights for KYNMOBI treatment of episodes associated with Parkinson's disease. But compared to the previous year, this has worsened by ¥216 billion. As a result, there was an operating loss of ¥488.8 billion and income reduction of ¥457.8 billion year-on-year. Finance income was ¥26 billion, a worsening of ¥5.2 billion year-on-year. Out of this, there was a gain on foreign currency transactions of ¥32.5 billion because of weakening of the yen, a worsening by ¥3.3 billion year-on-year. Income tax expenses was ¥2.7 billion, down ¥44.4 billion year-on-year. As a result, net income attributable to owners of parent posted a loss of ¥311.8 billion, down by ¥318.8 billion year-on-year. The exchange rate, no surprise, which affects our performance. The average U.S. dollar rate during the term was ¥144.59 to a dollar and naphtha price was ¥69,100 per kiloliter. Yen weakened and feedstock price decreased compared to the previous year. Next is the sales revenue by business segment. Sales revenue in total decreased by ¥448.4 billion year-on-year. Looking at [Indiscernible] sales by segment, sales revenue declined in all segments. As for the year-on-year change of sales revenue, analyzing by factors; sales price went down by ¥143 billion and volume dropped ¥395.9 billion, foreign exchange transaction variance of foreign subsidiary sales revenue increased by ¥90.5 billion. The total core operating income decreased by ¥241.8 billion year-on-year. Analyzing these changes by factor in terms of price, this was minus ¥76 billion and cost plus ¥119.5 billion. On the other hand, volume variance including changes in equity in earnings of affiliates was minus ¥285.3 billion. Next let me talk about the performance by segment. Essential Chemicals & Plastics segment, core operating income was minus ¥90.7 billion, down ¥56.5 billion year-on-year. For price variance, profit margins deteriorated mainly due to declining overseas market prices of synthetic resins. In volume variance, there was a deterioration in the performance of Petro Rabigh equity method affiliate due to deteriorating refining margins and worsening profit margins for petrochemical products. Next is Energy & Functional Materials segment. Core operating income was ¥7.8 billion, down ¥7.4 billion year-on-year. Demand declined mainly for automotive applications and shipments of resorcinol and separators declined. Next page, IT-related Chemicals segment. Core operating income was ¥44 billion, down ¥3.6 billion year-on-year. Price variance in displays related materials, selling prices fell for polarizing films. For volume variance, shipments for photoresists and processing chemicals declined with a drop in semiconductor demand. On other hand, shipments for polarizing films and touchscreen panels increased. Next page, Health & Crop Sciences segment. Core operating income was ¥30.9 billion, down ¥26.4 billion year-on-year. Price variance in addition to a decline in the selling prices for generic products post-patent products in South America, profit margin deteriorated due to a decline in market prices of methionine. For volume variance, there was an increase in methionine shipments. Next page, Pharmaceuticals segment. Core operating income was minus ¥133 billion, down ¥149.2 billion year-on-year. Price variance, sales prices declined due to the impact of National Health Insurance drug price revisions in Japan. Cost variance, selling costs and SG&A expenses decreased due to the reorganization and rationalization of Sumitomo Pharma's North American subsidiaries. Volume variance, shipments decreased due to the expiration of exclusive marketing period of LATUDA, which was larger than the increase in cost. This is all for the performance by business segment. Next page is consolidated statement of financial position. Page 12, please. Total assets at the end of March 2024 was ¥3,934.8 billion, a decrease of ¥230.7 billion from the end of the previous year. The main reasons were a decrease in cash and cash equivalents, reduction in inventories to improve working capital, and decrease in PPE and goodwill and intangible fixed assets due to impairment losses. Interest-bearing debt is ¥1,563.5 billion, up by ¥102.1 billion over the end of the previous year. The equity was ¥1,164.4 billion, down by ¥324.8 billion from the previous year. Next, I will explain consolidated cash flows. Operating cash flow was negative ¥51.3 billion, down by ¥162.9 billion from the previous year. This was mainly due to decrease in income before income taxes. Investment cash flow was negative ¥112.2 billion, down by ¥92.8 billion from the previous year. This is mainly due to the increase in loans to Petro Rabigh. As a result, free cash flow was negative ¥163.6 billion, down by ¥255.8 billion from the positive ¥92.2 billion in the previous year. Financing cash flow was ¥49.2 billion, ¥227.7 billion increase from the previous year. Next, I will explain the revised full year forecast for FY 2024. First, I will explain the business environment surrounding our company that is the premise for our full year forecast for FY 2024. This is Page 15. Regarding economic conditions, inflation is expected to slow down worldwide and the global economy is expected to stabilize, but low growth rate is expected. I will only mention some distinctive points of FY 2024 forecast compared to FY 2023 actuals. First, regarding the petrochemicals and raw materials at the top, we believe petrochemical market bottomed out in FY 2023 and will gradually recover towards FY 2024, but the extent of the recovery is limited and the low margin will continue. Next, regarding the semiconductors, fourth from the top. The demand is headed for a gradual recovery and full scale recovery is expected towards the second half of the year. As for the Crop Protection, third from the bottom, overseas distribution inventories are being eliminated and as a result, we expect the recovery of sales volume, especially in South America. This has been the main business environment for FY 2024. Next, I will explain consolidated business forecast on Page 16. For FY 2024, our forecast has not changed from what we announced on April 30th. Sales revenue will be ¥2.670 trillion, up by ¥223.1 billion from the previous year. Core operating profit will be ¥100 billion, up by ¥249 billion from the previous year. Operating income will be ¥70 billion, up by ¥558.8 billion from the previous year. Net income attributable to owners of the parent will be ¥20 billion, up by ¥331.8 billion. Thus, we expect increase in sales and profit. The assumptions for exchange rates and naphtha prices are as shown on the slide. We will make utmost efforts to achieve a V-shaped recovery in FY 2024. I will discuss the sales revenue and core operating income by segment from the next page. We expect increase in operating income and net income attributable to owners of the parent, thanks to the improvement of core operating income as well as the reduction in impairment losses and expenses for business restructuring. As for the dividend for the current year, we will pay an interim dividend of ¥3 and year-end dividend of ¥6 per share. Thus, the annual dividend will be ¥9, the same as the previous year. Next, I will explain the sales revenue and core operating income by business segment on Pages 17 and 18. Sales revenue forecast for FY 2024 is ¥2,670 billion, up by ¥223.1 billion from FY 2023. By segment, we focus to increase revenue in all segments except Energy & Functional Materials and IT-related Chemicals. Looking at the analysis of variance; sales price is plus ¥79.5 billion, volume is plus ¥168.3 billion and foreign exchange for the sales revenue of overseas subsidiaries is minus ¥24.7 billion. Please turn to Page 18. Forecast for core operating income is ¥100 billion, up by ¥249 billion from FY 2023. We expect increase in profits in all segments. By variance analysis, positive ¥19 billion for price, positive ¥141 billion for cost difference, and positive ¥89 billion for volume, et cetera, including changes in equity in earnings of affiliates. Let me now explain the consolidated cash flows. Focus for operating cash flow is ¥160 billion, increased by ¥211.3 billion from FY 2023. Investment cash flow will be ¥110 billion, up by ¥222.2 billion over FY 2023 due to the short-term intensive business improvement measures. This will result in positive ¥270 billion in free cash flow. Interest-bearing debt balance at the end of FY 2024 is expected to be ¥1,320 billion. That is all regarding the forecast. And for the first half, we decided not to disclose the forecast because it is difficult to expect. And so we will make company-wide efforts to achieve a V-shaped recovery because this is the top priority items and that will include the restructuring or the rationalization. But it is difficult to expect the timing or it is not appropriate to actually disclose the timing and so we decided not to disclose the interim forecast and thank you for your understanding. And as for the FY 2024 the performance, we will still see the loss in the first quarter. But after that, towards the end of the fiscal year, we expect the gradual improvement. And that is all I have to say on business report. I would like to take your questions now. Thank you.

Operator: Now, let's receive your questions. Now, we'd like to receive the first question from Morgan Stanley MUFG Securities, Mr. Watabe.

Takato Watabe: Thank you. This is Watabe speaking. My first question is about your measures to improve your revenue in a short period of time, the last fiscal year and this fiscal year. You include about ¥20 billion in the previous year, but that is not allocated by segment. So, was that influenced? And what is your forecast for this year?

Keigo Sasaki: The immediate-term concentrated measures to improve business performance. In FY 2023, we implemented some measures and already they have been announced. For example, in the Health & Crop Sciences sector, post-harvest business sales that was one thing that was done some businesses -- we withdrew from some businesses. In FY 2023, the influence was not that large and already we have announced, for example, in the Pigment business or China LCD Chemicals. In FY 2024 -- towards FY 2024, there are some businesses that will be affected. But to a certain extent, I cannot tell you the amount because there is a counterparty and it's a matter of timing. I cannot tell anything in concrete, but this has been included to a certain extent. On the 30th of April material, it was mentioned that for FY 2023 and 2024, comparing those two years, the immediate-term concentrated measures about ¥3 billion was the figure described.

Takato Watabe: By segment, is that being included?

Keigo Sasaki: Yes, to a certain extent, they're included. And under others, also some items are included.

Takato Watabe: Others is ¥20 billion. So, by segment, it would be about ¥10 billion?

Keigo Sasaki: Yes. Under others, yes.

Takato Watabe: In FY 2023, you said there was not much influence. But for IT-related Chemicals, there was a profit in the fourth quarter. So, that was based on your actual real capability and also from Crop Sciences, right?

Keigo Sasaki: Yes, in some areas of IT-related Chemicals, they were doing well and I think it's right to say that that is our capability. But for Health & Crop Sciences, we didn't achieve the forecast, so fourth quarter didn't grow as much as we had expected. To consume the inventory in the distribution process didn't proceed as we have expected. In FY 2024, there may be a reaction to that, we expect positive shipments.

Takato Watabe: For Health & Crop Sciences, the current environment in Brazil trend of generic price. Do you expect higher prices mainly for methionine? Is that the factors you expect for this year?

Keigo Sasaki: Yes, this year for Health & Crop Sciences, we are assuming positive price. As you mentioned, methionine and also for Crop Protection chemicals, generics, or post-patent products, price is declining quite a lot in FY 2023. Compared to that, price itself will be recovering. That is what we expect. Besides price, in terms of volume in South America, we expect expansion of sales. So, inventory in the distribution will gradually decline. In North America and South America, we expect expansion of sales.

Takato Watabe: Understood. Thank you very much. This is not a question, but for confirmation, you can answer later. The SG&A in your fourth quarter is increasing by about ¥200 billion compared to the third quarter. I hope you can answer that to me later. Thank you very much.

Operator: Thank you, Mr. Watabe. Let's move on to the next question from Mizuho Securities, Yamada-san, please.

Unidentified Analyst: This is Yamada from Mizuho. I have two questions. Thank you. The first question, I don't know how much you can answer. But I would like to know the situation of the improvement of the situation for Essential Chemicals and loan to Petro Rabigh? And for the Essential Chemicals, there is the major decline of the loss and its plus ¥22.7 billion over FY 2023. And so how much of that is thanks for the receipt payment difference? And how much is due to Rabigh loan? And receiving the payment difference and so looking at the others for there is the increase for the fixed assets and so if it's a loan, it's like ¥100 billion and of course, the ForEx -- the changes may be affecting. And so if -- am I correct to assume that it's a large amount of cash outflow and that is that like investment or the loans? Does it play a major role or is it for the JBIC? Thank you.

Keigo Sasaki: Well, your question covers quite a large scope, so let me try to answer one-by-one. First of all, it's regarding the earnings of the Essential Chemicals and for the price difference or the cost difference, yes, we expect a certain amount, but also we expect some difference in volumes. And so regarding the Petro Rabigh, I am not able to answer to your question, but it is included to some extent. And on the other hand for the usual expansion of the sales, in our explanation, I talked about the business environment and overall, we do not expect the rapid growth; but compared with FY 2023, we believe that there will be some improvement. And also for some products for example, there may be a level of increase for licensing and those may have some impact and that will result in the difference of the volume.

Unidentified Analyst: And for the receiving payment difference, it's not including?

Keigo Sasaki: Well, we have -- the price of the naphtha is like ¥75,000 and so we do not expect a very large difference.

Unidentified Analyst: This is a comparison from the previous year. Last year it was -- the difference was negative because the decline of the naphtha price, but this year it's positive. So, there will be some billion yen, but the amount itself is not a very large one, right?

Keigo Sasaki: That's correct.

Unidentified Analyst: And for the loans to Petro Rabigh?

Keigo Sasaki: So, there may be some impact of the foreign exchange. But currently we have the loan of the $750 million and so that's the amount. And if they demand the cash, we do offer the loan. And according to the current agreement, that's the limit that we will not expect any further and so we have hit the ceiling.

Unidentified Analyst: And this is a subject of the JBIC?

Keigo Sasaki: What I mentioned is the loan from our company and so it's on our BS.

Unidentified Analyst: But what you say JBIC, it's a project finance, you are mentioning project finance, right?

Keigo Sasaki: Regarding the project finance itself not only for the JBIC, but for others. If there is the guarantee, we will join.

Unidentified Analyst: And as for the project finance?

Keigo Sasaki: There see the termination and so we will not guarantee the whole amount. But what is put on the footnote is for one-time payment that actually for June and December that Petro Rabigh is making the payment in those cases. And so one-time payment, we guarantee the 50% of that for one-time and so the [Indiscernible] finance-related amount is not a very large one.

Unidentified Analyst: I see. I didn't have a good understanding. Thank you very much for your explanation. And next question, please. The second question is also probably it may be difficult for you to answer, but this is in Pharmaceuticals and the price difference is zero for the FY 2024, what is the impact of the price reduction -- impact of the price reduction?

Keigo Sasaki: The impact of the price cut is not a very major one and so our analysis, its zero. So, that's the impact of the price cut. And so it may not be exactly zero, but the amount is not a very large one. And so the amount is so small, that can be absorbed from other items.

Unidentified Analyst: So, it's not really meaningful in terms of the analysis. Is that correct?

Keigo Sasaki: Yes, that's correct.

Unidentified Analyst: Thank you.

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

Go Miyamoto: Thank you. I'm Miyamoto from SMBC Nikko Securities. I have two questions. One, for Health & Crop Sciences sector performance, the fourth quarter post-harvest-related were sold and a certain level of profit was recognized and where is that included in the core operating income on Page 10? Is that included in the volume variance? And on Page 29, volume variance ¥42.4 billion and plus ¥9.6 billion in terms of volume variance. In terms of marginal profit, the volume variance increase seems to be mild, is that related to post-harvest? And related to that, for new fungicide, INDIFLIN and Biorational, what was the trend in the previous year and your forecast for the next year?

Keigo Sasaki: For FY 2023 Q4 business divestiture, as you mentioned, that would be included in the volume variance. So, for comparing FY 2024 and 2023, for Health & Crop Sciences, volume variance may seem small. So, that factor is included partially, so you're right. And INDIFLIN was launched and FY 2024 will be the third year since the launch. Situation in South America in the last one or two years was not as good as we had expected. For FY 2024, distribution inventory issues, we expect will be resolved. So, we expect sales to be very aggressive. So, we include a certain level of expansion of sales.

Go Miyamoto: INDIFLIN increase in revenue, would that about ¥20 billion and what is the situation of Biorational? And the volume variance, I understood your point, but still the volume variance compared to ¥62.4 billion of revenue, the increase in profit seems to be low. I think there was more than ¥10 billion in terms of the gains from the sales of the business?

Keigo Sasaki: I am not in position to answering your question about the actual amount. But INDIFLIN and others sales scale, I can say that we expect a certain level of revenue increase. For Biorationals, I can't tell you the actual amount, but in terms of growth, somewhere from about 10% or 20% increase is expected. We ask for your understanding on that.

Go Miyamoto: Thank you very much. My second question is about IT-related Chemicals. Three months ago in the forecast, you said you expect the core operating income to increase by about ¥6 billion. Could you give me the details? And on Page 28, you have figures for new fiscal year, cost variance is plus ¥2 billion. And from display materials, polarizing films, there has been quite a lot of restructuring, so I expected large increase, but cost of semiconductors may be increasing. What is your forecast for the new fiscal year?

Keigo Sasaki: First in Q4, more than we had expected, the result was better from what we had forecasted. Major factors is display-related materials, OLED-related, and touchscreen panels, glass touch increased more than we had expected. Growth was not that large, but compared to our forecast, it was not that large, but semiconductors materials were better than our forecast in the fourth quarter. On the other hand, this fiscal year, FY 2024, compared to FY 2023 as increase in profit income, we expect about ¥3 billion increase. So, there is quite a lot of negative in the price variance for films. Certain price decline is expected. And for cost variance, it's ¥2 billion, which is not that large. That may be your impression. But with rationalization, we went through reorganization and for polarizing panels, plants were stopped and were shifted to automotive use. There were a lot of restructurings taking place. So, the effect of rationalization will be reflected. On the other hand, as you know, our semiconductor materials in FY 2023 and 2024, there plants that will be starting, so for a new plant, depreciation will increase. So, cost variance because of that will not be that large. That is how you should interpret. And expansion of sales is expected, which is reflected in the volume variance.

Go Miyamoto: Photoresist, polarizing films, semiconductor films, which areas will have a larger increase in sales?

Keigo Sasaki: Films are included, semiconductor materials are also included. Both are included.

Go Miyamoto: Understood. Thank you very much.

Operator: Thank you very much Mr. Miyamoto. Next question from Daiwa, Umebayashi-san, please.

Hidemitsu Umebayashi: Thank you. My question is about the Essential Chemicals. The Japan and Singapore other than Rabigh, could you share your image about the market situation and operating rates?

Keigo Sasaki: In Japan and Singapore -- first of all, Japan and Singapore, yes and both are applicable. But -- and in FY 2023, there was a periodic shutdown maintenance and compared with that 2024 -- FY 2024 the situation different. And so -- and for others in FY 2023, the Chiba plant and Singapore MMA have booked the impairment and loss and FY 2024, the depreciation will be less. And in addition to that -- and so on business, giving up the -- on business that is one of the restructuring and impact can be expected for the FY 2024. And also the improvement of the trading conditions and some business environment improvement can be expected although the actual extent is not a very big one. And based upon those, we have come up with the forecast.

Hidemitsu Umebayashi: Thank you. The second question, maybe it's difficult for you to answer. Earlier you mentioned that it's difficult to disclose the first half, but you gave us the idea that Q1 is the loss, but it will be the improvement later on. And for the Q1 in terms of the segment, Essential Chemicals and Pharmaceuticals are the difficult segments, is that correct understanding? And then after Q2, you would expect the improvement. And do you mean that from the Q2, do you think you will see some profits?

Keigo Sasaki: Thank you for your question. And yes, it's true, it's difficult for us to answer. But as you mentioned or as you suspected for the Petro Rabigh, the impact from January to March and that is included. And other than that, it's difficult to say, but we have been taking various measures. Such as for example in the pharmaceuticals, we see the gradual improvement, especially for the North America, the business restructuring or the structural reform was implemented and we will see the impact gradually. And in the Q1, there may be not the full-fledged effect as seen. But after Q2 and later, we expect improvement, but in terms of the amount or the extent, it's difficult to explain now. In addition to that, there are some -- the selling of some business and others, the reorganization could take place and that may have some impact -- financial impact. And so we don't want to mislead or have them suspect and so thinking of that, we decided not to disclose the first half.

Hidemitsu Umebayashi: Thank you very much.

Operator: Thank you very much Mr. Umebayashi. We are approaching for time to conclude, so the next question will be the last question and please limit to one question. From Nomura Securities, Mr. Okazaki.

Michio Okazaki: Thank you. I'm Okazaki from Nomura Securities. On the 30th of April, the material on Page 6, cost reduction rationalization, ¥33 billion is written. But in is material this time from Pages 26 to 29, cost variance, basically I think this is the subject. And actually the Chemicals, there may be increases, which may not necessarily match, is that right? And the ¥30 billion for this year, that is reflected in the volume variance of each segment? What is the breakdown of the ¥30 billion? That is all. Thank you.

Keigo Sasaki: Thank you for your question. First, as for your first question, yes, you are right. And for the immediate term concentrated measures, yes, you are right. Basically each segment, it is reflected in the volume variance. And the scale, whether it is large or small, at the moment, I'm sorry I cannot mention that.

Michio Okazaki: Thank you very much. That is all from me. Thank you.

Operator: Thank you very much. Now, this concludes the Q&A. So, Mr. Sasaki have a few words at the end.

Keigo Sasaki: Thank you very much for your participation. The performance in FY 2023 was quite poor and compared with that for the FY 2024, we are determined to achieve the V-shaped recovery. And also we will strengthen our damaged financial position and we appreciate your continued support. Thank you very much.

Operator: This concludes today's conference call. Thank you very much for your participation.