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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Thank you very much for participating in the Sumitomo Chemical Conference Call for Fiscal 2018 First Quarter Financial Results. First, from Sumitomo Chemical, Executive Officer Mr. Sasaki, will give a briefing on fiscal 2018 first quarter financial results. Later, he will be joined by Mr. Tan, General Manager of Accounting department to take questions. Before we begin the conference, let me give you some reminders. In the briefing, future projections based on current forecast may be provided, but please be informed that they involve risks and uncertainty. We ask that you be aware that sometimes the actual results may differ greatly from projections. We'll now start the conference call. Mr. Sasaki, please.
My name is Sasaki from Sumitomo Chemical. Thank you very much indeed for joining us for this conference call out of your busy schedules. To our investors and to the analysts, I'd like to express our gratitude for your continued support and understanding. I like to take this opportunity to express my appreciation. Now first, let me start giving a presentation on fiscal 2018 first quarter financial results.
Please go to Slide #4. Fiscal 2018 first quarter consolidated results. Sales revenues was JPY 548.9 billion, up JPY 41 billion year-on-year. Core operating income, reflecting recurring earnings capacity, was JPY 48.2 billion. It was down JPY 5.3 billion year-on-year. Equity and earnings included in core operating income was JPY 13.4 billion, up JPY 5.9 billion year-on-year. Nonrecurring items not included in core operating income, including changes in fair value of contingent consideration of JPY 2.5 billion, business structure improvement expenses of JPY 600 million, led to a total of JPY 4.1 billion in loss recognition. Same period last year, there was gain on sale of PP&E, and therefore compared to the year before it was down JPY 16.8 billion. As a result, operating income was JPY 44.1 billion, down JPY 22.1 billion year-on-year. Finance income and expenses. It was a profit of 6 -- JPY 7.6 billion, an improvement of JPY 7.1 billion year-on-year. Gain or loss on foreign currency transactions yen depreciated towards the quarter end, leading to a gain of JPY 6.8 billion. Therefore, it was an improvement of JPY 6.1 billion year-on-year. Income tax expenses was JPY 10.6 billion. The tax burden was down JPY 3.8 billion year-on-year. And as a result, net income attributable to owners of the parent was JPY 30 billion, down JPY 3.8 billion year-on-year. ROE was 3.2%. Now exchange rate and naphtha price, which has a bearing on our results. U.S. dollar average rate during the period was JPY 109.10 to the dollar, compared to JPY 111.09 year before. The yen was stronger by JPY 1.99 or 1.8%. Naphtha price was JPY 49,000 per kiloliter compared to the year before at JPY 39,100 per kiloliter. It was up by JPY 9,900 per kiloliter or 25.3%.
Overseas sales ratio was 63.6%. Increased shipment of petrochemical products to mostly China led overseas sales ratio higher. Next, results by segment. Please go to Page 5. Sales revenue. Total sales revenue was up JPY 41 billion year-on-year. By segment, Petrochemicals & Plastics, Energy & Functional Materials, Health & Crop Sciences saw increases.
Changes in sales revenue by factor. We conducted an analysis by factor on sales price, IT-related chemicals and Pharmaceuticals. So sales price declines. On the other hand, in petrochemicals with higher feedstock prices, product market price strengthened and sales price variance led to JPY 8 billion increase in sales revenue. On volume, shipment increased in all segments. Shipment volume variance led to JPY 33.6 billion increase in revenue. Now foreign currency conversion variance at overseas subsidiaries led to JPY 600 million decline in revenue. Now please go to Page 6. Total core operating income was down JPY 5.3 billion year-on-year. By segment, Petrochemicals & Plastics, Energy & Functional Materials, IT-related Chemicals saw increases. By factor, on price, profit margins deteriorated in Petrochemicals & Plastics and Health & Crop Sciences, and sales price declines in IT-related Chemicals led to a JPY 12 billion decline. On costs, in IT-related Chemicals, rationalization progressed, but in Pharmaceuticals, selling expenses increased and this led to a decline of JPY 3 billion. In shipping volume variance, which includes changes in equity in earnings, in Health & Crop Sciences with the stronger yen, export process received decline, but in other segments there was improvement. And overall, it was a positive of JPY 9.7 billion. Next, segment analysis. Please go to Page 7. Petrochemicals & Plastics, sales revenue was JPY 185.6 billion, up JPY 32.2 billion year-on-year. Core operating income was JPY 17.8 billion, which was up JPY 2.8 billion year-on-year. Sales revenue, with higher feedstock prices, product market price went up. And with increased shipment of Rabigh products, sales revenues were up. Core operating income, maintenance shutdown of Chiba factory and deterioration of profit margin of synthetic resin were negative factors, but caprolactam and other raw materials for synthetic fibers and MMA saw profit margin improvement. And stable operation of petro Rabigh, an equity method affiliate continued. So the results were improved greatly from the year before, where there was equipment problems. Moving on to the next page. Energy & Functional Materials. Sales revenue was JPY 68.5 billion, which was up JPY 9 billion year-on-year. Core operating income was JPY 5.9 billion, up JPY 1.1 billion year-on-year.
Sales revenue, aluminum market price was higher and lithium-ion secondary battery separator, cathode material, high purity alumina shipments increased, leading to higher sales revenue. Core operating income similar to petrochemicals. There was maintenance shutdown impact at Chiba factory, but with higher shipment volume, profits increased. Moving on to the next page, please. Regarding IT-related Chemical segment. Sales revenues was JPY 89.2 billion, down by JPY 1.6 billion year-on-year and core operating income was JPY 4.3 billion, up by JPY 1 billion year-on-year. Regarding sales revenue. Polarizing film shipment volume increased, but selling price of polarizing film and touchscreen panels declined, and therefore revenue decreased year-on-year. Regarding core operating income. Shipment volume increased and cost reduction, including rationalization, more than offset the negative impact of selling price decline. And therefore, operating income increased year-on-year. Next page, please. Health & Crop Sciences segment. Sales revenue was JPY 69.4 billion, up JPY 1.9 billion year-on-year. And core operating income was JPY 2.6 billion, down by JPY 2.9 billion year-on-year. Regarding sales revenue. We saw the impact of foreign currency conversion variance of foreign subsidiaries due to the stronger yen, but crop protection chemical shipment increased in overseas market, centering on Latin America and Asia, and therefore, revenue increased. Core operating income decreased due to higher feedstock prices and decrease in export proceeds due to stronger yen. Next page, please. Pharmaceutical segment. Sales revenue was JPY 124.3 billion, down by JPY 300 million year-on-year. And core operating income was JPY 19.7 billion, down by JPY 6.3 billion year-on-year. Regarding sales revenue. Shipment of Aptiom, antiepileptic agent in North America, and Trulicity, which is anti-Type II diabetes drug in Japan increased, but it was offset by NHI price revision in Japan, and therefore, revenue was flat. Core operating income decreased due to NHI price revision and increase in sales expense in North America. That concludes the results outlined by segment. Next page is the breakdown of nonrecurring items. The details and the amount of nonrecurring items was explained in the beginning. JPY 12.7 billion breakdown I will explain here for nonrecurring items. Other than JPY 6.4 billion regain on fixed sales of property, plant and equipment, there are some extraordinary items, which is changes in fair value of contingent consideration, JPY 7.1 billion.
This is regarding Napabucasin. This change in fair value of contingent consideration is the future milestone payment related to the decision on the unblinding of Phase III trial on stomach cancer and stomach esophagus cancer. Changes in fair value of contingent consideration decreased. And we do not have this extraordinary item this year, which we had last year, and that is why we are seeing a decline. Next, let me explain the details on the consolidated balance sheet. Total assets as of June 30, 2018, was $3,156,500,000,000, up by JPY 87.8 billion compared with March 31, 2018. The main factors were the increase in property, plant and equipment and inventories. Interest-bearing liabilities, excluding lease obligations, was JPY 937.8 billion, up by JPY 95.7 billion from March 31. Equity was JPY 1,265,900,000,000, up by JPY 13.7 billion compared with March 31. This was due to the increase in retained earnings. As a result, equity attributable to owners of parent to total assets or equity ratio was 29.7%, down by 0.5 percentage points from March 31. Next, let me explain consolidated statements of cash flows. Please turn to Page 14. Cash flows from operating activities was an outflow of JPY 17.2 billion, up by JPY 46.6 billion year-on-year. The main factors were the increase in working capital and decrease in operating income. Cash flows from investing activities was an outflow of JPY 41.7 billion, up by JPY 24.2 billion year-on-year. The main factor was the increase in the outflow due to the acquisition of PPE. As a result, free cash flow was an outflow of JPY 58.9 billion, up by JPY 70.8 billion compared with last year, which was JPY 11.9 billion. Cash flows from financing activities was an inflow of JPY 58.6 billion, up by 46 -- JPY 48.6 billion year-on-year. That concludes the outline of the financial results for the first quarter of fiscal year 2018.
Lastly, let me explain the progress rate of the first quarter results against our first half forecast announced in May. First half forecast was sales revenue of JPY 1,160,000,000,000, core operating income of JPY 90 billion; operating income JPY 80 billion; and net income JPY 55 billion. Progress rates are: core operating income, 54%; operating income, 55%; net income, 55%. All slightly exceeding the plan. The absolute value of income declined year-on-year due to the maintenance shutdown in Chiba Works and decline in income in nonrecurring items. But overall, progressing roughly in line with the plan announced in May with some variance on a segment basis. This concludes the presentation on the financial results. Now we would like to take questions. Thank you very much again for your attendance today.
Now the first question from Morgan Stanley MUFG Securities. Mr. Watabe, please.
First, IT-related Chemicals. Year-on-year, revenues were down but income was up. Cost reductions were quite effective. Are there any special factors, major products, polarizing film and touchscreen panels? Any developments including the developments in the second quarter? And inventories are up, so has there been any such impact coming from the inventory level?
Yes. You're right. Compared to the year before, sales revenues were down but operating income is up. The year before was a very difficult period. So the factors pushing down sales revenue is price -- the price impact. In terms of volume, in terms of a functional film, there's a lot of shipment, including for TV uses and medium-sized and small-sized shipments are up. So in terms of profit, that was a big contributor. Another major product is touchscreen panels. Overall, mostly, it's stable. Glass type and film type trends are different. But overall, I would say that the level is about the same as the year before. Now inventories are up, you mentioned that. But actually, it's not up by that much. Inventories being up means on a consolidated basis, overall the numbers are up. But the major ones that see inventory increases is Dainippon Sumitomo Pharma has seen inventories going up. And other increases are found in -- well, this is a seasonal factor as well. Crop protection inventory is up, because it's not the season for demand. But those are the major one seeing inventory increases. Last year in the fourth quarter, losses included some special factors. So both revenue as well as profits are up, improvements have been seen. So other than touch sense -- touchscreen panel or film type, there are improvements. Yes, that's right. Glass type for touchscreen panel. Glass type is doing quite well, but film type touchscreen panel is not growing as much as we would like to see. But there are signs of improvements underway. So film type is expected to see improvements going forward. That's our expectation. Thank you.
Second question is Health & Crop Sciences. Methionine market price as well as crop protection market in South and Latin America is recovering. Can you give us a feel of how that is developing?
Methionine market price gradually, well, last year in first quarter, that was the bottom and there has been gradual increases. But so far right now the increase is not that notable. So in that context, costs that is propylene costs is going up. And that is why the profitability is worst than the year before. Now crop protection. Overall, as you pointed out, it's shaping up to be pretty good, especially -- well, you mentioned Brazil, but India, sales in India was quite strong. So that is one notable element that I can speak of. Does this answer your question, Watabe-san?
Yes.
Citigroup Securities, Mr. Ikeda.
Yes. This is Mr. Ikeda from Citigroup Securities. My first question is the Energy & Functional Materials in the first quarter, there was the maintenance shutdown in Chiba Works, but it still good progress. Results seen in separators and engineering plastics, are those drivers that pushed up the profit? Could you explain the drivers and also your forecast in the second quarter?
Yes. First on the year-on-year basis. The big contributor to our profit was separators. In terms of volume, we saw a big growth. As you know, our customers' production is stabilizing and so this is a favorable factor. And the high purity alumina is also in a good situation. So those are the good positive factors. Resourcing, you mentioned resourcing. In terms of volume, it is declining. We have strong inquiries and we had been full capacity. And therefore, this is a negative impact if we have these scheduled maintenance shutdown.
Now the comparison with the fourth quarter. Compared to the fourth quarter, we are seeing an improvement. I talked about the battery last time. Our customers' situation was not favorable, but compared to that we are seeing an improvement. Other than that, super engineering plastics is in a reasonable situation in this first quarter. The new PES in Chiba, we built capacity in Chiba, and so we will see a stable production and operation going forward. Thank you very much.
So separator production seems to be increasing and because of the maintenance shutdown, we will see a higher level in the second quarter? Were there some extraordinary items or one-off items in the first quarter?
Yes. You're right. Of course, we will deal with the customers' changes and circumstances. But I understand that the situation on the customer side isn't generally favorable. So we under -- we think our shipment will increase accordingly.
My next question is your outlook on OLED, IT-related Chemicals, OLED will increase. So from the second quarter, are you optimistic? And for TV, are there some inventory adjustment in the third quarter, so if you could elaborate on OLED.
Yes. A polarizing film for OLED and LCD. If I may break down, for OLED, we hear some positive information that we will see an increase going forward. So we have high expectations. On the other hand, LCD, the high-end or full-screen enabled processing needs will increase. And they will use our product. And so we expect the increase in our shipment. So this is what it looks like now. Thank you very much.
Next question from Mizuho Securities, Mr. Yamada, please.
My name is Yamada from Mizuho. My first question is, Petrochemicals & Plastics, Rabigh is moving softly, operating well. Phase II included, what is the situation, the updates about the Rabigh situation? That's my first question. Next, distribution of Rabigh products, how are they selling? In Phase II product sales and other inquiries, if possible, if you could give me some update about that, please.
The question about Rabigh. This is a listed company, so there are certain things that we cannot touch upon. But Phase II, the situation. So far, most of the plants are now being -- starting to be launched, in the process of being launched. So performance guarantee for each plant such tests will be completed one after another by the fall of this year. When that is complete, then project finance tests, creditors liability tests will be conducted after that. That is our expectation. So Phase II trial operation is underway, but of course, products will be made, and therefore for those products, they are being sold in sequence. So in the first quarter, petrochemicals sales revenue increases. That was the factor in the first quarter's sales revenue compared to the year before. Thank you.
So if that's the case, completion guarantee will be made by the end of the year. So completion bond is going to come down towards the end of the year?
Well, I cannot say anything definitive, but that's the expectation that we have.
March 31, I think it was about JPY 281 billion. So in the first quarter, it remains unchanged. Similar amount is going to be added on and by the end of the year, you wish that it will go away, that's the expectation?
You are talking about completion bond. If the situation continues, then the completion bond would be added on in the second quarter as well as the third quarter, but by the end of the year, our hope that it will be lifted up and that it will be removed. That's the expectation.
Separate from that on the project finance side, creditors, reliability tests, you are expecting that will be completed?
Of course, with the lifting up of completion bond, one requirement is to have such tests conducted, tests of the operation. But there are other conditions attached. So inclusive of all of them, our hope is that, that will be lifted.
My second question is IT-related Chemicals. In the fourth quarter, it is true that there were special factors. In the third quarter of last year up to the first quarter of this year, if you look across, in the first quarter of last year, things were pretty strong. Sales was about JPY 10 billion. It was down by about JPY 10 billion, but operating income is at the level of third quarter last year. So compared to the third quarter, TSP, touchscreen panel, didn't do as well as the third quarter of last year. So yield improvement and cost reduction must have made a lot of progress, so that structurally you're able to generate profits. Is that the correct understanding?
In the fall, we worked on rationalization. So in that sense, profitability has been enhanced gradually over time. And you asked the question about comparison with the third quarter of last year. In the third quarter of last year, IT-related Chemicals revenue was JPY 98.1 billion, operating profit of JPY 4.6 billion. So sales revenue is down quite a bit, but the profit level is maintained almost. Sales revenue is coming down meaning, every period prices are coming down. So obviously, in line with that. We need of our working on rationalization of our operations. Touchscreen panels in that sense, at one time we struggled. We did have such a period, but compared to then, now different shape processing various uses are being introduced. So our hope is that, that will continue in to the future. That was my answer to your question.
My impression is that the yield has been improved greatly, am I correct?
Yes, to a great extent. Well, I would say that it's reasonably good.
Now we would like to take the next question SMBC Nikko Securities, Mr. Takeuchi, please.
This is Takeuchi from SMBC Nikko Securities. In the last part, you talked about the first quarter progress against the first half's forecast. Now on the segment basis, you said that there's some variance on the segment-by-segment basis. On Page 17 -- I'm looking at Page 17, so basically, looking at the numbers, other than the Pharmaceuticals, it seems the progress is high. Is that correct in your plan? Which segment has low progress, for example? So if you could give me some nuance or image, please.
Yes. First, the low progress is from Pharmaceuticals, 46%, and IT-related Chemicals in the first half, JPY 9 billion core operating income was forecasted, but we are JPY 4.3 billion. So it is a little less than half. So these shortfalls are covered by Energy & Functional Materials, and Petrochemicals & Plastics and Health & Crop Sciences. So they are offsetting. So that is why I said there are some variances by segment.
Yes. So the remaining questions on IT-related Chemicals. From first, second quarter, there were -- you are doing good rationalization so you will see a growth. So basically, for the first half you will not have a big shortfall in the first half, this is, IT-related Chemicals will reach the target, right?
Yes. IT-related Chemicals. There are some good signs we are starting to see. So in that sense, we wanted to achieve this target, and we think there's sufficient possibility that we can achieve this target.
My second question is on the same page, Petrochemicals & Plastics. In the first quarter Q-on-Q, it is down by JPY 6.1 billion. Now maintenance shutdown included, what is the -- could you elaborate on the profit for the quarter?
Yes. So that is Petrochemicals & Plastics, right?
Yes.
So here, as you just correctly mentioned, maintenance shutdown factor is about JPY 4 billion to JPY 5 billion, we think. So excluding that factor, it is about the same, flat. But 1 change we are starting to see is polyolefin -- polyethylene. The Asian market price is weakening somewhat. The feedstock price is coming up. So this is a negative factor, we think. Other than that, MMA, very strong. Thank you very much.
Now just to be sure, this fiscal year on a full year basis, the maintenance shutdown impact is JPY 9 billion, if I'm correct. And Energy & Functional Materials. What is the impact of the maintenance shutdown, negative factor on the first quarter?
First quarter, roughly speaking, JPY 5 billion is a negative factor.
So Petrochemicals & Plastics -- so Energy & Functional Materials, it will be about JPY 500 million to JPY 1 billion?
Yes.
So from the second quarter, how will this come out? What will be the amount like?
In July, we think we will see some amount.
But the big impact was the first quarter, am I correct?
Yes. The remainder is not just Chiba Works, but in Singapore, we plan a maintenance shutdown. So from first to second quarter in Petrochemicals & Plastics, there's still some factors remaining from the maintenance shutdown, but it will not be big. It will decline somewhat, but there will still be some impact in the second quarter from the maintenance shutdown.
So no big difference from first to second quarter. But a big difference between first and second half, is that right?
Yes.
Thank you very much. We're approaching the time to finish the Q&A session. Lastly, Mr. Sasaki, can you say a few words to conclude this meeting?
Thank you very much for your participation in this conference. As I have explained, in the first quarter, we have made a reasonably good start. Initial target to be achieved, we will continue to work very hard to achieve our initial targets. So I would hope that you'll continue to give us your support. Thank you, once again for your attendance.
Thank you very much. This conference call today will be distributed on Sumitomo Chemical website as archived for 3 months from today. So please, replay and listen any time. With that, we would like to conclude the conference call today. Thank you very much again for your attendance.