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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you very much for participating with Sumitomo Chemical Conference Call for Fiscal 2019 First Quarter Financial Results. First, Mr. Sasaki, Executive Officer, will give you a briefing on financial results for fiscal year 2019 first quarter, and later, he will be joined by Mr. Tan, General Manager Accounting Department to take questions. Before the conference, let me give you some reminders. In the presentation, future projections based on current forecasts may be provided. And please be informed that they may involve risk and uncertainties. Please be aware that actual results may greatly differ from projections. Now I'd like to start with the conference call. Mr. Sasaki, please.
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. I'd like to take this opportunity to thank you all.
Now let me start with the explanation of financial results of fiscal year 2019 first quarter.
Please turn to Slide -- Page 4. Consolidated results for fiscal year 2019 first quarter. Sales revenue was JPY 553.2 billion, up by JPY 4.3 billion year-on-year. Core operating income representing the recurring profitability was JPY 44.3 billion, down JPY 3.9 billion year-on-year. Equity in earnings included in core operating income was JPY 8.2 billion, down by JPY 5.1 billion year-on-year. Nonrecurring items not included in core operating income had JPY 1.3 billion of restructuring charges, which was a loss, but there were changes in fair value of contingent consideration of JPY 18.5 billion, which was again resulting in a profit of JPY 18.1 billion, improvement of JPY 22.2 billion year-on-year. Changes in fair value of contingent consideration is from the decision of suspending the Phase III trial of napabucasin for pancreatic cancer. The drop in the fair value of future debt milestone payment led to reversal of expenses, posting large gains. As a result, operating income was JPY 62.4 billion, up by JPY 18.3 billion year-on-year. Finance income and expenses was a loss of JPY 5.5 billion, worsening by JPY 13.1 billion year-on-year. Out of this, gain or loss of foreign currency transactions posted a loss of JPY 7.1 billion with a strengthening of yen during the term, which is a worsening of JPY 13.9 billion year-on-year. Income tax expenses was JPY 36.5 billion, increase of JPY 25.9 billion year-on-year. The main reason for the increase, as I mentioned earlier, is the suspension of Phase III trial of napabucasin for pancreatic cancer, resulting in a reversal of deferred tax assets recognized in the United States. As a result, net income attributable to owners of a parent was JPY 14.5 billion, down by JPY 15.5 billion year-on-year. As for the exchange rate and the naphtha price, which affect our results, average U.S. dollar rate during the term was JPY 109.90 per dollar, which is nearly flat from the same period of previous year. Naphtha price was JPY 45,500 per kiloliter, down by JPY 3,200 per kiloliter from the previous year.
Overseas sales revenue ratio was 66.6%. The ratio increased with a increase in shipments of IT-related Chemicals. And next is Page 5. Results by business segment. Sales revenue in total increased by JPY 4.3 billion year-on-year. By segment, sales revenue increased in IT-related Chemicals, Health & Crop Sciences and Pharmaceuticals.
Analyzing the factors for the differences in sales revenue. For sales price, in addition to lower market price accompanying the lower feedstock price for Petrochemicals and Energy & Functional Materials, sales price of IT-related Chemicals and Health & Crop Sciences dropped, resulting in a drop of JPY 31 billion in sales price. On other hand, in volume, shipments of Petrochemicals, IT-related Chemicals and Health & Crop Sciences increased, resulting in increase in shipping volume of variance of JPY 37.3 billion. Overseas subsidiaries, sales revenue, foreign currency conversion variance went down by JPY 2 billion. Next is Page 6. Total core operating income went down by JPY 3.9 billion year-on-year. By segment, income of IT-related Chemicals and Pharmaceuticals went up but went down for Petrochemicals and Health & Crop sciences. Analyzing by factors for price with margin erosion Petrochemicals and Health & Crop Sciences and drop in sales price of IT-related Chemicals, and as a result, price variance resulted in minus JPY 13.5 billion for cost. Fixed cost increased with enhancement of Health & Crop Sciences facilities, leading to cost variance of minus JPY 5 billion. On the other hand, shipping volume variance, including differences of equity in earnings of Affiliates was JPY 14.6 billion, center the IT-related Chemicals. Next, our results by segment. Page 7. For Petrochemicals & Plastics segment, sales revenue was JPY 177.5 billion, a decline of JPY 8.1 billion year-on-year, and core operating income was JPY 13 billion, a drop of JPY 4.9 billion from the previous year. The shipment of Rabigh products increased. Lower feedstock price such as naphtha related to lower market prices of petrochemicals and synthetic resins at a market price of caprolactam and MMA also were low, leading to a drop in sales revenue. Periodic plant maintenance, which was made at a Chiba plant in the first quarter of a previous year was not conducted this quarter, which was an increase in factor for core operating profit. But in addition to margin erosion of MMA and synthetic resin, equity in earnings of PCS, Petrochemical Corporation of Singapore, dropped, resulting in decline of core operating income. Next page. Energy & Functional Materials segment. Sales and revenues was JPY 64.9 billion, down JPY 3.6 billion from first quarter last year. Core operating income was JPY 5.6 billion, down JPY 300 million year-over-year. Sales revenue decreased owing to low-market price for aluminum and decline in selling price of cathode materials, while shipment of lithium-ion secondary battery separator increased. Core operating income dropped slightly year-over-year, while shipment volume increased, impact of periodic plant maintenance at Chiba works as was with Petrochemical segment and decrease in profit margin on aluminum led to the slight decline. Please turn to the next page. IT-related Chemicals segment. Sales revenue was JPY 102.5 billion, which is an increase of JPY 13.3 billion year-over-year. Core operating income was JPY 7.8 billion, up JPY 3.5 billion year-over-year. Sales revenue was up, while selling price of polarizing film and touchscreen panels declined, shipment increased, with increase in demand. Core operating income suffered a negative impact of decline in selling price. But since increase in shipments was larger, core operating income increased year-over-year. Please turn to the next page. Health & Crop Sciences segment. Sales revenue was JPY 71.9 billion, up JPY 2.5 billion year-over-year. Core operating income was a minus JPY 4.6 billion, down JPY 7.2 billion year-over-year. Sales revenue was up owing to increase in shipments due to the expansion of production capacity implemented last fiscal year, while methionine market prices were lower. In the meantime, core operating income was down year-over-year because of decrease in profit margin on methionine and increased costs due to expansion of production capacity. Next page, please. Pharmaceuticals segment. Sales revenue was JPY 125.8 billion, up JPY 1.5 billion year-over-year. Core operating income was JPY 23 billion, up JPY 3.3 billion from the first quarter last year. Sales revenue was up, thanks to increase in shipment of Latuda in North America, while shipment of long-listed brands in Japan decreased. Core operating income was up due to increase in shipment as well as decrease in sales expense and R&D expenses. That concludes the overview of results by business segment. And the next page is the breakdown on nonrecurring items. Since major line items and amount of nonrecurring items were already explained, I will not dwell on this page. And next is consolidated balance sheet. Total assets as of end of June 2019 was JPY 3.2359 trillion, up JPY 64.3 billion from the end of last fiscal year. By applying IFRS 16 on lease, property, plant and equipment increased. Cash and cash equivalents also increased. Interest-bearing liabilities was JPY 950.9 billion, which is an increase of JPY 111.4 billion from the end of last fiscal year. Equity was JPY 1.3094 trillion, down JPY 42.4 billion from the end of last fiscal year. This is primarily owing to decrease in other components of equity due to yen appreciation. As a result, equity attributable to owners of parent to total assets or equity ratio was 29.8%, down 1.7 percentage points from the end of last fiscal year. And next, I would like to explain the consolidated cash flow. Please turn to Page 14. Cash flows from operating activities was inflow of JPY 400 million, up JPY 17.5 billion year-over-year, mainly due to a decrease in working capital. Cash flows from investing activities was outflow of JPY 35.9 billion, down JPY 5.8 billion year-over-year, mainly owing to decrease in cash out for investment. As a result, free cash flows was outflow of JPY 35.6 billion, down JPY 23.3 billion compared to the outflow of JPY 58.9 billion same time last year. Cash flows from financing activities was an inflow of JPY 85.4 billion, which was an increase of JPY 26.9 billion year-over-year. This concludes the overview of first quarter results. Lastly, let me say a few words on the progress in the first quarter vis-à-vis first half projections announced in May. First half projections were: sales revenue JPY 1.180 billion; core operating income JPY 80 billion; operating income JPY 75 billion; net income, JPY 35 billion. Progress made so far are: core operating income 55%; operating income 83%; and net income 42%. Operating income and net income are affected by the changes in fair value of contingent consideration in pharmaceutical segment as well as reversal of deferred tax assets, but excluding these factors, progress is steadily seen across all income levels. However, in the meantime, U.S.-China trade dispute and increased uncertainty from geopolitical risks spare us from being optimistic. While it is still difficult at this time to quantify the impact, we need to closely monitor any jobs in product demand, particularly in petrochemicals. And also watch out for any changes in the business environment such as drop in market prices among others. The earnings forecast for the first half and full year will remain unchanged. While there are risks of business environment deteriorating, as I just mentioned, it does not yet require an immediate revision or forecast. In fact, Sumitomo Dainippon Pharma, our subsidiary, revised forecast on our company is limited. Going forward, revisions will be made if deemed necessary in light of trends in business environment. This concludes my explanation on our earnings results. And I would like to open the floor for questions. Thank you very much for attending today.
Thank you very much. Now we'd like to receive your questions.
I want to introduce our first question from Morgan Stanley MUFG Securities, Mr. Watabe.
My first question is about IT-related Chemicals. As seen, our results were quite improved, but including the medium and small-sized TVs and the touchscreen sensors, what is the situation? And what is the impact of the situation between Japan and South Korea?
About IT-related Chemicals, as you mentioned, in the first quarter, we had very good results compared to a same period of a previous year. In the previous year, there were inventory adjustments, so compared to that, our situation is very good this year. And by product, let me mention the main trend. First, for fuels. In the first quarter, for TV views, the situation was good. And for mobile views and for OLED or LCO (sic) [ LCD ] full-screen purposes, and for this, the results were relatively good. For touchscreen panel, the trend in the first quarter -- the trend is also relatively good. So for films and for touchscreen panels, I can say that the results were relatively good. However, for semiconductors, as you can see from the press reports, the memory market mainly is showing a slowdown trend. So that may be slightly negative. But in general, we can see that results were good. And for the second quarter -- for example, in the second quarter last year, as you may recall, that quarter was very good, and compared to that, I think there will be a decline. If the situation in first quarter continues as it is, I don't think that will happen. For example, for smartphones sales itself, I don't think is expected to increase as we did experience until now. And also, there is a dispute between U.S. and China. So the movement of goods may not be that good. So as for the future, there are issues that we have to be concerned about. And that is all.
How about the situation between Japan and South Korea?
About the situation with South Korea, the 3 items restrictions is now being discussed about. And related to resist, it means that we have some relationship with this situation. But depending on the type of light source, they are a different breed. So not all breeds are covered. So at the moment, we don't think the impact would be so large. We think the impact will be limited. But our concern is that exports for South Korea with [ strength and ] control of exports of South Korea and that we could lead it to slowdown of IT industry itself. So there could be interact impact that we must be concerned about.
My second question is about Health & Crop Sciences. The loss in the first quarter is we're seeing your assumption or about the sales volume is positive, but the profit is negative. There was increase in methionine, but the margin is low. So with a declining crop protection chemicals, that is -- is that the reason of a negative results? I understand the fourth quarter is important for the sector, but how about the situation of first quarter?
Yes. As you say, Mr. Watabe, you are right. Methionine price is not going up as we have expected. In the first half projections, core operating profit, our original assumption was supposed to be 0, so it may be for situation slightly lower than that. And the volume for Animal Nutrition is increasing, but the profit level is low. And of course, we have a new facility. So there is increase in fixed cost also. So those are the factors. And for crop protection chemicals, there is a time lag of shipment in case of overseas, there's impact of abnormal weather. And it is -- we're seeing an assumption, but the impact may be to the negative direction.
In the second quarter, do you think the situation will be similar? Or you're not sure?
Well, in the second quarter, whether the situation will be similar or not, at the moment, we don't know, but we will do our best to improve as much as possible.
I now would like to take the next question from Mizuho Securities, Yamada-san.
This is Yamada from Mizuho. First question is on Energy & Functional Materials, volume difference, I'm looking on Page 8. Last year, the volume recovered from periodic plant maintenance at JPY 1.7 billion, increase in income. But I feel that this is a bit weak. The impact of periodic plant maintenance probably about JPY 1 billion or so and lithium-ion batteries is not contributing that much, maybe there is some kind of a decrease. Could you please elaborate on that? And also, the difference in cost. I would like to have some explanation on that. And also battery materials. Are there any -- is there anything that you can share with me for the second quarter?
For the Energy & Functional Materials segment, year-over-year comparison on Page 8. The volume difference, as you can see, this shows year-over-year difference, and there was periodic plant maintenance in Chiba Works last year. And the impact was a positive of about JPY 1 billion. And apart from that, volume increased. For example, for separators, it has also seen volume increase and that is also included in this year-over-year change. And the difference in fixed cost, you talked about giving a breakdown. And there are multiple line items included. For example, the high-purity alumina facility. There was some inclusion of impairment losses, which was not included in the past. And that was an addition increase. So there are small line items that are included in this cost difference, but please take it that those are some items that are included.
I was not expecting that. And thank you very much for the explanation. And also, for the second quarter for batteries materials, anything that I need to be aware of for the second quarter for cathode materials and separators?
For separators. In the first quarter, to a certain extent, auto in the United States, well, as you may know, there are some challenges -- issues. What I mean by that is the model X or model S. As you know from media reporting, there is a slowdown being seen, and therefore, this is a drag on our performance, but towards the second quarter, some recovery is expected. For example, for Tesla, we are seeing some increases pick up in production volume, and therefore, we are anticipating some recovery in the second quarter.
I see. Second question, napabucasin. In the nonrecurring sector, as this was not included originally in fair value, so it's not going to impact the core operating income, but for nonrecurring, this will be an upside factor, JPY 18.5 billion. It could push up operating income by JPY 18.5 billion, is that the fair way of looking at it?
With regard to napabucasin, it was not taken into consideration, at first, in the original plan. The suspension of clinical trial for pancreatic cancer was not anticipated at first. And therefore, this is a profit that was not expected. But in the meantime, this is something that I mentioned when I talked about tax cost but reversal of deferred tax assets. Because of the suspension of clinical trial, profit or income, should I say, that could be enjoyed in the future has been reduced, and therefore, tax -- deferred tax asset was reversed. So this comes as a set.
Deferred tax asset reversal. Sumitomo Dainippon Pharma, U.S. recognized profit -- cannot recognize profit in the future, and therefore, it's like a write-off for losses, is that correct?
Yes. Correct. It is a write-off for that in the form of deferred -- reversal of deferred tax assets.
You've been making a lot of investment in the past, and that's why you have this?
Yes. The write-off or loss consists of R&D and various other investments that we've made in the past, and so it's a loss that is anticipated or that could be expected from the investments in R&D in the past. So Yamada-san, your interpretation is correct.
The next question is from Citigroup Securities, Mr. Ikeda.
I'm Ikeda from Citigroup Securities. My first question is about the petrochemicals. You mentioned towards the end that the -- your comments were very conservative. So what are the major areas that we must keep watching, MMA or polyethylene? There's a trend of weakening, so depending on the demand environment, what are the areas that we should keep watching?
For petrochemicals, originally, we tended to be conservative and versus in the first quarter, we assume the future will be more challenging. Our original forecast, JPY 40 billion was the annual amount of core operating income, but in the first quarter, it is JPY 13 billion. So the progress is high. But we assume going forward, the situation will become more difficult. As I have said before, the first factor is the U.S. shale-related ethane and polyethylene based on that inflow of such products into Asia. We'll start in a professional manner and that is our assumption. As you know, ethane cracker basal shale. These plants are also starting, so this is some of the background.
And is there U.S.-China trade dispute?
This may lead to more unclear trend of demand. So this applies to all petrochemicals as a whole. And from that, we will expect margin erosion and also the slowdown of a Chinese economy. For instance, I believe may impact MMA, for example. So deterioration of profitability and some other factors. With this, we believe the situation will worsen for caprolactam. At the moment, the situation is already quite poor. And we don't expect a sudden improvement in the situation. We would like to expect some improvements, but we tend to be conservative. So that is why I was saying that I was conservative.
In addition to that, the MMA restart in Singapore with such a low market price, would you even consider that?
For MMA, we start the resumption of operations as we assume we will resume the operations. But in doing so, we also must consider the current situation, and there's nothing decided at the moment, but we will consider this cautiously in deciding whether we are going to do this or not.
And my second question is about IT-related Chemicals. Sales increased by 15%, but price is declining. So I believe the growth rate is quite high. So touchscreen panels, the polarizing panels for mobiles, which had a high growth? And China, including Huawei, you had a high share. Is there any impact of that? And for touchscreen panel through BOE, I believe this is being shifted to the smartphone manufacturers in China. So do you think there will be a drop in the second quarter? Could you compare the first quarter and the second quarter?
It's very difficult to answer this question. And it's for how much is being carried forward. It is quite difficult to say how much we will do that. Looking at the situation in the first quarter, with this situation continuing in the second quarter, as I answered to Mr. Watabe earlier, I don't think the same situation will continue in the second quarter. So we believe there'll be some slowdown going forward. So this is my answer to that question.
So in that sense, there's a slowdown in China and smartphones, South America may recover. So on the quarter-to-quarter basis, there has been improvement, but it is worsened compared to the same period of the previous year?
First, as without the panel manufacturers. So in some areas, we are not fully aware of how much is being shifted after that stage. So it's difficult to say is there some decline in some place, there would be -- could be increases in other areas. So you must be flexible in responding to the changes. And in that sense, what will be the future trend, it is difficult to say. But in general, as a trend, I think that demand itself, which continue to increase. Until now, I think the situation will be different going forward.
This is limited only to smartphones, how about the TVs? TVs will not change that much?
Television itself. The situation is very good right now. Last year, in 2018, panels for TVs greatly increased in 1 year. And growth from that for 2019, there will be increase, but the increase rate will not be that high. On quarter-to-quarter basis, I don't know when that will surface, but in general, we cannot expect a growth rate as high as the one we enjoyed last year. So there may be some slowdown, it is growing, but the growth rate is slightly slowing down.
We will now like to take the next question, Nomura Securities, Okazaki-san, please.
Just one question from my part. For petrochemicals from Q4 to Q1, operating income has increased quite significantly. Looking at the market prices, I think, has gone down, but can you elaborate on any increases or decreases in income for petrochemicals and plastics? As you mentioned, if you look at the market price itself, it is not that good. And there is sort of a special factor associated to this, should I say? And for one thing, catalyst sales or license, these things come in from time-to-time. So those factors are slightly included from what you are expecting?
Okazaki-san, maybe our performance was a bit too good. It was better, and that is because of those factors.
I see. But those are things that you don't know when they will surface? Well, those are factors that are included in the first quarter. When you compare fourth quarter last year and first quarter this year, that could be the difference -- that could explain the difference. But apart from that, basically, you are in line with the market price situation.
Yes. In principle, market prices are slightly down.
It's now time to close. So with this, we would like to conclude the Q&A session. Lastly, I'd like to invite Mr. Sasaki from Sumitomo Chemical for your closing remarks.
Thank you. This is Sasaki speaking. Thank you very much for participating today. As I have explained right now, as for the future, it's difficult to say that a good situation would continue. However, in our medium-term plan and our budget to achieve the plan and the budget, we will do our best efforts so that we can achieve the plan and the budget. So I hope we can continue to have your support going forward. Thank you very much for your attendance today. Thank you very much.
This conference call will be delivered through the archive of the work page of Sumitomo Chemicals for 3 months starting today. Please access whenever you need. This concludes the conference call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]