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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 attending the conference call on the financial results of Sumitomo Chemical for the first quarter of fiscal year 2020. Today, Managing Executive Officer, Sasaki, will explain the first quarter results for fiscal year 2020, followed by Q&A session with Kun, General Manager of Accounting Department. Before starting the conference, I have a few housekeeping announcement. We may touch on the forward-looking statements based on the current estimate, which all involve risks and uncertainties. Please understand that the actual results may differ materially from these estimates. . We will now start the conference call. Mr. Sasaki, please.
This is Sasaki from Sumitomo Chemical. Thank you very much for taking time out of your busy schedule to attend this conference call. Allow me to express my deep gratitude to the investors and analysts for your understanding and support to our business. Let me explain fiscal year 2020 first quarter results and our full year outlook.
Please turn to Slide #4. This shows the consolidated financial results for the first quarter of fiscal year 2020. Sales revenue was JPY 500.2 billion, down JPY 53 billion. Core operating income that shows the recurring profitability was JPY 20.2 billion, down JPY 24.2 billion. For nonrecurring items that are not included in core operating income, we posted JPY 1.7 billion gain on sales of fixed assets for profit while the change in fair value of contingent consideration of JPY 1.2 billion and business restructuring costs of JPY 500 million were posted as loss resulting in JPY 1.4 billion loss on net. On the other hand, last year, with the review of the business plan on pharmaceuticals, we posted big gain on change in fair value of contingent consideration, JPY 18.5 billion. And therefore, nonrecurring items deteriorated by JPY 19.5 billion year-on-year. As a result, operating income was JPY 18.8 billion, down $43.6 billion year-on-year. Finance income expense was JPY 4.9 billion loss, up JPY 600 million year-on-year. Gain/loss on foreign currency transactions was JPY 4.5 billion loss due to yen appreciation this year, but this is an improvement of JPY 2.6 billion year-on-year. Income tax expenses was JPY 11.9 billion, down JPY 24.6 billion year-on-year. The main declining factor was the review of business plan in pharmaceuticals that I mentioned earlier, resulting in [ DTA ] reversal that was recognized in the U.S. of JPY 23.6 billion. As a result, net income attributable to owners of the parent was negative JPY 6.8 billion, down JPY 21.3 billion year-on-year.
Exchange rate and naphtha price that impact our financial performance were the average rate during the period of JPY 107.63 to the dollar and naphtha price of JPY 25,000 per kiloliter, yen strengthened and naphtha price dropped.
Next is results by segment. Please turn to Page 5. First, total sales revenue was down by JPY 53 billion year-on-year. By segment, IT-related Chemicals, Health & Crop Sciences and Pharmaceuticals improved, but Petrochemicals & Plastics and Energy & Functional Materials declined. Breaking this down by factors on a company-wide basis, sales price variance was down by JPY 30 billion. Volume variance down by JPY 13.5 billion and foreign exchange variance from sales revenue of overseas subsidiary was down by JPY 9.6 billion.
Please turn to Page 6. Company-wide core operating income was down by JPY 24.2 billion year-on-year. By segment, IT-related Chemicals, Health & Crop Sciences and Pharmaceuticals, increased while Petrochemicals & Plastics and Energy & Functional Materials decreased. Breaking this down by company-wide factors, price variance was down by JPY 10 billion, and cost variance was up by JPY 500 million. Volume variance, including changes in equity and earnings was down by JPY 14.7 billion. Volume variance is shown on the lower chart, impact from the shipment increase in pharmaceuticals was plus JPY 19.9 billion, on the other hand, decrease in shipment due to the spread of COVID-19 was negative JPY 13 billion. And drop in equity and earnings was negative JPY 21.6 billion.
Next, let me explain financial results overview by segment. Please turn to Page 7. Petrochemicals & Plastics. Sales revenue was JPY 108.2 billion, down JPY 69.2 billion year-on-year. Core operating income was negative JPY 19.9 billion, down JPY 32.8 billion. In sales revenue, with decline in naphtha and raw material prices, petrochemical products and synthetic resin market price declined. In volume, our equity method affiliate, Petro Rabigh, had periodic maintenance shutdown and therefore, sales volume in [ Sumika ] Asia decreased. In addition, due to the decline in the economic activities from the spread of COVID-19, synthetic resin shipment, mainly to the automobile application declined. In operating income, core operating income, profit margin of petrochemical products deteriorated. And equity and earnings of Petro Rabigh decreased and shipment volume dropped due to COVID-19, and therefore, core operating income declined.
Next page, please. Energy & Functional Materials. Sales revenue was JPY 48.3 billion, down JPY 16.6 billion. Core operating income was JPY 2 billion, down JPY 3.6 billion. In sales revenue, aluminum market price and cathode material selling price dropped. And automotive use battery component, including lithium-ion secondary battery separators and cathode material and synthetic rubber shipment decreased due to the spread of COVID-19. Therefore, sales revenue declined. Core operating income decreased due to the lower shipment volume from the spread of COVID-19.
Next page, please. IT-related Chemicals. Sales revenue was JPY 103.8 billion, up JPY 1.4 billion, and core operating income was JPY 9.9 billion, up JPY 2 billion year-on-year. In sales revenue, in price, polarizing film and touchscreen panels, selling price dropped, but high-purity chemicals and photoresist for semiconductor process increased, thanks to the growth in demand, and therefore, sales revenue increased. In core operating income, decline in selling price was more than offset by cost reduction and increase in shipment volume. So core operating income increased.
Next page, please. Health & Crop Sciences. Sales revenue was JPY 88.9 billion, up JPY 16.9 billion, and core operating income was JPY 3.8 billion, up JPY 8.4 billion year-on-year. Sales revenue increased, thanks to the acquisition of South American subsidiaries of Nufarm in April this year, resulting in higher sales. And methionine market price increased, resulting in higher sales revenue year-on-year. Core operating income improved, thanks to the improvement in the profit margin of methionine and increase in shipment of crop protection from the acquisition of South American subsidiaries of Nufarm.
Next page, please. In Pharmaceuticals, sales revenue was JPY 140.8 billion, up JPY 15 billion and core operating income was JPY 24.5 billion, up JPY 1.5 billion year-on-year. In sales revenue, Latuda atypical antipsychotic shipment increased in North America. In addition, Equa and EquMet type 2 diabetes drugs launched last year in Japan contributed and therefore, sales revenue increased. In core operating income, with the strategic alliance with Roivant, fixed cost incurred in the newly acquired Sumitovant and its subsidiaries but with higher sales revenue, core operating income increased.
This concludes the financial results overview by segment. Next page is on the breakdown of nonrecurring items.
As a breakdown of nonrecurring items have been covered at the beginning of my presentation, I will skip this slide. Next is consolidated balance sheet. Total assets as of end of June 2020 was JPY 3.7629 trillion, up JPY 112.6 billion from March 2020, mainly due to increase in cash and cash equivalents. Interest-bearing debt was JPY 1.4846 trillion, up JPY 179.9 billion from March end 2020. Equity was JPY 1.3724 trillion, down JPY 16.5 billion from end of March 2020. As a result, equity attributable to owners of the parent or net worth was 24.2%, down 1.1 point from the end of last fiscal year.
Next is the consolidated statement of cash flow. Please turn to Page 14. Cash flows from operating activities was an inflow of JPY 55.6 billion, up JPY 55.2 billion from May 2020. This is mainly due to poor cash flow from concentration of outflow for periodic maintenance shutdown same time last year. Cash flows from investment activities was an outflow of JPY 44.2 billion, up JPY 8.3 billion year-over-year. This is primarily due to increase in purchase of other financial assets. As a result, free cash flow was JPY 11.4 billion in inflow. Cash inflow increased JPY 47 billion year-over-year compared to JPY 35.6 billion outflow same time last year. Cash flow from financing activities was an inflow of JPY 126.6 billion, up JPY 41.2 billion year-over-year.
Next is our outlook for fiscal year 2020. Please turn to Page 16. Full year outlook for fiscal year 2020 was left undecided at the time of earnings results briefing on May 15 because of the spread of COVID-19 and difficulties in coming up with a reasonable earnings forecast, including foreign exchange and feedstock prices. This time, for this briefing, we have estimated our earnings forecast by taking into account business trends and currently available information comprehensively. Foreign exchange rate and naphtha prices, that affect our earnings are set at JPY 108 to the dollar. And JPY 30,000 per kiloliter for naphtha. This is our assumption for our forecast of sales revenue JPY 2.215 trillion, down 0.5% year-over-year. Core operating income, JPY 80 billion, down 39.7% year-over-year.
I will cover core operating income on the next page. Nonrecurring items include retirement of assets that are incurred within an ordinary range and gains from sale of [indiscernible] works by our subsidiary, Sumitomo Dainippon Pharma in the meantime with progress in R&D, costs associated to changes in fair value of contingent considerations expected to increase. As a result, operating income is expected to be JPY 70 billion, down 49.1% year-over-year. As deferred tax assets were reversed in the Pharmaceuticals business in fiscal year 2019, tax expense will decline year-over-year. Therefore, net income attributable to owners of the parent is expected to be JPY 20 billion, down 35.3% year-over-year. ROE is estimated at 2.2%. Dividend forecast is JPY 6 for interim dividend, JPY 6 for year-end dividend, JPY 12 in annual dividend.
On Page 17, I will take you through our analysis of changes in core operating income. This slide compares core operating income results for fiscal year 2019 to fiscal year 2020 forecast of baseline profit, excluding the impact of COVID-19 disclosed at May 28th conference call of management issues and business strategy. And fiscal year 2020 projection we are announcing today. Starting from JPY 132.7 billion in fiscal year 2019, negative impact from upfront expenses for the alliance with Roivant is offset by increase in crop protection product shipments and higher market prices for methionine. Fiscal year 2020 forecast of baseline profit was JPY 130 billion, flat year-over-year. JPY 55 billion impact from COVID-19 and JPY 5 billion cost cut measures to mitigate poor performance impact leads to our 2020 projection of JPY 80 billion. Impact of COVID-19 is explained on the next page.
Breakdown of JPY 50 billion consist of JPY 37 billion from impact of COVID-19 pandemic, JPY 18 billion from others. Total downside risk is estimated to be JPY 55 billion. The impact of COVID-19 pandemic as shown in the slide consists of weaker automobile demand in the Petrochemicals & Plastics segment, weaker display-related demand in the IT-related Chemicals segment. In the meantime, no major impact is expected in the life sciences field, including pharmaceuticals and crop protection products. The fact that the company has diverse business coverage has given us ability to resist the changes in the environment. In Others, we anticipate loss or income from inventory valuation from drop in crude oil prices as well as changes in performance of affiliate companies. And JPY 5 billion in cost cut is taken into account.
Next is core operating income by business segment. Please turn to Page 19. As explained earlier, core operating income forecast is JPY 80 billion, down JPY 52.7 billion year-over-year. By segment, Health & Crop Sciences is the only segment forecasting increase in profits. Petrochemicals & Plastics segment is expecting operating income losses due to margin erosion against the backdrop of lower market prices periodic plant maintenance at Petro Rabigh and decrease in shipment owing to the spread of COVID-19. Energy & Functional Materials segment and IT-related Chemicals segment also expect operating income losses due to the decline in shipment from spread of COVID-19. Health & Crop Sciences segment is expecting operating income gains from improved profit margin backed by higher market price for methionine and increase in shipment of crop protection products in the Americas. Pharmaceuticals segment is expecting operating income losses with increase in fixed costs associated with strategic alliance with Roivant. Cost cut of JPY 5 billion explained in the previous slide, is included in others and adjustments on this slide. That is all for core operating income.
While the impact of COVID-19 is mainly expected in the first half, we expect the impact to continue to a certain extent, in the second half of the year, while economic environment is expected to recover gradually.
Consolidated statements of cash flow is shown on Page 20. Cash flows from operating activities is expected to be an inflow of JPY 210 billion, up JPY 104 billion year-over-year. Cash flow in fiscal year 2019 was poor due to concentration of periodic maintenance shutdown related expenditures, while working capital is expected to improve in fiscal year 2020. Cash flows from investing activities is expected to be an outflow of JPY 190 billion, down JPY 309.7 billion year-over-year. Expenditure related to strategic alliance with Roivant and Sumitomo Dainippon Pharma and acquisition of the South American business from Nufarm were incurred in fiscal year 2019. As a result, free cash flow is estimated to be an inflow of JPY 20 billion.
Interest-bearing debt balance at the end of fiscal year 2020 is estimated to be JPY 1.370 trillion. That is all for earnings. I would like to take questions from you. Thank you for your participation today.
Let me introduce the first person, Morgan Stanley, MUFG Securities, Mr. Watabe.
This is Watabe speaking. So the full year forecast is set out this time. I don't know the first half, second half numbers. So on that basis, in the IT-related Chemicals, the profit is improving significantly on a year-on-year basis and the fourth quarter, semiconductor and display, could you give me more breakdown? And in the first quarter, you see JPY 10 billion. On the full year, it is JPY 23 billion. And the COVID impact is mostly in the first half. So in the second quarter and the second half, could you give me more forecast?
Yes. IT-related Chemicals. In the first quarter, we are seeing a pretty good result compared to the fourth quarter last year, the progress is high. And the factors behind this is, first, the COVID-19 impact exists. And there were many factors that pushed down our profit. But in the first quarter, there were extraordinary factor, the increase in demand in touchscreen sensors, the sales was strong there and in semiconductor-related, semiconductor process materials, we got the business in a front-loaded fashion. So the business was strong in the first quarter. So that is our analysis. So the first quarter with the front-loading effect, we enjoyed the strong business. Therefore, this time, we are not presenting the first half figures, and we don't know how long this COVID impact will last. So this time, we are showing you the full year forecast. So overall, first quarter seems strong -- stronger but last year, JPY 25 billion core operating income. We think this year will be slightly lower than that, even with including the COVID impact. There are still uncertainties going forward, but this is our current outlook. So I hope you could understand. So did I answer your question? So cost reduction, JPY 4 billion, I think, is a good pace. On a full year basis, it will be time 4, the figure will be 4x bigger than this. As I always say, we always make efforts to reduce our costs. But this trend, the sales volume, the cost reduction tends to be higher when sales volume is high. So yes, we would very much like to quadruple the number, but I cannot -- not confident enough to say that, yes, today. So I am not sure if we can have the number 4x bigger than this, but still, we will continue making our best effort to reduce costs.
Second question is about the sales in Crop Sciences. In the first quarter, it's much better than last year. Methionine effect in the new farm contribution. Could you break down these factors and the North American market, I think it will be in the fourth quarter. So could you share with us your forecast in the methionine market price, please?
Yes. In the first quarter, in the Health & Crop Sciences, we are off to a very good start. And the factors are first, like, as you correctly mentioned, methionine market is finally picking up. And we are confident that it is now picking up. So on a full year basis, we think this impact will last. And in methionine, the feedstock raw material price is down. But the profit margin is improving even more. So on a full year basis, JPY 30,000 per kiloliter is the naphtha price assumption. And the first half was JPY 25,000 -- first quarter was JPY 25,000. So we think it will rise a little including other rationalization measures, we hope that we can secure profit increase. Now our South American business, the COVID impact exists. But crop protection, agro business does not have much impact that is our current view. In the South American business that we acquired, [ PMI ], is progressing faster than we originally anticipated. So this year, we have high hopes for it. In addition, in North America the weather was unstable, extreme weathers, and this impacted us last year and this year. As of now, the crop is being cultivated favorably. We hear that there's still some more inventory adjustment to do but we expect the demand will recover gradually. So did I answer your question? Mr. Watabe, I hope we answered your question.
Yes.
Let us move to the next question. From Mizuho Securities, Mr. Yamada.
This is Yamada speaking from Mizuho Securities. In Energy & Functional Materials, volume variance, there's a big gap. There's a big negative. Synthetic rubber and separators as well. The breakdown, if you could give us some more meat to it the first quarter in the second half of the year in the second quarter. What is your outlook for the volume? I think your forecast represents a big and strong recovery. I would like to hear some more explanation on the background.
Thank you very much for the question. For Energy & Functional Materials segment, it is very much affected by COVID-19. That is how we see the segment. The automobile use application takes up a large part of this business. And as I explained in my presentation, impact of COVID-19 is seen in separators and also cathode materials. Those are areas in which we expect strong impact. And for the full year, we expect substantial impact for separators and also for synthetic rubber, auto-related business, more than JPY 10 billion downward pressure on profit income. That is what we are anticipating. Partially, for example, results in all, raw material prices have come down. And with improved better margins, that's an upside. However, overall, it's quite a tough environment. But this is for Tanaka Chemical Corporation with Northvolt Corporation, they have signed a license agreement, which I think we've explained already. And license income, can be expected for this fiscal year, and that is an upside that we have incorporated. But overall, we are expecting a challenging situation. That is all for Energy & Functional Materials.
Well of these JPY 37 billion impact from COVID-19, JPY 10 billion is from Energy & Functional Materials. So 1/3 is from Energy & Functional Materials, correct?
Yes, the impact of Energy & Functional Materials is quite significant. You said more than JPY 10 billion. The same could be said for Petrochemicals & Plastics. So these 2 segments, Petrochemicals & Plastics and Energy & Functional Materials account for a large part of the JPY 37 billion.
Separator business will recover in the second half. Is that your outlook?
For separator, this, again, is very difficult to foresee, but separator business itself. This is indeed an area that we put our focus on. And we expect a part of it to recover but also, we need to be mindful of the impact of COVID. And therefore, it's very difficult to say anything for sure. But talking about the first quarter, our clients had suspended their plant operations, and therefore, impact was quite significant and large, and we expect that to succeed going forward, but we are taking a cautious approach towards our outlook.
Understood. So risk is also taking into account. My second question is about the Petrochemicals & Plastics business. Petro Rabigh earnings, I looked at it, and they seem to be in a very difficult situation. Non-Rabigh must recover from second quarter. Otherwise, it will not turn out the way you explained because there are some impact from loss or income from inventory valuation. And second quarter and second half outlook for Petrochemicals & Plastics, please.
Thank you for the question. Petrochemicals & Plastics segment in the first quarter, JPY 19.9 billion. And fourth quarter compared to fourth quarter last year, the downward trend of JPY 7 billion. For the full year, a loss of JPY 28 billion, that is our forecast. But as you pointed out, Petro Rabigh, second quarter results have come in, have been announced. And first quarter equity, earnings and losses, I think, can be estimated from that. Somewhat of a recovery from that level is taken into account. And as I mentioned at the beginning of my presentation, impact of COVID-19 itself will remain until the second half, but for the second half, compared to first quarter or second quarter, we expect the impact of COVID-19 to be less in the second half. Petro Rabigh had the bad first half because of the periodic plant maintenance, the third and fourth quarters for Petro Rabigh is not -- we don't expect to be as bad as the first half. But since it's a listed company, and it's very difficult to say anything about the company, but we expect a situation earnings to recover somewhat. We have had licensing activities that we have been putting a lot of emphasis and focusing our efforts on. In this fiscal year and fiscal 2020, we will -- we are expecting a certain level of income from licensing. That is also factored in. That leads to the JPY 28 billion in our forecast for fiscal 2020 for the Petrochemicals & Plastics segment.
Singapore related business, should I say, even under COVID-19 situation, not so bad situation is expected to continue. That is what I can say for our forecast for Petrochemicals & Plastics segment as a whole.
Understood. Maybe I have missed out on our news release, but the Rabigh completion guarantee, has this been taken?
Yes. For completion guarantee, one, it would need to pass the performance deal, we call a CRT. Performance test has to pass and it has passed the CRT and the other condition is rights issue once. Right issuance of Petro Rabigh for 1 thing, at Aramco, Aramco as a company, is now a public company. And therefore, in the equities market, there's a lack of funding, and that has been a problem. And rights issuance for Petro Rabigh is quite challenging under the current conditions. And also in light of the current situation that we are facing, rights issuance is quite tough under current conditions. In replace of rights issuance, how could we fulfill those criteria and conditions? That has been under negotiation with the financial institutions for the past few months. 1st of July had been the deadline according to our original schedule, but owing to the current situation, this deadline has been postponed. And by fall, somehow we hope to achieve this. So completion guarantee, this, I think, will require some more time.
Thank you very much, I understood very clearly. We look forward to your performance.
It is coming close to the closing time. So the next question will be the last question. Next question, Nomura Securities. Mr. Okazaki.
I have 1 question in the IT-related chemicals for fourth quarter to first quarter, mobile and TV change and what your outlook is on the second quarter? In touch sensor, touchscreen sensors, there were some extraordinary factors in the first quarter. Is that correct?
Yes. So IT-related Chemicals. Fiscal year 2019 fourth quarter to this first quarter, COVID-19 impact started emerging from March onward. So overall, the business is difficult, challenging. The polarizing film, OLED ratio is increasing. We expect the OLED ratio to increase, but it has not progressed as much as we hoped for. So including that impact, including the impact of COVID, we are still in a difficult situation. So that is mainly centering on mobile. On the other hand, touchscreen sensors in the first quarter this year, the polarizing film revenue increased. But the film type, as you know we're starting to see more in-house manufacturing by the manufacturers. So this first quarter result will not continue. It is unlikely to continue. So touchscreen sensors will also be difficult. Glass film will be difficult. Glass, we think will be reasonable, but film will be difficult, we think. The mobile polarizing film -- so we cannot expect increase in the second quarter.
And what about TV?
So mobile, smartphone, units sold, projection is in fiscal year 2019 was a decline year-on-year. In this fiscal year, we think there will be a further decline. Overall, around 10% decline is our estimate. So that was the basis of my explanation earlier. The replacement cycle is slowing down and the smartphone momentum in China is slowing down. And COVID-19 impact is added on top of that. The TV, the channel for TV of fiscal year '19 was -- volume was about the same as fiscal year '18. This year, we think it will go down by around 7% to 8%. And with the COVID-19 impact, we are taking a conservative view, that is where we are. We are trying to exert our strength in the strength of the large size is our strength. So we want to grow there as much as possible, but it is difficult to expect too much of that.
I understand.
Thank you very much. So with that, we close the Q&A session. Mr. Sasaki, could you give us the last closing remarks?
Thank you very much for joining us in the conference call for Sumitomo Chemical today. As I explained in my presentation, first quarter core operating income was not so bad. However, we have a very poor visibility for the future. But against the backdrop, and this is something that I mentioned on the 28th of May. The priority topics for this fiscal year is to revisit the business portfolio to be able to enjoy income and profit gains under COVID-19, large, we did 2 large M&As last fiscal year. And we hope to deliver on the [ PMI ] in a steady manner going forward. We appreciate your continued support and understanding. Thank you very much.
Thank you very much. The conference call today will be distributed on Sumitomo Chemical website as arc. With that, we conclude the conference call. Thank you very much again for your attendance.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]