Sumitomo Chemical Co Ltd
TSE:4005
Earnings Call Analysis
Q1-2024 Analysis
Sumitomo Chemical Co Ltd
In the face of ongoing challenges, the company is committed to improving its financial health while maintaining performance forecasts. The executive team has articulated a three-pronged approach to achieving a healthier balance sheet, focusing on reducing investment expenditures, selling strategic equity holdings, and aggressively targeting a 20% reduction in inventory levels. An emphasis on efficient global cash management has also been touted as a priority. With an aim to achieve a debt-to-equity ratio within the 0.7x range by the end of fiscal 2024, the company remains steadfast in its strategic direction, despite acknowledging that certain initiatives may depend on external parties and their timing remains uncertain.
A target for the improvement of the company's financials was reiterated, with expectations of additional profit contributions potentially in the tens of billions of yen range. However, specifics about the exact figures or the nature of these extra profits were not disclosed during the call.
The crop protection product segment, facing supply chain disturbances and an overstocked market, is undergoing adjustments. The company noted that despite challenges such as drought and generic product scarcity, the farm yield size remains less affected than anticipated. However, shipment volumes are pressured due to the reactions to supply chain confusion in the past. Executives are optimistic that the situation will turn around within the year, driving change through various initiatives.
The company has indicated a strategic approach to its business portfolio, showcasing a willingness to sell even profitable businesses if they do not align with core strategic objectives. While acknowledging potential losses, the company also anticipates gains from these transactions, collectively implying a potentially robust financial upside that resides within these divestments.
Keigo Sasaki, the company executive, hinted at potential asset sales being recorded within fiscal year 2023 to boost profits, although negotiations with external parties mean that these cannot be assured. The company has marked these as instrumental to their financial strategy moving forward.
The burden on the environment remaining low, the company sets high expectations for its new product, INDIFLIN. Since it is a novel offering, there is no channel inventory build-up, suggesting a potential rapid uptake in the market, upon which the company places much hope.
The company anticipates a gradual recovery in the demand for semiconductors, potentially seeing positive trends in the third or fourth quarter, despite current challenges. However, it is emphasized that this recovery is not guaranteed within the second quarter, indicating a cautious outlook.
Echoing global movements in the semiconductor material industry, the company acknowledges the need to maintain and enhance competitiveness amid escalating R&D costs and technological advancements. In response, it seeks to strengthen its shares through product innovation and effective business rationalization, although concrete actions remain underwrap.
With inventory levels exceeding JPY 800 billion, the company is actively working towards its target of reducing inventory by 20%, strategizing reductions especially among crop protection chemicals and other essential bulk products. A concerted effort to increase sales and to rationalize production operations in Chiba and Singapore is in progress, with aims to complete the bulk of the inventory reduction within fiscal 2023 and reach the aforementioned target by the end of fiscal 2024.
Concluding remarks highlighted the company's dedication to further improvement plans, acknowledging the difficulties experienced and the possibility of a delayed recovery. To address this, additional unspecified actions have been agreed upon by the company. The executive expressed gratitude for attendance and continued support from stakeholders while facing these business hardships.
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We will now start our conference call of Fiscal 2023 First Quarter Financial Results. Thank you very much for joining. Today, Mr. Sasaki, Managing Executive Officer, will take you through fiscal 2023 first quarter financial results and then he will be joined by Mr. Yamauchi, Executive Officer and General Manager, Accounting Department in the Q&A. We plan to end at 5 minutes past 6. Over to you, Mr. Sasaki.
This is Sasaki. Thank you very much for joining us for this conference call out of your busy schedules. To our investors and analysts, I'd like to take this opportunity to express our gratitude for your understanding and your support to the company's business as always. Thank you so very much. Now let me start the briefing on financial results for fiscal year 2023 first quarter. Please go to Page 4. First, let me discuss the business environment surrounding the company in the first quarter of fiscal 2023. On economic conditions: with the lifting of COVID restrictions in China, the world economy was expected to make a gradual recovery. But with geopolitical factors, including the prolonged conflict in Ukraine and the U.S.-China confrontation over semiconductors as well as the impact of monetary policies in various countries in response to inflation and a drop in personal consumption, there is more uncertainty about the economic outlook. So our assessment is that the business environment surrounding the company was on the whole challenging. Now as to our assessment of the business environment in our major business areas indicated with weather forecast symbols. The left column is the previous period and the right column is the assessment as of today. Let me take you through a number of them. First, petrochemicals and raw materials. While feedstock fuel prices were on a declining trend, final demand was weak mainly in China and product markets also declined so very low margins continued. On automobiles, semiconductor shortage has been softened and our assessment is that production volume including Japan is on a recovery trend, but the pace of recovery is not that fast and genuine demand growth is yet to be seen. Now skipping over to semiconductors. A number of manufacturers have already cut production and they have announced that the correction phase will continue for some time and in conjunction with this development, our related materials also saw reduction in demand. For crop protection chemicals, the first quarter is an off-demand season so it's usually the period where the expectations are not that high in overseas markets mainly. Inventory in local distribution chains is on an increasing trend and as a result, the demand for crop protection chemicals declined more than we anticipated. Pharmaceuticals, with the expiry of the exclusivity period for Latuda in February of 2023, the sales of the drug saw a huge drop. But on the 3 key drugs to compensate for Latuda, sales expansion progressed mostly as planned. Now please go to Page 5. The first quarter situation, the financial summary. Sales revenue was JPY 563.1 billion, down JPY 211 billion year-on-year. Core operating income that shows recurring earning power was a negative JPY 53.6 billion, down JPY 117.7 billion year-on-year. Nonrecurring items not included in core operating income includes business restructuring cost of JPY 18.1 billion for the reorganization of North American subsidiaries of Sumitomo Pharma and a loss of JPY 18.1 billion was recorded. As a result, operating loss was JPY 71.7 billion, worse by JPY 138 billion year-on-year. Finance income and gains on foreign currency transactions were JPY 23.8 billion due to yen depreciation; but compared to the same period last year, it was down by JPY 26.1 billion. As a result, net loss attributable to owners of parent was JPY 33.2 billion, worse by JPY 103.1 billion year-on-year. As for exchange rate and naphtha price, average exchange rate during this period was JPY 137.49 to the dollar, naphtha price was JPY 67,500 per kiloliter. Compared to same period last year, the yen was weaker and the feedstock price was lower. Next please go to Page 6. As I said, sales revenue of JPY 563.1 billion is down by JPY 211 billion year-on-year. But by segment, all segments except for others and adjustments, were down. Now please go to Page 8. Core operating income by business segment. Essential Chemicals & Plastics, core operating income was a negative JPY 21 billion, down JPY 31 billion year-on-year. There was a lot of volume variance, Petro Rabigh deterioration in performance. In addition to that, decline in demand mainly in automotive application resulted in lower shipments. Page 9. As for the Energy & Functional Materials segment, core operating income was JPY 3 billion, down by JPY 3.6 billion year-on-year. Over here the volume variance centered at the drop in demand particularly in automotive applications, shipments of resorcinol declined as well. Next is the core operating income of the IT-related Chemicals was JPY 6.7 billion, down by JPY 9.1 billion year-on-year. For this segment as well, the volume variance impact is large mainly for TV related applications, high purity chemicals and photoresist product shipment has declined. As for Health & Crop Sciences, core operating income was a negative JPY 7 billion, down JPY 29 billion year-on-year. The factors for the price variance, the market price for methionine declined and the agents price -- or excuse me, utility prices became high and caused the profit margin to deteriorate. Volume variance, there was a decline in shipments in South America resulting from an increase in inventory in the market. As for the Pharmaceutical segment, core operating income was a negative JPY 33.3 billion, down JPY 47.3 billion year-on-year. As for cost variance, it has turned positive. Sumitomo Pharma's Latuda's exclusive marketing period expired. However, we conducted streamlining of business operations and SG&A has declined. However, as for the volume variance, there was a impact from Latuda's decline in shipment. The impact of that was large. Therefore, it has experienced a larger decline in terms of the operating income. That is all for the explanation of the results by segment. And the next page is our breakdown of the nonrecurring items. However, I have already explained that before. Therefore, I would like to move on to the explanation of the consolidated statement of financial position. Total assets of June 30 was JPY 4,373.8 billion, JPY 208 billion-plus higher from the end of the previous period. We had the impact of a weaker yen. The main factor was an increase in value of assets of overseas subsidiaries converted to yen due to weaker yen. Interest-bearing liabilities has increased and also there is an increase of the inventory that is increasing as well. In addition to that, on the liabilities, interest-bearing liabilities totaled JPY 1,632.6 billion. Therefore, it is an urgent matter to reduce this interest-bearing liabilities. And Page 15 is showing the cash flows. In the last 3 months, operating activities cash flow was an outflow of JPY 131.9 billion and this is mainly the impact of the Sumitomo Pharma. Therefore, the improvement of the cash flow is a major challenge that we need to overcome as well. This concludes the explanation for the financial results. However, as mentioned right now, the first quarter results were extremely challenging. Declines in Essential Chemicals and Pharmaceuticals already were incorporated in the guidelines or the guidance announced in May. Therefore, as for the first quarter, it was not a large deterioration against the forecast. However, from the second quarter onwards and the first half, JPY 30 billion negative core operating loss is forecasted. However, the second quarter needs to turn positive in other words. So for us first of all as the seasonal factors, for example for the crop protection products business in South America and India, in the second quarter they will be entering the demand season. And as for the display applications businesses, the second quarter -- third quarter will be reaching the peak. So there are seasonal factors. On the other hand, as explained at the beginning, the weakening of the petrochemicals and also the semiconductors are entering the correction phase. Therefore, there is changing from the original outlook we had. Please go to Page 16. Here at our financial results briefing in May, we used this material. We said that a V-shaped recovery in fiscal 2024 will be driven by the following initiatives in 4 segments excluding Pharmaceuticals. They are bolstering of growth businesses, that's item #1 and the second one is reform and rationalization of low-profit businesses. We said that we are aiming at steady performance improvement that will not rely on external environment such as terms of trade. With the current uncertain business environment, we are moving ahead with these reforms. Now as for growth businesses in item #1, things are moving along with the plan. And as for reform and rationalization of low-profit businesses, we will be broadening the scope and work on further business restructuring. Currently we are focusing on low-profit businesses, but we will not be limiting ourselves to such businesses that are currently suffering from low profitability. For those businesses that are currently contributing to profitability, but if they are not to be included as part of our core business in the future, we will consider possible business transfers or collaboration with others from the perspective of upgrading our portfolio. We have already begun negotiations on a few such cases and this effort is going to be widened further. As for these initiatives not just to make improvements in P&L, we are expecting to see improvements in our cash flows. Page 17. Also at our briefing in May, this is the material that we have used then. Here we talk about interest-bearing liabilities as well as cash and cash equivalent. We want to improve cash flow not just the P&L improvement. As for debt to equity ratio, we are aiming for 0.7x range by the end of fiscal 2024. These are the 3 initiatives that is listed in this box. The first one is reduced investments by carefully selecting projects. As we explained in May, we will be moving ahead with this reduction so that initiative is underway. Item #2 on asset efficiencies. We are continuing with the planned sale of our strategic equity holdings and we will further consider additional sales of such shares. In addition, as we explained when we talked about balance sheet, at the end of June our inventory exceeded JPY 800 billion. So we are working to reduce it and we set a target of cutting it by about 20%. On global cash management, we are steadily moving ahead with this initiative. Now on specific deals such as business transfers, I will refrain from discussing it any further at this point. When the right time comes, we will make them public. And the overall picture of our efforts that I have just described, this will be discussed when we announce our first half financial results. So for some of these improvement measures, the timing of contribution to our performance cannot be determined beforehand because of the involvement of external parties. But we are prepared to make our utmost efforts to achieve the forecast we announced in May and we are currently keeping our performance forecast unchanged at this time. This is the end of my presentation. Now we would like to take your questions. Thank you very much for your attention.
[Operator Instructions] The first question from Morgan Stanley UFJ Securities, Mr. Watanabe.
This is Watanabe from Morgan Stanley. I have 2 questions. First of all regarding reforming that you are conducting within this challenging business situation, seems that you are slightly behind your plans. And next year you're aiming for JPY 200 billion, but it seems that you're quite behind. And you're saying that what you're planning right now is a fundamental reform with this JPY 25 billion low revenue. How much of upside is there? Can you explain to the extent that you can?
Thank you very much for your question. Regarding this point, as mentioned before, there is the other party involved so it's difficult to share information with you. But several deals have started, but it's not that they're all low profitability. At June, the caprolactam or synthetic rubber type of business. I did explain that it's an extension of that and maybe you felt it that way, but that is not the case. They're achieving a certain level of profitability. So when we think about the future, are they going to become our core business or they maybe have a slight distance with our core business or they're peripheral businesses? From that perspective, we are selecting the businesses. And of course there is the other party on the other side so we are proceeding with the consideration and going into the negotiations. And I believe you were asking about the sense of size or the scale. It's difficult to give you an answer, but the image is several ten billion yen size is what we are aiming for. I hope you will understand in that sense. This JPY 25 billion to several 10 billion, I'm not being picky. But the plus alpha part is several 10 so it's JPY 25 billion plus several 10 billion.
My second question is regarding the Health & Crop Sciences. It has started from the loss. Was that expected or at the later pages by region, it seems that the Latin America decline is quite large. Is that within your expectations? And towards the second half and the full year, what is the situation going to be? And regarding this crop science product, what is the situation? Can you elaborate more including methionine? I think you are seeking a recovery of methionine market price. So can you elaborate more on that?
Thank you very much for your question. First of all, for the crop science product situation itself or crop protection product situation itself. From looking at the farming yield area size, it's not as bad as we think. Of course partially there are drought situations. However, that is not a negative factor as much. Having said that, last year the generic products or the post-patent products, the procurement of those products may become difficult is what was thought. Therefore, last first quarter the price of those products have gone up. Therefore, we had quite strong sales and that was due to the confusion of the supply chain and because of that, our customers were purchasing ahead of schedule earlier than usual. But we are now seeing the reaction to that centering at the off-patent products. The inventory in the market is not declining. Therefore, it is impacting our shipment. So this is not just for us, but also for our competitors it is the same situation is our understanding. Therefore within this year, we are thinking that the situation is going to change and that is why we're implementing various initiatives. And I believe you had another question related to methionine. As for methionine, last fiscal year we recorded an impairment loss. Therefore, as an environment, it was not a good business environment and starting this year we were expecting that it will gradually recover. However, at this point overall, this type of a commodity product or a large volume product. The same for olefin, supply side recovers more than the demand side first. The supply and capacity, particularly in China, is increasing so the product price itself is having difficulty to increase as well. Therefore, we are struggling at this point. However, it's not that we have visibility that this is going to be better. However, the latter half of the year, as first quarter, second quarter comes; maybe we will be slightly behind. However, gradually around 5% to 6% of demand increase is what is the basis of what I'm saying and we have expectations that we'll be seeing a gradual recovery.
So this Health & Crop Sciences is as you have expected, I want to confirm.
Well, compared to our forecast and expectations due to the 2 factors I have explained regarding South America and methionine, it is slightly behind what we have expected.
Next question is from Mizuho Securities, Yamada-san, please.
This is Yamada from Mizuho Securities. Now about reform and rationalization, tens of billions of operating income could be boosted and that could be expected towards fiscal 2024. Then this could be a major -- there could be a major nonrecurring loss and to the debt equity ratio of 0.7x, there could be a negative impact. For those things with profitability if it is noncore, you will be carving it out so in totality we don't have to be worried about this. Can you talk about how we should be looking at this?
Thank you for the question. Let me just give you an example. In the first quarter Pharmaceuticals, Sumitomo Pharma's Animal Health business was sold to a third party. That was worth about some billions of yen. That was a profit that was recorded in the first quarter. So as an extension of such activities even if the business is producing profit today, in the future it's not likely to stay as part of the core business. Then in this fashion we would like to conduct such sales. Of course for low profitability businesses, we will have to be prepared for such losses. But when you conduct a transaction like this, a positive impact could be expected as well. So it is from this perspective, we are seeing positive tens of billions of yen could be expected.
I see. Nonrecurring loss could be produced in conducting these reform efforts, but there could be other impacts so we shouldn't be that worried. Am I correct in understanding it this way?
When you're saying that it is a nonrecurring loss what is operating today. By stopping its operation, there could be some impairment losses that could be incurred. I think that's what you're referring to. But it's not like that for everything. Of course if those things do happen, we need to address them early on. But the positive impacts could be larger than such negative. And for those things, in fiscal 2024 -- some could arise in 2024, but as much as possible we would like to realize them in 2023 to record profits. Of course there's the other party involved. We cannot be certain, but we are aiming for those things to be recorded in fiscal 2023.
So in the first half results briefing, I expect to get more disclosures about that. Next question Health & Crop Sciences. In South America, off-patent products channel inventory is building. You said JPY 42.2 billion reduction in net sales in South -- Latin America, but volume impact is about JPY 19 billion. So given the marginal profitability, this is not old seller. And for INDIFLIN and other new products, sales expansion as well as your approach towards the next fiscal year? Sorry about a long question. But can you give me an image of how crop sciences business is likely to make improvements going forward?
In Latin America, sales revenue is down year-on-year and the factor contributing to this is as was discussed. Yes, you're correct in that understanding. But on the other hand INDIFLIN, in the first quarter this wasn't a demand season and therefore we're not expecting much sales. But in the second quarter and beyond, we are expecting quite a bit of growth. We do have that expectation. And of course the market itself, how much channel inventory there exists in the market, of course that's a factor. But as far as INDIFLIN is concerned, this is a new product so such concerns are quite minimal for this product. So we have high expectations.
The burden on the environment is low, this is a new product and there should be no channel inventory building up. So there could be high expectations for this product. Am I correct?
Yes, that is correct.
So I will continue to have high expectations for this product.
The next question, SMBC Nikko Securities, Mr. Miyamoto.
This is Miyamoto from SMBC Nikko Securities. I have 2 questions also. First is regarding to the IT-related Chemicals short-term perspective. In the first quarter compared to the previous quarter, it has an increase of about JPY 2.8 billion in terms of profit? In photoresist mainly compared to the previous quarter, what kind of trends are you seeing? If you look at the seasonal perspective, we believe that we can have expectations towards the second quarter. Over here too can explain mainly focusing on photoresists. Compared to the conventional years, it seems that the shipments towards the smartphones may be delayed. But can you elaborate on the situation of IT-related Chemicals?
Thank you very much for your questions regarding IT-related Chemicals. The numbers as you have mentioned, the fourth quarter was JPY 3.9 billion and JPY 6.7 billion. It's increasing. Usually the fourth quarter has seasonal factors and it has a trend of declining. First of all, display related matters, the staying home or working from home type of demand has disappeared this year compared to '21 to fiscal year 2022 and is dropping. But that trend -- from 2023 to 2024, that trend is continuing especially the large size TV application. The environment for that is quite challenging is what we understand. And the smartphone for the medium and small size, the trend is the same. Especially LCD is facing an extremely challenging situation. However, for OLED, it's not as bad as LCD. And our new area for the automobile applications, we believe that this is a market that is going to further grow. So we would like to focus in this area. That is the overall situation. And given the current situation within this challenging environment, the first quarter may be slightly insufficient. But overall the display is performing at a certain extent and from the second quarter onwards although it is a challenging environment, we believe that it will start to increase. On the other hand for the photoresist related situation, a difficult environment is continuing. And the memory area actually is bad and for logic compared to the cutting edge, it is not as strong. For the semiconductor related businesses, a challenging situation is not going to continue. And of course given that environment, we are going to put our utmost efforts. But for photoresist, we are in a situation where we can expect a large growth. So from the second quarter onwards, we have expectations that it will gradually recover.
Understood. Towards the smartphone, you are saying that the shipment is going to be slightly behind than the usual years?
The smartphone itself; for the high end ones, we have expectations that it's not going to be that bad. However, the demand towards the smartphone right now is slightly following a different trend than what it used to be. So I cannot say that everything is going to be okay. However, we are going to put our utmost efforts in it.
The photoresist, the second quarter is going to increase compared to the first quarter. Is that your impression?
Well, we are hoping that it will become that way. However, I cannot say that it will definitely be better. Having said that, gradually the semiconductor itself demand probably is going to recover is how we are looking at it. Therefore, I cannot say that it will definitely be the second quarter. However, towards the third quarter or the fourth quarter, we have expectations that it's going to show a gradual recovery.
Understood. The second quarter is also related to IT-related Chemicals for the medium and long-term strategy. Towards the photoresist, manufacturing company has occurred so photoresist or semiconductor material industry's restructuring. How are you looking at it? And also there is some movement in the subsidy. It seems that you are reducing the investment so maybe it is a situation so difficult to make investments. And also the reforms and rationalization of the business especially for the polarizing film, it's difficult to have a steady progress, especially the latter part, can you answer?
Well, thank you for your questions. There are quite difficult questions so I don't know if I can answer all of them. However, if I may share what I'm thinking right now. Acquisition or related to the delisting matter. The semiconductor material area, including ourselves, the other manufacturers in Japan they do have quite of a competitive edge. But as [indiscernible] becomes a cutting-edge technology, the R&D expenses becomes higher and given that situation moving forward to maintain and enhance international competitiveness is an issue that we need to tackle. And given that environment of such movements have occurred is how I understand it. Each company have conducted development until now. However, they were not facing all the same directions. There were various types that exist. Each technology was a unique technology for the individual companies. Individual companies were utilizing their strengths and their uniqueness and have come so far. If there's going to be consolidation within the industry, is everything going too well or not? I believe various things will be considered moving forward and of course for ourselves the R&D expense becoming very large. I believe there are various options that we can take in terms of rationalization. It's not that we're going to eliminate something. We would like to make decisions when it is appropriate to make appropriate decisions. And regarding the displays related restructuring, I did mention in May towards 2023, 2024 how can we optimize the production capacity. What's the challenge? And regarding this point, I don't have anything that I can share with you at this point, but we are considering various things. The effect that we will see of this optimization efforts will not be that far away. And as I have mentioned before for OLED, this is the area that we have strength in. Therefore in this area, we would like to brush up ourselves. And also for automobile application business, in 2019 we have brought in [indiscernible] as a group company and since then we have been focusing in this area. And this display is different from the conventional display, it has high heat resistance and it has a wide vision field of visibility and this is the area that we can utilize our know-how and experience and we would like to increase our shares by creating products. And for rationalization, I did mention about JPY 10 billion. But at this point with what items we will have this reduction, I cannot share at this point. I hope you will understand. I don't know if I answered all of your questions, but that concludes my answers. But if I'm missing something, can you please mention?
Can you say a word explain a bit about the subsidy towards the semiconductor materials?
Well, currently I believe that various movements are occurring regarding that. But for our company, how much we are doing. I don't have the information on hand so I would like to refrain from answering that.
I have expectations towards your company.
Next question is from Daiwa Securities, Umebayashi-san.
This is Umebayashi from Daiwa Securities. I have 2 questions. The first one is inventory has exceeded JPY 800 billion and you said that you would like to reduce this by about 20%. Compared against the sales, which ones have excess inventory and can you give me the reasons why?
Thank you for the question. Now inventory increasing, of course this is observed in a number of businesses. But especially I talked about Crop Protection inventory building up and our shipments are not increasing because of that. And in Health & Crop Sciences, inventories are going up. So in this environment, how are we going to reduce this inventory? Of course we have put together quite a bit of plan already. So in a sense at this timing, this is the way the products are sold. We do have such plans in place. And the realization feasibility of this plan is very high in our view. Crop protection chemicals after they are produced, there's quite a bit of lead time until they actually get shipped out so it's actually building up right now. Furthermore, INDIFLIN we are expecting to increase our sales going forward and currently at this point in time we're just about to focus our efforts into sales. So inventory is going up, but of course I believe that they will be conserved within this period. Other bulk products, of course we make production decisions by making anticipations of sales and inventory tends to be higher especially amongst Essential Chemicals. We have been making adjustments into our utilization of facilities; but in China and others, they have boosted their production capacities. They are increasing capacity in China. But in the domestic market not all supplies can be absorbed and those supplies are coming out of the country and that is why prices are not going up, actually prices are coming down. So we would like to make some adjustments into our capacity utilization as much as possible. And as we explained back in May, in our case we have a factory in Chiba. And in Singapore, we are going to conduct some integrated operation of these factories for a number of products and for a number of grades. How we are going to be shifting production to which factory. We are currently in the midst of that consultation. So through such efforts, we want to move ahead with compressing and rightsizing the inventory levels. Thank you for the question.
Just to confirm. Inventory is not that high for energy and functional materials?
Yes. For some products, there are ones that have seen increases in inventory. But compared to the ones that I gave you, their levels are relatively lower. Of course in Energy & Functional Materials, for resorcinol and other products, there is an increasing trend in the inventory levels for those products. So we have to make sure that we address those issues as well.
Second question, related question. But chemicals capacity utilization in the fourth quarter, maybe you didn't reduce it that much. But in the first quarter compared to the fourth quarter, how much reduction was there in capacity utilization? And going into the second quarter, am I correct in understanding that the utilization rate is going to be further reduced? And the timing of this inventory adjustment, what timing are you aiming at? For crop protection chemicals, it seems that within this fiscal year you are planning to do this. But in petrochemicals and by when are you going to actually take those steps because if utilization rate is lowered, P&L will be worsened. Should we be prepared for that?
Thank you for the question. In my explanation I talked about cash flows, how we are to generate cash flows. So we may need to sacrifice profit and loss in some areas. And about capacity utilization, polyolefin utilization rate of course is not at full capacity utilization level right now. And as I said, looking at the situation in China as well as in Asia, a very difficult environment continues. So that is why we are keeping operation at this level. We don't have an ethylene plant in Japan, but ethylene plant utilization level was less than 90% for 11 months in a row. So those with higher utilization rate, the product will have to be very competitive for it to be utilized at that level in our view. In terms of reducing our inventory so what's the time period was the question. We would like to do that as quickly as possible. So within fiscal 2023 as much as possible for those things that we can do, we would like to complete that within 2023 and as said, a cut of 20%. By the end of 2024, that's 1 target that we have by the end of fiscal 2024.
2024, that is next year, next fiscal year. By the end of next fiscal year, that is by the end of March 2025.
That's correct.
Let me just ask once again about the image of utilization. Polyolefin was I think 90% for PP and polyolefin 70% and Singapore 80% M&A, I think it's down to about 40%. First quarter and second quarter, how are they trending? If you have those numbers.
The ones that you mentioned, utilization rate. Scheduled shutdowns are excluded from those numbers I would suppose, but there could be some scheduled shutdowns. So from the fourth quarter to first quarter and then into the second quarter, broadly speaking it's not that any particular thing will have a major drop. We're not intentionally going to lower the rate for any particular type of product. But generally we are looking at the sales situation to try to compress utilization rate where possible. So it's not that we're going to be stopping operations in a major way starting from the second quarter. But depending on the situation, we may need to make such decisions in certain instances. That is how we are looking at it.
We are getting close to the ending time, but we have 1 more person who's raising his hand so 1 more question. Nomura Securities, Mr. Okazaki.
This is Okazaki from Nomura Securities. I just have 1 question. For the Crop Protection products, South America or India was mentioned. After the inventory adjustment completes, your shipment on a year-on-year basis, I would like to know the timing where we'll see the increase. At the last briefing session for South America, there will be inventory adjustments throughout the year. But if there were any changes from them, can you share some information?
Thank you very much for your question. Specifically at what timing, was it June when I provided the explanation, I don't have any additional information since then. However, image-wise, it's within the fiscal year -- by the end of the fiscal year we will see a gradual improvement. That is the same for India.
So in other words so from October to December sales wise it will decline and from the start of the new year, it will start to increase. Is that the image?
It depends on the product, but it's not necessary as so. As I have mentioned before, INDIFLIN, which is a new crop protection product, we have expectations that it is going to show a rapid increase in South America and probably we will see the increase to a certain extent and also in other regions. Asia may be struggling slightly. However, in other regions for the third quarter and the fourth quarter, we have expectations that we will be selling the product to a certain level.
We have exceeded the allotted time so this is the end of the Q&A. Lastly, I would like to invite Mr. Sasaki to make some concluding remarks.
Thank you very much for your attendance. As I have just explained, our business performance is struggling. Certain things we knew already, but the actual results were actually more difficult than we anticipated so the recovery period could be delayed. And therefore, as for our improvement plans, we have decided on additional actions to be taken. So given this situation, we will be making maximum efforts to make improvements. So I would like to continue to seek your understanding and your support. Thank you so much for your attendance today.
This is the end of today's conference call. Thank you very much for joining. [Statements in English on this transcript were spoken by an interpreter present on the live call.]