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Thank you very much for participating in the Sumitomo Chemical Conference Call for Fiscal 2020 Second Quarter Financial Results. First, Sumitomo Chemicals Managing Executive Officer, Mr. Sasaki will give a briefing on fiscal 2020 second quarter results. And later, he will be joined by Mr. Tan, General Manager, Finance and Accounting Office, to take questions.
We will now start the conference call. Mr. Sasaki, please.
My name is Sasaki from Sumitomo Chemical. Thank you very much for joining us for this conference call out of your busy schedules. To the investors and to the analysts, I thank you for your understanding and support for our business. I'd like to take this opportunity to express my heartfelt gratitude.
Now let me start fiscal 2020 second quarter financial results briefing and our full year outlook. Please go to Slide #4. Fiscal 2020 second quarter consolidated results. Sales revenue was JPY 1.468 trillion, down JPY 60.8 billion year-on-year. Core operating income that reflects recurring earnings power was JPY 54.1 billion, down JPY 30.5 billion year-on-year.
Nonrecurring items not included in core operating income, on the gain side, there was a gain on sale of property, plant and equipment of JPY 1.8 billion. On the loss side, restructuring charge of JPY 2.6 billion was recorded. So on a net basis, it was a loss of JPY 3.3 billion.
In the same period last year, as a result of a revision of business plan in pharmaceuticals, an impairment loss of -- an impairment loss was recorded, but there was a larger gain from changes in fair value of contingent consideration. And compared to that, this was a deterioration by JPY 21.3 billion year-on-year. As a result, operating income was JPY 50.8 billion, down JPY 51.8 billion year-on-year.
Finance income and expenses, it was a loss of JPY 11.9 billion, worse by JPY 6 billion year-on-year. Gain or loss on foreign currency transactions due to a stronger yen, it was a loss of JPY 9 billion that was recorded, so it was worse by JPY 2.2 billion year-on-year. Income tax expenses was JPY 23.4 billion. The tax burden was lower by JPY 23.1 billion year-on-year.
In Pharmaceuticals, there was a revision of the business plan, and there was a release of deferred tax asset. So this was a major factor for the decline. As a result, net income attributable to owners of the parent was a loss of JPY 1.1 billion. It was worse by JPY 30.8 billion year-on-year.
Now exchange rate and naphtha price that have a bearing on our results, average exchange rate in the period was JPY 106.93 to the dollar, and naphtha price was JPY 27,800 per kiloliter. So the yen was stronger and the feedstock price was lower year-on-year.
Next, results by segment. Please go to Page 5. Sales revenue. Total sales revenue was down JPY 60.8 billion year-on-year. By segment, IT-related Chemicals, Health & Crop Sciences, Pharmaceuticals, recorded revenue increases. On the other hand, Petrochemicals & Plastics, Energy & Functional Materials had revenue declines. Total sales revenue changes by factor. Sales price variance saw a revenue decline of JPY 56.5 billion. Shipping volume variance had a revenue increase of JPY 11.9 billion. Foreign currency conversion variance of revenues of overseas subsidiaries had revenue declines of JPY 16.2 billion.
Please go to Page 6. Total core operating income was down JPY 30.5 billion year-on-year. By segment, IT-related Chemicals, Health & Crop Sciences, Pharmaceuticals saw core operating income increases. On the other hand, Petrochemicals & Plastics and Energy & Functional Materials experienced income declines.
Now by factor, price variance was a negative JPY 17.5 billion. Cost variance was a negative JPY 500 million. Shipping volume variance, including equity in earnings was a negative JPY 12.5 billion.
Shipping volume variance as shown at the bottom chart in IT-related Chemicals and Pharmaceuticals and Crop Protection products shipment increased by JPY 43.7 billion. Now shipping volume decreases due to COVID-19 was minus JPY 21 billion. And deterioration of equity in earnings was negative JPY 35.2 billion.
Next, results by segment. Please go to Page 7. Petrochemicals & Plastics. Sales revenue was JPY 243.6 billion, which was down JPY 108.6 billion year-on-year. Core operating income was minus JPY 31.3 billion, which was worse by JPY 48.7 billion year-on-year. Sales revenue due to declines in naphtha price, petrochemicals product market prices declined.
On volume, at equity method affiliate, Petro Rabigh, there was a periodic plant maintenance and sales volume declined at Sumitomo Chemical Asia. In addition, due to drop in economic activity due to the spread of COVID-19, synthetic resins shipment dropped mainly for auto use.
Core operating income. In addition to decreases in profit margins on petrochemical products, there was deterioration of equity in earnings for Petro Rabigh and others and lower shipments due to the spread of COVID-19, core operating income declined.
Please go to the next page. Energy & Functional Materials. Sales revenue was JPY 105.2 billion, down JPY 25.8 billion year-on-year. Core operating income was JPY 4.8 billion, down JPY 7.8 billion year-on-year. Sales revenue, in addition to lower market price for aluminum and declines in the selling price of cathode materials and with the impact of COVID-19, there was a decrease in shipment of battery components for autos as well as synthetic rubber, which led to revenue declines. Core operating income, with the spread of COVID-19, shipments declined, leading to core operating income declines.
Please go to the next page. IT-related chemicals. Sales revenue was JPY 213.3 billion, up JPY 6.4 billion year-on-year. Core operating income was JPY 22.1 billion, up JPY 6.8 billion year-on-year. Sales revenue on the sales price side, polarizing films and touchscreen panel selling prices declined. But on the volume side, with the growth in demand, high-purity chemicals and photoresist semiconductor process materials shipments increased. With stay-home demand and work-from-home demand, display-related materials shipments grew. So the revenue increased. As for core operating income, declines in selling price was more than compensated by rationalizations and shipment increases and core operating income grew.
Please go to the next page. Health & Crop Sciences. Selling -- sales revenue was JPY 186.1 billion, up JPY 39.7 billion year-on-year. Core operating income was JPY 9.9 billion, up JPY 18.1 billion year-on-year. On sales revenue, with the acquisition of South American subsidiaries of Nufarm conducted in April of this year, sales increased. And methionine market price increased. And as a result, sales revenue was up year-on-year. Now core operating income, in addition to the improvement in profit margin of methionine, there was rationalization of manufacturing cost of methionine, cost variance due to change in timing of recording expenses and shipment increases from acquisition of South American business, this led to profit number increases.
Next page. For the Pharmaceutical sector, sales revenue, was JPY 276.1 billion, increase of JPY 28.7 billion year-on-year. Core operating income was JPY 49.1 billion, up by JPY 2.2 billion year-on-year. Sales revenue increased, shipment of Latuda in North America increased. And in Japan, with contribution of domestic sales of Equa and EquMet , which was launched in the previous year, there was an increase in sales revenue. In core operating income, due to the strategic alliance with Roivant, newly acquired Sumitovant and other subsidiaries, had increase in fixed cost, but with the increase in sales revenue, there was an increase in income. This is off of outline by segment.
Next page is Page 12. The major nonrecurring items, as I have already mentioned at outset, I will not cover the details currently.
So next, is the consolidated balance sheet. Total assets as of the end of September was JPY 3 trillion -- September 2020 was JPY 3.7744 trillion, up JPY 124 billion from the previous term. This is a result of increase of cash and cash equivalents to secure in hand liquidity. Interest-bearing liabilities was JPY 1.4512 trillion, up JPY 146.6 billion from the previous term. On the other hand, net interest-bearing liabilities balance declined after offsetting the interest-bearing liabilities with cash and cash equivalents. Equity was JPY 1.3712 trillion, down JPY 17.6 billion from the previous term. As a result, equity attributable to owners of parent to total assets, or so-called shareholders' equity ratio, was 24%, down 1.3 percentage points from the previous term.
Next, is a consolidated statement of cash flows, Page 14. Cash flows from operating activities was an inflow of JPY 156.6 billion, increase of JPY 86.7 billion year-on-year. This is because during this term, working capital improved. And in the same term of the previous year, cash flow worsened with concentration of the expenditure related to periodic plant maintenance. Cash flows from investment activity was an outflow of JPY 63 billion, down JPY 9.8 billion year-on-year. The major reason is a reduction of the expenditure of acquisition of fixed assets.
As a result, free cash flow was an inflow of JPY 93.6 billion, increase of JPY 86.5 billion (sic) [ JPY 96.5 billion ] compared to an outflow of JPY 2.9 billion in the same term of the previous year. Cash flows from financing activities was an inflow of JPY 97.9 billion, up JPY 17.6 billion year-on-year.
Next is outlook for FY 2020. Please turn to Page 16. We reviewed the outlook for fiscal year 2020 from the one announced previously on the 4th of August. For the exchange rate and naphtha price, which affects our performance, our assumptions at average U.S. dollar rate during the term is JPY 107.47 per dollar and naphtha price to be JPY 28,900 per kiloliter.
Sales revenue remains unchanged from the previous projection at JPY 2.215 trillion, and core operating revenue, core operating income is estimated to be JPY 100 billion, up 25% from the previous estimate. I will explain about core operating income in a later slide.
For nonrecurring items, in changes in fair value of contingent consideration of pharmaceuticals, the development schedule of napabucasin, an anticancer agent under development was revised and we expect a drop in expenses compared to the previous estimate. As a result, operating income is up 50% from previous estimate at JPY 105 billion. Net income attributable to owners of the parent is up 50% from the previous projection to JPY 30 billion. Dividend projection remains unchanged from the previous projection. Interim dividend of JPY 6 and year-end dividend of JPY 6. Total dividend per share at JPY 12.
Next is Page 17. This slide, on the left-hand side, the blue bar is the core operating income result for FY 2019 and including -- not considering the downside risks like COVID-19 for so-called baseline income and the right-hand side is the newly announced projection, and this diagram shows the changes. This is an update of the previous material used in the presentation of the first quarter.
As I had explained before, starting from FY 2019 results of JPY 132.7 billion, there is negative impact of increased upfront expenses for alliance with Roivant. On the other hand, they're offsetting with higher selling prices of methionine and increased shipment of crop production products. Baseline profit for FY 2020 is expected to be the same level as the prior year at JPY 130 billion. From this, impact of COVID-19 and other negative factors is JPY 55 billion.
And pursuing the improvement of pharmaceuticals with an improvement of JPY 25 billion, but total is minus JPY 30 billion being considered, which leads to the current projection of JPY 100 billion.
The impact of COVID-19 is explained in the next slide, Page 18. This is a breakdown of JPY 30 billion. First, impact of COVID-19 pandemic is expected to be JPY 33 billion and other factors to be JPY 22 billion. Total is a negative impact of JPY 55 billion.
As for the impact of COVID-19 pandemic, as you can see on the slide, we expect drop in automotive demand in petrochemicals and energy and functional materials. On the other hand, weaker demand in displays in IT-related chemicals will be limited after the second quarter. And in life science field of pharmaceuticals and crop protection chemicals, we do not expect a large negative impact. The business structure of the comprehensive chemicals has a power to resist changes in environment, such as the impact of COVID-19.
Now as for others, we take into consideration investment-related gain and losses with a rapid drop in oil price and changes affiliated company's performance. Totaling all those factors, the total downside risk is JPY 55 billion, the same as of prior projection. So against these negative factors, including reduction of expenses, expect JPY 25 billion of improvement of pharmaceuticals performance, so there's improvement of JPY 20 billion compared to the previous projection. So the core operating income is up JPY 20 billion from previous projection of JPY 80 billion to JPY 100 billion.
And lastly, sales revenue and corporate income by segment, Page 19. As I have mentioned, sales revenue is unchanged from the previous forecast, and core operating income is up JPY 20 billion from previous projection to JPY 100 billion. So by segment. In petrochemicals, we expect delay in sales recovery of synthetic resins and others, so we expect a drop in sales and profit. On the other hand, in IT-related Chemicals and Pharmaceuticals, shipments made up to the second quarter was firm, so we expect increase in revenue and income.
This concludes my presentation.
Now I'd like to receive your questions.
We will now be taking questions. Now the first question is from Morgan Stanley, MUFG Securities. Watabe-san, please?
My name is Watabe. I have 2 questions. The first one, sales in crop sciences. Normally, first half is not that profitable, but you have a profit of about JPY 10 billion. Methionine is coming back. Nufarm, the acquisition effect is being felt. So if you could elaborate more on that. And full year projection has not been changed, but methionine market prices and Nufarm in the first place was factored in? And is it going according to plan or North American weather included? If you could comment on the general prospects of Health & Crop Sciences.
Health & Crop Sciences. First, North America. Let me start from North America. From last year, there has been weather problems, and that problem is continuing. The harvested area itself is increasing from last year, especially soybeans, it's up by about 9%. So inventory in distribution finally, is coming down. The worst is now over, we feel. So compared to -- but compared to our assumptions, it's still quite difficult. That is the situation in North America.
Now South American business. We made acquisitions from Nufarm. Things are going relatively well according to plan, but local currency, Brazilian real, compared to the beginning of the year, the currency is cheaper. So in that sense, when you make currency conversions, the monetary amount tends to be smaller. So that has an impact. So compared to our initial projections, things are moving in a negative direction, more or less.
Now as for India, initially, because the lockdown due to COVID-19, we were factoring in a negative impact there, but fortunately, it isn't as bad as we initially anticipated in India. Things are going more or less well in India.
Now methionine, the price is going up steadily, but currently, in the immediate period, it has shown a slight decline, but selling prices are higher than last year. In addition, feedstock prices, naphtha price is so cheap now. So with the declines in feedstock prices, there are improvements in profit margins, and therefore, this is a positive.
So if you put them all together, our full year forecast remains unchanged. That is the projection that we are making.
Let me just confirm, first half. Things are going according to plan in the first half. Yes, first half was mostly in line with the plan. Of course, expenses were delayed. So it's a bit of a positive there, but things are mostly going according to plan.
My second question is about cash flows. In the first half, you have a positive free cash flow. In the conventional projections, JPY 20 billion per annum, that was the number that was anticipated, but you are making cash flow projections. If you could talk about that. And income numbers have been revised up, but dividend plan remains unchanged, if you could think -- talk about your position.
Now as for free cash flows, compared to the year before, things appear better, and this is because things are going in line with the plan. Well, at the year end of the last fiscal year, as at the end of March, securitization of receivables was restrained compared to the average year, issuing subordinated bonds in the background. So as at the end of March, securitization of receivables, was lower, and there's not much change in -- at the end of September. And this is the reason. One year ago, in March, there was a lot of securitization, and that was lowered at the end of September.
That would change the level of free cash flows. So that is one impact why free cash flows are higher. Cash flows from operating activities is higher. So please think of it that way.
Now as for dividends. In July, JPY 6 and JPY 6 totaled JPY 12, that was the projection that we made, and net income was JPY 20 billion at that time. So JPY 12 dividend payment, total amount would be slightly less than JPY 20 billion. So in terms of payout ratio, it's about 97% or so. So this time, net income is up by JPY 10 billion. Against this number of JPY 20 billion, payout ratio is going to be around 65%. So from the perspective of the payout ratio, it's still high. I think the level is still high in our view. And that is why we did not change our projection of our dividend payments.
The next question is from Mizuho Securities, Mr. Yamada.
I'm Yamada from Mizuho Securities. I have 2 questions. About Energy & Functional Materials segment, the separator is being influenced by the COVID-19, but if possible, the volume variance, what is your view about the second half situation on the major products? Could you tell me the situation in the second quarter and your views about the second half?
For Energy & Functional Materials, the separators was the question. And in the first and second quarter, automotive-related areas had a lot of difficulties. And besides those, and for example, super engineering plastic is also related to automobiles and synthetic resin as well -- or synthetic rubber as well. So the impact of COVID-19 was seen in these areas.
For resourcing, there is some impact of COVID-19, but the impact was not that large as we had projected. That is our feeling.
So how about the second half? The impact of COVID-19, I believe, will gradually decline. So as for our profit and loss projections for the full year, JPY 18 billion is the figures that we have. In the first half, JPY 4.8 billion. And after that, we believe there will be a positive result. The impact of COVID-19 will gradually be reduced. And shipments, we believe, will increase. That is one point.
And another point, so you may wonder whether that is only reason why we expect the increase. As of July, I have mentioned that for the second half, license income is also being expected. So there is a onetime profit considered. So JPY 18 billion is the full year projection. JPY 17 million was the projection made previously, but we expect an increase of JPY 1 billion.
For confirmation, license income was about JPY 3 billion?
A few billions of yen. That is the level.
A few billions, I see.
Then in the first half of last year was JPY 13.1 billion. And in the second half, you expect the improvement. So revenue will slightly go down. And operating income projection is about JPY 10 billion. So if you can achieve this level of sales revenue, you expect that income and the background, as you have mentioned, is resolving and automotive will improve -- will recover?
Yes, your understanding is correct.
And my second question about IT-related Chemicals. First and second half, for both sales and income, you expect to drop. In the fourth quarter, January to March term, is there majority seasonal reasons? And are they -- are there no other concerns? Or do you have any other reasons to be concerned?
For IT-related Chemicals, in the first half, the situation was very good. At first, with the impact of COVID-19, we expected a larger drop in display, for example, but because there was some demand for stay-home, TVs and monitors and notes were the major items. Smartphones are not doing well, but others are doing better. So this is one factor.
And another point, is, as I mentioned at the outset, semiconductors process materials are doing well. There's an increase of inventory at the customer side, and that may be one reason. But restoration was very good. First half was doing very well.
So will this continue? That is the question. That may not be true. That is one point, but -- and including -- in addition to that, the fourth quarter, as you have mentioned, the seasons are very less demand. So including that, in the second half compared to the first half, there may be some slowdown, but basically, we expect a moderate situation in July compared to the projections of July, which is JPY 23 billion. We expect an increase of income of JPY 13 billion compared to that. So we decided to revise our projections.
Looking at pro forma projection, I said increase in revenue and reduction in income, I made a mistake in my earlier question. So currently, it's not that there's no adjustment, but it was too good in the first quarter -- or in the first half. So going forward, there may be some adjustments. Is that the right understanding?
Yes, there may be some concerns about it. So that is also being factored in.
So -- but that's not a clear concern?
If you ask me that whether that is clear, we believe such possibilities are relatively low.
Let us move on to the next question from Nomura Securities. Okazaki-san?
My name is Okazaki from Nomura Securities. A related question. It-related Chemicals from the first quarter to the second quarter. Polarizing film for TVs and film of touchscreen panel film and glass, what were they like? In the first quarter, touchscreen panel film was quite good. That is what we heard. Can you give us a direction and from the second quarter to the third quarter, how are the developments?
First, polarizing film, polarization panel, large-sized, middle-sized and small-sized for TVs and smartphones, there are these different applications. Basically, in the first quarter, things were very tough, this is due to the COVID-19, overall, but through to the second quarter, gradually, there were recoveries observed, especially TV use. Because people were staying home, people are spending more time at home. So that may be a factor in the background. Notes and monitors, things improved.
As for mobile use, because of COVID-19, the impact was strongly felt. There could be some temporary elements, but the COVID-19 impact stayed. And as for touchscreen panel, first quarter and second quarter sensitivity, yes, there were COVID-19 impacts felt, but from the first to second quarters, there were recoveries seen at the final use level. And in conjunction with that, sales volume started to go up for glass products that is for the glass products.
On the other hand, touchscreen film panel, in the first quarter, there were inventories being built up at our customers. Yes, there were temporary increases, as I said, at the previous time, and as you know, as for touchscreen film, customers are producing them internally. That is the trend.
So this may continue going forward?
So given the situation, as we look at the third quarter and the fourth quarter, as I answered to the question by Yamada-san, we are thinking that this trend may continue. Especially in the fourth quarter, this is a period where demand is low. So as the average year, we are anticipating slowdowns.
From the second to third quarter, TV polarizing panel, smartphone?
Well, TV is strong. And as for smartphones, there could be recoveries. Well, as for smartphones, we hope that there will be recoveries gradually as the impact of COVID-19 dissipates, that is the hope that we have.
Second question, Petrochemicals. From the first quarter to the second quarter, excluding Rabigh, I think recoveries have been about JPY 5 billion. What are the contributions? Where are they coming from? And in the second quarter, excluding Rabigh towards the second half, what are the assumptions that you're making?
First, as for Rabigh and excluding Rabigh, in a sense, in the first quarter and the second quarter, this was the period that was hit hardest by COVID-19, especially around the auto sector. So in the third and the fourth quarters, we are expecting improvements. In fact, towards the end of the second quarter, we are starting to see recoveries. So we are hopeful, but when it comes to the margins, it depends on the product.
In the first quarter, feedstock prices were very low. So if you just look at margins, it was very good, but that may go back to a normal level. In the first quarter, shipping volume was very bad. So there wasn't that marked contribution, but margins will also start to normalize. So therefore, as we go towards the third and the fourth quarters, I would say that there are recovery trends underway. That is how we are looking at things.
We're approaching the time to conclude. So the next question will be the final question. Mr. Umebayashi from Daiwa Securities.
I'm Umebayashi from Daiwa Securities. On Page 10, Health & Crop Sciences sector, the volume variance, JPY 8 billion in terms of income. Almost all of those are with South America, is that right? And for South America, in the second half, the season is reverse from here. So is it better to say that income cannot be expected in the second half? Or do you believe there will be some level of income or profit in the second half?
And about the cost variance, first quarter was plus JPY 3 billion and second quarter, plus JPY 3 billion. So it is quite large. And so for this towards the second half, could you tell me your expectations for the second half?
Yes. About EUR 8 billion volume variance and as you have said, with the acquisition of Nufarm related to South America, that was a major factor. About half maybe for these factors, that is the overall image. And as for others, there are some factors leading to this positive figure.
Now the rationalization, should I say -- or before that, you asked about South America. And South America, from July to September is a peak. So now going forward, there will be some slowdown. It's not that this will be totally gone, but there will be a slowdown. It's the opposite from the North America. This is how we should see the situation.
And rationalization or basically, methionine-related production rationalization is what this is. And last year, in September, the oldest, the most noncompetitive plant was announced to be stopped. But that result, the plant was moving in the first half of last year, but not in the first half of this year. So cost rationalization is reflected in the first half this year. In the second half, this was stopped last year also, the situation will not be the same in the second half. That is how we should look at this.
And another question. The volume effect of the first half, I thought South America had a larger effect, but you said this is about half. So the other, plus JPY 4 billion, what is the reference for that? Is that America, United States or India or other sectors other than the Crop Sciences?
I said about half, that is about the overseas crop protection chemicals and others for Japanese crop protection chemicals and household products, there is a slight increase in general. That is how this should be interpreted.
And with COVID 19, for example, methionine, and this is a very technical point, but selling price is recovering, I mentioned. And with that, for example, inventory valuation loss reversal is taking place. That is like a part will be included in the volume of areas.
Thank you very much. That concludes the Q&A session. Lastly, Mr. Sasaki will make concluding remarks.
Thank you so much for joining us for this conference call. With respect to COVID-19, the second wave could be coming. And U.S.-China relations are something that we need to focus upon. There are a number of uncertain factors. Against this backdrop, we will try to create corporate value. We will work very hard to create corporate value. So please give us your support and guidance, as always. Once again, thank you very much for your participation.
This concludes today's conference call. Thank you very much for your participation.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]