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Thank you very much for joining us for Sumitomo Chemical's Conference Call for Fiscal 2021 Second Quarter Financial Results. Today, Mr. Sasaki, Managing Executive Officer, will give a briefing on fiscal 2021 second quarter results, and he will be joined by [ Mr. Tan ], General Manager of the Accounting Department for the Q&A session. Now over to you, Mr. Sasaki, please.
My name is Sasaki from Sumitomo Chemical. Thank you very much for coming to our conference call out of your busy schedules. I'd like to take this opportunity to express our gratitude to the investors and analysts for your understanding and your support to us. Now, let me start our briefing on the financial results for fiscal 2021 second quarter. Please go to Page 4. Our consolidated results for fiscal 2021 second quarter, sales revenue was JPY 1,325.2 billion, up JPY 278.4 billion year-on-year. Core operating income that represents our recurring earnings power was JPY 148.9 billion, up JPY 95.4 billion year-on-year. Nonrecurring items not included in core operating income, negative items include restructuring charges of JPY 3 billion, impairment loss of JPY 1.6 billion, resulting in a loss of JPY 4.6 billion. It was worse by JPY 1.3 billion year-on-year. As a result, operating income was JPY 144.3 billion, up JPY 94.1 billion year-on-year. Finance income and expenses was a gain of JPY 2.5 billion, an improvement of JPY 14.4 billion year-on-year, of which gain and loss on foreign currency transaction saw an improvement of JPY 15 billion compared to a JPY 9 billion loss due to yen appreciation last year. Income tax expenses were JPY 39 billion. The tax burden was up by JPY 15 billion year-on-year. As a result, net income attributable to owners of the parent was JPY 88.9 billion, up JPY 91.1 billion compared to last year's loss of JPY 2.2 billion. The exchange rate and naphtha price that have an influence on our results. Average exchange rate during the period was JPY 109.81 to the dollar. The naphtha price was JPY 50,600 per kiloliter. The yen was cheaper, and the feedstock cost was higher. Next, results by segment. Please go to Page 5. Sales revenue. Total sales revenue was up JPY 278.4 billion year-on-year. All the segments saw higher revenues. As for the difference in sales revenue analyzed by sector or analyzed by factor, sales price difference was a positive JPY 110 billion, shipping volume variance was a positive JPY 139.4 billion, foreign currency conversion variance of foreign subsidiaries sales revenue was a positive JPY 29 billion. Next, please go to Page 6. Total core operating income was up JPY 95.4 billion year-on-year. By segment, all segments, except for Others & Adjustments posted higher core operating income. Analyzed by factor, price variance was a positive JPY 8.5 billion, cost variance was a negative JPY 26 billion, shipping volume variance that includes changes in equity in earnings was a positive JPY 112.9 billion. Next, results by each segment. Please go to Page 7. Petrochemicals & Plastics. Sales revenue was JPY 399.5 billion, up JPY 155.9 billion year-on-year. Core operating income was JPY 42 billion. It was better by JPY 73.3 billion compared to the same period last year. For petrochemicals, synthetic resin, raw materials for synthetic fiber backed by a demand recovery and higher feedstock prices, market prices went up and profit margins improved. In addition to Petro Rabigh, our equity method affiliate going through a periodic plant maintenance last year. Due to COVID-19, shipments were low last year, mainly to the auto sector, so both net sales and core operating income were higher year-on-year. Please go to the next page. For the Energy & Functional Materials segment, sales revenue was JPY 148.5 billion, up JPY 43.2 billion year-on-year. Core operating income was JPY 12.6 billion, up JPY 7.8 billion year-on-year. Shipment of lithium-ion secondary battery separator was strong. With a stronger aluminum market price and higher market price of cathode materials, selling prices went up. Also due to COVID-19, shipments were low last year, mainly to the auto sector, and both sales revenue and core operating income were higher year-on-year. Please go to the next page. IT-related Chemicals. Sales revenue was JPY 227.7 billion, up JPY 14.4 billion year-on-year. Core operating income was JPY 29.5 billion, up JPY 7.4 billion year-on-year. On sales revenue, there was a decline in the selling price of polarizing film, but there were increases in the shipments of high-purity chemicals and photoresist, which are processing materials for semiconductors boosted by growth in demand. Also, due to increased shipments of materials for display applications due to higher demand from people staying home and working from home, revenues were higher year-on-year. On core operating income, the drop in selling prices was more than offset by higher shipment volume. The core operating income is higher year-on-year. Next page, please. As for Health & Crop Science segment, sales revenue increased by JPY 23.4 billion year-on-year to JPY 209.4 billion, and core operating income was JPY 18.5 billion, up by JPY 9.1 billion year-on-year. Sales revenue increased year-on-year due to steadily and strong shipment of crop protection products in North America, South America and India as well as higher market price of methionine. As a result, both -- the sales revenue has increased year-on-year. Core operating income increased due to increase in profit margin of methionine and increase in shipments of crop protection products.
Please go to the next page. As for the Pharmaceuticals segment, sales revenue was JPY 309.6 billion, up by JPY 33.4 billion year-on-year, and core operating income was JPY 50 billion, up by JPY 0.9 billion year-on-year. In terms of volume, Dainippon Sumitomo Pharma, a consolidated subsidiary, recorded upfront payments for a co-development and co-marketing agreement with Otsuka Pharmaceutical. Furthermore, contributing to the increase in sales revenue were Orgovyx, which was launched in the previous fiscal year, and Gemtesa and Myfembree, which we launched the first quarter of this fiscal year. On the other hand, sales decreased for Brovana, which the exclusive sales period has expired. In terms of selling prices, there was an impact from the NHI drug price revisions in Japan. As a result, sales of revenue increased year-on-year. Core operating income increased due to an increase in sales revenue despite an increase in fixed costs caused by the full-scale implementation of sales activities at Sumitovant subsidiary. This ends the explanation of the overview of business results by segment. Please go to the next page.
As for the main contents and amount of nonrecurring items, I mentioned at the beginning of this presentation, so I will skip them. Next, I would like to explain the content of the consolidated balance sheet. Total assets as of September 30, 2021, was JPY 4,082.8 billion, up by JPY 92.5 billion compared to the end of the previous fiscal year. This was due to an increase in inventories, which are working capital, and increase in trade and other receivables as a result of higher raw material prices. Inventory buildup prior to regular shut down for maintenance and increase in sales. Interest-bearing liabilities was JPY 1,358.1 billion, up by JPY 7 billion from the end of the previous fiscal year. Equity increased by JPY 65.6 billion from the end of last fiscal year to JPY 1,547.8 billion. As a result, the ratio of equity attributable to owners of the parent or equity ratio improved by 1 percentage point from the previous year to 26.5%. Next, I will explain about our consolidated statements of cash flow. Please go to Page 14. Cash flows from operating activities had an inflow of JPY 77.2 billion, down by JPY 79.4 billion year-on-year. As I mentioned earlier, this is mainly due to an increase in working capital. Cash flows from investing activities had an outflow of JPY 65.2 billion, up by JPY 2.2 billion year-on-year. As a result of this, free cash flow had an inflow of JPY 12 billion, down by JPY 81.6 compared to an inflow of JPY 93.6 billion same period last year. Cash flows from financing activities had an outflow of JPY 27.1 billion, up by JPY 125.1 billion year-on-year. Next, I would like to explain our outlook for fiscal year 2021. Please look at Page 16. The full year forecast has been revised from the previous numbers announced in May. Sales revenue is expected to increase by 3.8% from the previous forecast to JPY 2,710 billion. Core operating income is expected to increase by 22.5% to JPY 245 billion. And operating income is expected to go up by 25% to JPY 225 billion. Net income attributable to owners of the parent is expected to increase by 40% to JPY 140 billion and expect an increase in both revenue and each profit level. As for sales revenue and core operating income, we expect both to increase due to improved profit margin as a result of higher market prices in Petrochemicals & Plastics and steady strong shipments in IT-related Chemicals. Operating income and net income attributable to owners of the parent are both expected to increase due to an increase in core operating income. As for the naphtha price for the second half of the year, it has been revised from the previous forecast of JPY 47,000 per kiloliter to JPY 50,000 per kiloliter and JPY 50,300 per kiloliter for the full year. The dividend has also been revised in line with the upward revision of the full year performance outlook. The dividend at the end of the second quarter and the interim dividend has been set at JPY 10 per share as initially planned. On the other hand, the year-end dividend forecast has been increased by JPY 4 from the previous forecast of JPY 10 per share to JPY 14 per share. As a result, the annual dividend forecast has been revised from the previous forecast of JPY 20 per share to JPY 24 per share. The annual dividend of JPY 20 per share is a record high dividend. The next page shows sales revenue and core operating income by business segment. As for sales revenue, we expect it to increase in Petrochemicals & Plastics and Energy & Functional Materials where we expect to raise prices due to higher raw material prices. In addition, we expect sales revenue to increase in IT-related Chemicals and Health & Crop Science due to strong shipments in the first half. As mentioned earlier, core operating income is expected to exceed the previous forecast in Petrochemicals & Plastics, IT-related Chemicals and Health & Crop Science, where performance has been strong. That is all the explanation from our side. Now I would like to take questions from you. Thank you very much for participating today.
Now we will move on to the Q&A session.
Now the first question is from Morgan Stanley MUFG Securities. Watabe-san, please.
My name is Watabe from Morgan Stanley. Thank you very much for the briefing. Very strong results and upward revision. Congratulations. Now my question is about Health & Crop Sciences. In the second quarter, the results were very strong, including methionine. What is in the background? And in the second half, crop protection products, what is the business environment? What are your projections? Can you talk about this, please?
Thank you very much for the question. Now on Health & Crop Sciences business, it is true that in the first and second quarters, we had a strong start of the year. Now as for crop protection products, there's new materials that is Page 26 of the slide. If you could take a look at Page 26 of the material, sorry, I didn't look at that material. Now from this time on, by region, we have product sales by region. We started to disclose this information. We wanted to elevate the level of disclosure. And if you could look at this, you'll be able to see that this is for the first half, so this is total for the first and the second quarters. Japan, we see increases -- slight increases in sales, but in other regions, a modest increase in sales, especially Central and South America. Through M&A, we have established a new office. We have expanded our footprint. And in these regions, peak time is July to September period. So in the second quarter, this is a positive factor. In addition, India, we have established a new presence. We have a listed public subsidiary, and there are shipment increases making a contribution to these numbers.
Now as for our outlook for the second half in terms of crop protection products, there are weather factors. But so far, in the second half, we do not have much concerns in our outlook. And as for North America, from March onwards or after the fourth quarter, North America is going to be the focal region. And 2 years ago, because of bad weather conditions, we had excessive inventory in distribution, but gradually, that is being dissolved, so shipments from that region could be expected. As for South America, new product, INDIFLIN, registration is expected in the second half of this year. That is our outlook. So shipment could increase in the second half of this year from that contribution. So that is the overall situation of crop protection products. Now, methionine. On methionine, compared to the year before, the same period year before, profitability is better. That is prices are going up. If you look at the first half overall, the price itself is gradually weakening. That is how we see. But currently, there are signs of the price going up. And the biggest factor, we don't know what the reason is, but one of the factors is in China. There is a constraint placed on electricity supply. There is a shortage of electricity in China. So at our competitors, there is a cut in production. They are forced to cut their production. So that could be one factor in the background. So the prices are starting to go up. So because of the demand and supply being tightened, we could expect prices to start to go up. That's part of our expectation. That is all. Thank you very much.
My second question is auto production cuts. What is the impact of that? I think it will be the petrochemicals business as well as Energy & Functional Materials. And in the second half, your projection is that naphtha price is going to come down. Even if it becomes JPY 57,000 or so, there's not going to be much of an impact because the price will go up.
Thank you for the question. Your latter question about the naphtha price, some time ago, we made our estimates, and we're working based on that estimate. Right now, in excess of JPY 60,000, currently, the level is much lower. But as we have been explaining from before, crude oil prices going up and naphtha price going up. And the impact of that, well, there could be some timing differences. But throughout the period, the impact could be considered to be mostly neutral. In Saudi, at Petro Rabigh, there could be benefits in ethane. When feed stock prices go up, they could stand to benefit. But at the same time, Japan, and in these regions, when raw price of methionine prices go up or crude oil prices go up, the positives and the negatives, they offset each other. So in that sense, in terms of the impact on the P&L, there's not going to be very much impact. So that is why we haven't made any revisions. Because in terms of net sales, there could be an impact, but in terms of P&L, it doesn't have much of an impact. So it's slightly different from the current situation in terms of the feedstock price because we're looking at the price level that we made an estimate some time ago in making these projections. And auto production cuts and its impact was another question of yours. Right now, we don't see a big impact. But going forward, there could be a certain amount of an impact on us. So that is now being factored into our estimate at this time. I cannot say what would be the size of the impact, but a certain portion of that impact has been factored in into our forecast, and we will continue to be focused on that. That is all. Thank you very much.
Mr. Watabe, thank you very much. We would like to take the next question. Mizuho Securities, Mr. Yamada, please go ahead.
I am Yamada from Mizuho. Congratulations on your good results. I have 2 questions. The first question is related to the crude oil and fuel price increase, the difference between the first and second half. The sales revenue by segment and core operating income, difference between them decreases. The block down is that Rabigh was in or having a trouble of the improvement of the profit margin is the cause of this? Or next fiscal year, that is going to even out? So this quarter was the quarter 2, make those adjustments or not. Can you please answer this question?
The question that I received right now is that first of all, regarding the second half of this fiscal year, at the Chiba plant, we are scheduling a scheduled shut down for maintenance. And because of that, starting from now, we are starting to accumulate or build up the inventory. That is because we have the scheduled maintenance shutdown in the fourth quarter. When such a shutdown occurs in Japan, approximately JPY 8 billion impact occurs in the P& L, therefore, that is incorporated. That is the answer for the Petrochemicals & Plastics and slight impact also to Energy & Functional Materials. And that impact is incorporated in the Petrochemicals & Plastics and Energy & Functional Materials in the second half outlook. And regarding the price, because the raw material prices are increasing, and due to that, the market price is increasing, and therefore, the sales revenue has increased. That is at the basis. However, in terms of a profit and loss or in terms of margin, it is not going to become a key point. In terms of margin, saying what's going to happen to it at this point is difficult because the market price of various things are going up. Not limited to naphtha price, but other prices are going up related to this also. And that is why, compared to the first half, which was a very strong performance, the second half will slightly settle down. Especially in the first quarter in North America, there was the cold wave, and so the first quarter margin was very good. And when these special factors do not exist anymore, we believe that the situation is going to calm down. And I have been saying that it is going to start to calm down at the latter part of the year from before. So that is the reason.
So in the second quarter, there were -- I thought that there are no special factors. So when I double the second quarter, the second half has larger sales but smaller core operating income. But you have mentioned about the scheduled maintenance shutdown or you're looking at the numbers slightly in a conservative way is the reason for that?
For the second quarter, it's exactly JPY 200 billion for the Petrochemicals & Plastics. And compared to that, seeing an increase is the reflection of the overall market price going up. As for the profit and loss, due to this scheduled maintenance shutdown, there is other factors such as the profitability itself. We are taking a conservative view on that. Thank you very much.
So compared to the second quarter, the second half, the naphtha price was lower, and I couldn't understand why the numbers are going to be this. Another question briefly speaking, the Pharmaceuticals segment, the maturities at Dainippon Sumitomo. And probably, they have not revised their numbers, so you have not revised your numbers either. Maybe this is something that I should ask Dainippon Sumitomo, but the upfront planning because it was upfront payment and because that was incorporated at the forecast at the beginning of fiscal year, you're not making any revisions. Is that -- my understanding correct?
Yes, it is. This amount was already incorporated in the forecast. So it has not been changed. Thank you very much.
Thank you very much, Mr. Yamada. Let us move on to the next question from Nomura Securities, Mr. Okazaki, please.
My first question is on IT-related Chemicals, Pages 23 and 24. Usually, Page 24, profits. From quarter 1 to quarter 3, you have increases in profit. TV, polarizing film and cash balance. And in the second quarter, in the second half, it goes down to JPY 18.5 billion. There's a big drop. There could be seasonality in quarter 4, but what are these movements? Can you talk about this, please?
Thank you for the question. In IT-related Chemicals, in the second quarter, it was very strong. And as we discussed in the briefing last year, from the second half, there is a lot of demand from people staying at home and working from home. That was a very big contributing factor. And demand from people staying at home is starting to stabilize in terms of the level of demand. That is the projection, and that is how we look at it, too. So in a sense, for example, panel price is -- was staying at a high level, but that will start to gradually come down. We have already seen that in August and September. In addition to this, as you pointed out, Mr. Okazaki, in the fourth quarter, still there is seasonality, a period where there's not much demand. So that is how we look at it overall. But if you look at some specifics, film products for TV applications, yes, we could have that kind of view that we talked about, but extra large usage that we're strong in, relatively speaking, the impact is not that strong. We're expecting that this will continue to perform quite strongly. And for mobile applications, OLED usage, it was, relatively speaking, quite strong in the second quarter, so we hope that it will stay strong in the third quarter as well. But in these areas, we are expecting that there could be some impact to be felt. That is the kind of outlook that we have. That is my answer to your question.
OLED smartphones, you hope that it will be better in the third quarter, but there could be an impact. What do you mean by that?
OLED polarizing film for OLED purposes. For new models, when it is adopted, and there is an increasing demand for that for these new models. And if the demand stays strong, well, that is our expectations. Please understand it in that way.
Chinese and large players, are there any differences in terms of the development of smartphones?
Overall, there could be some differences. But for us, we want to make inroads where possible. That is how we have been operating so far. So what I talked about is that it's not that there are any specific circumstances or differences. We just will continue to work hard.
Now Page 26, crop protection products. This information was very useful. Your outlook for the second half. North America, there could be -- there have been some droughts and soy bean prices coming down. So the demand -- the final demand development is very difficult to see. How are you looking at these different developments? Central South America, Asia and India, in these regions, including recovery from COVID, you're expecting that in the second half, strong market is likely to continue? Is that the case? And in the previous period on Page 24, compared to last year's second half, crop protection products profit is going up but not by that much. How do you look at this, please?
Thank you for the question. First, as for crop protection products, our outlook going forward overall, as for North America, this is going to be the demand period going forward, and therefore, last year -- we want to do better than last year as much as possible, and we will be working very hard towards that end.
And as for Central and South America, the demand peak period itself is between July and September. So for that period, in the second half of this year, compared to the first half, the development is going to be rather smooth and modest. That is how we are looking at it. So in the second half, in terms of P&L, profit level may not be as high as last year. You might be seeing it that way, but with new products that are being launched, including INDIFLIN, and there are also expenses associated with that, so we would like to work very hard to be able to achieve these targets. North American market overall is strong. Of course, there's -- there is the response rebound coming from some adjustments. But overall, the market is strong. Well, how to look at that is a very difficult question, but in terms of planted acreage, there may not be such big negatives.
Mr. Okazaki, thank you very much. We are getting close to the end time. So we would like to consider the next question as the last question. SMBC Nikko Securities, Mr. Miyamoto. Please go ahead.
I am Miyamoto from SMBC Nikko Securities. I have 2 questions. The first question is regarding the overall performance. Dual control in China as the energy control. Can you please elaborate on what kind of impact you are receiving? The increase of the methionine price or within the explanation, the rare metals raw materials prices are increasing was explained to you. But currently, what kind of impact are you seeing? And for the second half, what kind of impact do you expect? Can you explain it by segment?
Thank you very much for your question. Our company just started collecting various informations. Therefore, there is an issue of to what extent we can fully grasp the situation. However, this point is extremely important to our company. Therefore, we would like to continue to work on collecting information. Having said that, currently, conclusion first, it's not that we are facing a major problem at this point. Our offices or the manufacturing sites in China, depending on the province, the situation differs in China. However, our manufacturing process is not being impacted. Therefore, that is our understanding right now. Also, we purchased various raw materials. And as you have pointed out, there are raw materials that the market price is hiking. Therefore, trying to procure this as well as price as possible. And also, we are working on multiple sourcing from China. However, for the raw materials that are increasing price overall, we will have to pass on that increase to the product price. Therefore, we are probably going to negotiate with the customers to do so moving forward. That is the overall situation. However, regarding the issues faced by each business segment, I don't have anything to share with you at this point.
So the Health & Crop sciences, the methionine price increase is working positively. But for the other business segments, that -- the raw material prices increase is going to have a negative impact. But is that understanding incorrect?
No. Actually, we would want the situation to be that way also. Meaning that for the products that we sell, if the market price increases, we will appreciate that very much. However, how high is that going to increase is something that we cannot determine yet at this point.
So for the Energy & Functional Materials in the second quarter, it seems that the profit margin is worsening. Is that due to the raw material price increase in China? If that is so, can you tell us how you are looking at the passing on the increase of raw material prices in the second half?
The raw material prices, meaning naphtha price, there's an impact from that as of the first half this fiscal year. But for other areas, for example, our sales selling price, whether that is impacting for the cathode materials price increase, we'll be able to pass that on to the product price. But for the other worsening areas it's due to the impact from the increase of the naphtha price.
The second question is regarding dividend. JPY 20 per share is a record high, JPY 24, excuse me. JPY 24 is a record high price. So can you please comment on that?
Thank you very much for your question. This time, we have JPY 140 billion. And out of that, JPY 40 billion of the net income revision upward is what we have done. And regarding the dividend and the shareholder return, we would like to continue the stable dividend payout, and that is one of the policies that we have. And also, in the mid- to long-term perspective, 30% of payout ratio is what we are aiming for. So the JPY 24 per share as dividend, and when we described that in the payout ratio, it is approximately 28%. So it's -- we said we're going to aim approximately 30% was our policy. So it is in line with our policy.
So is it correct to understand that it is going to be a level that's going to continue?
Our policy is a stable dividend. And in mid- to long-term payout ratio, 30% is our target. So these are the measures within that range of policy and targets that we have. Thank you very much.
Thank you very much, Mr. Miyamoto. That concludes the Q&A session. Lastly, I'd like to ask Mr. Sasaki to make some concluding remarks.
Thank you very much for your participation. As we have explained just now, we have made a revision into our forecast. But basically, the first half was strong. So this is a revision reflecting the strong performance of the first half. But at the same time, in the second half, there is a shortage of semiconductors. And as was raised in the question, there is the shortage of electric power in China. So there are a number of factors contributing to concerns. So the business environment could take a dramatic turn, and we are looking at that possibility as well. But we hope to be able to respond to those changes in a timely fashion. So I do ask you to continue to give us your support and understanding. And once again, thank you very much for your participation today.
That concludes the 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.]