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Thank you very much for attending the conference call regarding the financial results of fiscal year 2018 third quarter.
Today, after Mr. Nozaki, Director and Senior Managing Executive Officer explains the fiscal year 2008 (sic) [ 2018 ] third quarter results, there will be a Q&A session joined by Mr. Tan, General Manager of the Accounting department. Before we start this conference, we will like to point out one thing. When we talk about the future outlook based on the current forecast, when we give the explanations, this also goes with risks and uncertainties. We kindly ask for our investors understanding that the -- there may be -- results may be largely different than the outlook. Now we will like to start the conference call. Mr. Nozaki, please.
I'm Nozaki from Sumitomo Chemical. Thank you very much for attending our company's conference call despite your busy schedules. I would like to very much thank our investors and analysts for your understanding and support towards our business. I would like to extend my heartfelt gratitude at this occasion. Now from now, I would like to explain the financial results of the fiscal year 2018 third quarter. Please refer to Slide -- Page #4. The consolidated results of fiscal year 2008 (sic) [ 2018 ] third quarter were for the 9 months from April to December. Sales revenue was JPY 1,714,100,000,000, up by JPY 108.3 billion year-on-year. However, regarding the profit items, they all experienced a decline. Core operating income that shows a recurring revenue -- earnings capability was JPY 154.9 billion, down by JPY 43.9 billion year-on-year. Equity and earnings, which is included in the core operating income, was JPY 32.4 billion, down by JPY 7.6 billion year-on-year. As for the nonrecurring items, we have recorded a loss in total of JPY 12.3 billion, which includes business structure improvement expense of JPY 6.1 billion, changes in fair value of consideration with conditions of JPY 5.5 billion and others. Last fiscal year, we recorded the gains on sales of property, plant and equipment. Therefore, the amount has worsened by JPY 5.8 billion year-on-year. As a result of all this, operating income on IFRS basis was JPY 142.6 billion, down by JPY 49.7 billion year-on-year. Finance income and expenses gained JPY 5.6 billion and was up by JPY 3.8 billion year-on-year. Out of this, gain/loss on foreign currency translation recorded a gain of JPY 4.8 billion due to the depreciation of yen towards the end of the quarter. And this was a JPY 3.1 billion improvement year-on-year. So the rate was about a JPY 0.5 depreciation. And that was an improvement of JPY 3.1 billion improvement year-on-year. Income tax expenses was JPY 30.6 billion, and the tax burden went down by JPY 17.3 billion year-on-year. As a result of this, our net income attributable to owners of the parent, which is the net loss and gain, this quarter was JPY 89 billion, down by JPY 19.7 billion year-on-year. ROE at the 9-month pass point was 9.3%. The exchange rate and naphtha price that impact our results were as follows: Average U.S. dollar rate during the quarter was JPY 111.14 to the dollar. So compared to the previous year, it was almost flat. However, regarding the naphtha price, the average of the last 9 months and this quarter was JPY 52,200 per kiloliter. Therefore, compared to the previous year, it has increased by approximately 30.8%. Overseas sales revenue ratio was 64.9%. This showed an increase mainly due to the shipment increase of Petrochemicals & Plastics and IT-related Chemicals products to China. Therefore, the ratio has gone up compared to the previous year.
Next, I will explain the outline of the sales revenue by segment.
First of all, the sales revenue. Company-wide sales revenue, which is recorded in total sales, was up by JPY 108.3 billion year-on-year. In terms of by each business segment, Petrochemicals & Plastics, Energy & Functional Materials, IT-related Chemicals, resulted in an increase. When we analyze the company-wide factors of increase and decrease year-on-year of the sales revenue, first, in terms of pricing, IT-related Chemicals and Pharmaceuticals have resulted in a decline in selling price. But on the other hand, the product-to-market price increased due to raw material price increase in Petrochemicals & Plastics. Therefore, owing to the calculation, this segment gained JPY 36 billion from the selling price differences. As for the volume. All of the segments except Pharmaceuticals and Others, experienced -- which is the 4 lines of segments from the top, they experienced an increase in shipment. Therefore, the difference in volume gained JPY 80.4 billion. Overseas subsidiary sales revenue, the local currency-foreign exchange difference, was a negative factor of JPY 8.2 billion. Please look at Page 6. Company-wide core operating income declined by JPY 43.9 billion year-on-year. In terms of business segments, Energy & Functional Materials and IT-related Chemicals experienced an increase.
And regarding the other segments, compared on a year-on-year basis, they experienced a decline. Looking at the analyzing factors, in terms of price, the IT chemicals and Pharmaceuticals experienced a decline in sales price. And in terms of Health & Crop Science, in terms of methionine, the profit margin went down. And overall, it was a JPY 22 billion decline. As for cost in IT-related Chemicals segments, we proceeded in streamlining. However, Pharmaceuticals experienced an increase in sales and marketing costs. Therefore, cost had a negative impact of JPY 10.5 billion. As for the volume difference, which includes the ups and downs of the equity earnings, the Energy & Functional Materials and IT-related Chemicals, they have increased -- a positive gain. On the other hand, Pharmaceuticals, which recorded a transfer of business the previous year, and Petrochemicals & Plastics that had a scheduled shut down for maintenance experienced a loss. Therefore, in total, volume was down by JPY 11.4 billion. Next. I will be explaining the -- each business segment outlined. Please refer to Page 7.
At first is the Petrochemicals & Plastics segment. Sales revenue was JPY 576.9 billion, up by JPY 80.3 billion year-on-year. However, core operating income was JPY 51.8 billion, down by JPY 18.9 billion year-on-year. Sales revenue went up due to the product market price increase. And also, there was an increase of the shipment of the Rabigh products. And therefore, overall, it experienced an increase. As for the core operating income, the MMA and the caprolactam synthetic fibers, profit margin improved. However, the petrochemical products and the synthetic resins profit margin worsened. In addition to that, there is an impact of the scheduled shut down for maintenance in the Chiba and the Singapore plant. And also, last -- previous third quarter, we recorded a license income, which showed a temporary minor factor. And so overall, it has increased a decline. Next is for Energy & Functional Materials segment. Sales revenue was JPY 214.7 billion, up by JPY 26.9 billion year-on-year. Core operating income was JPY 20.2 billion, up by JPY 4.3 billion year-on-year. And this segment experienced an increase both in revenue and profit. Sales revenue increased due to the increase of aluminum market price and shipment increase of lithium-ion secondary battery separator and cathode material, which is a precursor product, and the high purity aluminum. Core operating income increased due to increase of a shipment though there was an impact of the scheduled shut down for maintenance at the Chiba plant, which was the same as the Petrochemicals & Plastics. Next page, please. This is the IT-related Chemicals. So the sales revenue marked JPY 300.9 billion, which was plus JPY 14.3 billion year-over-year. As for the core operating income, this was JPY 22.3 billion. And again, this was an increase by JPY 8.7 billion year-over-year. So just like the Energy & Functional Materials, this is another segment that we were able to find increase in both sales and operating income. Now for sales, although selling prices of polarizing film declined, shipments increased. Thus, we were able to find an increase in sales revenue. As for our core operating income, the negative impact from sales price decline was more than offset by increase in shipment and by a positive result of cost reduction through rationalization. And so therefore, in the end, we were able to increase our core operating income. Please go to the next page. This is our Health & Crop Sciences segment. Sales revenue was JPY 202.7 billion (sic) [ JPY 212.7 billion ]. This declined -- this is a decline by JPY 3.5 billion year-on-year. Core operating income was JPY 3.9 billion, which was a large decline, a decline by JPY 14.7 billion year-on-year. Now as for sales, shipments of agricultural chemicals increased in South America and Asia. On the other hand, sales of the feed additive methionine dropped due to lower market prices, which had a large impact. And also, I did mention about the currencies of emerging market. But this depreciation in emerging market currencies, such as India rupee, and Brazil real, had a negative effect on sales from overseas subsidiaries in yen terms. So that was also another reason why we found the sales declined. Now for core operating income, there was a higher feedstock price. But then because of declining Australian entity, Nufarm, this caused a decline in the profit. There was this equity method investment lost on Nufarm. Next, we move on to our Pharmaceuticals segment. As for sales revenue, it stood at JPY 371.8 billion, which was down by JPY 8.6 billion year-on-year. Core operating income was JPY 59.3 billion, which again, was a decline, a decline by JPY 22.3 billion year-on-year. So first of all, for sales revenue. In North America, sales of Latuda, which is a typical antipsychotic drug, as well as Aptiom, which is for antiepileptic treatment, and other treatments, increased. But then, on the other hand, results were adversely impacted by drug price revisions instituted by Japan's NHI, and there were less shipment of long-listed drugs and that is why the overall sales revenue declined. As for core operating income, because of the impact of drug price revisions of higher sales expenses -- now -- and there was also -- this higher sales expense came from North America. And the drug price revision, of course, was of Japan, which impacted both sales and income. And there was also a onetime gain recorded in the same period the previous fiscal year on a transfer of business. And so therefore, core operating income declined.
So this concludes the performance overview by segment. Now next page is our breakdown of nonrecurring items. In Japan, this would be about our extraordinary loss. But then as for the major points and value impact, we do have the details on this slide. But this is exactly what I did introduce at the beginning. And so therefore, I will not go further on at this point. Next, let me go through our consolidated balance sheet. So please turn to the next page. Total assets, as of December 2018, was JPY 3,270,500,000,000, which is an increase by JPY 201.8 billion year-on-year. This is mainly due, as you can see, to the increase in inventories as well as the property, plant and equipment. Interest-bearing liabilities was JPY 966.8 billion, which was an increase by JPY 124.7 billion year-on-year. For equity, this was JPY 1,328,600,000,000. Compared to year before, this was an increase by JPY 76.4 billion, mainly because there was an increase in retained earnings. Therefore, equity attributable to owners of parent-to-total asset or, in short, equity ratio stood at 29.9% because there was the increase in the asset, especially, in December. And so again, the equity ratio was 29.9%, a bit under that 30% level. In other words, this was a deterioration by 0.3 percentage points year-on-year.
Next, let me go over consolidated cash flow. Please turn to Page 14. Cash flows from operating activities was positive by JPY 68.3 billion but was JPY 82.9 billion decline from last year. This is mainly because operating income declined while spending -- we spent more on working capital. Cash flows from investing activities stood negative by JPY 129.5 billion, meaning we spent JPY 16.7 billion more, mainly because we spent acquiring fixed assets. Therefore, free cash has stood negative JPY 61.2 billion, meaning that we spent more by JPY 99.7 billion than FY 2017 third quarter, when we had a positive cash flow of JPY 38.5 billion. Cash flows from financing activities was a positive JPY 68.5 billion. We gained cash here by JPY 53.8 billion. And so this concludes the overview of our Q3 performance. But then now before I end, let me go through our full year's forecast. Now as for our full year's forecast, we made no change to our numbers, to the numbers we disclosed back in the announcement in May. Our progress of third quarter results versus full year's for sales revenue is 69%; core operating income, 55%; net profit, 68%. So in terms of progress, it is rather slow, but for us, fourth quarter is when you usually have intensive demand and sales for crop protection chemicals. And so if you keep that in mind, I think we can say that we are making steady progress so far. Per segment, petrochemicals & Plastics, Energy & Functional Materials, IT-related Chemicals, made solid progress. On the other hand, Health & Crop Sciences, Pharmaceuticals were a bit slow. But again, this is because there was going to be a time difference in when we will find the increase in activities such as shipment. And so therefore, we do believe we should be able to recover in the -- this fourth quarter.
With that said, at the moment, we do have concerns over the impact of U.S.-China trade war. And again, Health & Crop Sciences, we expect for more shipment and demand, but this is something that we still would have to see. And so we do sense some difficulty in finding visibility of this part of our segment.
But with that said, we do want to make sure that we will be able to increase the shipment in the fourth quarter as we expect. And so we expect to achieve our total forecasted figure in the end. And so that is why we decided to keep our annual forecast. Now of course, we do have some segments that do have some seasonal impact, like I said earlier, especially, the Chinese New Year. We do have to pay attention to what kind of impact there could be. So therefore, we'd like to pay close attention to the latest performance. There probably will be some ups and downs between each segment. So if necessary, we'd like to be prompt in making some revisions, in other words, the revisions in the breakdown of the figures.
Now this -- so I would like to close my overview of the financial results. And so I would like to have your questions. Again, thank you for your participation.
[Operator Instructions] Now I would like to introduce the first person to ask a question, Morgan Stanley MUFG Securities, Mr. Watabe.
First of all, today, you announced the change in your CEO. Is there something that you can share with us regarding this change? And if not, I'll go into my real question.
So 5:45 p.m., regarding that, the press conference is going on. Therefore, the details will be spoken there. Therefore, I would like to refrain from making comments.
Okay, understood. Then I would like to ask my first question. At the end, you touched upon the Health & Crop Science segment. Having said that, still, the third quarter progress is quite slow. And it's hard to have a visibility of how much you can recover. But can you explain about the market price and the supply and demand situation of methionine?
Yes, regarding methionine, we were quite nervous of this, and we caused you some worries. But if we look at the monthly numbers, November was the bottom. And since then, the price has started to recover. At the latter half of October, just looking at our shipment numbers, on average, November was the bottom, especially the shipment towards China starting to show a recovery. This situation is no different in January. That is because the trend of recovery and increasing in December has not changed in January. And for Europe, in the months of October to December, it did not show an increase that much. But especially in Europe, the price is decided every 3 months. Therefore, in January, the order is placed at the price that has increased. So I think that the price is increasing gradually. However, as we expected at the beginning of the fiscal year, we have not reached that level. Therefore, regarding methionine, against the annual forecast, it will go under quite a bit. As for the crop protection chemicals business overseas, there is a gap by large. What I mean by this is that the distributors' inventory period is becoming shorter. Therefore, regarding this, the third quarter, the shipment is stagnant. However, in the fourth quarter, we believe we can have a recovery to a certain extent. Therefore, as we forecasted at the beginning of fiscal year, the profit of Health & Crop Science, achieving that forecast I think will be difficult. However, as I said before, the other segments, there are some that are doing well. So overall, I believe that we can achieve the numbers. Methionine -- even though, your plant that increased the capacity is operating well, there is no impact on the marketing price, but for the third quarter, for the crop protection chemicals, they recovered in the fourth quarter. For the profit and loss, that is the image I have, the crop protection chemicals have its seasonalities, November, December, January, February, March. If we look at the monthly shipment volume, it's hard to have a far visibility. Looking at the past, we had a large shipment in the fourth quarter, or there was some concentration in the fourth quarter. Another -- so we believe that we will be able to show quite a bit of recovery in the fourth quarter. And regarding methionine, at this point, our plant started its operation, and that impact is not so much is what I feel because the pricing hit the bottom. And from there, it is gradually increasing. That is the current situation.
Next is regarding the IT-related Chemicals. The third quarter, they are performing quite strongly. And of course, I believe the second quarter was the peak. But the movement from the second to the third and the fourth quarters, the magnitude of the performance I'd like to know because the smartphone is quite weak.
Yes, as you mentioned, the second quarter was the peak. The third quarter, compared to that peak time, mainly for the smartphones, it is peaking out. However, having said that, in our company's case, relatively speaking, the third quarter, the polarizing film was quite strong in terms of volume even though the pricing is a bit tough. Therefore, from the peak time of the second quarter, there is a slowdown in the third quarter. However, still, it is at a satisfactory level of shipment. And for the fourth quarter, usually, as I have mentioned already, there's not much of a demand in the fourth quarter because there are some replacements and others. However, in that sense, the second quarter -- it will not be like the second quarter or the third quarter. However, on the other hand, when we look at the full year smartphones, TVs, the final product sales volume is not declining. Therefore, the breakdown of that for our company, we are focusing on the OLED components. Therefore, from that perspective, the fourth quarter also we can expect some performance. Two consecutive years, the fourth quarter was making a loss, but that is not the situation this time, I believe so. Thank you very much.
And we'll move on to the next question. This comes from Mr. Yamada from Mizuho Securities.
Yes, this is Yamada from Mizuho Securities. I have 2 questions. You've just heard from Mr. Watabe his question about IT-related Chemicals. I'm going to have a follow-up. So Q4, I also don't expect there's going to be another loss. But then, if I try to make a simple calculation, you are supposed to have a loss in Q4. And you're also -- we're also going to see the same scenario with Energy & Functional Materials. Now you said that Health & Crop Science segment is a bit weak, but others will be able to make up for it. Now can I understand that it's going to be made up for -- by Energy & Functional Materials and IT-related Chemicals? Or do you think you'll be able to have an upside with Petrochemicals & Plastics segments as well? So what is the sense you have per segment in terms of upsize or any areas where it might not be able to achieve the target?
Yes, thank you. Well, you just made a very good summary, Mr. Yamada. So Energy & Functional Materials, IT-related Chemicals, so at the point of Q3, we were able to already surpass our annual target. And so therefore, in Q4, even through -- even if it's theoretically true, we don't expect it's going to be a loss-making quarter. JPY 20 billion, that's our expectation for core operating income. But we do expect that there should be good upsize. Now probably IT-related Chemicals segment should be able to contribute more. Now when it comes to Petrochemicals & Plastics, it's quite difficult for us to make any expectations. How to look at this is quite difficult. At the moment, for example, there is this trade dispute between the U.S. and China, Petrochemicals & Plastics segment is very prone to getting the impact from this trade war. Also shale gas-based polyethylene, now this is not about China, but in Southeast Asia, we're finding more being shipped. And so therefore, it's not exactly easy for us to foresee what exactly may happen. So we're not making too much of a bullish expectation. But then Health & Crop Sciences, any drop there should be made up for by, again, Energy & Functional Materials and IT-related Chemicals. That's our total image.
Well understood. My second question. So cash flow -- operating cash flow, you had a great reduction there. And you said that there is more working capital behind this. Now why is this working capital increasing? Is it because there is this change in price of naphtha, in other words, raw material prices declining? In other words, can we expect the working capital to decline from now on? And if that is going to be the case, net debt to equity at the moment is like 0.7x, and there's like JPY 700 billion of interest-bearing debt. And so in the next midterm plan, I do believe we'll be able to have a better financial status. But is that the same way you see? How would you look at your financial status?
Thank you for your question. So again, December was a bit unique month. There were some unique items. Our working capital, operating cash flow did shrink. So for example, any amount for tax, now last year we had a record high. And so therefore, that means we will be paying more tax in the following years. So that's something that we do have to keep in mind. Also for the working capital, I mentioned earlier, that there was this crop protection products or Pharmaceuticals product that is -- that needs a little more time before we're be able to increase the shipment. And also, you just mentioned the raw materials cost. But then I think it was around October when we did have the change there. In other words, the payment is actually coming before we'll be able to see the impact to our business. And so these are the elements, which makes everything look like it is not rosy. But then a little more than JPY 960 billion is amount of -- is the amount of interest-bearing debt. Now as we go towards the end of March, there will be these special factors that we will be able to clarify a little more. And so the loan, again, of JPY 900 billion amount, probably would be the final number that we should be able to find. So in that sense, we are on a steady progress to improve our financial status.
Well understood. In 2016, March, you said that you wanted to make sure you'd be able to go behind -- below JPY 900 billion. And you have been able to continue that for the 2 years. So I am very convinced now.
I'd like to take the next question, Nomura Securities, Mr. Okazaki.
My first question is regarding the IT-related Chemicals. You did already explain before from Q2 to Q3 or from Q3 to Q4, your forecast, of the polarizing film and the TV and the smartphone polarizing film. What is the trend of the shipment? And how are you looking at the trend of the shipment?
Are you talking from the third quarter to the fourth quarter?
No, first from the second to third and third to fourth, or maybe the full year.
For the TV application, well, the second quarter was the largest in terms of money amount. No, correction. The third quarter sales for the TV application is larger as for the polarizing film. That is because we have been focusing on this and also, mainly, the Chinese manufacturers -- well, panel manufacturers for the large-size TVs, their production level became high. And due to that, our sales volume was also increasing. As for the TV application, the fourth quarter also will not be that different, and we'll continue to have a strong performance is what we think. And as for the mobile phone application, as all of you know, the second quarter, it had a very strong performance. And once we entered the third quarter, for some customers, we experienced a decline. However, the LCDs full-screen message, the special processing application, it has -- this is quite an additional value -- high additional value product. So that contributed. And as for the fourth quarter, as for the polarizing film, this is the pattern that we see quite often, there will be a model change. Therefore, we think that it is going to experience a slight decline. However, as for the touchscreen panels, for our company, mainly, it is used for the OLED smartphones. However, when we look at the overall smartphone production volume, the normal case is that the fourth quarter will experience a slight decline, but when we look into the breakdown of it, the OLED smartphone percentage is increasing. Therefore, in that sense, our company's touchscreen panels, even though the overall volume shrinks, the touchscreen panels will be able to maintain a strong performance.
So from the second quarter to the third quarter, the touchscreen panels between the glass and film, what was the situation?
The glass type slightly declined. The film type actually is increasing.
And from the third quarter to the fourth quarter, do you have the same image?
From the third quarter to the fourth quarter, I think the glass actually is going to start to show an increase. So that means that the film is going to slightly go down. But overall, second, third, fourth quarter, they are still performing in a satisfactory level.
We'll move on to the next question. This will be from Mr. Ikeda from Citigroup.
Yes, this is Ikeda from Citigroup. So my question is on Energy & Functional Materials. Now for separators, I think you've been able to really grow this. But then can you give me a little bit more details from the Q2 to Q3?
Yes. So you mentioned about separators. This is making a steady progress. And also, when it comes to inorganic materials, these are all going steadily as well. So Energy & Functional Materials segment, we do find, overall, especially the products that we focus on, are making very good progress so far. So I think we can say, we're making some constant progress.
Yes. So separator, 10% -- there has been like a Q-on-Q growth for like 10%. Is that the correct image?
Which -- where are you comparing?
So it's a comparison from Q2 to Q3?
Yes. So second quarter versus third quarter? Right, so maybe a little more than 10%.
I see. In other words, it is -- you are making very steady growth. So I don't find any elements for dropping -- for the trend to drop for separators or inorganic materials. So how do you look at separators trend in Q4? Do you think it would keep on pace?
Well, separators, I don't think there is any reason why we would have to expect a decline in performance. And if there would be any reasons for decline, for example, synthetic rubber, I know, we are -- we would have to expect some tough situation.
I see. My next question is about IT-related Chemicals. So if I look at Q3, the -- I think price change, there wasn't much drop. And I think that very much impacted the contribution. It really contributed to the growth. Now of course, you will not be able to compare in short term. But how do you look at the price competition? When I listen to your peers, there isn't much price competition nowadays. And so I do believe there is a growth of volume, but then for the existing players, the market trend is quite favorable. Is that the way to understand it? And it seems like there isn't much worries for 2019 as the rumors have been going. In OLED, LCD, you'll be able to take the market? So how do you find about the future progress?
Yes, for the pricing. We do have to be very sensitive. But we don't want to really comment that would enable you to specify which customer we're talking about. But I think everything is resembled in our figures. But then what was your -- latter part of your question?
Yes, so looking at the smartphone market, we are finding a decline, but then as we look into 2019, what would be your outlook? Do you think you'd be able to maintain the same performance? Or do you think you'd be able to add more value to add more numbers to your profit level? So what is the sense you have for the next year?
Yes. So especially, something that we've been working on TVs, but then this OLED for smartphones, that's very much our focus. And how we'll be able to increase the amount of components for this part is something that we're focusing on. And also, within the smartphone, there had been this super high end that had grasped OLED. But then it seems like more general models are able to adopt OLED. So therefore, even if we don't have many smartphone increase, we -- the number of smartphones probably would be saturated in the market. But then overall, I do believe the trend is working favorable for us. That is our expectation at the moment.
In other words, polarizing film, touchscreen panels, you should be able to expect a share increase? And do you think you'd be able to see more volume?
That's exactly what we expect.
We're getting close to the ending time. Therefore, we would like to conclude the Q&A session.
So before we end, may we ask Mr. Nozaki from Sumitomo Chemical to give any closing remark.
Yes. So Change and Innovation, our midterm plan, we are at the final year, and we only have like 2 months left. Like I mentioned earlier, we will be working together so that we'll be able to achieve our goal. We do want to make sure we'd be able to brush up our performance even more. And again, what was -- this is something that we discussed earlier, but then under the new CEO, we will be compiling our next midterm plan. And we will be focusing -- our direction itself will not change drastically. But then please look forward for how much we'll be able to contribute to the society and how much growth we'll be able to pursue under the leadership of our new CEO. So I would like to ask for your further support and understanding. So once again, thank you very much.
Thank you very much. Also, today's conference call will be distributed in Sumitomo Chemical's website as part of the archive. And so you will be able to replay and listen to the recording for the upcoming 3-month period. And so with that, we'd like to end today's conference call. Once again, thank you very much for your participation.