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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you very much for participating in the Sumitomo Chemical Conference Call for fiscal 2020 Third Quarter Financial Results Today, Mr. Sasaki, Managing Executive Officer, will give you a briefing on financial results for fiscal year 2020 third quarter, and later, he will be joined by Mr. Tan, General Manager of Accounting Department, to take questions.
Mr. Sasaki, please.
Thank you very much. I'm Mr. Sasaki from Sumitomo Chemical. Thank you very much for attending the Sumitomo Chemical conference call despite your busy schedule. I'd like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for your cooperation.
Now let me start with the explanation of financial results of fiscal year 2020 third quarter and full year forecast. Please turn to Slide/Page 4. Financial results for fiscal year 2020 third quarter. Sales revenue was JPY 1,642.6 billion, down JPY 8.1 billion year-on-year.
Core operating income showing the recurring earnings power was JPY 107 billion, down JPY 9.3 billion year-on-year. The core operating income dropped during the 3 months from October to December quarter basis. Despite that drop, we could achieve earnings exceeding JPY 50 billion. As for nonrecurring items not included in core operating income, for profit direction, JPY 18.6 billion of gain on sale of fixed assets accompanied the sale of a former Ibaraki plant of Sumitomo Dainippon Pharma was posted. And as losses, there was JPY 3.7 billion restructuring charges. As a result, the net gain was JPY 9.7 billion.
On the other hand, in the same period of the previous year, in addition to the impairment-loss-accompanied revision of the Pharmaceuticals business plan, there was a restructuring charge of JPY 5 billion. But there were changes in fair value of contingent consideration exceeding that amount, so there was a worsening of JPY 1.7 billion compared to the same period of the previous year. As a result, operating income was JPY 116.6 billion, down JPY 1 billion -- down JPY 11 billion year-on-year.
Finance income and expenses was a loss of JPY 23.1 billion, down JPY 22.3 billion year-on-year. This includes gain or loss on foreign currency transactions. As yen strengthened, there was a loss of JPY 18.5 billion, resulting in a drop of JPY 16.6 billion year-on-year.
Income tax expenses was JPY 39.4 billion. Tax burden decreased JPY 20.9 billion from the same period of the previous year. Some major factors for the decline in the previous year, as I have mentioned, was a revision of the business plan for Pharmaceuticals. There was a reversal of deferred tax assets of '20 that led to this result. As a result, net income during the quarter attributable to owners of the parent was JPY 21.9 billion, down JPY 15.6 billion year-on-year.
The exchange rate and naphtha price, that influences our performance. The average U.S. dollar rate during the term was JPY 106.1 to $1, and naphtha price was JPY 28,900 per kiloliter. Yen strengthened and feedstock price decreased year-on-year.
Next, I'd like to talk about sales revenue by business segment. Please turn to Page 5. Total sales revenue decreased JPY 8.1 billion year-on-year. By segment, in IT-related Chemicals, Health & Crop Sciences and in Pharmaceuticals, sales revenue increased. On the other hand, Petrochemicals & Plastics, Energy & Functional Materials had a decline in revenue.
As for the changes of sales revenue year-on-year, by analyzing the factors, sales price decreased by JPY 68.5 billion and volume increased by JPY 89.6 billion. Foreign exchange translation variance of foreign subsidiary sales revenue dropped JPY 29.3 billion.
Next is Page 6. Core operating income decreased JPY 9.3 billion year-on-year. And by segment, in IT-related Chemicals, Health & Crop Sciences and Pharmaceuticals, core operating income increased and decreased in Petrochemicals & Plastics, Energy & Functional Materials. Analyzing the factors, price was minus JPY 12 billion and cost was minus JPY 3.5 billion. Volume variance, including changes in equity earnings of affiliates, was a positive JPY 6.2 billion.
Next, I'd like to introduce the outline of each segment. Please turn to Page 7. For Petrochemicals & Plastics, sales revenue was JPY 408.4 billion, a decline of JPY 109.9 billion year-on-year. Core operating income was minus JPY 27.9 billion, down JPY 55.2 billion year-on-year.
In sales revenue, with a drop of feedstock price like naphtha, petrochemicals market prices declined. In volume, Petro Rabigh, which is an equity affiliate, had a periodic plant maintenance. So sales volume of Sumitomo Chemical Asia declined. In addition, with a drop in economic activities accompanying the impact of COVID-19 pandemic, there was a decrease in shipments of synthetic resins mainly for automotive use.
In core operating income, in addition to decrease in profit margin on petrochemical products, there was a decrease in equity earnings from investment affiliates, such as Petro Rabigh, and a decrease in shipments due to the COVID-19 pandemic, and core operating income decreased.
Please turn to next page, Energy & Functional Materials. Sales revenue was JPY 175.4 billion, a drop of JPY 15.3 billion year-on-year. And core operating income was JPY 15.6 billion, drop of JPY 2.1 billion year-on-year.
For sales revenue, in addition to lower market price for aluminum and decline in the selling price of cathode materials, there was a decrease in shipments of lithium-ion secondary battery separators and synthetic rubber for automotive use due to the COVID-19 pandemic. And therefore, sales revenue decreased. Core operating income dropped with a decrease in shipments volume due to the COVID-19 pandemic.
Please turn to the next page. IT-related Chemicals segment was JPY 324.3 billion in sales revenue, up JPY 19.3 billion year-over-year. Core operating income was JPY 31.8 billion, up JPY 13.2 billion year-over-year.
Regarding sales revenue, while selling price of polarizing films dropped, shipment of semiconductor materials such as high-purity chemicals and photoresists increased in volume, owing to increase in demand. Demand for staying home and working from home drove increase in shipments of materials for display applications. Thereby, sales revenue was up year-over-year. Core operating income was up on the back of rationalization and increase in shipment volume, offsetting the drop in sales prices.
Please turn to the next page. In the Health & Crop Sciences segment, sales revenue was JPY 282.4 billion, up JPY 63.9 billion year-over-year. Core operating income was JPY 12.2 billion, up JPY 25.8 billion year-over-year.
Sales revenue was up with increase in sales from a South American company acquired in April 2020 by Nufarm. Crop protection chemicals shipment increased in India as well. Coupled with higher methionine market prices, sales revenue was up year-over-year.
Core operating income improved, owing to increase in profit margin on methionine, rationalization of methionine and cost variance, including change in timing of recording expenses and increase in shipment of crop protection chemicals from the South American acquisition as well as in India.
Please turn to the next page. Pharmaceuticals segment. Sales revenue was JPY 417.5 billion, up JPY 35.3 billion year-over-year. Core operating income was JPY 74.7 billion, up JPY 7.2 billion year-over-year.
Regarding sales revenue, shipments of Latuda increased in North America. In Japan, Equa and EquMet for type 2 diabetes launched last fiscal year contributed to the increase.
Core operating income was up as increased fixed costs incurred by Sumitovant, acquired under our strategic alliance with Roivant and its subsidiaries, was offset by increase in sales revenue, among others.
That is all for breakdown by segments. The next page shows nonrecurring items. As I have already covered the highlights of nonrecurring items, I will not dwell on this page.
Next is consolidated balance sheet. Please turn to Page 13. Total assets as of end of December 2020 was JPY 3,890.2 billion, up JPY 236.1 billion from the end of the fiscal -- end of the previous year. This is due to increase in cash and cash equivalents to secure liquidity on hand.
Interest-bearing liabilities was JPY 1,464.6 billion, up JPY 160 billion year-over-year. In the meantime, net interest-bearing debt balance, offsetting cash equivalents and interest-bearing liabilities, decreased.
The robotics-related development and marketing alliance that we announced in December with Pfizer, JPY 650 million in upfront payment has been received, and this is reflected in this. Capital was JPY 1,391.4 billion, down JPY 1.2 billion year-over-year. As a result, net income attributable to owners of the parent or equity ratio, was 23.7%, down 1.6 points from the end of the previous year.
Next is consolidated cash flow. Please turn to Page 14. Operating cash flow was an inflow of JPY 253.4 billion (sic) [ JPY 273.4 billion ], up JPY 209.8 billion year-over-year. Owing to improved working capital and deteriorated cash flow from concentration of expenditure and also one upfront payment from Pfizer contributed to this performance.
Investment cash flow was an outflow of JPY 159.9 billion, decrease of JPY 259 billion in outflow year-over-year. This is primarily because strategic-alliance-related payment was made to Roivant by Sumitomo Dainippon Pharma same time last year.
As a result, free cash flow was an inflow of JPY 113.5 billion, which is an increase in inflow of JPY 468.9 billion compared to an outflow of JPY 355.4 billion same time last year. Financial cash flow was an inflow of JPY 103.1 billion, a decrease of inflow by JPY 360.8 billion.
Let me turn to our full year 2020 full year forecast. Please turn to Page 16. At this moment, no revision is foreseen in our full year forecast announced on October 30, 2020. As explained, consolidated financial results for the year ending March 2021 is robust up to the third quarter.
Our subsidiary, Sumitomo Dainippon Pharma, is scheduled to come up with statistical analysis of global Phase III study for napabucasin in colorectal cancer patients in February, and collaboration with Pfizer to develop and commercialize a product, which was announced in December last year, may impact earnings. Should there be any impact from these announcements on earnings requiring changes in consolidated forecast, Sumitomo Dainippon Pharma will disclose promptly.
We, in turn, will ensure swift disclosure in case our consolidated earnings forecast need to be revised. The timing of disclosure is expected to be by mid-February.
That is all for earnings results, and we will be taking questions from the audience. Thank you very much.
Let me introduce the first question from Morgan Stanley MUFG Securities, Mr. Watabe.
This is Watabe speaking. My first question. In the third quarter, any special factors for the Energy & Functional Materials, for example? And for the full year by segment, excluding Pharmaceuticals, what is the current progress? Could you briefly elaborate?
First, in the third quarter, I mentioned that it was very good. As you mentioned, for Energy & Functional Materials, there was a onetime income only for third quarter so the figure is high. So there was a special factor. And those special factors. We don't have so many special factors, but Pharmaceuticals was doing well and the Petrochemicals as well. For Petrochemicals, the margin situation is not very good.
As for the full year forecast, at the moment, for core operating income, I'm saying JPY 100 billion. But for the whole company, the situation is above that level. In particular, the major factor for that is Pharmaceuticals. So you asked the question about excluding Pharmaceuticals. At the moment, it's very difficult to say.
And basically, for Petrochemicals, the market price is very good in the third quarter. So how much of that will continue? There may be impact of COVID 19, and how much will that continue is the question.
And for Health & Crop Sciences, not much of the third quarter, the fourth quarter is the key. So for the forecast for this fiscal year, I think we can look forward to that. But with the strengthening of yen -- we announced a figure of JPY 100 billion in October. That was based on the second half yen rate of JPY 108. But yen is not quite as strong, which is the reason for concern. These are our overall image.
My second question. You said that Health & Crop Sciences sector, fourth quarter is the key. In North America or in Brazil, would there be an influence of the flood? And methionine is rapidly recovering. What are your views about it? There may be changes caused by the climate factor, so what is the situation including Health & Crop Sciences?
For Health & Crop Sciences, for crop protection chemicals, and in particular in North America, the weather was unstable so far. And inventory level at the distribution stage is becoming very high. In 2020, corns or soybeans acreage compared to previous year is recovering. There's an increase. But the inventory, to a certain extent, is being consumed. This is our analysis. But it's not that the excess has all been eliminated, so there is still some concerns remaining.
Besides crop protection chemicals, in case of methionine, in the third quarter, on average, price declined. But in the second half of the third quarter, there was a rapid recovery. And currently, what will be the future trend? We want to keep watching. We think the price level has bottomed out. So in the fourth quarter or after April in the next fiscal year, we think there will be a gradual increase.
Let us take the next question from Mizuho Securities, Mr. Yamada.
This is Yamada speaking. I have 2 questions. My first question is with regards to IT-related Chemicals. From the second quarter to the fourth quarter, sales revenue slightly increased, but operating profit was down. Semiconductors, in the meantime, is quite robust -- remains to be quite robust. Stay-in-home demand has increased, and tablet PC demand has increased. Has that led to a deterioration in mix? Or has cost increased? Can you give us an update on Q-on-Q trend?
And also for the fourth quarter, you have not revised your forecast, which suggests that you're expecting a drop in profit. What is your forecast? Do you expect some costs to be incurred heavily in the fourth quarter? What is your outlook?
For IT-related Chemicals, that was your question, especially the trend from Q2 to Q4. As you correctly pointed out, sales revenue was flat or a slight increase, whereas core operating profit was down. And as you correctly pointed out, display-related materials, applications and semiconductor applications shipment is on track.
And I think this is something that I have been saying over time, but the film-type touch screen panels, the films, our customers are starting to produce in-house. I think this is something that I have repeatedly mentioned over the past meetings. This negative impact is being felt. I think that is a fair way to put it. That is, I would say, the biggest factor.
For the full year of this year, what is our outlook? I think that is also another part of your question. And as you know, the fourth quarter is quite slow. And there are some discrepancies over years, but there are not many years in which we would see strong performance in the fourth quarter.
So that is the situation. But as much as possible, we would like to maintain the current situation. Especially with semiconductors, the situation is quite robust. It's a strong market. We want to capture this opportunity so that we can see growth in our business performance in the fourth quarter.
A lot of activities are sluggish and the -- with COVID-19, good performance in the first quarter. But the second and third quarter, expenses have grown, and you're expecting cost expenditures to grow in the fourth quarter.
Well, in terms of impact of COVID-19, the first half of the year, there were a lot of factors in the first half. For example, high-end demand slowed down, among others. But beyond that, we did see pickup in demand due to work from home and stay home. So in terms of impact of COVID-19, it's not expected in the second quarter, including the -- second half of the year, including the fourth quarter.
My second question. You talked about crop protection chemicals, North American inventory. In the Health & Crop Sciences, you have biorationals. Do you have any updates to share with us?
Biorationals, we are putting a lot of emphasis in this area, especially related to environment or ESG. We are putting a lot of emphasis on biorationals because it is environment-friendly, and this is an area in which we have been improving our product lineup. And we want to make it one of our core businesses. So that is the kind of the trend that I would like you to look at on biorationals.
In North America, I think you talked about opening an organization biorationals or postharvest. Are these areas you expect to see growth going forward as planned?
Yes, we have revisited our organization, that is true, so that decision-making could be done in a timely and smooth manner with a sense of speed. That is the whole purpose of the change in the organization. And the impact of that, we hope, will be felt this year and next year.
The next question from Daiwa Securities, Mr. Umebayashi.
I'm Umebayashi from Daiwa Securities. About Energy & Functional Materials, I have a question. Earlier, you mentioned that there was a license income in the third quarter. If this is excluded, compared to the second quarter, what is the amount? Could you explain about it? The product will be battery separators or engineering plastics, I believe, for automotive use. So including license, what is the situation?
For Energy & Functional Materials, from second quarter to the third quarter trend, for operating income, JPY 2.8 billion to JPY 10.8 billion. There was a very large increase, an increase of JPY 8 billion.
For license income, for -- this is relative to Tanabe Pharmaceuticals (sic) [ Tanaka Pharmaceuticals ]. As you know, this is a listed company. So the price announced, excluding that by Tanaka Pharmaceuticals, we cannot announce that amount. So that is how we have been explaining. We cannot talk about it, so I ask for your understanding.
In the second quarter to the third quarter, comparing the 2, let me talk about the situation. Besides the license income, automotive-related area is recovering. In specific terms, resourcing and synthetic rubber and super engineering plastic are recovering. So that is included in this quarter. I ask for your understanding about it.
Yes. So excluding license income, in the fourth quarter, if you exclude the situation, it's not that bad.
Yes. With regards to the fourth quarter, as much as possible, for automotive-related area, we want to identify the trend of the demand and take necessary responses. But the concern right now is centered at international logistics. Shortage of containers, for example, is the point which might become a problem. So for this, we want to be able to take necessary measures.
My second question is also about Health & Crop Sciences. In the third quarter, profit was about JPY 2.3 billion. And last year, you were having losses. And so in South America, the situation is affected by rough weather. But what is the background for the improvement compared to the previous year? Is that because methionine made a great contribution? Or excluding South America, crop protection chemicals like in Japan and India, other countries, were there more shipments?
For Health & Crop Sciences, from second to the third quarter, there's a decline. As you have mentioned, there are seasonal factors. Compared to second quarter, usually third quarter is worse. In the same period as the previous year, compared to that, I think we are seeing a lot of improvement.
As you have mentioned, one is methionine price. Compared to last year, the price is higher. Analyzing the total for third quarter, we are seeing such figures. In addition to that, another contribution is the South American business that was acquired from Nufarm. Shipments are progressing quite well. The peak period is already gone, but the situation was very good.
In addition, India was also in a good situation. The demand period in India is the second quarter. So the third quarter, we see a slight slowdown. In addition, India itself is influenced by the lockdown. But that impact is not as large as we had estimated. So that was also a positive factor for the third quarter.
I see. So overseas was leading the performance.
We would like to take the next question. SMBC Nikko Securities, Miyamoto-san, please.
This is Miyamoto from SMBC Nikko. First question is with regards to Petrochemicals & Plastics. From the second to the third quarter, JPY 15 billion increase in profit, of which JPY 9 billion -- close to JPY 9 billion is Petro Rabigh, but close to JPY 6 billion increase in profit. Could you explain on that?
The market prices for ethylene and MMA was quite outstanding, but if you could give us an outlook of the market prices going forward.
Thank you very much for your question on Petrochemicals & Plastics. As you mentioned, we did see big improvement, JPY 14.8 billion from the second quarter to third quarter. And as you correctly mentioned, Petro Rabigh saw a significant increase. Compared to the time there was a drop, it has improved.
But your question was excluding Petro Rabigh. There are a couple of factors that led to market price improvements. And auto, as I mentioned, for Energy & Functional Materials, there was a partial recovery in demand for auto, and I think that contributed. MMA market prices have improved, and that's one factor. And propylene oxide is also quite strong. So the third quarter, for those reasons, I would say that the demand environment was quite positive.
In the meantime, in terms of our outlook going forward, for the fourth quarter, there will be certain aspects of what we are experiencing today to continue into the fourth quarter. But there could be some changes. Seasonal impact is most felt in Petrochemicals & Plastics segment, and so the big concern will be the impact of COVID-19. And this is different by country by country.
And the impact of COVID-19 may have somewhat subsided in Europe, but Japan, some cities are still under the state of emergency. How long will this continue? So that could be seen for the fourth quarter. We would want to address these changes as much as possible and take countermeasures as much as possible.
That was very clear. My next question, second question, is IT-related Chemicals. The polarizing films, TV, smartphones, OLEDs and non-PC, tablets, if you could please give us a breakdown and your sense of direction for the fourth quarter and for the entire segment. The price variance, I think, is narrowing down is becoming more moderate compared to other years. If you could give us a breakdown on that.
For IT-related chemicals, for polarizing films, I think that was your question, as I understand. Polarizing films, basically, first quarter, second quarter, the impact of COVID-19 was expected, and yet we are seeing a strong recovery. I think that is where we are. This is our basic understanding.
TV application -- let me start with TV application. A strong situation, I think, is seen, especially for large TV screens is increasing compared with the previous quarter. This is a positive trend. Monitors and non-PCs also seeing quite a robust situation.
Mobile application of polarizing films, for the third quarter, OLED application as well as LCD application were both quite strong compared to the previous quarter. I think the third quarter fared quite well.
So that being the background -- and of course, prices are coming down, but the trend is quite moderate. The impact of price decrease is quite mild because of the pickup in demand that we are seeing from stay-home demand and also work-from-home demand. We think that things are improving in this part of the business.
In terms of direction going forward, as I mentioned earlier, IT-related Chemicals for slow demand in the fourth quarter, that's been the trend. So whether the trend -- the positive trend that we are seeing up until the third quarter will continue into the fourth quarter, that is not very clear at this moment. Well, so we will try to capture the trend and make sure that we come up with the right countermeasures.
It's now time to close. So with this, we'll conclude the Q&A session. Lastly, Mr. Sasaki will give the closing remarks.
Thank you very much for attending the conference call today. As I have just explained, until the third quarter, our performance was very smooth. On the other hand, going forward, depending on the situation of COVID-19 and the third quarter, for ForEx centered on Health & Crop Sciences sector, there will be more shipments overseas, so the foreign exchange trend is also important. So we would like to identify the trends on a timely manner and take measures with speed.
We ask for your further support going forward. 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.]