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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.
It is now time, and we would like to start the Fiscal 2022 Third Quarter Financial Results Conference Call. Thank you very much for joining us. First, Mr. Sasaki, Managing Executive Officer, will give a presentation on the financial results for fiscal 2022 third quarter and the revised full year forecast. And then we'll have a Q&A session joined by Mr. Yamauchi, Executive Officer and General Manager of the Accounting Department. We plan to end the conference at 6:00 p.m.
Mr. Sasaki, the floor is yours.
Thank you very much for joining us for this conference call. My name is Sasaki. To our investors and analysts, I thank you very much for your understanding and support for our business. As always, we are very grateful. Now I would like to give a briefing on the financial results for fiscal 2022 third quarter and the revised full year forecast.
Please go to Page 4. Our consolidated financial results for fiscal 2022 third quarter, sales revenue was JPY 2,257 billion, up JPY 219.2 billion year-on-year. Our core operating income, which represents our recurring earnings, was JPY 142.2 billion, down JPY 63.5 billion year-on-year. As for nonrecurring items not included in core operating income, impairment and other losses of JPY 70.7 billion were recorded. It was worse by JPY 63 billion compared to the same period last year.
As a result, operating income was JPY 71.4 billion, down JPY 126.5 billion year-on-year adding finance income or expenses and income tax expenses to operating income and net income was JPY 60.3 billion, which was down JPY 73.4 billion year-on-year. Average foreign exchange rate during this 9-month period was JPY 136.49 to the dollar, and the naphtha price was JPY 80,000 per kiloliter. Compared to the year before, the yen was weaker and the feedstock price is higher.
Now by segment. Please go to Page 5. Total sales revenue was up JPY 219.2 billion year-on-year. All segments, except for IT-related Chemicals posted higher sales revenue. On the analysis of variance of sales revenue by factor, take a look at the graph at the bottom.
Please go to Page 6. Total core operating income was down JPY 63.5 billion year-on-year. Analysis of variance shows price variance was a negative JPY 55 billion. By segment, all segments other than Health & Crop Sciences posted lower core operating income. Essential Chemicals core operating income was a negative JPY 2 billion, down JPY 54 billion year-on-year. On the price factor, while feedstock and fuel prices rose, they could not be fully passed through to selling prices and therefore, profit margin deteriorated.
On the volume factor, in addition to the deterioration of the equity in earnings from investments in affiliates demand dropped mainly in the auto applications causing shipment decreases. In the Health & Crop Sciences, core operating income was JPY 47.2 billion, up JPY 19.4 billion year-on-year. On price variance, methionine market rose but increases of prices of feedstock and fuels were higher and the margin deteriorated.
On the cost factor, the launch of our new product INDIFLIN and new pipeline development-led to higher expenses due to business expansion. On the volume factor, increases in shipment of crop protection chemicals in Latin America and India and increases in export revenue process due to the weaker yen led to higher core operating income.
As for the Pharmaceuticals segment, core operating income was JPY 43.1 billion, down JPY 19.4 billion year-on-year. On the price factor, sales price declined due to NHI price revisions in Japan. On the cost factor, in association with sales promotion of Orgovyx and Gemtesa, selling and general administrative expenses rose. On the volume factor, in addition to sales growth in North America, there were proceeds from the transfer of sales rights. But in the same period last year, we recorded a lump sum revenue from our alliance with Otsuka Pharmaceuticals, so it was a negative factor year-on-year.
Please go to the next page. As for breakdown of nonrecurring items, impairment loss was JPY 56.4 billion, restructuring charges was JPY 22 billion. Impairment loss is mostly linked to the patent right of KYNMOBI, the therapeutic agent for Parkinson's disease. Restructuring charges are mostly provisions for plant retirement expenses associated with plant closure.
Next, I'll talk about our consolidated balance sheet. Please go to Page 8. Total assets as at the end of December 2022 was JPY 4,550.6 billion which was higher by JPY 242.5 billion from the end of the previous period.
Next is consolidated cash flows, but I will not go through this page, and let us go to Page 11. Second half of fiscal year 2022 outlook for the business environment. With regard to the current economic situation, the global economic situation shows no signs of improvement in the economic slowdown is expected to increase. In addition, the monetary policies of various countries, including the Bank of Japan have caused the yen to swing towards a stronger yen trend than before, and we expect the benefits of a weaker yen of our overseas business has been reduced. And below that is showing a meteorology diagram regarding the differences from the previous forecast. Actually, in the petrochemicals and methionine will be more prolonged than in our previous forecast, and we expect the overall business environment to be very severe from here onwards.
Next, please go to Page 12. Considering the business environment described right now, we have revised our performance forecast for fiscal year 2022. Sales revenue, JPY 2.990 trillion; core operating income, JPY 120 billion; operating income and net income both are 0. It is significantly lower than the previous forecast. For this, we have listed our assumptions for the annual average raw materials price and exchange rate. However, looking only at the fourth quarter, 3 months, we forecast the naphtha price to be JPY 65,600 per kiloliter and an exchange rate of JPY 130 to the dollar.
Core operating income and for the net income, I will explain in the next slide. First is about the net income that we are forecasting to be 0. I'd like to first of all say that we have been profitable since fiscal year 2013. Therefore, we are taking the situation very seriously as management and feel a great deal of responsibility. And there's a variance analysis from the previous forecast is as shown.
In the red line, we're showing the profit reducing factors due to asset valuation, which does not have cash outflows such as the impact of foreign exchange and the factors in the yellow line are factors that reduced profit from business activities, such as the decline in core operating income.
The first of the valuation items finance income and expense, which is valued to be about JPY 30 billion lower to the exchange of the estimated exchange rate for the fourth quarter from JPY 140 to JPY 130 in the direction of appreciation. And as the business gone worse and various risk factors may emerge, therefore, we have sorted out such certain risk factors and allocated JPY 45 billion as a nonrecurring item for structural improvement expenses, which is the second item evaluation in nature and does not involve cash outflow. And business profit and loss, which is it related to core operating income and other tax burden adjustments that are in the negative factors, about JPY 30 billion.
Next page, please. Core operating income by business segment is shown as for the factors behind the increase-decrease compared to previous forecasts are as follows: in Essential Chemicals & Plastics, profits declined sharply due to working profit margin, expected lower shipments in Rabigh Singapore and others, IT-related Chemicals profit declined due to lower-than-expected shipments of display-related material cost by stagnant downstream demand. In the Health & Crop Science business, profit decreased due to an expected decline in the market price of methionine caused by deterring supply and demand.
In the Pharmaceuticals, while there was about JPY 20 billion factor to decrease sales of Latuda, the gain from the transfer of Sumitomo pharmas nonpharmaceutical business, which was included in the Other segment and the previous forecast is now included in the Pharmaceuticals segment, resulting in almost flat performance in Pharmaceuticals and decrease in profit in the segment. The total is expected to be JPY 120 billion, down by JPY 70 billion from the previous forecast. Out of the JPY 70 billion decline from the previous forecast, there are 30% will be the market price situation such as methionine others and the remaining 40%.
And the next page, please. As for the shareholders' return, as explained previously, we expect net income to be significantly lower than our previous forecast, and we sincerely apologize to our shareholders that we have changed our year-end dividend forecast for the current fiscal year from JPY 12 to undecided. As uncertain environments continue, we will announce the amount of the year-end dividend again in March, considering the trends in the fourth quarter and the next fiscal year.
Page 16 will be the last slide. Up to here is the explanation for the revision of the full year forecast for fiscal year 2022. Given these severe business results, we intend to further accelerate our efforts to improve business performance. First, as for the restructuring our businesses in response to changes in the environment, we believe it is necessary to proceed with restructuring being well prepared and in a speedy manner. At the same time, we intend to restructure our business portfolio to which is resistant to market price.
Next, we will reduce costs and inventories and rigorously select investments. With the aim of achieving a more lean profit and loss structure, we also intend to sell assets, including a further review of strategic stock holdings.
Now this concludes my explanation regarding the outline of the financial results and revision of the forecast. And now I would like to take questions from the floor. Thank you for participating today.
So we will now go to the Q&A session. Now we will have the first question, the question is from Morgan Stanley MUFG Securities, Mr. Watabe.
Watabe of Morgan Stanley MUFG Securities. My first question was very difficult results and you are working to improve your results. Specifically speaking, what are your thoughts? It's what I want to know. In the fourth quarter, restructuring expenses included, if I could get your thoughts about this. And as for dividends, year-end, well, is there a possibility that no dividends will be paid at the end of the year? So these are my initial questions.
Thank you for the question. First, risk factors, nonrecurring items, JPY 45 billion. I say that, and there's a number of factors inside this. Business environment is very opaque. There's not a lot of visibility. So in a number of businesses, impairment risk does exist. So that is one thing. And in this interim period, we have decided to exit from a number of businesses. So those restructuring expenses would come to JPY 45 billion. So as I said, business environment is one factor, the market factor. These are the 2 factors that we are faced with. And going forward, we will be proceeding with restructuring. And on the slide, we have reference materials attached.
Over the past few years, we have exited from a number of businesses, shrunk some business, and we have been strengthening our businesses. That's shown in the reference materials. As for the ones that we will be working on going forward, well, there's nothing I can share with you right now, but we are currently looking at a number of initiatives.
So dividends, given the current situation, we have just looked at the risks. So once there is more clarity, we would like to make our announcements, whether there is a possibility that there's 0 dividends at the end of the year. We cannot rule that out altogether. That is where we stand today.
Let me just take some clarification for the next fiscal year. The cost. Is there any item that you are likely to be able to reduce lots of cost in the second half of this year through restructuring?
Well, cost reduction is what I mentioned. In the corporate area as well as business segments costs, there's not going to be any sacred ground. We will try to reduce costs on all fronts. We will be developing our plan together. And currently, I cannot say specifically what will be done, but I'd like to look for more opportunities to be able to share that information with you.
Second question, Health & Crop Sciences, methionine is deteriorating, and that is why you revised downwards. Crop protection products, North America, South America, generic markets. Can you give me an update about this development?
Health & Crop Sciences, our previous forecast compared to that, it's slightly down. This is mostly due to methionine, overseas crop protection materials. It's not that bad. It's relatively good.
In North America, until now, distribution inventory did exist, but that's what I thought, but it's declining gradually. So that is a positive factor. As for generics, as you asked, just as we had expected, gradually, prices are coming down. So generics profits are not so large. But South American business itself, new products have just been launched, so that looks promising. So in that sense, the situation is pretty good in our view.
I would like to take the next question. Mr. Yamada from Mizuho Securities.
This is Yamada from Mizuho. The first question, sorry to be repeating. Within the nonrecurring item, you added JPY 45 billion. And to begin with, your company was planning JPY 75 billion at the start, so it's JPY 120 billion. So the nonrecurring item is JPY 120 billion and some as the core operating income being 0. And this is a nonrecurring item, the Essential Chemicals, which are facing difficult situations, this only occurs in these partial difficulties facing companies, but it's not going to occur in the subsidiaries type of companies. But is it Essential Chemicals, are there going to be any fundamental reshuffling type of initiatives? Sorry, it is a one deeper question. And if you can explain, please explain if you cannot, that's fine.
Thank you very much for your question. For the nonrecurring items, I said that I only can comment a little. However, as you said, by segment or regarding the business content I cannot share anything with you. So I seek your understanding on this point. The business environment, we believe, will face multiple difficulties. So it's not just one possibility, but there are various possibilities that we have considered and reflected in this way. And also, if it's Essential Chemicals, I cannot say definitely that it's essential chemicals. And you asked for if I can speak in more detail or elaborate, but there's nothing that I can. Therefore, I apologize that I cannot comment fully to your question.
Understood. You do have some items in your mind. However, whether that's going to progress this year or not, so you included a risk for the JPY 5 billion or there are no items that are determined yet, meaning that you don't have to do this year, but you'll do it next year. So this nonrecurring item, it is already decided internally, and it will come out some time from here. And after that, we can have the expectations that it is going to improve. Is that -- is this item such an item as so?
Well, regarding your question, as explained before, the asset valuation items is what we are thinking. And as you know, towards the fiscal year-end, for example, if we see the signs of impairment, if that is so, we will conduct the impairment test. That is the accounting rules. Therefore, if the situation becomes as severe, depending on accounting rule, there is a possibility that we will record impairment. That's how we like you to look at it.
I understood it very well. My second question is regards Essential Chemicals. And the third, the operating income loss is going to widen is your forecast. Basically, the market price factor and in the fourth quarter, the crude oil price declined, so is that the issue of the payment receiving that? Or are there any other issues related to this?
Thank you very much for your question. And regarding the Essential Chemicals, you are asking that from the third quarter to the fourth quarter. You're asking about that period, correct?
Yes.
Sorry, I kind of skipped out some words. In the third quarter or even from the previous second quarter, a difficult situation was continuing. And Petro Rabigh in the third quarter, there are numbers that are disclosed between July and September. So if you can refer to that.
And as for the first quarter, other than Petro Rabigh, for example, Singapore and Japan's on to third quarter, they have come out from the worst situation, and I believe that they are going to improve -- start to improve, but it's not just all those good things, but the -- towards the automobiles, the demand itself, we don't know, and there's a risk that it is going to remain stagnant. Therefore, I cannot comment on this part. However, for Petro Rabigh, the fourth quarter, its invested company, therefore, I cannot comment that much. However, in 3 months, October to December number should be announced soon.
But generally speaking, for us, we thought that it is going to improve. However, it did not as so. And also the demand trend was one of the factors. And as you know, the crude oil price towards the end of December, it was declining and the inventory valuation loss was occurring to a certain level is what we think.
And the fact -- if I may raise one more fact is that I believe it's from December, there is the scheduled shutdown, maintenance shutdown from December. So that is going to be the factors that will worsen the situation compared to July, September. It is a listed company, so I cannot elaborate further. So I hope that you'll understand this answer.
The 2 units scheduled shutdown for maintenance is in December, right?
Yes, it was a later timing of December.
So that means that, next fiscal year, the first quarter, it will be a factor the price down that performance, right? If the fourth quarter is this way, I'm concerned that the first quarter of next fiscal year is going to be worse than this.
In effect, there is a scheduled shutdown for maintenance, but how much of a loss is that going to cause is we do not know.
Next question. SMBC Nikko Securities, Miyamoto-san.
My name is Miyamoto. Essential Chemicals. Capacity utilization, what does it look like? Third quarter and the prospects for fourth quarter, can you share that with me?
And some optimistic development is that refining margin is improving. I believe that this is going to have an impact in the next period. What are your outlook about this margin and Chinese reopening after the Lunar Chinese year, things are looking up. So such optimistic views, if you have any, please share that with us.
Thank you for the question. Now optimistic signs. First, Zero COVID policy has been lifted in China. So demand is expected to recover. So that is something that looks promising. Whether it's going to recover right away, it's very difficult to tell. But petrochemicals did have prolonged periods of stagnation, so we hope that it is going to improve as soon as possible, not just petrochemicals, refining margin is also expected to be in the positive territory. That is our outlook. So from those viewpoints, according to some IMF is revising world economic numbers upwards according to the news reports. So those are good news for us.
And as for Essential Chemicals, this economic cycle, this is a sector that is sensitive to economic cycle. So we do hope that there are going to be upward revisions or better growth prospects. We are having a very strict view of the fourth quarter. But from 2023 onwards, we hope that things will start to pick up.
Currently, are you getting more inquiries? Are you getting the sense that demand is being stronger? And also, capacity utilization situation about the third quarter and fourth quarter.
Now the margin in the third quarter rather than October to December period, it is going to be better in January through March. That's our outlook. But for a number of products, inventory is growing. So the balance of our inventory -- I didn't go into detail of our balance sheet, but inventories are going up.
For some products, so we need to make some adjustments in our capacity utilization for certain products. So in the fourth quarter, it's not that everything is looking bright. But basically speaking, compared to the third quarter, we are expecting that the fourth quarter is going to be better than the third quarter.
Now Essential Chemicals likely to drop in profit in the fourth quarter, but you said that things are going to look better in the fourth quarter. I cannot see consistency here. Can you explain?
Factors for deterioration. Well, I said that it's difficult for me to elaborate. But for petrochemicals, things will be slightly better. But on the other hand, for Petro Rabigh from July, September and October, December, things are getting tougher. Of course, it was tough to start with. So that is how we would like you to understand.
Okay. My second question is IT-related Chemicals. From the second to third quarter, JPY 1.6 billion increases in profit. What are the projects -- what are the products that made a contribution to more profits? And from the third to fourth quarter, profit is going to come down by about JPY 20 billion. Display materials environment is worsening and semiconductor materials, demand is also deteriorating. So can you talk about the developments from the third quarter to the fourth quarter?
Thank you for the question. IT-related Chemicals, things are getting tougher. That is what we have said and especially polarizing film business. For TV applications, things are tough. Every year, we are looking at this that for TV unit sales and panel unit sales. For fiscal 2022, the numbers were tough compared to 2021, things are deteriorating. So that's the situation. So in response to that, we are faced with a continuing tough situation. And as for mobile applications, this is our situation. But in the third quarter, things were very good, but there has been peaking out. So in the fourth quarter, this is not a period of high demand. This is a low-demand period to start with. So because of the overlapping factors, the situation is not looking so great.
Compared to the average year seasonality, I think the drop is larger than the average year. What is the reason?
From the second quarter to third quarter, the change is polarizing film for the home use. Well, the improvement was for mobile users from the second quarter to the third quarter. The improvement was from that product. Drastically deteriorating is the final demand because of inflation concerns, consumption appetite is being eroded, and that is why we are seeing deterioration.
It's not just films, touch sensor panel, screen panels are also being affected by these developments. Photoresist, there's not going to be a lot of deceleration in the fourth quarter. Semiconductor materials, cloudy kind of a situation is continuing. For one thing, there are concerns about slowdown of the economy. So we do feel that there's going to be some slowdown but leading-edge products are very strong.
So unlike displays, semiconductors themselves, it's not that is going to clear up and things are going to get better. That's not the case. But it's not that bad comparing third quarter and the fourth quarter. We don't think that it's going to deteriorate that much.
We would like to take the next question. Daiwa Securities, Mr. Umebayashi.
This is Umebayashi from Daiwa Securities. I have two questions. The first question is methionine was the factor of the revision downwards this time again. I just wanted to begin with, why is it performing poorly, the price -- raw material -- the price went up, the sales price went up, but the raw material cost was higher than that, what was explained. However, I think that maybe the demand itself is not good or your sales volume is declining is what I think and the profit and loss situation is not improving. I would like you to explain the reason and the timing of when we can see some improvement? Or when do you expect this improvement?
Thank you very much for your question. Regarding methionine, regarding the sales price, within my explanation, I said that the average of this fiscal year or the 9 months, it is slightly up. However, looking at the sales price changes recently it's declining quite a bit, so April to December. And if you add that to 2021, it is slightly going up. But the raw material prices are increasing more than that.
So in terms of making profitability, it is difficult. And the reason why I'm saying that the sales price is declining recently. In fiscal year 2022 in the second quarter -- from the second quarter, the price decline is continuing. The background of the war in Ukraine, the demand is decreasing. It's one of the factors we think that we can think of.
And regarding the initiatives or countermeasures to this situation when the sales price is not going up as much, we have implemented cost reduction measures. However, in terms of profit and loss, showing the positive direction, it is not fully reflected that way yet.
Understood. Your -- I just wanted to confirm that your company sales volume is not declining. And around what time that you will start to see recovery?
Volume-wise, there is a declining trend. Therefore, increasing the volume itself is not necessarily all going to be a positive factor for us. Therefore, within the sales strategy, we are thinking of various measures.
On the other hand, from what timing will this trend going to change, it's difficult to give you a definite answer. However, as I was mentioning previously, China's Zero COVID policy has been lifted. And led by that, some of the demand will increase, and the supply chain is going to gradually be normalized. If such a thing happens, then the methionine business itself is going to go back to normal situation. And I believe that the demand for poultry will increase, and it matches the healthy trend and it could be regardless of your religion. So I don't know at what timing, but at a early timing, we are hoping or we're expecting that it will start to show a recovery.
Then my second question is regarding your way of thinking for dividends. This time, the major factor for the revision downwards this time is, well, half of it is related to the nonrecurring items and including the foreign exchange rate, it is more than half. So the -- what was mentioned as impairment, a possibility, then I thought that there's not much of a cash outflow but is that you cannot determine what the year-end dividends are going to be. I would like to know the reason.
And also with a difficult performance in the New Year, your CEO said in the media interview that regarding the investments, you'll continue to actively make investments, however, within this situation, I think that you may have to not invest that -- invest that proactively. So I'd like to know your thoughts on that.
Regarding the dividend, I said that it is not decided right now. So generally speaking, I'm just saying that we can just think of various things. It's not that I said that it's going to be 0, so -- or no dividend. So I'd like you to understand that point.
The majority of the worsening factors is related to valuation side. So it is -- has no relationship with the cash outflow. So considering the situation at some point around March timing, we think that we can give you a thorough explanation.
In addition to that, various cost reduction measures and for the investments, we are rigorously selecting the investment that we will be making. And we are creating the plan right now. Various situations will occur. So even though we rigorously select investments, there are things that we can do and not do. And once we organize everything and come to a point that we can give you the explanation, we will like to provide that explanation.
Let us go to the next question, Nomura Securities, Okazaki-san.
Okazaki from Nomura Securities. Health & Crop Sciences, let me just check with you. If you look at the third quarter, Page 31, you have revenue by region. North America more than positive from foreign exchange, revenue seems to be growing more. Of course, inventory adjustment has progressed. Is that correct? And Latin America considering foreign exchange, the growth year-on-year is not enough. So first half price was higher, but it has reversed and volume and price in the third quarter, there has been some dislocation. Look, from outside, that is how it looks. Can you explain?
Page 31 shows our sales by region. So your question is based on this page. If you just look at October-December, revenue year-over-year, taking into consideration foreign exchange -- thank you. Now North America, in a sense, as I said earlier, there are weather factors -- there is no weather factors. So we believe that this is growing soundly. But Central and South America, of course, there is foreign currency conversion variance, but in terms of shipping volume, it is growing quite a bit. But you say that this is that, this doesn't look sufficient enough.
Seasonal factors do have a contribution. If you look at compare first, second and third quarters, third quarter tends to drop the most. The same is true for North America and also for South America. The third quarter is likely to drop the most. So probably, that had an impact here.
Central and South American prices with the -- has it come back to the period where generics API has come back?
You're talking about generic market prices. in the first quarter from China, there was a lot of API supply shortages and market prices went up. Currently, it's now starting to stabilize. But in terms of absolute number, I don't have that number with me right now. But in a sense, in the first quarter, it went up extraordinarily, but that is likely to stabilize. That was our anticipation. So this wasn't a very big surprise. And in the third quarter, it has stabilized. That is what the number shows.
Second question. Energy and Functional Materials in the third quarter, resource and separators and high-purity alumina in the third quarter and the fourth quarter, what are the changes in the demand side? These are the main products?
In Energy & Functional Materials, in the second quarter to the third and the fourth quarter, we are anticipating -- or it looks that it's deteriorating. And as for resource, it has always been the case, but most recently, because of the emerging manufacturers, the impact is growing and separators. Auto applications are not so strong. So that situation is continuing. So in terms of volume, this is leading to sales declines. And that is, these are the factors contributing to lower performance of the Energy & Functional Materials.
It has become close to the ending time. So with this, we would like to conclude the Q&A session. At the end, Mr. Sasaki, would like to make some closing remarks.
Thank you very much for participating today. As I have explained, we are facing a quite difficult situation. Improvement of the business performance, the measures to do so. At this point, there are not that much that I was able to share as of today. However, regarding this part, moving forward, we would like to thoroughly establish that and to give you a thorough explanation as well as contact follow-up on the measures. So we seek your continuous support and understanding. Thank you very much for today.
With this, we would like to conclude today's conference call. Thank you very much for your participation today.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]