Mitsui Chemicals Inc
TSE:4183
Earnings Call Analysis
Q3-2024 Analysis
Mitsui Chemicals Inc
Mitsui Chemicals has revised its financial forecast for FY 2023, lowering the operating income projection from JPY 112.0 billion to JPY 93.0 billion attributable to weaker demand, longer recovery times, and reduced utilization rates of crackers. Likewise, net income expectations have been cut to JPY 50.0 billion, factoring in the downscaled operating income and losses from business restructuring. Despite these adjustments, the company aims to maintain an unchanged annual dividend forecast of JPY 140 per share.
Mitsui Chemicals experienced a year-over-year decrease in the April-December sales revenue, dropping by JPY 154.4 billion to JPY 1.2745 trillion. The operating income and net income also fell by JPY 37.9 billion and JPY 27.6 billion, respectively. Notably, global automotive production is showing signs of recovery, except for regions affected by strikes such as North America. The semiconductor and smartphone markets continue to hurdle through declining demand but seem to be stabilizing, with gradual recovery forecasted in the latter half of the year. However, polyurethane and cracker utilization rates are not expected to rebound soon, reflecting stagnant demand levels.
Different business segments exhibited varied performance trends: While Life & Healthcare Solutions and ICT Solutions reported lesser operating incomes by JPY 3.1 billion and JPY 4.9 billion respectively, mainly due to the weakening demand in vision care, semiconductors, and smartphones, Mobility Solutions bucked the trend with a JPY 2.1 billion increase in operating income, riding on the wave of recovering automotive applications and solar cell materials. Basic & Green Materials segment faced a sharp decrease of JPY 33.7 billion in operating income, highlighting the continued challenges in raw materials market volatility and lower demand.
The company achieved a positive JPY 115.0 billion in cash flows from operating activities, an improvement from the previous year as a result of enhanced working capital management. Investing activities recorded a stable outflow comparable to the prior year's, resulting in a healthy free cash flow of JPY 45.2 billion. The financial positioning is solid, with total assets reaching JPY 2.1626 trillion, reflecting an inflow primarily driven by the effects of yen depreciation and strategic acquisitions.
Looking ahead, Mitsui Chemicals forecasts a full-year sales revenue of approximately JPY 1.741 trillion, which would represent a JPY 138.5 billion decline from previous year's figures. The projected operating income is poised for a decrease by JPY 20.9 billion, while net income is foreseen to tumble by JPY 32.9 billion. Despite these downward revisions, the company's focus appears to be on navigating through market uncertainties and strengthening its core operations in preparation for future demand recovery.
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Ladies and gentlemen, this is Nakajima, CFO of Mitsui Chemicals. Thank you very much for joining us today at our online conference. Today, we have announced our financial results for the third quarter of fiscal year 2023 as well as our forecast for the full year. In the third quarter, due to general sluggish demand, continued weak semiconductor and smartphone demand and consumption and the falling raw material prices, both sales and profits declined year-on-year. The forecast for FY 2023 has been devised downward from the previous forecast of JPY 112.0 billion for operating income before special items to JPY 93.0 billion, as the sales volume is expected to decrease due to the fact that it is taking longer than expected for demand to recover and lower cracker utilization rates. The net income forecast has also been devised downward to JPY 50.0 billion from the previous forecast due to the decrease in operating income before special items and the recording of losses for business restructuring. On the other hand, the annual dividend forecast is expected to remain at JPY 140 per share. I would now like to explain our business performance, business overview and financial statements based on the materials. This is our agenda today. First, I will provide an overview of the financial results for the third quarter of fiscal year 2023, followed by an overview of the forecast for fiscal year 2023. Please see Page 1. This section describes trends in the major markets related to our business during the fiscal period under review. First, the outlook for the eyeglass lens market for the Life & Healthcare segment. Although there have been some inventory adjustments through the first half of the year, we expect the market to be strong from the third quarter onward as inventory adjustments are resolved and demand recovers. In agrochemicals, inventory adjustments have occurred in some regions due to the effects of the weather and demand has fallen from the previous forecast due to inventory adjustments and other factors. Next is the outlook for global automobile production volume related to the mobility segment. Compared to the previous year, global production volume is expected to recover despite the impact of the strike in North America and other factors. Compared to the previous forecast, we also expect an increase in overall global production volume, although there are differences by region. In the semiconductor and smartphone markets related to ICT, demand continues to decline. But there are signs of bottoming out, and the market is gradually recovering in the second half of the year. Market conditions for polyurethane related to Basic & Green Materials are expected to remain unchanged from the previous forecast. Cracker utilization rates have remained low since the first half of the year and are expected to decline from the previous forecast due to the lack of recovery in demand. See Page 2. Status of major investment projects. Projects in yellow are those that will start commercial operation in the current fiscal year. Projects in blue are those that have been decided in the current fiscal year. The following are the developments since the last financial announcement, the decision has been made to suspend PET production in Japan. See Page 3. Consolidated financial highlights. Sales revenue for the April December period was JPY 1.2745 trillion, a decrease of JPY 154.4 billion versus the same period last year. Operating income before special items was JPY 72.4 billion, a decrease of JPY 37.9 billion versus the same period a year ago. Net income attributable to owners of the parent was JPY 37.3 billion, a decrease of JPY 27.6 billion versus the same period last year. The exchange rate was JPY 143 to the dollar, a depreciation of JPY 6 versus the same period last year. Domestic naphtha prices were JPY 68,000 per kiloliter, a decrease of JPY 12,000 versus the same period last year. See Page 4. The following is a summary of operating income before special items in the current financial results compared to the same period of the previous year. As for the volume, sales of vision care declined in the first half of the year due to inventory adjustment in some markets. Sales of automotive applications increased due to the recovery of automobile production. Sales of semiconductor-related products declined due to a slowdown in demand in the semiconductor and smartphone markets. Sales of polyolefins and the phenols also declined due to a drop in demand. Terms of trade. Terms of trade improved due to price revisions and the impact of yen depreciation. On the other hand, inventory valuation gains that occurred in the first half of FY 2022 due to raw material price changes were eliminated. As for fixed costs and others, repair and maintenance costs increased due to soaring material costs and development costs also increased. Equity in earnings of affiliates also declined due to deteriorating market conditions and lower demand. Looking at the results by factor, within the JPY 37.9 billion decrease in profit from the same period of the previous year, the volume difference was minus JPY 19.2 billion. Terms of trade was plus JPY 0.6 billion and fixed costs and others were minus JPY 19.3 billion. See Page 5. Sales revenue and operating income before special items by business segment. The following pages provide a detailed explanation of the increase and decrease factors for each segment. See Page 6. Life & Healthcare Solutions reported operating income before special items of JPY 18.5 billion for the current period, a decrease of JPY 3.1 billion versus the same period last year. The volume difference was a negative JPY 5.2 billion. Sales declined in the first half of the year in vision care due to inventory adjustments in some areas. However, the adjustment was resolved from October onward. Sales of nonwoven fabrics declined mainly for disposable diapers due to decreased demand. Terms of trade improved by JPY 4.2 billion, partly due to price hikes in vision care and yen depreciation in agrochemicals. See Page 7. In Mobility Solutions, operating income before special items for the current period was JPY 41.0 billion, an increase of JPY 2.1 billion versus the same period a year ago. Volume variance was positive JPY 2.3 billion, mainly due to growth in solar cell encapsulant materials and the volume growth associated with recovery in automotive applications. Terms of trade was positive JPY 4.6 billion, reflecting the overall effect of exchange rate differences and the shift to high value-added products in last months. Fixed costs and others were negative JPY 4.8 billion, mainly due to a decrease in equity in earnings of affiliates. See Page 8. In ICT Solutions, operating income before special items for the current period was JPY 18.1 billion, a decrease of JPY 4.9 billion versus the same period last year. The volume difference was a negative JPY 4.3 billion due to the significant impact of slowing demand in the semiconductor and smartphone markets, despite strong sales of EUV pellicles and coating and engineering materials. Terms of trade were positive JPY 4.4 billion. In addition to the positive effect of foreign exchange, terms of trade improved due to lower raw material prices in coating and engineering materials. Fixed costs and others were minus JPY 5.0 billion due to increased development costs for sales expansion. See Page 9. Basic & Green Materials posted negative JPY 3.9 billion in operating income before special items for the current period, a decrease of JPY 33.7 billion versus the same period last year. The volume difference was minus JPY 12.0 billion due to lower sales amidst generally sluggish demand. Terms of trade was minus JPY 12.6 billion due to the significant impact from the elimination of inventory valuation gains that occurred in the first half of FY 2022, as a result of raw material price changes. Fixed costs and others were minus JPY 9.1 billion, mainly due to a deterioration in equity in earnings of affiliates. See Page 10. Nonrecurring items. Nonrecurring items totaled negative JPY 12.4 billion, a decrease of JPY 9.1 billion versus the same period last year. This was mainly due to the impairment losses as a result of restructuring in packaging film business. See Page 11. Consolidated statement of financial position. Total assets amounted to JPY 2.1626 trillion, an increase of JPY 94.4 billion from the end of March 2023. Total assets increased mainly due to the impact of yen depreciation as well as business acquisitions and other factors. See Page 12. Consolidated statement of cash flow. Cash flows from operating activities were positive JPY 115.0 billion as working capital improved significantly from the previous year. Cash flows from investing activities were negative JPY 69.8 billion, the same level of capital expenditures as the previous year. As a result, free cash flows were positive JPY 45.2 billion. Cash flows from financing activities were negative JPY 23.7 billion. Next, I will explain the outlook for FY 2023. See Page 13. Highlights of consolidated financial outlook. For the full year, sales revenue is expected to be JPY 1.741 trillion, a decrease of JPY 138.5 billion from the previous year. Operating income before special items is JPY 93.0 billion, a decrease of JPY 20.9 billion from the previous year. Net income attributable to owners of the parent is expected to be JPY 50.0 billion, a decrease of JPY 32.9 billion from the previous year. The exchange rate is assumed to be JPY 144 to the U.S. dollar for the full year, a depreciation of JPY 9 against the U.S. dollar from the previous year. Domestic naphtha price is expected to be JPY 71,900 per kiloliter in the second half and JPY 68,700 for the full year. See Page 14. Highlights of operating income before special items in consolidated financial outlook. The situation up to the third quarter is not going to change significantly. But for the fourth quarter, compared to the large decline in the same period last year, profits are to be increasing, mainly in the growth domain. As for the volume, sales of vision care declined in the first half of the year due to inventory adjustments in some markets. Sales of agrochemicals continue to be strong. Sales of automotive applications increased due to recovery in automobile production. Sales of semiconductor application related products declined due to a slowdown in demand in the semiconductor and smartphone markets. Sales of polyolefins and the phenols also declined due to decreased demand. As for the terms of trade, terms of trade improved due to the progress of price revisions in line with higher utility and logistics costs as well as the impact of yen depreciation. Inventory valuation gains that occurred in the first half of FY 2022 due to fluctuations in raw material prices were eliminated. Fixed costs and others are expected to be in the negative direction. Although we have been enjoying the effects of business structure improvement, repair and maintenance costs have been increasing due to soaring material costs and the development costs have also been rising, and equity in earnings of affiliates are also expected to deteriorate. Overall, the company expects a JPY 20.9 billion decrease in profit compared to the same period last year, of which volume difference is to be minus JPY 5.5 billion, terms of trade is to be plus JPY 3.5 billion and fixed costs, et cetera, are to be minus JPY 18.9 billion. On the other hand, in the growth domain, we expect profit is increasing mainly in the Mobility segment, and the profit is forecasted to be JPY 111.0 billion, which is an increase of JPY 8.7 billion from the previous year. The following pages will explain the reasons for the increase or decrease in each segment. See Page 15. Life & Healthcare Solutions is forecasted to achieve JPY 30.0 billion in operating income before special items for the full year, an increase of JPY 0.8 billion versus the previous year. Volume difference is negative JPY 1.0 billion. Despite an increase in agrochemicals sales volume, volume is expected to decline mainly due to the impact of first half inventory adjustments in vision care and lower demand for nonwoven fabrics.
Terms of trade is expected to increase by JPY 4.5 billion. This is mainly due to the effect of price adjustments in vision care as well as price increases and foreign exchange effects in agrochemicals. Fixed costs and others are minus JPY 2.7 billion, mainly due to an increase in fixed costs associated with the operation of a new plant at vision care and an increase in SG&A and R&D expenses associated with the expansion of agrochemicals. We expect a decrease in profit from the previous forecast, mainly due to lower sales in vision care which was unable to recover the sales decline in the first half and lower sales in agrochemicals due to inventory adjustments caused by weather effect. See Page 16. In Mobility Solutions, full year operating income before special items is expected to be JPY 57.0 billion, an increase of JPY 7.7 billion versus the previous year. The volume difference is expected to be JPY 8.5 billion positive, with overall sales growth expected to be driven by growth in solar cell encapsulation materials and the recovery in automobile production. Terms of trade is expected to be JPY 7.0 billion positive, mainly due to the overall effect of exchange rate differences and the shift to high value-added products in last months. Fixed costs and others are expected to be negative JPY 7.8 billion, due to an increase in fixed costs such as development and repair expenses and decrease in equity in earnings of affiliates. Although there will be a decrease in sales from the previous forecast due to a delay in the recovery of demand outside of automotive applications, there will be no change from the previous forecast as we strive to reduce fixed costs, et cetera. See Page 17. In ICT solutions, we project our full year operating income before special items of JPY 24.0 billion, an increase of JPY 0.2 billion versus the previous year. The volume difference is expected to be minus JPY 2.0 billion. And although sales of coating and engineering materials have been strong, sales are expected to decrease due to the significant impact of slowing demand in the semiconductor and smartphone markets. Terms of trade is positive JPY 5.5 billion. This is mainly due to an improvement in terms of trade resulting from the depreciation of the yen and the decline in raw material prices in the first half of the fiscal year in coatings and engineering materials. Fixed costs and others are expected to be minus JPY 3.3 billion due to an increase in fixed costs, resulting from higher development costs and other factors. From the previous forecast, we expect a decrease in profit due to lower sales in the semiconductor and smartphone markets, which are recovering more slowly than expected. See Page 18. In Basic & Green Materials, the full year operating income before special items is expected to be minus JPY 11.0 billion, a decrease of JPY 28.8 billion versus the previous year. The volume variance is minus JPY 11.0 billion due to lower sales amidst generally sluggish demand. Terms of trade is expected to be minus JPY 13.5 billion due to the elimination of inventory valuation gains that occurred in FY 2022, despite the effect of price increases. Fixed costs and others are expected to be minus JPY 4.3 billion, due to a significant deterioration in equity in earnings of affiliates despite the positive effect of business structure improvement. From the previous forecast, the profit is expected to decrease mainly due to the impact of the continued slowdown in demand. See Page 19. Next, I will explain the changes from the third quarter results to the fourth quarter forecast by segment. Since the third quarter results were JPY 30.4 billion and the fourth quarter forecast is JPY 20.6 billion, which means that we expect a JPY 9.8 billion decrease in profit from the third quarter to the fourth quarter. While we expect a JPY 5.3 billion increase in profit for the growth domain as a whole. By segment, we expect an increase in profit due to volume growth, mainly in Life & Healthcare and Mobility. Life & Healthcare, which accounts for a large portion of the increase in profit in the growth domain is growing its domestic sales due to the recovery of the vision care business and the increase in domestic sales of agrochemicals due to its high demand season in the domestic market. Basic & Green Materials is expected to decrease profit by JPY 10.3 billion due to an increase in fixed costs caused by taxes and dues, in addition to the impact of inventories resulting from a decline in raw material prices. See Page 20. Finally, let me explain the projected cash flows for the full year. Cash flows from operating activities are to be positive JPY 130.0 billion. Cash flows from investing activities are expected to be negative JPY 106.0 billion. As a result, free cash flow is to be positive JPY 24.0 billion. Please also refer to the appendix on Page 21 onward. That's all for the explanation about the results for third quarter of FY 2023 and outlook for full year FY 2023. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]