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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.
[Interpreted] Thank you for joining us. I am Hidefumi Date, CFO of Mitsubishi Chemical Holdings Corporation. Let me start the presentation. Please turn to Page 4 for consolidated statements of operations. In terms of exchange rate used, the yen was stronger by 2% and the price of naphtha applied was JPY 27,600 or a decrease of 36%, respectively, year-on-year. Sales revenue dropped by JPY 322.9 billion from a year before to JPY 1,504.8 billion. Main reasons behind this include the impact of about JPY 10 billion from the exchange rate. The volume was affected by COVID-19 across the board, except for the health care, pushing down the sales revenue by JPY 200 billion. A decrease of about JPY 110 billion was attributed to the price factor as prices of materials in Chemicals segment fell as the market prices went down. The core operating income was JPY 54.6 billion, down JPY 76.2 billion year-on-year. Details will be explained later. Special items ended up in a net loss of JPY 82.7 billion. We have been engaged in the development of a drug for Parkinson's disease originated by NeuroDerm, for which we have charged impairment loss on in-process research and development expenses or one of the intangible assets. There is a total of slightly under JPY 130 billion in in-process R&D expenses, of which JPY 84.5 billion was posted for an impairment loss. The remaining balance is JPY 43.2 billion, which is held in U.S. dollars and therefore, could change when translated into yen. For this project, we have learned that due to the impact of COVID-19, the development time line will be delayed by 1.5 years. We have presumed a decline in its profitability in light of the status of the development of competitive products and decided to recognize JPY 84.5 billion in impairment loss. For more details, please refer to Page 33 and 34. As for the operating income, the huge amount of loss in special items led to the operating loss of JPY 28.1 billion. Under the financial income and expenses, we have posted a financial expense of JPY 8.7 billion, almost unchanged year-on-year. Loss before taxes was JPY 36.8 billion. Unfortunately, there is still an income tax expense of JPY 3.1 billion. This is partly because you cannot aggregate income and losses of all operations worldwide. But for example, development companies running continuous losses are unable to post deferred tax assets, making it impossible to recognize tax effects. Those are some of the reasons why we still have the tax expense of JPY 3.1 billion.
We did post a loss of JPY 84.5 billion under special items due to the impairment loss charged on intangible assets. For this, there was a reversal of comparable amount of JPY 19.4 billion from the deferred tax liability. As a result, we ultimately posted tax expense of JPY 3.1 billion.
The net loss from continuing operations was JPY 39.9 billion. And our bottom line or net losses attributable to owners of the parent was JPY 49.7 billion, representing a deterioration of JPY 131 billion year-on-year. Please move to Page 5, where I still -- I will discuss what transpired between the first and second quarters and how that led to the differences between the forecast from last earnings report and the actual result that we are announcing today. At the last earnings report, we had expected JPY 14 billion in core operating income for the second quarter. The actual result was JPY 39.6 billion, JPY 25 billion ahead of the forecast. One reason was that Functional Products was expected to post JPY 4 billion for the second quarter, but turned out to reach JPY 8.7 billion, the same level as in the first quarter. As for the first quarter, we said that there was 1-month worth of extra orders that we received for display and semiconductor-related products in order to hedge against what is called Japan risk by building up their inventories. Since we had anticipated these orders to be absent in the second quarter and therefore, forecasted a quarter-on-quarter decline of JPY 1 billion. However, the display and semiconductor-related products have remained quite strong, and the orders received and shipment volume increased, resulting in a quarter-on-quarter rise of JPY 2 billion in the core operating income, up JPY 3 billion from the forecast announced last time. In addition, aluminum fiber was expected to undergo inventory adjustments with a negative impact of about JPY 1 billion. This inventory adjustment did take place and result in a sound inventory status at the end of September. Moreover, high-performance engineering plastics and Aqua and separator solutions saw a slight increase in volume. All together, we posted the core operating income of JPY 8.7 billion. As for Performance Chemicals, we had anticipated the second quarter to be almost unchanged from the first quarter but ended up with JPY 2.9 billion, up close to JPY 2 billion quarter-on-quarter. In the first quarter, we had scheduled maintenance and repair and did expect to have a rebound in the second quarter, but an even larger impact was seen in the sales increase of performance polymer. As a result, an upside of slightly under JPY 2 billion was posted. As for MMA, we posted a negative JPY 1.2 billion in the first quarter and came forward with the forecast of positive JPY 1.2 billion for the second quarter and 0 for the first half. But we landed JPY 3 billion for the second quarter. The price was expected to be $1,350, but turned out to be $1,371 instead, bringing in a quarter-on-quarter increase of about JPY 2 billion. In petrochemicals, partly due to the slight rise in the price of naphtha, inventory valuation loss shrank in the second quarter. Consequently, instead of the last forecast of negative JPY 3.4 billion, a positive JPY 1.1 billion was posted in the second quarter.
Carbon products showed the results mostly in line with the forecast announced last time. Industrial Gases was almost JPY 2 billion ahead of the forecast last time. In the health care, we have forecasted a loss of JPY 2.3 billion in the second quarter, but posted JPY 4.5 billion in profit. Because of COVID-19, SG&A and R&D expenses have not made as much progress as planned. In Other segment, again, although we had expected to see a loss of JPY 4.3 billion the second quarter, we posted a loss of JPY 100 million only due to less-than-expected progress in the spending of the expenses. Let us move on to Page 6. Analysis of core operating income or loss. The total core operating income fell significantly by JPY 76.2 billion year-on-year. The price accounted for a drop of JPY 28.3 billion. MMA and Carbon Products & Chemicals segment were responsible for a decrease of JPY 23.9 billion, while a drop of JPY 6.4 billion was attributable to the health care due to the NHI drug price revisions in April. In terms of volume, almost all segments, except for health care, were negatively affected. Fixed cost reduction contributed JPY 4.5 billion, each in the first and second quarter. Others accounted for a drop of JPY 4.2 billion. As shown in star 1 footnote, this includes inventory valuation loss of JPY 11.9 billion and equity loss of JPY 7 billion, which is partially offset by a positive impact of JPY 17 billion due to less-than-expected progress in the spending of fixed costs, as I have mentioned earlier. Please turn to Page 7, where you can see the overview of the Performance Products segment. Functional Products posted a drop in both sales revenue and profit. As described here, despite signs of a pickup in the near term, looked at for the period of 6 months, demand weakened mainly for automotive applications. As sales volume of high-performance engineering plastics, among others, declined, we saw a fall in both sales revenue and core operating income. In Performance Chemicals, in addition to the overall decline in sales volume for automobiles, we had a scheduled maintenance and repair in Ibaraki site this year, suspending the operation for slightly more than 2 months, which led to a drop in the sales volume. Hence, the decrease in both in sales revenue and profit. Moving on to Page 8, Chemicals segment. MMA posted a positive core operating income of JPY 1.8 billion for the first half. This was partly because in the first quarter, the ICIS price was $1,340, which improved by $31 to $1,371 in the second quarter. Therefore, though the result was significantly behind the year before. There was a slight improvement as compared to the more recent past. Petrochemicals showed a significant drop in both sales revenue and profit, which represented a large impact from the first quarter. In addition to greater impact of scheduled maintenance and repair, the effect of lower raw materials costs manifested itself significantly in the first quarter. Hence, the considerable loss that we suffered. Carbon products, likewise, posted a dip in both sales revenue and profit. This was due to lower prices as a result of reduced raw materials costs, a drop in sales volume and decline in demand for cokes and needle cokes for use in graphite electrodes. Page 9 shows Industrial Gases segment, where we saw the core operating income of JPY 13.5 billion in the first quarter, JPY 22.1 billion in the second quarter and JPY 35.6 billion in total, which shows a recovery trend from the first to second quarter. However, due to the significant deterioration seen in the first quarter, we suffered a year-on-year drop of JPY 8.7 billion. Page 10 shows the Health care segment. We posted the core operating income of JPY 13.4 billion. And the revenue was unchanged, mainly because higher sales volumes, primarily in the domestic priority products were offset by lower domestic sales prices for pharmaceuticals due to NHI drug price revisions. On the other hand, the core operating income increased because constrained activities owing to the COVID-19 pandemic suppressed spending on SG&A and R&D expenses. On Page 11, you see the consolidated special items, the impairment loss of JPY 84.5 billion, which I mentioned earlier is the main cause. Page 12 is the consolidated cash flow statement. I will explain in real terms. Net cash from operating activities was JPY 70.1 billion in the first quarter and JPY 163.3 billion for the 6 months. Free cash flow was positive JPY 22.8 billion in the first quarter. Cumulative cash flow as of Q2 was JPY 50.3 billion. So we are steadily generating cash.
As I explained in the first quarter, there was an expenditure of JPY 95.4 billion in April,to buy additional shares of Mitsubishi Tanabe Pharma to make it a fully owned subsidiary. At the same time, in order to have stability in our funding situation to deal with COVID-19, we increased our cash on hand by about JPY 100 billion. That accounts fully for the increase in gross interest-bearing debt. And accordingly, cash and cash equivalents at the end of the term was JPY 403 billion. Page 13 is the consolidated statement of financial positions. Total assets at the end of September was JPY 5,079.2 billion, which was a decrease of about JPY 52.9 billion. Impairment loss for NeuroDerm was JPY 84.5 billion. On the other hand, in terms of foreign exchange, euro was up against the yen, so that pushed up total assets by about JPY 21 billion. Net interest-bearing debt shown in the lower right-hand corner was JPY 2,175.4 billion, with a net D/E ratio of 1.94x. Unfortunately, the equity ratio was 22.1%, a deterioration from the end of March. Next, I will explain the full year financial results forecast. Page 15, the forecast for the second half of the fiscal year is based on an exchange rate of JPY 106 to the dollar and naphtha price of JPY 33,000. Sales revenues is forecasted to be JPY 3,175 billion for the full year.
I will explain the core operating income on the next page. This is in line with the initial forecast. The full year forecast for special items is JPY 136 billion, an increase of JPY 133 billion compared to the beginning of the fiscal year. One reason is the JPY 84.5 billion impairment loss on intangible assets of NeuroDerm, as I mentioned, as well as the JPY 24 billion loss in the second half due to the closure of MMA Beaumont site in the United States, which is written in the margins. In addition, We have publicly announced the career change support program today, and we expect to incur additional expenses of about JPY 10 billion. This program is basically a system to support career change of people over 50 years of age at Mitsubishi Chemical, which has reformed its personnel system into a job-based system since October. The new personnel system is designed to promote people not based on their seniority, academic background or gender, but rather on whether they have the necessary skills for the position.
The purpose of this system is to develop innovators within the company. We believe that such people should be able to determine their own careers on their own initiative, which is why we converted to this system and why we have been soliciting applications for management positions since October. We expect to incur a loss of JPY 10 billion here. Sorry, I skipped over the explanation for Beaumont. We have 2 plants in the United States, 1 in Memphis and 1 in Beaumont. For the past 10 years, the Beaumont plant has been experiencing equipment troubles frequently. We have spent a significant amount of money on equipment investment and maintenance to deal with this problem. And we would need to continue to do so in the future. In addition, the plant is vastly inferior to our other sites in terms of cost competitiveness and also with supply and demand gap for MMA expected to continue for the time being. We have decided to terminate its operation. Since we had expected Beaumont itself to be profitable, there is no sign of a need to take impairment. And it is not an impairment due to a decline in profitability. So that and the JPY 10 billion in career change support. I am now explaining the breakdown of the JPY 133 billion.
Other than that, there are certain projects that saw substantive progress in discussions and studies under COVID-19. And as a result, we expect to incur about JPY 10 billion in expenses in the second half. In addition, we expect to incur about JPY 5 billion in other costs. We announced the reduction in coke ovens on October 26, that we will reduce coke capacity from 3.9 million tonnes to 2.5 million tonnes. So we will be shutting down the ovens in the second half. As we will be shutting down 1.4 million tonnes capacity, we estimate that it will cost a little over JPY 2 billion for shutting down costs. As for the remaining amount of just under JPY 3 billion, we plan to continue to consolidate our offices in response to COVID with the aim to reducing operating costs in the future. Because of these major special items, we regret to report an extremely small amount of operating income of JPY 4 billion for the full year. And as for our bottom line, the net loss attributable to owners of the parent is expected to be JPY 59 billion. On Page 16, I explain the second half financial results forecast. Functional Products income is expected to increase by JPY 2.2 billion to JPY 19.6 billion in the second half. High-performance engineering plastic molded parts and alumina fibers to the automotive industry are expected to grow even further than the first half, so at JPY 4 billion. On the other hand, there is the impact of Chinese New Year, so we expect about a JPY 2 billion negative impact. Performance Chemicals was JPY 4.1 billion in the first half. We expect to add JPY 5.8 billion to JPY 9.9 billion. There is an increase of JPY 2 billion due to growth for functional resins and battery materials for automotive applications. And there was suspension of phenol-polycarbonate in the first half, which is gone. So for the fixed costs, JPY 1.5 billion and then about JPY 2 billion forecasted due to increase in sales volume of various products. MMA income is expected to increase by JPY 1.4 billion from JPY 1.8 billion to JPY 3.2 billion. For the third quarter, we expect a market price of $1,500. And for the fourth quarter, we expect $1,400 Asian market price. The market has recently exceeded $1,500. But why do we expect the price to fall in the fourth quarter, January. March? It is because the market has risen a bit because the recently completed plants in China have not been operating properly. We expect them to enter at least stable production, and so we expect the market to fall during the January-March period.
As for the petrochemicals, We expect an income of JPY 2.5 billion, JPY 15 billion increase over the JPY 12.5 billion deficit in the first half. There is JPY 7 billion impact due to the absence of scheduled maintenance. There was lower of the cost inventory valuation gain and loss impact in the first half, but that is gone. So JPY 6 billion plus. And also we expect about JPY 2 billion increase in profits from polypropylene compounds and other for automobiles.
Carbon products, we forecast a JPY 4.8 billion increase in income and a return to profitability, so JPY 0.9 billion income for the second half. We expect the inventory valuation difference in the first half due to major drop in coking coal prices will not exist in the second half. So that is JPY 2 billion plus. Needle coke volume is finally starting to increase, so plus JPY 1 billion. And carbon black is also expected to gradually increase for automobiles. So forecasting about JPY 1 billion improvement from the first half. As I mentioned earlier, Industrial Gases for the second quarter was JPY 22.1 billion. The forecast for the second half is about double that amount. As for Health Care, we expect that the unused portion of selling, general and administrative expenses and research and development costs that were in the first half of the year,will somehow be absorbed in the second half. We expect an increase of JPY 6.6 billion in Others. Basically, we assume the progress to be made about expenses with a view to returning to profitability. However, it is difficult to say whether we will be able to make such progress itself given the current circumstances. So with these assumptions, we are forecasting some positive numbers here. Finally, Page 17. As for the dividend, as it is written on the fourth line, we project a significant loss due to the effects of the pandemic and the impairment losses on growth investments. Although this resulted in a large loss, in keeping with the 30% guideline of dividend payout ratio and commitment to dividend stability, the Board of Directors today resolved to pay an interim dividend of JPY 12, and we expect to pay the same amount at the end of the fiscal year.
That is all. Thank you very much. Now we will start taking questions.
Let me introduce the first questioner. Mr. Watabe from Morgan Stanley MUFG Securities.
Watabe speaking. I have 2 questions. The first question is about MMA. You decided to close the Beaumont site after the past several years where you have been making significant investments in an effort to recover its competitiveness. I understand Lucite site in U.K. is also less competitive. But I'd like to check how low the Beaumont site is in its competitiveness once again. I also want to know a possible impact on the electrolyte business co-located in the site as well as on the possible construction of a new shale gas-based facility in the U.S., though you may not be able to tell now that the CEO will change.
First of all, the plant for electrolyte is in Memphis and therefore, will not be affected. As for Beaumont, there is actually a long history behind this. The operation was once suspended. But an enormous amount of capital investment was made to update the facility and to manage somehow to operate the plant. But we were not able to stop the problems from happening, and the plant was not operating properly more recently.
Given that we will need to continue to invest in updating the facility going forward, taking the current timing of supply-demand imbalance, we decided to shut down the operation and to make up for the loss of capacity by increasing the capacity utilization rates of other sites. Now as I said earlier, the Beaumont site was not an unprofitable operation and was not showing signs of impairment losses. With the market price between $1,300 and $1,400, staying profitable is a challenge. However, in light of longer-term price trends, we would have decided to continue to run the Beaumont site if the supply-demand balance had been tight.
What about the investment in shale gas-based facility in the U.S.?
We will be able to share information with you if you can wait a bit longer. As we said in response to a question from the media earlier today, asking about the possibility of operating in the Beaumont site with the shale gas-based process, we'll not operate the shale gas-based process in Beaumont. Therefore, unfortunately, we'll not be able to offer jobs to 100 and several tens of employees in Beaumont anymore and are now engaged in negotiations with them. Basically, we are going to terminate the employment for them.
But is it certain that you will build a new shale gas-based facility, nonetheless?
Definitely, we will. Regardless of the fact that the CEO will change, we will. Yes.
I see. My next question is about functional products. I'm interested to know how much recovery seen in the July-September quarter? And how the status is now in October-December quarter for optical films, high-performance engineering plastics and semiconductor-related products?
If I separate semiconductor-related products out from the rest, as they are different, polyester films and Clearfit for use in panels and smartphones were quite strong in the second quarter, and remain so currently. But smartphone business will be affected by Chinese New Year. And so we expect a slight downturn in January-March quarter. But we are of the view that they are still basically strong. The OPL films, which are for panels for use in TV sets are performing well. For example, Korean panel manufacturers who have been saying that they would shut down the operation anytime, are now saying they could continue the operation a bit longer, which shows how well the production is going in Korea. Does that answer your question?
Yes. At the outset, I said investments are made in Beaumont, but I was mistaken and what I meant was Memphis.
Well, we did make investments in Beaumont as well.
The next person is Mr. Yamada from Mizuho Securities.
Yamada from Mizuho Securities. I have 2 questions on nonpharmaceutical businesses and 1 on the pharmaceutical business. My first question has to do with petrochemicals. Could you give me the capacity utilization rates in the second quarter and your assumption for the capacity utilization rates for the main facilities for the second half.
In our company, the ethylene center has been operating at the full capacity. On the other hand, as for EG, ethylene glycol, among others, due to the deteriorated market prices, we have been making adjustments in our operations. We are also adjusting the operation for [ oxo-acrylic acid ] to the changes in demand. The [ oxo-acrylic acid ] is the kind of product where the operation hardly reaches the full capacity in the first place. Polypropylene and polyethylene have been maintaining high levels of operations. Inventory levels are not a matter of concern as they are currently sound.
What about the phenol-polycarbonate? I realize that it is classified under performance products.
Yes, it is. But as for phenol-polycarbonate, there was a long scheduled maintenance and repair this year, which was extended by 1 week due to COVID-19. And therefore, the operation is at the full capacity now. We expect the full capacity operation to continue going forward with the inventory at a tight level.
If that is the case, am I correct to say that revenue is expected to increase from the second quarter to the second half because of natural increase based on the rise in the price of naphtha, while the assumption for the margin is quite conservative, leading to your forecast of JPY 2.5 billion in the core operating income in the second half?
Yes, you're correct. EG is expected to be quite challenging.
My second question is about carbon products. You said carbon black, cokes and needle cokes are all expected to improve in the second half. I understand it is only natural to expect a recovery for carbon black after such a significant reduction in production of tires. And it is also understandable that the performance of cokes will improve as some steelmakers have stopped banking or temporary suspension of blast furnace operations.
But as for needle cokes, do I understand correctly that their inventories have been worked off to a large extent? Could you tell us more about carbon products?
Unfortunately, domestic electric furnace manufacturers have been operating at a rate of 30% of the average year and are expected to stay at the reduced production volume till the end of the year. It is not entirely impossible for them to start stepping up the capacity utilization rates gradually from the beginning of next year. What I said earlier may reflect a bit of our hope as well because the expected increase in exports has been also part of the assumption. The volume is not expected to grow so much. But unlike cokes, needle cokes has a slightly larger margin.
I see. Next, I want to ask a question about pharmaceuticals. More specifically, 3 compounds. Can you tell me more about the status of progress in clinical trials for MT-1186? Am I correct to say that as the patient recruitment was finished in October, the trial is going well as planned? An impairment loss was posted for ND0612, but what is your view on the possible risk of further delay?
At the earnings report at the end of fiscal 2019, I asked whether you are not expecting any delay for the Parkinson's disease project. And you replied that things are all right so far, and yet you are now charging an impairment loss, which makes me worried. So can you tell me how we should consider the risk of further delay? Furthermore, what about the status of VLP? It is still in Phase I study. And so we will probably have to wait until next year or thereafter, if anything. But please share with us if there is something you can share with us.
Kobayashi will answer the questions.
Kobayashi of Mitsubishi Tanabe Pharma Corporation. I will answer the questions. Page 33 shows the status of the 3 items that you asked about. With regard to MT-1186, at the last earnings briefing, we announced the change of our plan due to a slight delay, and things are going as planned since then. As for ND0612, the biggest change that we've seen this time, since it is now in Phase III, the clinical trials were supposed to be started simultaneously in multiple countries in Europe and U.S. around April. But due to COVID-19, medical institutions have stopped their engagement. It was very unfortunate, but we had no choice but to change our plan.
Going forward, in order to make sure there won't be any further delay, we're shifting from visiting the medical institutions in person to make various requests to a remote practice without face-to-face meetings since the situations over at the medical institutions and our company have changed. So by introducing such new practice, we would like to ensure things will go as scheduled. As for VLP, MT-2766, which is still in Phase I now, the result of Phase I study is expected to be out soon. After that, we're considering to combine Phase II and Phase III studies to accelerate the development process.
Then is the recruitment likely to be started next year for Phase III?
Mr. Yamada and Mr. Kobayashi, MT-2766 is a vaccine for COVID-19. I wonder if Mr. Yamada may be confused with the vaccine for influenza with an adjuvant. Since MT-2766 is a vaccine for COVID-19, the development process has been significantly expedited into an extremely short period.
I see. I was asking about this mistaking it to be an influenza vaccine. Now I understand why it is going so fast.
So as for Parkinson's disease project, am I correct to understand that since patient recruitment can be managed remotely, we do not have to worry much about any further delay?
Yes, we would like to successfully manage by using remote methods as well. Having said that, should a lockdown or entire prohibition of the movement be imposed then we might be in trouble, but we will definitely achieve the plan without assuming such a scenario.
Next, Mr. Miyamoto of SMBC Nikko Securities.
Miyamoto of SMBC Nikko Securities. I have 3 questions. Firstly, I want to ask about pharmaceutical business. As for VLP for COVID-19, which was asked about earlier, clinical development is now underway in Canada. But is there any possibility of expanding the geography to include the U.S. and other countries? And if there is, what possible barriers do you expect to face? Another question is not -- addressed to Mitsubishi Tanabe Pharma, about Muse cell-based product. I understand that it was originally scheduled to be filed for approval by the end of the year ending March 2021. I would like to know if there has been no change in the schedule.
Mr. Kobayashi, would you answer the question other than the one on new cell.
The VLP vaccine is a Phase I study, which is designed for a limited number of subjects or patients and therefore, tends to be done in a single country. In that sense, while we are conducting a Phase I study in Canada now, going forward, we obviously plan to carry out clinical trials in the U.S. and other countries as well.
Are you planning to start clinical trials in the U.S. at the same timing as you go into Phase II and III studies in Canada by the end of the year? Could you tell me more about the time frame?
When a drug enters the final stage of development, Phase IIb and III, you do not recruit patients in a single country, but further, you do global clinical trials where you use the same protocols and designs to recruit patients in Canada and the United States and possibly also in Europe and also in Japan. So with the fact that P-III started in Canada, you can assume the same thing is moving forward in other countries like the United States.
I think it may depend on the design of the trial, but am I correct to assume that clinical trials will also start in the United States by the end of the year?
Yes, that's correct. The plan is to conduct the trials in countries, including the United States.
As for new cell-based products, Unfortunately, there has been a slight delay due to the effects of COVID-19. So application by the end of this fiscal year seems difficult. What happened is, there was a delay in the procurement of some of the raw materials. This has now been resolved, and we will be able to make an application in the next fiscal year.
Will that be during the first half of the next fiscal year?
Hopefully, as soon as possible.
In the next fiscal year as soon as possible, right?
Yes.
The second question is about MMA. First of all, what was your utilization rate in the second quarter and your outlook for the second half? Also, given that the market has been recovering slightly in the last 2 months, is there any change in the demand situation? For example, demand for acrylic boards for partitions for COVID countermeasure use. Also, you mentioned 3 months ago that you were planning to reduce production of ACH and increased production of C4 C2. Is that kind of optimal operation being constructed effectively?
Yes. The average utilization rate in April-June was 60%, and that rose to 75% in July-September, although there was scheduled maintenance. This is partly due to the increase in transparent acrylic boards. The forecast for October to December is 67%, taking into account that this is a period for scheduled maintenance in Europe and United States. By next year, when scheduled maintenance is completed, we expect utilization to rise to nearly 80%.
Why the price increase?
Usually, new capacity lowers prices, but the new capacity was not performing properly and also because the demand for exposure prevention application continued to be strong from July to September. It was thought that, that demand will end, but it continued strong.
For C4, the price of butadiene or C4 had fallen drastically and the spread had widened. And now things like tires are starting to recover. And hence, the market condition for C4 such as butadiene is gradually rising. So with all of that in mind, we will consider the production of ACH and C4. Ethylene Method is the most competitive. So we will have full operation of that. And we are still conducting various simulations to determining the optimal production. Understood?
Finally, the third question is about financial strength. On Page 13, you explained that the net D/E ratio rising to 1.94x, with a net loss in the second half of the fiscal year as well. How would you review your financial health over the medium term? For example, is there anything you can tell us now such as a plan to accelerate the sale of assets?
With regard to the sale of assets, we have been saying for some time that we are going to do it. So we are not currently considering taking any additional big moves on that front in order to quickly improve our financial position. Of the 1.94x, JPY 900 billion is net interest-bearing debt of Nippon Sanso Holdings. They are a listed subsidiary, an independent entity. So the portion of the debt that we must properly consider repaying is JPY 1,281 billion.
We will take necessary measures for that portion with due consideration and Nippon Sanso Holdings will continue to repay its debt while meeting the various constraints of hybrid financing. So we will basically continue with our measures to improve our financial strength without relaxing our efforts. We will steadily proceed with various measures, including sale of our assets and businesses.
Now we will move on to the next question. Mr. Okazaki of Nomura Securities.
Yes. I'd like to ask 2 plus 1 questions. First about MMA. From what I have heard so far, the second half will see improvement in both the utilization rate and market conditions on par with or better than the second quarter. So despite there being a scheduled maintenance in the third quarter, the JPY 3.2 billion profit for the 2 quarters seems to be a bit low to me. So JPY 3 billion in Q2 and JPY 3.2 billion in second half seems a bit low. Is there any factor other than what you have described?
The utilization figure I cited reflects the scheduled maintenance. Scheduled maintenance does lead to additional cost. And also, in the second half, there are seasonal factors. In Europe and the United States, there is Christmas. And in Asia, there is a Chinese New Year, during which customers lose a certain number of operating days. For this reason, the volume tends to be lower in the second half compared with the first half.
Just to confirm, the 67% utilization in Q3 would be a little bit higher, like 75% if there were no scheduled maintenance?
That's correct.
Second question, in Performance Products, you said there was significant demand that was front-loaded in Q1. Now with real demand in semiconductors and LCD materials improving, it may be difficult to identify that trend. But what are your thoughts on this issue of front loading of demand? Whether there will be a reaction? Could you also tell us about the demand trend for carbon fiber, which you didn't mention and lithium ion battery materials which you mentioned briefly?
Yes, we received very large volume of orders in the second quarter. So we think that the semiconductor and the panel business will end the air on this trend. In Q1, we received excess orders while customers were struggling to start up their plants. So that was very understandable. However, customers are now operating at full capacity. So I think we are in an extremely good situation in that sense.
As for the batteries, utilization rate fell sharply in Q1. That was because operation of customers of battery manufacturers had stopped. As this has returned in the second quarter, the quantity has increased by a factor of 1.5 over the 3 months of the first quarter.
What was the other one?
Carbon fiber. Demand for carbon fiber is not so weak in terms of total volume. So we are managing to perform solidly. However, as I mentioned at the end of the first quarter, we had to make some production adjustments in the second quarter due to a slight buildup of inventory. However, this was only a temporary measure. And although, basically, the market is not that strong, we feel we are receiving real demand.
Lastly, on Page 33 of the slide, you mentioned that in the pharmaceutical market, VAFSEO was launched in August. I believe that you are targeting a switch from products like NESP. What is the current situation of that launch? For example, could you tell us how much you are aiming for in terms of sales next fiscal year?
Mr. Kobayashi?
This is Kobayashi. I don't have a specific figure for next fiscal year, but I'd like to confirm the peak figure. Let me check. It will be JPY 14.1 billion. And as you know, when a new drug is launched, there is a process of hospitals adopting it, and then the revenue is generated. So we are engaged in recruiting hospitals in earnest in November and December. We plan to see full-fledged start of adoption in the next fiscal year or so.
Am I right in understanding that this initial process is going well?
Yes, we believe that we are making good progress.
So it is starting well despite COVID-19?
Yes.
Also, what does the timing of the peak of JPY 14.1 billion look like?
It would be a few years from now.
We are coming to the end of our session. So we will conclude with the next person's question. Mr. Nishihira, Okasan Securities, please.
Nishihira of Okasan Securities. One question, please. In terms of the Chemicals business, In dealing with COVID-19, your company's strategy was to close the Beaumont site for MMA. And in petrochemicals, I believe you are making reduction in the domestic production of polypropylene, polyethylene and EVA. Also in carbon, there was a reduction in coke ovens. So I think the strategy that came out of your company was the diminishing equilibrium strategy. Do you plan to maintain the diminishing equilibrium strategy for chemicals for the time being until profitability improves significantly? Or do you plan to shift course and invest again at some point? Please tell us about your chemicals strategy.
Yes, about MMA, as I mentioned to Mr. Watabe earlier, we are going to talk to you really soon about a project to set up an Ethylene Method facility in the United States. The plant we built in Saudi Arabia was JPY 100 billion, 250,000-tonne plant. And this time, we are planning a 350,000-tonne plant. So if you ask, is this diminishing equilibrium, it certainly is not. And in petrochemicals, as for the partial shutdown of the polypropylene plant, we are building new plants in Kashima and Goi. And after we get approval from our customers to accept changes, we are planning to cease production with our old fluffy method, which is more costly. So it is all a part of that strategy. So if you ask me, if this is also diminishing equilibrium, I don't think so.
With regard to the carbon, domestic demand clearly evaporated. And in that sense, you are correct in your understanding that it is shrinking. That's all I have to say.
So that concludes the question-and-answer session. Date, CFO, please give us closing remarks.
Thank you for staying with us until after 6:00. We look forward to continue working with you in the future. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]