Mitsubishi Chemical Group Corporation (4188.T) Earnings Call Transcript & Summary

It's time to start the IR Day of Mitsubishi Chemical Group Corporation. Thank you very much for attending this session in your busy schedule. Investors and shareholders, thank you for joining us physically and through the online. My name is Shimizu from IR office. I will be moderating this session today. Let me introduce the speakers for today. Mitsubishi Chemical Group Corporation, Representative Corporate Executive Officer, President and CEO, Chikumoto; Corporate Executive Officer, Chief Transformation Officer, Araki; Corporate Executive Officer, Chief Financial Officer, Kida. Prior to starting the presentation by Chikumoto, President, I would like to inform you on several points. First, we will take questions. After the presentation, we will hold a Q&A session. Today's session is held in hybrid format. The presentation by the President and also the replies to the questions will be in Japanese language. At the same time, simultaneous interpretation into English is provided. Those of you in this room, please use the receiver to listen into English interpretation. Online participants, please select your language using the interpretation button on the screen. And the video and audio including the Q&A will be posted on our company's website later on. Now, I would like to hand over to Chikumoto-san.

Good afternoon, everybody. Thank you very much for joining us today. And also thank you very much for your understanding and support to our business and to our company. Thank you very much. Today, I will give you an update from the last IR Day, KAITEKI Vision 35, and also the Mid-Term Management Plan 2029. And I'm happy to report the progress, and I will also explain our plan for the future. There are four points in today's message. First, Specialty Materials. And Specialty Materials is growing beyond our expectation. It is increasing profitability. Going forward, mainly from Specialty Materials, we want to be actively make investment. On the other hand, MMA and Basic Chemicals, which are vulnerable to market volatility, we are impacted by the Chinese increased production and we are hit hard, especially for MMA, the market volatility hit us very hard. Last year, this was contributing to the profit. But this year, it will be making a loss. For the Petrochemical, later, I will come back to explain this. As you know, there is a three company collaboration and also progress plan regarding rationalization and green transformation. The plan is in progress according to the plan. But there is excess production capacity and the loss-making business requires rationalization, which was a bit delayed and profitability was suffering from that. For the Carbon business, we have the structural reform. We reduced production from 25 coking up to 15 and we are making breakeven point, but the domestic steel situation is rather challenging and Chinese cokes manufacturers are selling at lower price, and we are impacted market condition. So the situation remains challenging. And the three disciplined approaches in business operations, the core policy of our Mid-Term Management Plan, we are delivering this as the core of our management. And going forward, we would like to stick to the plan. And later, I'll come back to this. And by sticking and penetrating these three approaches, profitability is improving. And for the next-generation and growth driver, we will concentrate our investment here and for further improvement and also the new business, which will be the source for our future profit, and that should be contributing faster to our profitability, and that is ongoing process. Lastly, management commitment. I will explain that, and we say that and we do it. And that is our management commitment. We work as a team, and we confirm the current situation and our new commitment, we hope to -- you can feel that through my presentation. Today's topics are shown here. First Mid-Term Management Plan guiding principles. Pricing policy, investment decision-making and asset optimization. We will execute this to achieve JPY 140 billion profit contribution, of which we achieved in the 1 year and 6 months and JPY 59 billion, that is 42%. So in 4 years, we can achieve 58%. That's the plan. But we have this JPY 140 billion in plan, it will go up and the rest of 58%. In the next 4 years, you may thing we are not working. We want to make sure that we can exceed this number. This is by segment Specialty Materials. More than we expected, profitability is improving. And we are feeling that very deeply. May forecast said JPY 46 billion in profit. But October forecast has changed to JPY 65 billion. Now it is exceeding this number. And in the next 4 years, JPY 40 billion (sic) [ JPY 43.5 billion ] with three disciplined approaches. But then the rest would be JPY 144 billion. And so, we want to exceed this number, and we want to have concentrated investment. On the other hand, the market condition hit hard for Base Materials, Polymers and MMA derivatives. The environment has deteriorated, especially for MMA, China impact was hitting hard. And because of the market condition, we are making a loss. And we need to accelerate our structural reform. Today, because of the -- our relations to the partners, I can't give you details, but actions are being taken already. Basic Materials & Polymers, which I'll come back to explain later, already actions are taken. But we can do construction at the repair and maintenance timing. And regarding the rationalization of production, we are a bit delayed. That is true. Regarding three company collaboration, it is in line with the plan. So now later, we should be able to make announcement to you. There are three structural reforms. And by the end of March, we should have come up with a plan so that we can execute. And for the next year, MMA should be profitable, and Petrochemical, we hope to make a profit. And for the Carbon business, the challenge continues. But we are close to breakeven, and we need further actions on the top of the existing actions, and we are trying to come up with specific actions internally. Overall, Industrial Gases as planned is showing growth and profitability is unshaken. So, for Chemicals, JPY 170 billion growth, we will make investment appropriately and rationalization speed should be accelerated. Those are two main themes. And this time around, business portfolio is clarified and our focus area is clarified or structural reform area is clarified. And for each area, growth strategy is explained. On the right, those are the focus area and the growth potential versus profitability, you can see, and cash earning Cornerstone business and the growth is driven by growth drivers. And for the next future growth, profit and next generation area and areas for structural reforms. You can see which portfolio fits by each business segment that we have. For Cornerstone business, we have batteries, electronics, films and carbon fiber, carbon fiber and composites and infrastructure solutions, those will fit here. For the growth driver, Semiconductor and Polymers include SoarnoL, barrier materials mainly and high-performance film, engineered performance, Engineering plastic shapes and solutions. For the next-generation GaN-on-GaN, that is a substrate for semiconductor in terms of quality. We are among the top level in the world. I'm sure about that, and that should grow large in scale, and we will accelerate investment to have higher speed. And NTT's photon is a project we have jointly and we work with partner for developing businesses. For semiconductor like EUV metal resist. Already in U.S., we make investment and construction is almost completed. And for thermal management, the other day in the U.S. we have the second investment decision to this U.S. venture company that was decided and the contribution to the profit should be realized soon. For chemical recycling plant business is included here for us. Green transformation is one of the important business areas for the next-generation. Structural reforms include Carbon, MMA Materials and Polymers. As you can see, we have already made investment of JPY 200 billion to growth driver and next-generation JPY 80 billion for the Cornerstone business generating cash. So, you can see the level of investment on our side. This is just an image and how the investment will contribute to the profitability is shown here. Also green transformation. Naturally for next-generation and growth driver, we concentrate and focus and the Cornerstone generating cash, green transformation is essential and in structural reform, particularly in petrochemical, green transformation is considered and discussing green transformation can impact the world. But in terms of profitability, actually, this is a new business opportunity. We want to stay as a top runner. And together with METI, we have discussions regarding how we can advance green transformation in Japan. We always have that discussion. This is the growth driver and semiconductor products are shown here. One is Synthetic Quartz and Cleaning Services and EL hydrochloric acid. And our semiconductor business is not limited to these. They are #1 in shares, it says. And we negotiate with customers, and we provide super high purity and super low contamination products. And so, this is not just #1, but this is the only one product. And those only one products in the semiconductor area should grow, that would make our contribution in the semiconductor industry. And this is for the next-generation and planting seeds. GaN-on-GaN substrate, it can be vertical or horizontal and data centers power consumption can be largely reduced by this. And currently, this is an issue. Our data center construction and power consumption is an issue. Where do you get the power from is an issue. And this, we can provide one solution to that. We make investment here and R&D should be accelerated. And also for EUV MR registry already in U.S. the investment is completed and the construction is almost completed, and this is close to the actual operation. And also Neutron shielding materials or electromagnetic wave absorption and optical waveguides would be required and R&D is ongoing. As the growth driver and also as Cornerstone business, we have carbon fiber and composite. We have a lot of facilities in the upstream and the balance between the upstream and downstream was not optimal. So, we closed Everstone plant in the U.S., reduced the Sacramento plant. And we have temporarily halted the operation in Hiroshima. And we optimized the production capacity in upstream and also made investment in composites and parts. So, in this March, we will be able to turn to profitability for this business segment in overall. We have been running in loss until last year, which will finally turn to profitability. We have been working on rationalization and integration during the past 1.5 years, and we can reap the benefit for -- in next fiscal year and also new projects are launched. And for CFRP the mobility and other projects have been launched without the contribution yet, we will be -- we have already turned this to profitability. This is Engineering Shapes & Solutions, the semiconductor and medical are the sources of the profit. How much growth can we expect from these Engineering Shapes & Solutions, you can see from the graph, we have expanded the capacity in Thailand factory and also in Belgian factory. We intend to expand the investment here. For medical application, we need to coordinate with the customers. And for semiconductor, when we develop the materials, we talk to the semiconductor manufacturers. So these are unique products. For Films & Polymers, there's no doubt that this generates a strong profit -- profitability is, so this is the largest cash generating business. This applies to high-performance films and also general purpose industrial films, we have high competitive strength and high quality, and we are currently making profit strongly, especially SoarnoL for barrier material and MLCC Film for semiconductor or in display area as well, the high-resolution film is highly valued by our customers. And for the advanced display, we are a dominant player. On the other hand, MMA, where restructuring is necessary, we are impacted by the major capacity expansion in China and the market have deteriorated. And we have introduced 60% home ratio, but still impacted by the market environment, and we will continue to optimize the production capacity and rationalize plans without competitive strength. And we will revisit the sales strategy to optimize the supply chain. Indian market is steadily growing, and this can be separated from the impact of China. So, we are exploring the possibility of new projects in India. We have no intention to give up MMA: C2, C3, C4. It is only our company with these three technologies. The production increase in China, how can we avoid the impact of that and introduce the latest technology and reduce the cost? Those are the efforts we will continue. And downstream Polymer and MMA Derivatives, we will focus on expanding them and secure the revenue in that area. For excess MMA and Monomer, we are to rationalize. The Basic Materials & Polymers. In this area, we are to implement -- we were able to implement the rationalization at the time of the regular maintenance and the cost reduction was achieved. We will further implement such measures in the future. Western Japan ethylene production facilities reorganization is underway. We will be able to give you further report by the end of this fiscal year. And carbon products, we will further pursue structural reform. Green transformation in Kashima, the recycling efforts are underway, but this is operating in test phases. There are challenges. One is the material collected, used plastics, they are diverse. So, we need to collect the operation data in order to optimize the operation. And also currently, the plant is 20,000 tonnes. How can we expand to 200,000 tonnes? We are discussing with partners. The commercial operation can be started in March. We have been discussing with plant owners. And once we can start the commercial operation, this plant will generate profit. Biomass with these partners, currently, we are working on projects. Japan Airlines, I think it was today or yesterday, there was report on the newspaper to use 10% SAF. And I think they were mentioning 2030, and we would like to work together. The project in Abu Dhabi is underway, and there were issues of cost reduction, but there was a major progress recently. And by the -- within next fiscal year, we would like to decide on this as well. On capital allocation, JPY 3.170 trillion will be allocated with this weight. The shareholder return and debt repayment will make up 25%. Investment in Chemicals business will be 44%. And within this, growth and strategic investment will be 27%. The rest will be investment in group business, mostly for Nippon Sanso. The financial soundness target net D/E ratio of 0.8 or lower. For shareholder return policy, dividend payout ratio target will be 35%. The minimum amount -- annual dividend of JPY 32 per share. And we will consider additional share buybacks as opportunities arise. Next, on evolution of business foundations on human capital. Next Stage Support Program was introduced. This is to provide to the employees opportunity to consider next career. And as a result of having employees of 50 years old or higher consider working at new places, we had more than 1,000 employees make decisions. One objective was to optimize the workforce age distribution; two, and also improve the workforce productivity; furthermore, we have younger capable talent and to provide job opportunities to those people. So, those were the objectives of Next Stage Support Program. Currently, when -- for talent management, all of the leadership team has members, have good grasp of the outstanding talent and young talents, cross-organizational assignments and tough assignments are given to promote the growth of such young talents. And on HR system, global database has been developed, and we have framework of post-off and also double ladder consisting of management and professional ladders. On the dialogue with the employees, last year, we have held dialogues for more than 40 times and the leadership team is visiting all locations around the world to hold direct dialogues. We communicate management policies and receive questions and leverage the feedback in our management. Another project is so-called Work Improvement project. We received a total of 7,200 suggestions, and they include discontinuation of inefficient work or unnecessary meetings. We scrutinized all of these proposals. And when the decisions are not convincing, we raised it to upper layer and had discussions at the executive level. As a result, for 4,100 tasks, we decided to discontinue. And for the tasks that could not be discontinued due to safety or compliance or governance reasons, the explanations were provided to the employees and decided and made it convincing. And next year, we would like to introduce another project to collect work improvement ideas or what they want to do in order to raise their motivations. In the Employee Engagement Survey, we felt that the employee engagement is on the right track of improvement. We would like to continue to focus on improving employee engagement. For the salaries and bonuses of the executives, we have made changes so that it better reflects the profitability of the scope of responsibility and also align the perspectives with investors. We doubled the TSR-linked portion. And also the independent Board member ratio was raised from 50% to 75%, especially by having members with the thorough knowledge on the management. We were able to improve the management capability. And lastly, I would like to cover the management commitment. In addition to the one published in November last year, we made three additions. First, we are to execute three disciplined approaches in business operations with commitment and persistence, the JPY 140 billion. On this amount, we would like to further add on top through this measure. For structural reform, unrealistic measures will not have any meaning. So, we are to execute the measures that can be executed. And 5 years later, through these measures and also through the acceleration of the specialty business, we can further compensate. And we have clarified the business portfolio, and we will continue to focus on the investment into next generation and growth driver quadrants and also continue to generate cash from the Cornerstone businesses. And for structural reform areas, we will present the direction once again around end of March next year. During the past 1.5 years, 70% or 80% of the measures were defensive, and 20% to 30% were offensive. And through these measures, we have improved our ability to generate profit, but there are tasks still to be done during the remaining 3 months. And I have confidence that we will be able to complete them all by the end of this fiscal year. For next fiscal year, we will focus -- shift our focus mode to the offense. My personal view is 90% is offense and 10% is defense. But Kida-san may not agree. So, I shall set the weight to 80% to 20%. But my personal view is that, since we have done so much, next phase is to shift to the offense. That is what I have in my mind. Once again, this is the review of our purpose. We lead with innovative solutions to achieve KAITEKI, the well-being of people and the planet. Thank you for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]