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

Good afternoon. This is Hitoshi Ochi, President and CEO of Mitsubishi Chemical Holdings Corporation or MCHC. Thank you for joining us for this briefing. Today, I'd like to discuss progress made so far with regard to the medium-term management plan and our view going forward. Today's agenda is as shown on the slide. First, operating results. The operating income forecast for FY 2019 is JPY 210 billion. Given the current business environment as well as other factors, achieving our target for FY 2020 appears very challenging. Against that backdrop, our job now is to make sure that we build a solid foundation for the years beyond. The current situation reminds us of years 2011 to 2012, when China's new normal began. Back then, the Chinese GDP growth fell from double digits to less than 8%. Our operating income from MMA fell from about JPY 45 billion to JPY 6 billion. Similarly, this time, the figure is falling from JPY 100 billion to several tens of billion yen. Back then, our consolidated operating income was about JPY 90 billion. Of which, JPY 75 billion came from Health Care and the remaining nearly JPY 20 billion coming from Performance Products. Petrochemicals was posting a loss of roughly JPY 20 billion, and things were very challenging. This time, while there are some similarities, there are differences. Health Care may be down, but Industrial Gases are making up for that. Performance Products is earning JPY 70 billion. MMA is also contributing for several billions of yen in operating income. This is thanks to all the structural reforms and reinforcement of business foundations we have implemented so far. The next slide compares the FY 2019 forecast against FY 2020 targets. Barring a major economic downturn, we can count on industrial gases for JPY 90 billion to JPY 100 billion; Performance Products for JPY 80 billion to JPY 95 billion; Chemicals for JPY 60 billion to JPY 90 billion; and Health Care for JPY 60 billion plus. This means we have a solid foundation for JPY 300 billion to JPY 350 billion now. The focus going forward would be how to further improve earnings capability through continued portfolio reform. The next slide shows investment plan progress. The figure on the slide does not include funding associated with converting Mitsubishi Tanabe Pharma Corporation, or MTPC, into a wholly owned subsidiary. We can see that progress is relatively slow with regard to Performance Products. CapEx and R&D investments are in line with plan, but we may need more for new business development. This would mean enhancing R&D investment, perhaps in a more focused manner, so as to create the size for future businesses. Here, we intend to further leverage startups and venture capital. With regard to capital efficiency, the initial plan was to generate JPY 500 billion worth of cash through efficiency improvements. So far, we have reduced cross holdings by JPY 120 billion. Thanks to this, combined with other efforts, we now expect nearly JPY 700 billion in total. Next slide shows shareholder returns. We believe it is important to balance growth, investments and financial structure improvement with stable dividends for a medium-term payout ratio of 30%. Focus is to realize stable shareholder return, in line with our growth process. That is why we still intend to maintain the current annual dividend of JPY 40 per share. It will mean that for this year alone, the payout ratio will rise to 70%. But if you look at the average over FY 2017 to FY 2019, it will be 34%, which is consistent with that 30% level. Now let me discuss management measures. The slide shows our priority management measures. Of particular focus are: For Performance Products, reinforcement of portfolio management; for Industrial Materials, maintaining and expanding global share of MMA and industrial gases; for Health Care, strengthening the drug pipeline, expanding U.S. business and commercializing regenerative medicine. We will also seek integration benefits and synergies from the newly merged Mitsubishi Chemical Corporation, or MCC, reinforce globalization of businesses, quickly commercialize the next generation of businesses through R&D and proceed with work-style reform. Given that the world is rapidly changing, we absolutely need to reinforce our foundations. To that end, we will work on digitalization, R&D reinforcement and human resources system reform. From here, I would like to discuss each of our focus markets. For each market, we are showing sales revenue in graph. With business divestitures, fluctuating feedstock prices, et cetera, not everything is exactly in line with plan, but we can say that in general terms, there has been steady progress. First, on mobility, given the trend toward case in the automotive industry and environmental issues, the action plan focuses on growth in compounds as well as carbon fiber and composites. For IT, electronics and displays, the focus is on leveraging our strength in display-related business for growth and to add strength in semiconductor-related business. The action plan focuses on capacity expansion for optical films, the acquisition of Cleanpart Group and the new production of 5G compatible films in Indonesia. Let us look at some of them in further detail. With regard to carbon fiber and composite materials, the left most photo shows a press facility at CPC in Italy, which can press mold SMC sheets in 1 step. The first 5 units that we installed are currently running at near full capacity. Sales is growing too. We have decided to develop this into a CFRP platform and are making preparations now. We have also decided to construct a new adjacent production facility for SMC. There is also continued strong demand for prepregs. We currently supply from Japan and the United States and have made an acquisition in Europe, so that we can also supply from there. For displays, we are focusing on 5G compatible materials as this is a rapid growth area. We are investing USD 130 million to add 25,000 tons of capacity in Indonesia. This is an area where we expect steady growth and where we can leverage our advanced technology for high-performance offerings. Now on environment and energy. Lithium-ion battery materials are finally growing. Development is progressing very well for both wastewater treatment and for products that reduce the environmental impact, namely biodegradable and bio-based polymers. With regard to packaging, unfortunately, progress has been slower than expected. For food packaging, high-barrier performance products are key. A new production site of DIAMIRON in Thailand is finally nearing completion and capacity expansion for Soarnol is also underway. While things are slower than planned, we will be able to meet market needs. With regard to specific action items, electrolyte production is steadily ramping up in both the United States and Japan. Another focus is anode materials. The key question here is how much CO2 emission is actually reduced over the whole life cycle of batteries. There are doubts now about whether artificial graphite performance makes sense, resulting in a fresh interest in natural graphite. We have newly developed spherical natural graphite-based material with good charging and discharging performance as well as extended life. We have already shipped samples for evaluation by customers. With regard to BioPBS, shipments had been rather slow in past years, at only 2,000 to 3,000 tons, but growth has finally taken off. And this year, we are approaching 9,000 tons, which was only to be expected given the needs out there. Our current capacity is for 20,000 tons, so we will probably need to expand that. For, DURABIO, again, there is steady growth with OEMs like Mazda and Suzuki, among others, focusing more on environmentally friendly cars and recognizing the value of eliminating the coating process. We intend to further expand business with Tier 1 suppliers. For Soarnol, which realizes high-barrier performance, we have production sites in the United Kingdom, Japan and the United States, and we will add capacity in the United States by 3,000 tons to meet new market needs. This page discusses the medical food and biomarket. This includes such robust businesses, including implant material business, nutrition-related business in Asia and China and the medical gases business. We have been working hard to expand them in a steady manner. We have purchased the home gases business in order to fortify the medical gas area. Another avenue for expanding our scope of business is supplying oxygen gas for aquaculture. As for the Health Care, as you very well know, we have been progressing quite smoothly by reinforcing the pipeline of the ethical pharmaceuticals, developing the U.S. business, commercializing VLP vaccines and commercializing the regenerative medicine after achieving 100% ownership of MTPC, that we have been strongly oriented to next-generation products. As we have already emphasized, our oxygen gas for aquaculture is appreciated globally, especially by salmon marine aquaculture in Norway. As their aquaculture industry is quite large in scale, oxygen is prerequisite to prevent the degradation of salmon feed. Turning our eyes to making MTPC a wholly owned subsidiary, we are already aware of the challenge of [ Delinia ]. As we address this outstanding issue toward the fiscal year 2023, we will strive to bring the status back to where it should be. This will be our first step toward strengthening the subsidiary. In this sense, development of the orally administered Radicava and the new flu vaccines, device used for treating the Parkinson's disease, these are the projects that we are expected to expand steadily. In order to successfully invite MTPC to our group as a wholly owned subsidiary, we have to take advantage of Tanabe's strengths in such areas of central nervous system and immunodeficiency and the vaccines development. We now have rich data and accumulated knowledge in order to provide the different services through digitally processing them. Furthermore, genome nucleic acid and antibody will give us promising clues to generate next-generation drugs toward 2030. Meanwhile, we expect the group synergies in many areas. Group companies can support each other in order to promote the Muse cell business and to develop the various gene therapies. They can most likely collaborate to develop advanced medical materials, streamlining manufacturing processes, utilizing the medical gases, sharing administration resources. In 2 years, we intend to identify areas of potential group synergies. In particular, I would like to attract your attention to Muse cells. I have already explained to many of you and rest of you have probably learned watching TV programs. So we are happy to report to you that clinical trials have been progressing very smoothly. Based upon the results of the tests, we are working hard to apply for marketing approval in fiscal 2020. If you turn to the next page, materials prepared at MMC are used in different entities of our group. The cold chain technologies established by the TNSC can be applied by other companies. Human resources and know-hows for the sales and marketing nurtured by the MTCP can be shared by other member companies. Next, I would like to touch upon fundamental industrial materials. We are proud of the fact that we have been providing the materials for fundamental importance to key industries in Japan. Consequently, we have to raise productivity in order to supply quality materials in stable manner. Therefore, we wish to start MMA project in the United States as soon as possible. In the framework of MMA, we can upgrade many supply chain management by introducing the IT technology. Raising the productivity of an entire chemical complex comprehensively is a crucial importance, therefore, expanding the petroleum refining and petrochemical synergy will be instrumental in optimizing the efficiency. We have already established a very strong position in the industrial gas market. Based on our solid foundation, we would like to continue evolving this business and thereby, secure our global base. This page explains that establishment of LLP with JXTG Oil & Energy. We are already keenly interested in optimizing all aspects of our business, including the raw materials, product utilization and production. Another important pillar of the alliance for us is to recycling the waste plastics. Material recycling and chemical recycling are, of course, very important, but these cycles are hard to materialize. Most of the waste plastics are still dumped into the thermal recycling systems. Mitsubishi and JXTG decided to join hands to create a system which can truly claim that it can chemically treat and recycle plastics. This page explains our business acquisition in Europe, which I believe many of you already know about. Acquisitions have been very successful in achieving very favorable profitability and market share. Our acquisition of the Linde's HyCo business has been producing good results. We would like to take full advantage of these success stories through establishing the holding company-based organization. This plan was already explained by TNSC CEO, Mr. Ichihara. We divide the global market into 4 regions. All regions who supply thermals will be placed under the umbrella of the global holding companies. These entities learn from each other's best practices, upgrade their level of governance and improve profitability. This concludes my presentation on main market conditions and action plans. I also would like to touch upon our plan for encouraging the growth and competitiveness through integrating 3 chemical companies. First, business integration. Our original plan of growth through synergies was JPY 35 billion, but actual figure as of 2019 was about JPY 20 billion. We are in the process of compiling the new budget. But as of the fiscal 2020, our estimate will be about JPY 26 billion, generating the synergy out of cooperation. Among the different entities is the synonymous was business building, it takes time. We may have to wait until 2022. But we would like to continue working hard toward the original goal step by step. Next, this is our forecast of rationalization effect by integrating 3 chemical companies vis-à-vis JPY 15 billion, we revised up to JPY 19 billion. Especially, we successfully eliminated 164 subsidiaries and affiliates by the end of the fiscal 2019, which is 86% of the final target and -- that we are witnessing specific results. As for productivity improvement and work style reform, we naturally set the effect of streamlining the operations, including the reduction of the headcounts of the headquarters. Just as important as the productivity improvement is the implementation of safety through the tripartite integration. We have added this theme as our top priority challenges. This is a summary graph. As a part of the portfolio reform, we have either liquidated and divested JPY 240 billion worth of the business by 2019. In the current term that we mainly sold or transferred the LSIM recording media operation. And we can say with confidence that by the end of the fiscal 2020, we will achieve our original target by selling or transferring 190 subsidiaries of all the effect of the JPY 300 billion. As I have referred to some moment ago that place utmost importance of safety. Safety or lack thereof has significant impact on the productivity and human resources. We have created a list of 257 hazardous workplaces in the Mitsubishi chemical plants. We have plan to invest JPY 5 billion in this term in order to reduce the number by 136. I would like to emphasize again, safety first is and will always be our motto. Next is another key theme of ours, namely globalization. Our target is both overseas, sales and the profit ratio of 50%. The estimate in fiscal 2019 is about 45%. So region by region, our gas business has already achieved this ratio. But MCC is now trying hard to build up and win the global recognition of 1 MCC in Europe and United States. Under the 1 MCC initiative, the stakeholders unite marketing management and cost-cutting measures. DX digitization is the most important element of reinforcing foundation. The DX team was established in 2017. Solid foundation is about to be finished thanks to the hard work of the team members in the last 3 years. There still are more than 160 remaining things to tackle. We would like to address even more challenges in order to advance to the Phase II. Productivity increase, new product development, utilizing the material informatics, optimization of the sales missed by analyzing big data, these projects called for full usage of our data. This will also be our very important theme to be adopted during the coming Phase II. Another important point is our efforts to strengthen our R&D capability. Yes, they are of interest, but we need to strengthen our own R&D. We are now building our new R&D center in Yokohama. We need to strengthen open innovation in a true sense. We need to better utilize information and digital technology for better efficiency. As for the pharmaceuticals, we are now disposing of our old facilities. We are now making the use of the Shonan space made available by the Takeda Pharmaceuticals. We would like to modernize our facilities. We are also transferring consumers and technological functions to be concentrated into other office. With our R&D expanding, we are now accelerating our new business opportunities. A case in point is our gallium nitride. With the EVs advancing more and more, there will be more needs for power semiconductor and laser technologies. We should not miss the opportunity by catching up to the trends in offering our high-performance gallium nitride. We have liquid phase technology, and we do have the 4-inch product. Its defect ratio is better compared with the general products on the order of 2 digits. We are now assessing the technology actively, and we plan to produce this more. Taiyo Nippon Sanso is now developing a new technology based on gas. Mitsubishi Chemical has its own technology. By putting them together, we should be able to jump up to the next stage with our new ideas. Another important business is display. As you may know, this in OLED and has the issues and such as cost and product quality. Without the black bank, color, sharpness is going to be poor. With this and our low-molecule technology, we can address these issues. Two years ago, we actually launched Diamond Edge Venture Investments. It is going rather smoothly. As of the end of last year, we have evaluated 280 plus themes. This slide shows the 3 cases: display materials, 3D printing methodology and the polymer production and simulation. We are combining them into a system. While incorporating external power, we are strengthening our own R&D. So far, I have touched upon our efforts for globalization, R&D efforts, digitalization and how to strengthen our market presence. I would say, in this area, we are the right on schedule. At the same time, the -- we have to make further efforts on the nonfinancial side. Yes, they are very critical and very important. For example, reduction of GHG and preventive medicine and safety and comfort ideas. We are trying to evaluate them as firmly as possible, and they are very important for this year. Based upon these ideas, we are participating in many initiatives. We have joined the value and balancing alliance in order to better express our corporate values. As shown in the second box, we have created KAITEKI center in collaboration with Arizona State University. We're trying to look at, for example, on the Tokyo metropolitan area, as a whole, how best we can manage the entire hub [indiscernible]. Of course, I'll face with serious issue such as wasted plastic. And there, Q1 is going to be a circular economy. So we are participating in many alliance activities in order to address these issues. Of course, ESG assessment is very important. As shown on the next page, yes, we are fortunate, we have received many awards. That said, of course, we are faced with a very serious decisions. As far as we are concerned, back in 2008, we started addressing some of these issues. And we have come up with what we call KAITEKI management system. A company needs to create its own solutions in order to solve social problems. Without this, no contribution possible and without this, no growth for the company in question. So we are deeply engaged in what we call the KAITEKI management but the fact is that changing are taking place around us so rapidly and the nature of those changes have become so serious. With this point in mind, it's rather difficult for us to just have the short-term strategies. Therefore, we are trying to actually formulate a basic policy based upon long-term perspectives. Based upon this, I would like to have what we call the APTSIS 25 (sic) [ APTSIS 20 ]. And this is what we call the KAITEKI Vision 30. This shows the framework. Starting from the left-hand side, our environmental social issues and regulation issues and also the webs of the major transformations, what we should aim at in regard to the society. And based upon these ideas, we are now looking at the year 2030 to be. For example, it does include planet and society and the people. I think that we have to address all these important ideas. With this point in mind, looking at the society in the year 2050, what is going to be our aspiration there? I believe that -- and we are sharing similar ideas. Of course, it's got to be a carbon neutral society. And our strategy should be having the best optimal resource recycling. And of course, we have to address water and food issues, and Japan is a big important. So we need to be able to support good systems to address these issues. People. People need to be able to work with a good health. And also, the cities are going to be quite important. If cities go down, nothing is going to be possible, including economic activities. And of course, each one of us should be having all the good skills and capability so that we can truly enjoy the quality of life. That's the kind of society, I think, we should aim at and of course, it is technologies, which are going to support these ideas. With this point in mind, I think there could be risk -- many risk factors. From the SDGs, of course, there are 169 targets. And besides them, there are many items, as many as 300. Actually now, we are looking at those 300 items, we're trying to quantify the risk factors against us, how we can translate them into our business and operations. As shown on the next page, starting from the top, going through all these layers, we're trying to understand what we have to do. And ultimately, we have come up with -- there are 6 priorities. I'm talking about 6 most important business areas. I think this is a mission given to us. And if we are successful here, we should be able to minimize our risk factors, we should be able to maximize opportunities. And of course, it is people who are going to make them. So we have to actually work on human resources systems. That said -- what is going to be the most important requirement in order for us to be successful? That's what we're addressing. And we're trying to go through the growth opportunities, and that is going to be in our portfolio for the year 2030. Of course, it goes without saying, these business activities are going to change. Next page, please. Of course, we have the traditional types of business operations and also some of the activities are part of the social system. How we can drive the growth? How we can actually define our values? This is going to be quite important. And actually, we are addressing these questions, and it's very important for us to come up with specific solutions, so that we can be truly offering higher values. All in all, as you see here, we have identified 6 business areas. This slide does not to show details. But let me remind you that we have really in-depth ideas behind all these scenarios. That said, one of the viewpoints or direction we would like to follow is, right now, the business areas account for about 25%. But going forward into 2030, we would like to actually grow that up to 70% plus. Revenue wise, we are going to aim at JPY 6 trillion. Based upon this, we would like to make our business plan now for the new fiscal year, now starting from April this year, midterm business plan. And in December, we'd like to offer to you a good explanation as to our business activities, including our in-depth action plan. That's what we would like to do. All in all, there are so many activities, and we have to be engaged in. Of course, it is the people who are going to back them up. People, of course, we are having this global trends. Of course, we need to be successful in reforming HR systems, respect for individuals, and we need to have flexibility. And also, we need to have the really market values and also HR system need to be successful. All in all, the aspiration in 2050 consists of those 4 items. First one is on solutions to be provided to society. And also, we would like to maximize corporate value and solid, sustainable management and of course, people, robots and AI should be able to jointly work together. Based upon this, we would like to naturally come up with the following 2030 vision. We are going to emit those activities, and we are tooling and hoping that we can actually create a really good successful business plan. As you see here, this is the last page. We do hope that we can create and have good cities and good communities and good society. And thank you, indeed, for your kind attention. This concludes my presentation. Thank you.

Watabe from Morgan Stanley MUFG securities.

First on large-scale M&As. You made a big step forward with regard to resolving publicly listed parent subsidiary payers. And now there's a lot of attention in the market as to what you would do about Taiyo Nippon Sanso Corporation or TNSC. You explained that due to an agreement, you can divest, but not purchase their shares. There must also be some financial considerations as well. Can you share with us more thoughts in this regard? And your balance sheet is now rather big, but I understand that you are still seeking M&A opportunities for semiconductors, among others. Can you also tell us about your view on further large-scale M&As?

With regard to Mitsubishi Tanabe Pharma Corporation or MTPC, our view was that continuing in the current form would be very difficult in the current age. On the other side, our chemicals operations also had a need to change to adapt to current trends. In particular, they needed to work on biopolymers, polymers using genetics or protein-based polymers. In that sense, there was great similarity and overlap in technology and R&D. MTPC also needed to work more on genetics, et cetera. So there is a lot that we share and can do together. On the other hand, we can no longer survive with simple, low molecular weight materials. We need new generation materials using new technologies. For that purpose, the listing gives us more freedom in investing resources and accelerating R&D. That is why we decided on converting MTPC into a wholly owned subsidiary. With regard to TNSC, they are growing steadily in scale and have stable earnings. What they need to focus on now is to further expand breadth of its earning power. They would need new investments, particularly in Asia. They must develop and expand business in specialty fields. So rather than spending resources and converting them into a wholly owned subsidiary, we believe it is time to invest more on growth. With regard to your question on our balance sheet and future M&A, the D/E ratio is indeed higher, but we would still want to seek M&A opportunities. Particularly for performance products, we need to further expand and reinforce the business foundation. As I mentioned earlier, M&As for performance products are short of what we had planned. So we would continue to seek opportunities. We have already divested businesses worth JPY 300 billion, but we may want to think further in that regard as well.

My next question is about MMA. What happened to the project in the United States? There hasn't been any announcement yet. How is progress there? What happens to existing capacity? And looking at Q3 earnings, supply-demand picture is such that the top MMA producer is only earning several hundreds of million yen. What would you do about this? How would you change the geographical allocation or portfolio of your MMA operations? I personally feel that you could just do with the capacity in the United States and Saudi Arabia alone, but perhaps that's not the case. What do you intend to do with the relatively uncompetitive capacity? Any structural reform? And can you tell me about the supply-demand picture and why MMA prices have continued to fall for 2 years now?

Well, I will defer the earlier part of the question about the United States to Mr. Waga from MCC. But first on MMA. As I mentioned earlier, the current situation reminds me of when China's new normal began. MMA is widely used in a variety of products in general, so that once the supply-demand balance is disturbed, the impact is big. When the new normal began, our MMA earnings fell from JPY 45 billion to JPY 6 billion. But once there is recovery, the market does recover commensurately too. All of this is closely tied to the economy and GDP growth. Once GDP growth recovers, things will turn up too.

Masayuki Waga from MCC speaking. With regard to the U.S. project, things are taking more time than initially expected. That is because of site selection. In the past, the only requirement would be good access to the feedstock ethylene. Nowadays, when building in the United States, we must also think about logistics, how we can ensure that modules and equipment can be brought in. That is why it takes more time and more considerations. Having said so, we are in the final stages, and I hope that within several months, we can make an announcement. With regard to market conditions, recovery is yet to be seen. Very recently, there is an impact of the novel corona outbreak as well. But from before that, there has been an impact of the trade friction between the United States and China. Exports of consumer electronics made in China to the United States have come to a standstill. PMMA was widely used for such products, but they have nowhere to go now. So prices were hard hit, and supply-demand balance has not recovered over a prolonged period. Actually, we thought prices had bottomed on 3 occasions, but not much of a recovery materialized. Having said that, there are no signs of further decline either even in the face of this coronavirus outbreak. Currently, prices are still bottom crawling.

What happens to the existing capacity once you have decided on a new site in the United States?

The existing capacity in the United States may be aged, but we have invested in necessary maintenance so that they can still run at nameplate capacity. That is also true for the United Kingdom. For both countries, we are controlling production levels only because of the current market condition. They are actually very ready to produce at full capacity. And the feedstock they use are different. So that depending on feedstock prices, we have the ability to switch in between capacity and optimize production and if necessary, help balance supply and demand.

Ikeda from Citigroup Global Markets Japan Inc.

You mentioned measures for earnings growth in performance products. I understand the unfavorable macroeconomic conditions, but growth in new products appear to be slow, except for clear fit, lithium-ion battery electrolyte and sustainable resources. How do you intend to realize growth and profitability in FY 2020 and beyond, particularly with respect to carbon fiber display and high-performance engineering plastics, please?

Waga from MCC speaking again. As Mr. Ochi mentioned, gallium nitride is effectively in the final stretch. We have high expectation for its contribution to earnings. With regard to anode material, again, we are to introduce new natural graphite-based anode materials. With regard to display, we have great expectations for 2 technologies. One is the low molecular weight inkjet coating material for OLEDs, and the other is black bank material using black column spacer technology, or BCS. We're also expediting commercialization of a technology using zeolite membranes to separate alcohol and water. I can go on and on. There is a long list of seas of promising new businesses. They may not develop into a blockbuster success overnight, but will steadily grow. This year, 5G compatible material is a big focus. And the black bank material and the low-molecular weight coating material for OLED are perfect opportunities to leverage the technology that we have developed over years.

Now on your dividend policy, you said the payout ratio this year would come to 70%, but the 3-year average is 34%. And for the sake of stability, you will maintain JPY 40. How do you intend to improve your financial structure? In particular, how do you intend to bring the D/E ratio down to 1 from 1.8?

If the business environment does not change much next year, your payout ratio will largely overshoot the 30% medium-term figure. But then you could say that given dividend income from TNSC and MTPC for more than JPY 20 billion, the net cash out is only about JPY 30 billion. So in the absence of liquidity risk, you can maintain JPY 40.

Can you elaborate on your dividend policy in conjunction with how you intend to improve your overall financial structure?

Hidefumi Date, CFO, speaking. Now this is what I always say to investors: rather than focusing on past years and the average payout ratio there, we have tended to look forward so that we can say with confidence that several years down the road, when we look back, we will be able to say that the payout ratio has indeed been at around 30%. That is the way we think when we say stable dividends. Your question is what would we do if FY 2020 is the same or worse than FY 2019. But the Gilenya issue would be resolved someday within 2 years. And if we can maintain our confidence about the JPY 40 dividend payment until that point in time, then it will remain at JPY 40. If you look at our track record, we do not necessarily shy away from the payout ratio rising temporarily to 100%. Obviously, we are mindful of rating, though. We will look at various factors, including past, future outlook, confidence level as we strive to maintain stable dividends and make decisions accordingly.

How do you intend to bring the D/E ratio down from 1.8 to 1? You would still want to make strategic investments. What is your outlook?

Well, our cash flow has been good, as we have reported in our earnings release. Q3 earnings per se may have been squeezed, but cash flow is still positive. Leveraging that cash and together with asset efficiency improvement, we intend to bring the D/E ratio down to 1.0 pretty quickly. That is just as we said back in November, when we announced the TOB for MTPC. While the current earnings situation has worsened, our thinking has not changed since then.

Yamada from Mizuho Securities.

My first question is about KV 30, or KAITEKI Vision 30. While I can only agree with all that is written there, how exactly can that help you earn money?

This is an important question. Resolving issues per se does not lead to any earnings. You have to get recognition for your contribution to the resolution of issues, so that your customers will pay you.

I have actually been studying the history of economic development of mankind over the past 2000 years. All the way until the 1820s, the per capita GDP remained almost unchanged. It suddenly started to grow then. Why? Because a transition was made to a society that keeps increasing entropy. Thanks to that transition, mankind became wealthier. Now how do you think you can reverse all that in just 20 or 30 years? How would you make such a transition? And how would you make money out of it? What kind of picture are you painting?

The answer could be that while you hold that vision for 2050, you don't really know. So KV 30 is mostly an extrapolation of where we are.

But can you please help me understand how you back halved from 2050 to 2030?

This is Yoshihiro Ikegawa speaking. I'm responsible for corporate strategy. As you mentioned, we expect the economic paradigm to change significantly. Instead of merely pursuing entropy increase, there will be more focus on quality. That idea forms the backbone of portfolio reform under KV 30. On the other hand, the world population, which stands at 6 billion may reach 10 billion by 2050. Out of 6 billion people, 4 billion live in urban areas as of now. The additional 4 billion, mainly in developing countries, including African nations, not developed countries, will seek to live in urban areas. In order to accommodate these additional residents, quality services, materials and health care facilities will certainly be required. Therefore, rather than asking how much profitability can be expected in each segment of economy, you have to transform our business portfolio in line with such changes. Otherwise, we cannot create value added. If we cannot produce products and services required in the market, we place ourselves in a risky position. Business model transformation and business upgrading and through innovation will help us minimize such risk. And this is a philosophy of KV 30. Now your question is how can we translate this basic direction to profitability? Page 42 or 49 rather discusses that business with group opportunities. There are 3 important elements consisting the backdrop of these growth businesses. One is the growth potentiality of the market. Secondly, technological innovation, namely, when and where and what kind of innovation emerge. We make our informed prediction so that we will be able to access the technology which would be established in 2030. We select the growth business from this vantage point of advanced technology. Thirdly, market emergences. We predict when the market emerges of what size. We take all these factors into consideration to select the candidates of growth businesses, which is to maintain about 10% of profitability on average. Possible profit ratio is also our criteria of selection. Now there is no guarantee that the profitability is realized at this moment. We only have a plan, but there will be 2 midterm plans issued between now and the end of the plan. So within this period, we would like to formulate action plans.

Personally, I think 10% rate of profit is very low because you have to assume a huge risk of reforming the company in the radical way. High-risk should be rewarded by high returns, what do you think?

Profitability fluctuates in the course of the time. At the prime time, profitability soars. But there are plenty of factors, including new competitors entering the market can contribute to turning it downward. Considering this, roughly, very roughly, I said 10% on average.

I understood. I expect much of you to lead KV 30 to a success, bringing corporate reform and the increase in profit. I have one more brief question. You listed up that advanced technology established and available in 2030. That list includes the regenerative medicine and health care innovation.

I agree with you.

You also mentioned that you will invest heavily into Muse cells. I'm sure you cannot disclose the information before launching the clinical tests. But how promising do you think your initiative will be? If the prospect is favorable, will you consider advancing into overseas market or concluding the alliance with overseas partners? If I'm right on this, are you going to consider that -- to open your innovation other than Muse cells with your entities?

Kiso is my name, Head of the Life Science Research office. As for our overseas strategies, primarily, as you have mentioned, the U.S. is our target for expansion. FDA, in particular, must be persuaded with ample clinical cases. I expect reasonable amount of the data to be gleaned by the middle of this year. As soon as we have significant body of data, we will bring them to FDA in order to engage in the consultation with them or even local development. We have already started considering how we should approach the U.S. market, including consultation with the FDA. As I have mentioned before, as soon as we gather enough data of reasonable quality and integrity, we will approach the U.S. authority. We have already started our preparatory works.

My name is Miyamoto from UBS Securities.