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

Thank you for joining us. I am Hidefumi Date, CFO of Mitsubishi Chemical Holdings Corporation. Let me start my presentation. Please turn to Page 4, which shows consolidated statements of operations. The exchange rate used was JPY 109 to the dollar for the full year and appreciation of yen of about 2% year-on-year. The price of naphtha applied was JPY 42,900, down 13% year-on-year. Sales revenue was JPY 3.5805 trillion, down JPY 259.8 billion year-on-year, of which about JPY 50 billion was attributed to the foreign exchange rate or stronger yen and JPY 180 billion to the falling market. The core operating income was JPY 194.8 billion, down JPY 119.3 billion year-on-year, which I will elaborate on more later. Special items will be explained in more detail later, but consist mainly of an impairment loss on goodwill for capsule materials, an impairment loss posted in the fourth quarter on the intangible assets associated with a virus-like particle, or VLP, vaccine for the prevention of seasonal influenza. Operating income was JPY 144.3 billion on an IFRS basis. On the financial income and expenses, in addition to deterioration in dividend received and foreign exchange loss, there was an increase of about JPY 7.4 billion in net interest expenses in the fourth quarter due to the acquisition of Taiyo Nippon Sanso. The income before taxes was JPY 122 billion. The income taxes were JPY 52.3 billion, which is smaller than the previous fiscal year, obviously, but the tax rate applied was higher at over 40%. Since we assume that as the outbreak of COVID-19 would significantly push down the profit for fiscal 2019 and 2020, we posted reversal of deferred tax assets for losses recognized in 2011 caused by the Great East Japan Earthquake. Furthermore, the impairment loss of capsule materials, for which deferred tax accounting was not applicable, also contributed to the higher tax rate. If you go down by 2 lines, there is net income from discontinuing operations attributed to the gain on stock transfer of diagnostic and testing business to PHC Holdings, which we have been telling you from the first quarter of fiscal 2019. Thus, our bottom line, the net income attributable to owners of the parent totaled JPY 54.1 billion, down 68% year-on-year. Moving on to Page 5, where you find sales revenue and core operating income by business segment. Inventory valuation gain or loss is shown at the footnote. In order to avoid making the table too busy to see, we have not shown the results by quarter. But in the fourth quarter, it was a negative figure for March 2019, but March 2020, it turned into the positive figure, showing a big difference year-on-year. In the fourth quarter alone, the net gain totaled JPY 12.2 billion, which is broken down into plus JPY 800 million for Performance Chemicals, plus JPY 12 billion for petrochemicals and minus JPY 600 million for carbon products. This may give a bit odd impression on the profit by business segment, which will be discussed later. On Page 6, you can see analysis of core operating income. Unfortunately, we suffered a decrease of JPY 119.3 billion year-on-year. In terms of price difference, biggest contributors were declines in the market of MMA, Carbon Products and Petrochemicals and Chemicals segment, which totaled a negative JPY 80.8 billion. Moreover, in health care, the spread was eroded following the revisions of the NHI drug prices this past October. Difference in volume led to a decline of JPY 40 billion. In Performance Chemicals, in the year ended March 2020, the semiconductor business remains sluggish throughout the year and automotive business deteriorated in the second half. In chemicals, the volumes of MMA and carbon products decreased. In industrial gases, in the second half, we acquired businesses in U.S. and Europe, which was reflected as an increase of a little less than JPY 20 billion. In health care, a JPY 44.8 billion decline was due to the suspension of recognition of sales revenue from Gilenya. As for the fixed cost reduction, we have more or less achieved the target set at the beginning of the fiscal year. Under Others, an annual total of JPY 3.1 billion in net inventory valuation loss was posted in addition to JPY 13.4 billion of decrease in share of associates and joint ventures. In industrial gases, the JPY 3.7 billion was due to the absence of the M&A transaction costs incurred in March 2019. Moving on to the next page, where I will discuss the results of the Performance Products segment. Functional products saw a decline in sales revenue and slight drop in profit. Things did not change much from the period up to the third quarter. Ion-Exchange Resin and Aqua-related sales volume increased, while sales volumes were down in high-performance engineering plastics and other products, primarily for semiconductor and automotive applications. Performance Chemicals also fell both in sales revenue and profit. Profit decreased amid a decline in the market of phenol-polycarbonate chain materials despite the positive factor of the impact of scheduled maintenance and repairs at these production facilities being resolved. Now as indicated at the left bottom of the slide, the impact of COVID-19 is estimated to be JPY 1.8 billion for this segment in fiscal 2019, primarily due to the automotive business. Please turn to Page 8. This shows the results of Chemicals segment. MMA fell both in sales revenue and profit significantly. This was a result of a smaller variance in prices between raw materials and products amid a market downturn. Petrochemicals also suffered a decline both in sales revenue and profit. Decline of prices more than the raw materials costs and deterioration in inventory valuation resulted in the deficits in the subsegment. Carbon products went through a very difficult fourth quarter. Declining costs of raw materials led to a sharp drop in the coke market, while needle cokes saw its sales volume decline. With regard to the impact from COVID-19, in MMA, sales volume fell, especially in China. In petrochemicals, the market dropped. And in carbon products, sales volume and the market declined. Please turn to the next page, where you can see the results of the Industrial Gases segment. Wholesales revenue and profit increased year-on-year. There was a strong benefit seen from the acquisitions. Turning to Page 10 for health care segment. As I explained, in addition to the impact from the revisions of the NHI drug prices, some Gilenya royalty revenue was not recognized resulting in the sharp decline in both sales revenue and profit. Page 11 shows consolidated special items. Impairment losses primarily consisted of the 2 items mentioned earlier. With regard to loss on sale and disposal of fixed assets, disposal of fixed assets for structural reforms are underway. Page 12 shows consolidated cash flows. Let me explain on the adjusted basis indicated in the middle of the slide. Net cash from operating activities reached almost the amount announced on May 14 as the target for the year. Although the profit dropped significantly, the decline in costs of raw materials turned the working capital into a net positive figure, which is a tailwind for us and allowed us to manage to generate the amount close to the original target. On the other hand, with regard to the net cash from investment activities, capital investments failed to make as much progress as had originally anticipated at the beginning of the fiscal year, though we did not particularly try to stem the investment. As a result, we ended up with free cash flow of JPY 246.3 billion. And the net cash provided by and used in financial -- financing activities, there is an item, additional acquisition of consolidated subsidiary stocks, which included the completion of TOB of subsidiary, Mitsubishi Tanabe Pharmaceutical Company, in March by spending JPY 398.1 billion. Now the complete settlement for making MTPC a wholly owned subsidiary is supposed to be posted in April and, therefore, will be reflected in cash flow for fiscal 2020. Moving on to the next page, the consolidated statements of financial positions. Total assets stood at JPY 5.1321 trillion, down JPY 440 billion from the year before. This includes JPY 200 billion due to a drop in cash and cash equivalents as well as cash on hand invested and JPY 130 billion in trade receivables due to drop in the raw material costs and sales volume as well as JPY 100 billion attributed to the stronger yen. IFRS #16 lease accounting actually helped increase the total assets by JPY 100 billion, but other items mentioned earlier, such as impairment losses and valuation losses in strategically held listed shares resulted in a JPY 440 billion shrink in total assets. At the right -- the bottom, the net D/E ratio is shown to be 1.79, which is in line with what we explained at the time of TOB. The ratio of equity attributable to owners of the parent was 22.8%, down 1.9 percentage points year-on-year. Unfortunately, ROE fell to a low level of 4.2%. Let me explain the full year forecasts on Page 15. The impact of COVID-19 in this fiscal year is estimated at JPY 80 billion. Sales revenue is expected to decline nearly JPY 250 billion to JPY 3.334 trillion. Core operating profit is projected at JPY 140 billion, down 28% year-on-year. Net income attributable to owners of the parent is projected at JPY 49 billion, down 9% year-on-year. The split between the first and second half is for core operating profit, JPY 25 billion and JPY 115 billion and for net income, 0 and JPY 49 billion. So it is fairly skewed towards the second half, as pointed out by some investors. Moving on to sales revenue and the core operating income by business segment on Page 16. This page explains the impact of COVID-19 for the first and second half, respectively. Let me make some additional comments. Earlier, when I talked about the COVID-19 impact of roughly JPY 80 billion, it is actually JPY 78.5 billion as the impact on core operating income, JPY 69.9 billion for the first half and JPY 8.6 billion for the second half. For the second half, JPY 4 billion for carbon products, JPY 4.6 billion for health care products. As for functional products, we have lower sales of automotive semiconductor production equipment, which is CapEx-related products and flat panel displays. For FPD materials, supply chain is not completely restored yet and production adjustment may start towards Q2. These assumptions are included in JPY 16.8 billion. As for Performance Chemicals, we are assuming decreased sales of automotive and polycarbonate inventory valuation differences of JPY 3 billion. Total is minus JPY 12.8 billion. As for MMA, in Asia and other areas, sales are expected to go down. Petrochemicals are projected to decline by JPY 15.9 billion, partly due to raw material price drop associated inventory valuation difference of about JPY 6.5 billion regard by declining naphtha prices to around JPY 20,000 as well as low sales of automotive and others. As for carbon products, sales are likely to decline by about 30%, with the production adjustment already being initiated at the moment. As for industrial gases, as announced yesterday, sales decline 15% and 10% is anticipated for Q1 and Q2, respectively. That's the background behind the decline of operating income by JPY 10.6 billion. As for health care, there will be less expenses because R&D is not making progress. But at the same time, people will try to avoid hospitals. That is why we are anticipating fewer outpatients to go to hospitals and drug administrations as well. These factors are considered for the second half of the year. Page 17, dividend forecast. The year-end dividend is forecasted at JPY 12 per share. That is the revised forecast announced on April 28. This is also the level we are maintaining for the interim and year-end dividends for next year. As explained in the last 3 lines of the slide, as for the dividends for FY '20, because it is unclear as to when COVID-19 pandemic will end and the challenging environment is likely to continue for some time, the previous level of JPY 20 for each 6-month period is no longer sustainable. We came to that realization in March where we had anticipated no profit for the first half and the recovery in the second half only. Based on that realization, we have reduced the dividend to JPY 12 per share, and now we are applying this level also to FY 2020 forecast. For the first half, we are paying a dividend of JPY 12, despite the fact that there is almost no profit. That will make the payment ratio -- payout ratio, 69.6% for the year because we are paying these dividends out of a profit of only 6 months. The payout ratio for the second half alone will be around 40%. Lastly before I close, let me go over some of the reference materials. On Page 21, we have shown the quarterly trend. Let me take you through the changes from Q3 to Q4. First, on functional products. During the third quarter, the trend started to go downward for optical films, and it continued to fall all the way to JPY 3.3 billion for Q4. On one hand, there was an impairment of about JPY 1.6 billion for a certain product, which is a onetime factor recorded during Q4. Also, optical films and packaging films are in a lower-demand period, and they are declining by about JPY 4 billion every year. We had about JPY 700 million COVID-19 impact. So if you exclude all of these factors, the balance is about JPY 10 billion. As for Performance Chemicals, for Q3 and Q4, there was a decline due to COVID-19. MMA also experienced a COVID-19 impact of about JPY 2.9 billion for Q4. Petrochemicals also suffered a COVID-19 impact of JPY 2.2 billion, on top of the JPY 2 billion impact from the trouble at Okayama plant, and another JPY 2 billion for the disposal of utility-related assets. So there were some special factors for this time around. Carbon Products also suffered a significant impact from COVID-19. Other than that, needle cokes volume was down further. The question now is whether the trend will pick up during the first half. In that respect, if we look at Performance Chemicals, the Q4 figure was JPY 3.3 billion. Excluding the special factors of Q4, the figures would have been around JPY 10 billion compared with JPY 8 billion, which is our forecast for the first half of FY 2020. This figure incorporates JPY 16.8 billion as the impact of COVID-19. So without COVID-19, the business would generate about JPY 25 billion, so we should carefully monitor the situation for Q1 and Q2. In addition, prices of raw materials, such as naphtha, are declining at the moment, which should make a positive contribution to earnings. That's the level we are looking at right now. Performance Chemicals forecast a negative JPY 1 billion for the first half of fiscal 2020, including JPY 12.8 billion impact from COVID-19. So without COVID-19, the business would have generated about JPY 12 billion in operating income. That's the consistent figure that we had for the third and fourth quarter FY 2019. MMA has set totally different assumptions. The business expects pricing to go up from $1,400 to $1,500 for the first half and from $1,500 to up to $1,800 for the second half of fiscal year 2020. The background of this is related to acetone, which is a raw material of isopropyl alcohol. Acetone prices are surging amid the brisk demand for disinfectant product. The ACH method is losing competitiveness, leading to gradual production adjustment at the moment. So the spread should rise little by little going forward. That is the expectation. Also, PMMA, which is a transparent acrylic resin, is experiencing a special demand at the moment, especially among banks that are trying to prevent droplet infection of COVID-19 between employees and customers by providing shields at the counters of the branches. Now petrochemicals forecast a negative JPY 19 billion, of which JPY 15.9 billion is due to COVID-19. The business is also planning to conduct a scheduled maintenance repair at Kashima. In view of these items, we belief that the forecasts are reasonable. As for carbon products, are already making utilization adjustment to overcome the impact of COVID-19 of JPY 3.9 billion and secure a positive profit of JPY 1 billion. During the fourth quarter, in terms of the exports, we are experiencing a decline in the spread. And we are trying to address this situation and try to increase the spread. That's my brief explanation of the trend from Q3 to Q4 through the first half of FY 2020. With this, we would like to open up the floor for questions. Thank you.

The first person to ask questions is Mr. Watabe, Morgan Stanley MUFG Securities.

I have 2 questions. Thank you very much for a very detailed presentation and breakdown of the impact of COVID-19. I would like to know the assumption for possible deterioration in the automotive business behind the extremely detailed description of the impact of COVID-19. And listening to your presentation, I sensed that you expect a deficit for the first quarter. Am I right?

With regard to the automotive business, some say there will be a drop of 20% to 30%. But the customers we do business with are different from component to component. And therefore, we cannot paint the picture with a single brush. For example, high-performance engineering plastics companies are basically based in Europe. As for Japanese companies, we expect their operations to be as announced at the moment. In other words, compared to the U.S. and European companies, we assume that there will be only a slight adjustment in the operation of the production facilities of Japanese companies. Having said that, however, as Toyota said, sales are expected to recover around the end of December. So our assumption is that in the second half, the production will be back on track and buildup of inventories will be complete. Now your question of the first quarter, likely to be in deficit was really a smart question. I think you are right. That is because petrochemicals business will see a JPY 6.5 billion in inventory valuation loss in the first quarter and so will the polycarbonate inventory valuation loss of JPY 3 billion all in the first quarter. We will see a significant impact in the first quarter from the fact that we use domestically produced naphtha. The only business, which we believe is likely to be worse in second quarter than in the first quarter is flat panel displays. They are performing relatively well, for now. But in the second quarter, the inventories in the supply chain will become stagnant and the business to become more sluggish. But for all the others, we expect all the players to gradually recover and be ready to operate by the end of September.

As for MMA, the leading manufacturer has turned into deficits, and I suspect the volume has been falling sharply. You mentioned IPA earlier. The market of IPA has been going up for quite some time with prices of acetone picking up as well. Despite that, MMA has been slow in turning upward. And yet your forecast incorporates a rise in MMA prices. Could you give us your logic behind that?

Well, previously, what I told you that we did think about raising the price. We are having practical discussions with some of our customers. But it is not necessarily the case that we can have conversations with 100% of our customers. So we are trying our best to persuade our customers of the price hike. It is not just us, but ACH manufacturers are now beginning to shift to the strategy of raising prices. Therefore, we'd like to take this opportunity to make sure that we will succeed.

Am I correct to say that the market sentiment is changing?

We want to change the market sentiment.

I see. There is one question on health care. I know you're not allowed to talk about this, but can you give us some indication as to whether you will be able to receive the royalty on Gilenya in this fiscal year?

From the perspective of recognizing profits, we have been told that it will take more than 2 years. Therefore, if you start counting from February last year, the earliest possible timing will be 2021, which is a general understanding. But we are receiving cash, which is posted not in the profit and loss statement, but as an item under liabilities.

The next question is from Mr. Miyamoto from UBS Securities.

There are 2 questions. The first question is again on MMA. Do you expect price movements to be uneven among different regions? Since I assume the extent of demand recovery will differ from region to region, could you share with us the regional breakdown of recoveries in prices and demand? I also would like to know capacity utilization ratios at your company.

Let me answer the easier question first. As for the capacity utilization ratio, we have seen it drop close to 50% most recently, partly due to the scheduled maintenance and repair in SAMAC. But going forward, we expect the ratio to go up gradually to reach 60% or a little more than 70%. With regard to prices, it is true that there is unevenness being observed. If there are better prices in the U.S. and Europe, the products are exported from Asia to those regions. And therefore, there's arbitration coming into play to some extent. But as the U.S. and European countries are still in the process of recovering from the outbreak of COVID-19, the demand there remains still weak. So although there is some unevenness, there will be -- not be export from Asia and the prices will remain low across the regions.

What was the capacity utilization ratio in the fourth quarter? And what is the forecast for the first quarter or first half of this fiscal year?

In the first quarter, it was 66% on the average. For April to June, it is expected to be 62%; July to September, 75%; October to December, 73%; and January to March, 70%.

Is it not your assumption that there will be more recovery in demand in the second half, the ratio is expected to peak in July to September?

Basically, we have not incorporated such a big fluctuation in demand in our assumption. After all, we will stop ACH method production to adjust the level of operation. And we expect other companies to do the same if they can.

Am I correct to understand that your company has 3 methods of production and that you plan to suspend the operation of ACH, which is relatively challenging, for now, to ensure the optimal operation, as you have been saying all along, so you can maintain relative competitiveness?

Yes, we definitely would like to not just say that in words but demonstrate our capabilities and financial results.

I see. My second question is about functional products. You shared with us your take on the fourth quarter and first half to some extent. But could you give us the more details by product? And no other companies were so clear about the likely drop in the second quarter for displays. Is there any particular reason behind this? I also want to know about how strong the tablet related demand is.

In the semiconductor business, the operation was not stopped in China, even in the fourth quarter. Then the flat panel display product business became sluggish during the Chinese New Year holidays and whilst staying at home order was in place. But the demand is now back as our products are of high quality. However, as I said, in the inventories in the next process of the supply chain, the inventories are getting stuck. And so we expect some adjustments to take place in the second quarter. Regarding the business by product, the functional products usually do not do so well in the second half due to its European business and optical films. While in the first half or the first and second quarters, this business is supposed to be strong, mainly due to demand for smartphones so we cannot tell when the new school year will start this year. For more detailed breakdown by product, could you ask our IR department separately?

In terms of directions of displays, semiconductors and automotive uses, is it your take that there is likely to be adjustments in the second quarter, especially in display business.

Yes. As for semiconductors, the U.S. and Europe are slightly stagnant. But in all the other regions, business is working well. And with 5G service becoming available, the memory business is also expected to recover gradually. The semiconductor is, therefore, not expected to be as bad as last year, but the automotive business is expected to drop sharply from last year, with perhaps about 20% fall in the number of vehicles produced year-on-year. On the average, the different customers will do differently.

The next question is from Mr. Umebayashi from Daiwa Securities.

I have 2 questions. Firstly, I may be ahead of myself, but you indicated that the core operating income of the functional products is forecasted to be JPY 29 billion in the second half, which is quite high compared to the figures achieved in the past. So could you tell me why you believe the profitability to go up?

In the fiscal 2018 and 2019, the semiconductor business was very bad and we expect it to do much better in the second half. And another assumption in this forecast is that the automotive business will be back to the pre-COVID-19 level. Therefore, the automotive businesses assume to be not that different from any average year. And optical films are not just for optical applications, but they can be sold for use in multi-layered ceramic condenser, or MLCC and others, and we incorporated an increase in the volume for such applications in our forecast. Does that answer your question?

Yes. My second question is about Page 23, which shows actual results of capital expenditure, depreciation and amortization and R&D expenses. Could you share with us your forecast for this fiscal year? There is also a discussion on new factory of MMA in the U.S. Do you expect it to start to be represented in those figures this fiscal year?

As for MMA, we have almost completed the selection of a site for the new factory and are about to start preparing EPC. Therefore, we expect very little spending associated with this as far as fiscal 2020 is concerned. Now, this is something I remember explaining once when we shifted to IFRS, but the expenses on scheduled maintenance and repairs used to be recognized as repair expenses, but has now been switched to capital expenditure, which is worth about JPY 10 billion to JPY 20 billion as it is considered to have a life of 2 or 4 years. Therefore, capital expenditure looks a bit higher by that much or is increased when compared to the previous years. With regard to the fiscal 2020, since there is much uncertainty in the future, and we face challenges in terms of profitability, we already started discussions postponing some of those capital spending projects that won't be so damaging even if postponed. But it is not the case that we have made decisions as to which will go as scheduled and which will be postponed in the budget. Does that answer your question?

In fiscal 2019, you spent JPY 240 billion in capital expenditure. This fiscal year, can we expect this to be reduced by several tens of billions of yen? What did you say about several tens of billions of yen?

Well, I am talking about capital expenditure, which was JPY 240 billion in fiscal 2019.

But this year, your financial performance is weak and expect to reduce the dividend. Most of the companies mentioned cash management as one of the most important challenges. Therefore, I'm interested to know if you have any specific idea about the size of the capital expenditure, say, JPY 220 billion instead of JPY 240 billion for this fiscal year.

No, I don't have any concrete idea about the scale. We're going to focus on doing what needs to be done. We do not want to sacrifice dividends by prioritizing capital investment or vice versa. But rather, operate our business while maintaining an overall financial balance.

This is Yamada speaking from Mizuho Securities. I have 2 questions for you. The first is about financial balance mentioned earlier. I think you're right in your explanation that inventory valuation loss was incurred for the first quarter, putting a significant pressure on earnings. On the flip side, though, inventory should increase, trade receivables should increase and the working capital should decrease at the same time. Currently, the company's net interest-bearing debt is a little over JPY 2 trillion. My estimate is that this should be further complexed by the end of the first half. Is that correct? And also, of the JPY 2 trillion, about JPY 800 billion belongs to Taiyo Nippon Sanso, so most of it should be excluded the purpose of credit rating evaluation. In other words, it is a project finance type. So if this is correct, the net D/E ratio is effectively about 1 time. From a cash flow standpoint, there was no need to reduce the dividend to JPY 12 for the first half, JPY 12 for the second half and JPY 24 for the full year. Did you lower the dividend because you have a sense of urgency that earnings will not recover, not only in the current fiscal year, but also in next 2 to 3 years? Please comment on that.

With respect to dividends, as we have said before, we take into account not only the average of past few years, but also the outlook for the next years by comparing it to the past. We are trying to do a very medium-term review. That's how we decided on 30%. In other words, we want to maintain a stable dividend during periods of extremely low profit. The dividend payout ratio may not reach 30% in a phase of rapid earnings growth. Rather than fluctuating the dividend up and down so much for the purpose of staying close to 30% for each year, we want to create a situation in which the payment is -- payout is 30% in a 10-year period looking back while maintaining a stable level. And by doing so, we want to gain satisfaction among shareholders. Did this answer your question?

In terms of financial balance, or balance sheet and cash flow, your company is not in a position where you can't pay a dividend. You have said that you will reduce the dividend for the first half of this year because of the impact of COVID-19 and unrecognized revenue of Gilenya and the impact of extremely unfavorable petrochemical market conditions. But why did you have to reduce the dividend to this extent? I am not saying that you should increase your dividend in a period of earnings growth. I'm not talking about that. It's hard to understand in terms of financial balance and 5-year moving average. That is the background of the question.

If you look at past years up to the fiscal year just ended, we have been able to pay a dividend of roughly 30%. If you are asking why the dividend was JPY 12, it is as I explained earlier. Profit in the first half of next year is expected to be almost 0, and the second half is expected to be over JPY 40 billion. That was something we were thinking about. We believe that when a difficult environment is expected in the next few years, from the perspective of a stable dividend, it will be desirable to lower the dividend level once, leaving an appropriate source of funds and then raise the dividend again in a later year. That's what we want to do. We also looked at the possibility of maintaining the dividend level of JPY 20 for each of the 6-month period. Your point is correct. Since the D/E ratio is onetime, if you exclude Taiyo Nippon Sanso, we believe that an annual dividend of JPY 40 in a period earnings growth is not a very sustainable level. We also have the potential to reform the -- or change our business portfolio in the post corona period, that is something that we are thinking about. We took into account that possibility and the various other points in our discussion. The positioning before and after coronavirus may change. That is another possibility. We are fully aware that various views have been expressed in this regard, but we hope you understand that we have considered all of these points.

I understand it well. You plan to make certain preparations during the COVID-19 period, and you want to take a conservative stance to some extent.

That's right.

I understand. I'm sorry for taking a long time. I have more question. The second question is about Mitsubishi Tanabe Pharmaceutical. What impact, if any, will this have on COVID-19 clinical trial?

Page 39 shows the pipeline and launch schedule. Our items such as ALS and Parkinson's disease likely to be given less priority in the situation.

Please comment on the progress of the trial and difficulty in recruiting.

This is Kobayashi speaking from MTPC. Thank you for your question. At this time, we are unable to say how much of an impact this will give on the clinical trial. However, some hospitals are slowing down or pending clinical trials in order to respond to COVID-19, while also taking into account patient priorities. We would like to let you know if there is any major change in the future.

Sorry, I want to make additional comment. The items in the late-stage have larger -- largely completed in the -- in terms of the clinical trial. Therefore, there is not much chance that the market launch will be delayed. Mr. Kobayashi's comment earlier was about items which are in earlier stages like Phase I and Phase II. Is that correct?

This is Kobayashi. As you know, a trial consists of 4 stages: a startup period, case-evaluation period, data-consolidation period; and filing period with the authorities. In this context, interactions with health care organizations occur during the start-up and the data consolidation periods, therefore, items in the start-up period could be affected by COVID-19. But so far, we have not made any schedule changes.

I see. MT-1186 trial started last November. I thought this item will be affected. And also ND 0612 has completed drug administration already and in this process of consolidation of the data. So I thought this will be affected, too, but there are no concrete changes at this stage?

That's right. Since those 2 are global trials, including the U.S. and Europe, there may be some impact going forward. But so far, there is not.

This is Takeuchi from SMBC Nikko. Earlier, you commented on MMA's fourth quarter capacity utilization rate. But please comment on the performance and the plans for other products, major products other than MMA.

Okay, from the top, the phenol chain is currently in full operation in view of scheduled maintenance and repair planned for the period. It will continue to run at full capacity going forward.

Was it in full capacity in the fourth quarter? What are the results for the fourth quarter? And what is the outlook for the new year?

The fourth quarter results and outlook are both full capacity, although the Chinese plant is skewed -- is slowed down, sorry, in the fourth quarter.

How about ethylene and the polyolefins, polypropylene and polyethylene in the petrochemical segment.

Ethylene is running at full capacity. In the purchasing balance, we only decreased the olefin purchase. For polypropylene, we've reduced production in response to lower demand. We had some trouble in Mizushima and had to make some repairs for it. So our utilization rate was down. Polyethylene utilization was at a reasonable level. But were affected slightly by the slowdown of sales. Ethylene will continue to run at full capacity. Polyethylene will run reasonably at a higher capacity rate and the polypropylene will continue to run at full capacity. This year, Kashima will shut down for about 2 months for scheduled maintenance.

How about COGS?

COGS has already made production adjustments. We are currently at about 80% utilization. And I think that the level will continue for some time to come.

Is it safe to assume that petrochemical inventory levels are already reasonable and that no major utilization adjustments are needed in the future? Is that correct?

Yes, that's correct. The inventory is not at a high level at the moment.

Understood. The JPY 78.5 billion of COVID-19 impact, is it all from volume factors?

There is an inventory valuation difference factor as well. That was JPY 6.5 billion for petrochemicals and JPY 3 billion for polycarbonate.

Okay. On Page 6, you have last year -- last year's waterfall chart. What is the breakdown for this year? The profit is going down by JPY 55 billion. Please comment on any cost savings or spread factors and so forth.

Sorry, I didn't understand your question. Could you repeat your question?

Well, there's a waterfall chart for the last year on Page 6. Do you have the information on the rough breakdown of the JPY 55 billion for the new fiscal year?

No, we don't have the information.

Okay. Then how much is the assumption for naphtha? Is the spread factor positive for MMA and in petrochemicals compared with the last year?

We expect the price of domestic naphtha to drop to around JPY 20,000 in the April, June quarter. If the level recovers, there will be inventory valuation gain. It is not included in the guidance. It is reasonable to assume that the situation will normalize in the second half of the year and that raw material prices will go up. We don't expect inventory valuation gains though, to increase, especially since the prices are currently falling due to factors other than COVID-19. The assumption is that the JPY 6.5 billion for petrochemicals and JPY 3 billion for polycarbonate in the first quarter for a total of JPY 9.5 billion.

So that will be continuing to exist as is?

Yes, that's right. Thank you very much, thank you for joining us today. If you have any further questions, please contact our IR office. Thank you very much.