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

Good afternoon. This is Date speaking. Thank you for joining us. Please turn to Page 4, consolidated statement of operations. During the first half of this fiscal year, exchange rate was JPY 110.1 to the U.S. dollar, representing depreciation of the yen from the same period of the previous year. Naphtha price was JPY 50,600 per kilo liter. Sales revenue was JPY 1,885.1 billion, up JPY 380.3 billion year-on-year, of which the impact of weaker yen amounted to positive JPY 50 billion. And price factor amounted to a positive JPY 130 billion, mostly resulting from higher market prices for Chemicals, while volume impact totaled positive JPY 200 billion, coming from over JPY 70 billion in petrochemical or Performance Products, over JPY 60 billion in Chemicals and JPY 50 billion in Industrial Gases, given that the corresponding period of the previous year felt a significant impact of COVID-19. Core operating income totaled JPY 156.1 billion, up JPY 101.5 billion. More on this later. Special items amounted to negative JPY 3 billion, an improvement of JPY 79.7 billion from last year's negative JPY 82.7 billion, which mainly came from impairment loss of JPY 84.5 billion at NeuroDerm on in-process R&D expenses relating to development of Parkinson's disease treatment. Operating income totaled JPY 153.1 billion, an improvement of JPY 181.2 billion. Financial income and expenses amounted to JPY 5.9 billion in expenses with increased dividends received and improvement of foreign exchange gain and loss of JPY 1.1 billion or so due to the depreciation of the yen. As income before taxes was positive, income taxes increased to JPY 45.3 billion. Net income from continuing operations was JPY 101.9 billion. And the bottom line, net income attributable to owners of the parent was JPY 85.2 billion, an improvement of JPY 134.9 billion from last year's loss of JPY 49.7 billion. As stated below the chart, share of profit of associates and joint ventures included in core operating income was JPY 9.6 billion, up JPY 8.5 billion, coming from improved profits at associates and joint ventures for MMA, carbon fiber, polycarbonate resin and other businesses. Page 5, sales revenue and core operating income by business segment. I will explain details by segment on Page 7 onward. I would like to draw your attention to the lower chart on inventory valuation gain and loss. Last year, we saw a large decline in prices, whereas this year, prices trended upward. So with higher raw material prices, we recorded inventory valuation gain of JPY 18.8 billion, which represented an improvement of JPY 35.8 billion. As for changes from the first quarter to the second quarter, please turn to Page 20. There, you can see sales revenue and core operating income by business segment on a quarterly basis. For polymers and compounds, as was explained in August, in the first quarter, there were an unprecedented levels of supply chain disruptions and prices shot up for certain products, which resulted in a substantial widening of price spread for certain products, and you can see that development by comparing to the previous levels. This boosted the results for the first quarter by about JPY 2 billion. So the core operating income of JPY 3.8 billion in the second quarter may seem to represent a big drop, but that actually was not the case. Larger impact of scheduled maintenance and repairs in the second quarter amounted to around JPY 1 billion, and the force majeure conditions on the supply of VAM, the vinyl acetate monomer in North America, also had an impact of around JPY 1 billion. Due to these reasons and others, profit declined by about JPY 4 billion quarter-on-quarter. Films and molding materials down from JPY 15.3 billion to JPY 11.8 billion due to an increase in raw material prices in the second quarter, especially feedstock for petrochemicals as well as summer being a relatively slow season, each of which had a negative impact of about JPY 1.5 billion. As for advanced solutions, we explained in August that in the process of PPA, purchase price allocation of inventories at the acquired company, Gelest Inc., inventory write-offs amounting to JPY 900 million per quarter were applied until the first quarter. That factor was no longer there in the second quarter. Added with seasonality, the core operating profit slightly increased to JPY 3.6 billion. As for MMA, prices remained almost the same and thus, the results were almost the same as well. As for petrochemicals, JPY 16 billion down to JPY 10.5 billion, with bisphenol A and other prices continuing to rise. For carbon products, as we explained in August, we enjoyed wide price spread in the first quarter as the coke price referencing the price in China was applied to those sourced from Australia. In the second quarter, the price for Australian coal rose to $200, and the price spread narrowed accordingly. In Health Care, with major progress in the Phase III clinical studies for COVID-19 vaccine, the R&D expenses concentrated in the second quarter. Let me also explain how the second quarter results compared to the projections we shared back in August. For polymers and compounds, as we were actually expecting better outcome, it was about JPY 2.7 billion short of the projections made in August. As I mentioned earlier, due to disruptions in the VAM supply chain in North America, rising raw material prices as well as an increase in provision for bonus payments to employees, reflecting improved business performance. Due to these reasons, the actual results fell short of the projection slightly. Films and molding materials outperformed the projections by about JPY 1.1 billion as polyester films for our optical applications continued to enjoy strong business. Our projection was slightly conservative to begin with, and therefore, there was an upside. Here again, of course, there was an increase in bonus payment provision, but still, we managed to achieve an upside. As for advanced solutions, on par with the projections. For MMA, we had anticipated that in the second quarter, the price would decline towards $1,900. But actually, the $2,000 level was maintained in the second quarter, resulting in the upside of JPY 800 million. As for petrochemicals, we had projected the price for bisphenol A to start to decline in the second quarter, but actually, the price level was maintained. Or actually, the price went up with some disruptions on the supply side, resulting in an upside of approximately JPY 4.5 billion. As for carbon products, we managed to secure higher-than-expected export prices, resulting in an upside of about JPY 1.9 billion. For Industrial Gases, strong business was maintained, resulting in an upside of about JPY 3.3 billion. For Health Care, with the increased R&D expenses for COVID-19 vaccine, expenses increased by about JPY 1.9 billion. Now back to Page 6. Based on such changes from the first quarter to the second quarter, core operating income for the first half totaled JPY 156.1 billion. representing an improvement of JPY 101.5 billion year-on-year. As for the price factor, market prices increased sharply for Chemicals, while price factor was negative for Performance Products. Price factor was also negative for Health Care as there were NHI drug price revisions in April, resulting in negative JPY 4 billion. Volume factor was positive for all business segments, reflecting recovery from COVID-19 impact. Cost reduction factor was in line with the original forecast. As for others, inventory valuation gain and loss was positive JPY 35.8 billion, and share of profit of associates and joint ventures amounted to around JPY 8.5 billion. Impact of SG&A expenses and R&D expenses amounted to negative JPY 15.5 billion in Health Care. For other business segments, in the corresponding period of the previous year due to COVID-19, most people stayed at home, but activities began to gradually resume from the second half of last year. And in line with the recovery in operating results, bonus payments increased, resulting in an increase in fixed cost. Please turn to Page 7, operating results of the Performance Products segment. For polymers and compounds, compared to last year, the first half posted JPY 7.2 billion increase in core operating income, reflecting recovery from COVID-19 pandemic, a rise in sales volumes for our polymers and a rise in market prices for some products, as mentioned earlier, which resulted in wider price spread. As for films and molding materials, higher sales revenue and higher core operating income were achieved. Sales volume increased for molding materials used in automobile applications as well as for semiconductor manufacturing equipment. What happened last year was, as you may remember, as we enjoy a large market share in alumina fiber, the production adjustment by the automobile OEMs under COVID-19 dealt a severe impact on our business. Molding products and alumina fibers saw a big drop in sales volume as a result last year. As a reaction to that, we saw a big increase in volume year-on-year. As for core operating income, while there was a rise in prices of petrochemical materials for food packaging materials as well as [ accrual nitro ] for carbon fibers, a big increase in sales volumes helped to bring about significant profit increase. On the other hand, advanced solutions saw its core operating income to deteriorate by JPY 2.6 billion to post near JPY 6.9 billion. Sales volume increased generally accompanying the recovery in economic activities, but last year, as I explained back then, semiconductor-related materials performed extremely well even under the pandemic. Optical materials for electronics did go through production adjustments, which led to sales volume increase in those products. And those which did not experience not much decline in the sales volume last year included water treatment products. In that sense, the increase in the sales volume was a lot milder for advanced solutions than that for films and molding materials. On the other hand, raw materials for infrastructure materials such as petrochemical products as well as lithium ion for lithium-ion batteries went up in prices. And we also acquired Gelest in October last year and the price purchase allocation has been completed, and we were slightly in the deficit after recognizing amortization expenses of assets such as customer lists in the first half, which also pushed down the profit of the segment. Furthermore, as I have been saying, we also recorded bonuses. On Page 8, in Chemicals segment, MMA posted sales revenue of JPY 151 billion with core operating income of JPY 24.8 billion. The ICIS average selling price in Asia was $1,356 last year and $1,998 this year. That pretty much explains the financial results of this segment. In petrochemicals, profit was driven by a smaller impact from scheduled maintenance and repairs such as the one in Mizushima as well as exceptionally strong market prices, especially for bisphenol A, which posted a historically high price. We were able to record JPY 26.5 billion in 6 months, which surpassed that of MMA. Carbon products was extremely strong in the first quarter. And in the second quarter, it was able to benefit from higher-than-expected export prices widening the spread in the first half. On Page 9, the Industrial Gases segment. As Nippon Sanso announced yesterday, this segment has been showing solid performance with an increase in both sales and profit. On Page 10, the Health Care segment. The sales volume increased for priority products. On the other hand, there was an increase in R&D expenditures for a COVID-19 vaccine. This has resulted in the core operating income of JPY 1.1 billion, JPY 12.3 billion behind the year before. Page 11, consolidated special items, was already discussed earlier so I would like to now skip the slide. On Page 12, consolidated cash flow statement. In the first half, unfortunately, free cash flow was only JPY 58.8 billion. This was solely because rising prices of raw materials led to more cash spend on the inventories, where cash totaling JPY 83.8 billion was spent. Of this, JPY 37 billion was due to the volume and the remaining JPY 47 billion was due to higher unit prices. Of the amount due to volume, more than half or about JPY 20 billion was built up ahead of the scheduled maintenance and repairs in autumn or the timing of recording expenses. Therefore, about JPY 20 billion will be able to be recovered by the end of this fiscal year. Page 13, consolidated statements of financial positions. The total assets stood at JPY 5,315.8 billion, up slightly less than JPY 30 billion. Cash on hand, which had been intentionally increased due to COVID-19 pandemic, has been partially spent to repay borrowings, which was reflected in the JPY 91.9 billion drop in cash and cash equivalents. The yen's depreciation also contributed JPY 11 billion to the increase in assets while inventories also increased, resulting in a net increase of about JPY 30 billion. If you can turn to the right bottom of this slide, you can see the net D/E ratio of 1.61x. Because of the strong profit result, though net interest-bearing debt declined only by JPY 11 billion, the net D/E ratio improved to reach 1.61. We are aiming to spend another 2.5 years to reduce it further down to 1 or less. I believe we are on the right track. Page 14, consolidated financial results forecast for the full fiscal year. If you turn to the next page, Page 15. For the second half, the exchange rate is assumed at JPY 110 to the dollar and the price of domestically-produced naphtha is assumed at JPY 60,000 per kiloliter. What is of note particularly for the second half is that as we transferred our polycrystalline alumina fiber business, as announced in September, the gain on the sale of JPY 54 billion was posted as part of special items. That will be reflected in the JPY 47 billion for the second half and JPY 44 billion for the full year in special items. Thus, the operating income is expected to be JPY 344 billion, and net income attributable to owners of the parent, JPY 192 billion. Although there was a special item of the gain on the sale of polycrystalline alumina fiber business, we're expecting the second highest ever levels in sales revenue, operating income and net income attributable to owners of the parent. When we announced our earnings at 1:30 p.m. today, and were asked about how this forecast would compare to our past records, we were not able to answer the question. And we looked into this in a hurry and are now sharing this information with you. Next, on Page 16, I would like to discuss the breakdown of the full year forecast for core operating income of JPY 300 billion. I will focus on how we are looking at the second half as compared to the first half. In polymers and compounds, in the first half, JPY 2 billion increase was derived from a tentative increase in the spread, which will be absent in the second half. On the other hand, in the second half, scheduled maintenance and repairs will be concentrated, but as I said, disruptions in VAM will be resolved in the second half. Therefore, basically, our focus for the second half for now is that we will not enjoy the increased spread seen in the first half. The films and molding materials is expected to post JPY 19.9 billion in the second half. The rising prices of raw materials are anticipated to continue, which will likely shave off about JPY 2.5 billion from the result in the first half. Moreover, the demand for optical panels has been subsiding, especially in TVs, among others. And Chinese New Year is coming soon. Food packaging films is in low demand usually in January to March. Those factors related to demand will likely result in a decline of JPY 4 billion in profit. As for advanced solutions, the core operating income is expected to be flat. The purchase price allocation for the inventories of Gelest had a negative impact of JPY 900 million in the first half, which will be absent in the second half, and therefore will be a positive factor. However, the sales volume of Clearfit, among others, may drop due to the Chinese New Year. Given all these factors, we have come up with this forecast of being almost flat. As for MMA, in the second half, ICIS price is assumed to go down to approach $1,900. The decline is expected to be gradual, and therefore our assumption for the price on the average is $1,950 during the second half. This should have a negative impact of about JPY 2.5 billion. The concentration of scheduled maintenance and repairs in the U.S. and Europe has been factored in for a drop of about JPY 2 billion. Rising prices of natural gas and other raw materials are being observed. Except for the price of acetone, which has been on the softening trend, the prices of other raw materials are going up. Demand is also expected to be a bit weaker. These factors together led us to come up with the forecast of JPY 15 billion. Petrochemicals are expected to post JPY 25.5 billion, which is unchanged from the first half. Bisphenol A was priced at more than $3,000 in the first half but we anticipate the price to go down or better put, return to the original levels of $2,500 in the third quarter and $1,500 in the fourth quarter. But this will be partially offset by the absence of scheduled maintenance and repairs in the second half, therefore we expect the core operating income to drop only slightly. In carbon products, coking coal is expected to go up to $255 resulting in a forecast of decline in profit in the second half. In Industrial Gases, we hold on to the forecast made at the beginning of the fiscal year. In Health Care, we originally said that we were going to file for approval for the COVID-19 vaccine in the second quarter and launch the product by the end of this calendar year, but we now expect a submission in the third quarter or by the end of this calendar year and start supplying to the Canadian government by the end of this fiscal year. So we have factored in that delay and slight drop in sales volume. That is why the new forecast is behind the initial one, but we still assume shipment of COVID-19 vaccine in the second half. Last but not least, the cash dividends. In light of all these factors, we're going to raise the interim dividend by JPY 3 to JPY 15 per share, which was decided at the Board of Directors meeting held today, therefore the year-end dividend forecast has now been raised to JPY 15 per share and the annual dividend to JPY 30 per share. That is all. Thank you for your attention.

[Operator Instructions] First is from Mr. Watabe of Morgan Stanley MUFG Securities.

I have 3 questions, including one on Health Care. First, on MMA, you have given us a detailed explanation. From the first quarter to the second quarter, while market prices remained unchanged, price spread improved and yet your profit did not improve that much. I don't think there were many scheduled maintenance and repairs during this period, so I wonder if there were problems regarding the sales volume. Also, you refer to natural gas in your projection for your second half. I believe materials for production in Saudi Arabia are fixed, so I was wondering why you mentioned natural gas. Also, what is your view on the current state of gradual decline in MMA price?

Thank you for your question. Yes, it may have sounded that natural gas was mentioned out of blue. Actually, it is used as material in Europe in ACH method, and the price is soaring to the unprecedented surprisingly high level. That is what I was talking about. Also, regarding the changes from the first quarter to the second quarter, volume-wise. Well, you indicated that the price spread widened during this period but our view is that basically, the price spread remains unchanged. So there were nothing special happening and perhaps you know something that we don't, but our purchase price level remained the same during this period.

I see. So there were no disruptions in terms of volume, correct?

Correct. No particular issues in terms of disruption to the sales volume. The supply-demand balance remained tight in the U.S. and Europe, but as far as Asia is concerned, we believe it was well-balanced. We are exporting from well-balanced Asia, including Middle East, to the U.S. and Europe, to a certain extent. That's how we are maintaining continued supply. By exporting to the U.S. and Europe, primarily from Saudi Arabia, ICIS price is being maintained. In that sense, it is not that demand is particularly strong. That is how we see the situation.

I see. What do you make of the current state of a gradual decline in MMA price?

Gradual decline in price? I believe the new and additional capacities in China is a factor. But we believe that basically, our supply from Asia and Middle East to the U.S. and Europe is keeping the price from plummeting, and that's contributing to a well-balanced situation.

I see. So I take it that the supply discipline and control exercised by you as the top supplier is keeping things under control. My second question is on petrochemicals. For the second half, judging from your assumptions on PPA, projected core operating income of JPY 25.5 billion seems rather high. What are your assumptions in terms of impact of inventory valuation gain and loss and scheduled maintenance and repairs?

Yes, we are assuming a rather large impact of inventory valuation gain and loss for the second half. JPY 8.5 billion worth or close to JPY 10 billion is projected as an impact of inventory valuation gain and loss. For polyolefin, even when there are changes in inventory valuation gain and loss due to the time lag of recording, they cancel each out and become neutral in terms of impact. That's for polyolefin. But for others, such as naphtha and monomers, we expect a positive impact of around JPY 10 billion. At the last meeting, we were expecting prices to settle down. But with higher crude oil prices, naphtha price remains rather high, and our projections reflect that.

I see. My next question is on Health Care, MT-2766, reasons for the delay in development. Also, at the beginning of the year, you were indicating the sales of around JPY 50 billion. So how would that be affected? Also, of the maximum supply of 76 million doses to the Canadian government, how much is fixed committed portion? And what would be the optional portion, if there are any?

I ask Kobaya-san, Mr. Kobayashi to take that question.

This is Kobayashi from Mitsubishi Tanabe Pharma. You asked about the delay in the clinical trials by about a quarter. Initially, trials started in such places as Canada, U.S. and U.K. primarily. But with the progress of vaccination using the available vaccines and other factors and also given that trials are easier in places where infection continues to spread, Brazil, Argentina and Mexico have been added. So with the expansion of the trial locations to include more appropriate areas, there has been a delay by about a quarter. And with that expansion, the trial-related expenses also increased somewhat. And regarding the maximum supply of 76 million doses mentioned in the agreement with the Canadian government, the detailed breakdown cannot be disclosed due to contractual confidentiality.

I see. What about the projected sales of JPY 50 billion?

Date will answer that question.

If you can look at Page 30, details of revenue of Mitsubishi Tanabe Pharma. Forecast for overseas ethical drugs has been revised downward by JPY 21.3 billion from the original forecast. And of course, not all of that has to do with the COVID-19 vaccine, but this should give you some idea.

I see. What about the downward revision of the profit forecast? Is it only reflecting increased R&D expenses? Or is the lower sales coming from delayed approval reflected as well?

It's the latter.

So even with the projected sales of JPY 50 billion or JPY 50 billion, your project -- your profit projection was not that strong. So you had properly taken that into account.

Yes, of course, it has been taken into account properly.

The next questioner is Mr. Umebayashi from Daiwa Securities.

I have 2 questions, including 1 on Health Care. First, on Health Care again, on the COVID-19 vaccine. There are increasing number of people that have been vaccinated with Pfizer or Moderna-supplied vaccines. And in terms of opportunities for your vaccine to be used, there could be the third booster shot or as the second shot where the mix-and-match vaccination is allowed, but that's not a mainstream yet. So I'm wondering whether your vaccine could be used as the second shot or the booster shot in mix-and-match vaccination. Are the trials being conducted with that in mind, to begin with?

I ask Mr. Kobayashi to take that question.

The trials assume the use as the first and the second shots. In other words, the current ongoing studies do not assume the booster shot.

I see. So that would mean that the scheduled filing by the end of the year is not for booster vaccination. So that type of mix-and-match vaccination would be subject to different studies, including the studies in Japan, for example. Am I correct?

Yes. Based on the results of 2 rounds of vaccination, consideration will be made for booster vaccination and other use.

My second question is more broad. Your product offerings for automobile applications, and there are many, looking at your projections from the second quarter to the second half of the year, I don't get the sense that you assume a large increase or a significant recovery in the automobile applications. So what is your view on the impact on sales volume of reduction in automobile production or the market situation overall?

We are incorporating the possible reduction in automobile production in our forecasts, and they are not bullish at all. So that will be a general answer.

I see. So looking at the first half of the year, in the first and second quarters, am I correct to understand that the sales volume of products for automobile applications declined?

No, not necessarily. Since around the second half of fiscal 2019, there has been a downward trend since even before the COVID-19 pandemic. So given that, I believe the situation is not that bad. You see, in terms of reduction in automobile production, some automobile OEMs are reducing due to the semiconductor shortages, while others are reducing due to weaker demand for their models. So the situation varies. So while production decline is presumed generally, we are taking into consideration many different factors in our forecast.

I see. Now you may not be clearly separating between the third and the fourth quarters, but in terms of the first half versus the second half, you are not expecting a strong recovery. Am I correct?

Yes, that is the case. Yes.

The next questioner is Mr. Okazaki from Nomura Securities.

I have 3 questions, including 1 on Health Care. First one may be related to the last question. For Performance Products, battery materials, the materials for the lithium-ion batteries and carbon fibers. What were the changes from the first quarter to the second quarter and what are the projections for the second half?

Battery materials and carbon fibers were very strong in the first and the second quarters. They remained strong throughout. But for the second half, we expect battery materials to feel the impact of reduced production due to semiconductor shortages, especially given that the applications are for electric vehicles. So we expect more impact than other materials. We are also assuming higher material prices. As for carbon fiber, as our competitor is also indicating, strong business is being maintained, and we expect this to continue.

Would that be primarily for wind power generation and industrial applications?

Yes, wind power generation, industrial applications, and we are also strong in the sports and leisure applications.

My second question is about carbon products, especially about needle cokes. The market in China should be recovering year-on-year, but seems to be leveling off on a quarter-on-quarter basis. This may be because the capacity utilization in electric steel furnace plants themselves is going down due to the part shortage in China, and graphite electrodes plants are also seeing their capacity utilization go down. So it may be difficult to foresee the prospect, but could you tell us your take on the demand from domestic market or from China and price trends for your needle cokes going forward?

As for the short-term prospects, we totally agree with what you said. In the second half, there is steady demand for electrodes in the domestic market. There was a scheduled maintenance and repair in the first half but not in the second half, therefore we expect the second half to be slightly better than the first half. With regard to the part shortage in China, it is not the case that we are primarily selling our products to customers in China.

I see. My third and last question is about COVID-19 vaccine. As I listen to Mr. Kobayashi, I was under the impression that since there's smaller room for you to enter the markets where progress has been made in vaccination, you are now going to focus on other regions such as Brazil. However, in Canada, their vaccination rate is already 74%, with vaccines from Pfizer and Moderna available. Is there a possibility that your target customers may change?

Let me answer the question first. Date speaking. What we are talking about with conducting clinical trials is more than 70% of the population have been vaccinated. Even if we try to conduct a clinical trial and recruit patients, there are not enough patients who would be willing to participate. That is what we're talking about. However, we're also conducting a clinical trial in Japan, where we will -- we still see people being enrolled even under the circumstances that we are in currently.

I see. As for demand for vaccines in Canada, am I correct to understand that your assumption of a certain level out of up to 76 million doses, including the first and second shots, still remain unchanged? The vaccine from Medicago will be considered to be a domestically-produced one in Canada, which I heard is being respected. Am I correct, Mr. Kobayashi?

Kobayashi speaking. The COVID-19 vaccines are procured in response to the current pandemic, and therefore are all purchased by the government.

So your understanding is that the government-purchase contract is valid, with no direct link with the vaccination rate in Canada, isn't it?

Yes.

Next question is from Mr. Miyamoto from SMBC Nikko Securities.

I have 3 questions. The first one is about Health Care, and is a follow-up on the previous question or more of a further clarification. You have made downward revision on the forecast for the shipment volume of vaccines, but are we supposed to believe that this is just a result of the postponement of deliveries of those that have been contracted, and therefore we do not have to worry about this? Or is it a case that what is included in the contract is nearly a maximum value, and therefore if the launch is delayed, the total volume of shipment could decrease?

Kobayashi speaking. We cannot disclose the detailed breakdown, but the 76 million doses represent the sum of minimum purchase volume and an optional part of purchases, and therefore the sooner we file for approval and are granted approval, the closer we will get to the maximum volume, and we're trying our best.

I see. Did you originally included in the company's earnings guidance the minimum purchase volume only? Or did you include some part of the optional volume?

That is not allowed to be disclosed, I'm afraid.

I see. But are you saying that the more delayed the clinical studies, the more likely that the upside you will get from the optional portion will be less?

Yes. Obviously, with the government purchase, vaccines are going to be distributed to those who are not vaccinated. And so if other vaccines are made more widely available, the optional part of our business could slightly drop. But we have not gone into specific negotiations with the government on that part yet.

I see. My second question is about MMA. I hear the demand is slightly becoming weaker in Asia. Could you update us on the demand trend by application and capacity utilization for the second quarter and your forecast for the second half? You said there were no particular disruptions, but I heard that the capacity utilization rate dropped slightly at SAMAC. But was the impact not that large?

The cut in production at SAMAC was not so large and its operation has already been restored. As for capacity utilization, we're expecting scheduled maintenance and repairs in the second half in various locations. In the first half, the average capacity utilization rate was around 75%, which was calculated by including those facilities shut down due to scheduled maintenance and repairs as a factor to push down the total capacity utilization rate. In the second half, the figure is expected to be about 65%, with multiple scheduled maintenance and repairs in the U.S. and Europe and other locations, including SAMAC.

What about demand trends by application?

As for demand, there's not much ups and downs. What you're concerned about is probably the demand for transparent partitions, which is slowing down. But this has been offset by the demand for coatings, therefore the total market can be described as being well-balanced, though the U.S. and Europe markets are in tight supply.

I see. Then do you think the prices are falling more due to the supply side?

Well, yes. Various newly built plants are coming online, and therefore prices in Asia cannot help being affected by that in our understanding.

My last question is about the rising prices of raw materials and fuels for Performance Products. Since your company engaged in very broad range of businesses, given the price of naphtha is going up this much in the second half, can you tell us which group of products will be affected more by raising costs and which groups are more likely to succeed in passing on the rising cost to the finished product prices? Listening to your earlier explanation, I thought optical films are more difficult to pass along the impact of rising costs or less polymers are not affected that much because the cost can be passed along with time delay.

In polymers and compounds, there are some that have the [ formerly ] applied. But for films and molding materials, except for molded high-performance engineering plastics for which we can raise prices if the price of engineering plastics go up, other products such as deep drawing films for food packaging are being purchased by accounting for high value added, and therefore their prices are not linked with their cost of raw materials. In advanced solutions, as I said, as for materials for semiconductors and batteries, except for the price of lithium, which can be passed along, it is hard for us to do so. In Performance Products, where what we are selling is really the high performance, the rising costs are dealing a heavy blow. I'm sorry, but there are no specific numbers such as percentages that I can share with you.

When you say semiconductor-related products, are you referring to cleaning products and services?

Yes.

And are the materials for batteries other than lithium the graphite?

As for graphite, we have never passed the cost increase on to the product prices.

Next question is from Mr. Yamada from Mizuho Securities.

I have 3 questions, even though time is running out. Firstly, on carbon products. Earlier, you said the price of hard coking coal is increasing. But the price of steel in the U.S. is at record high levels and the price of blast furnace steel is also high, and therefore I assume you can pass on the cost increases to the product prices. Am I not correct? And since the availability of players of high-quality needle cokes is limited, I would expect you can also raise your prices. Could you explain the background for rising cost of heavy or hard coking coal negatively affecting the financial result of your company, if possible?

As I said, the first quarter was extremely lucky for us. I'm not saying that we cannot pass on the cost increases in the product prices. I think we have been able to. However, in the first quarter, we were extremely lucky in that Chinese manufacturers were using expensive Chinese coal to sell products at higher prices in the cokes market, while we were able to use a large amount of inexpensive Australian coal and sell at the same prices as Chinese players, and therefore made a lot of profits in the first half. Therefore, we do not think we have not been able to pass along the cost. The forecast for the second half is smaller than double the actual result of the second quarter. I know I am talking about very minor details. In that sense, the forecast may be slightly conservative. I am saying this because in the second quarter, we have not assumed this much passing along of the rising costs and yet made JPY 4.4 billion in profits. In our forecast, our assumption for the cost increase is from $200 to $255. And we assumed that the difference of $55 could not be passed on to the product prices.

I see. My second question. Thank you for the increase in dividend. You said the payout ratio will be 30% for the mid to long term. But in the current forecast, special items are included in the profit. If you exclude the special items, the payout ratio will be close to 30%, and so this is the level of profitability that you're expecting. And it is not the case that you do not have the confidence in sustainability of the core operating income. Am I correct?

You're exactly right. That is exactly what I explained to the Board of Directors meeting today.

Thank you for your clarification. The third and last question on Health Care. I'm sorry my question is again about the vaccine. My understanding is that according to the protocol, the clinical trial is designed to look at the efficacy of the vaccine in the original strain of COVID-19 in subjects not vaccinated with other types of vaccines. Are you prepared to start clinical trials other than this? If you are, would it be quite costly? Could you share with us your strategy if possible? If you say that cannot be disclosed, that will be also fine with me.

Kobayashi speaking. At present, either Medicago COVID-19 vaccine or placebo are being administered to those unvaccinated to see the response. In the near future, we're expecting to see the result of this study, therefore based on the result, we will consider the possibility of booster shots or younger age groups. But at the moment, we do not have any clear answer about what specific additional studies we plan to perform.

That concludes the Q&A session. I would like to invite CFO Date to give us closing remarks.

Thank you very much for staying with us for such a long time today. We will continue our efforts going forward so I'd like to ask for your continued support. Thank you.