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

[Foreign Language] So good afternoon. And before I start, I would like to position this presentation versus the 5-year plan that we presented last year -- in last February, sorry, to avoid any confusion. Since last February, and up to this day, I think a lot of things have changed in the world. The economy has recovered. We are still under the cloud of COVID-19. Now on a positive note, our company has delivered much stronger results than predicted last year, and we are sharing with you a significant transformation of the company today. So our outlook now is very different than it was in February. So please consider that what I will present today is the first target towards our 2025 plan. As we start implementing this new strategy and work with a new management team, we will upgrade this plan, and we will update you through budget presentation and future investors meeting. So over the next top that's as an introduction. Now let me start the presentation. And over the next 45 minutes, I will walk you through a significant evolution of our strategy. One that will I'm convinced will create significant value for all of our stakeholders. But for investors, this plan will bring the company back on a profitable growth path, it will simplify and clarify our portfolio and our organization. And it will most importantly create significant value through a combination of earnings growth and deleveraging. For our employees, it will create opportunities. It will reignite what I hope is wage growth, through productivity and increased profitability. And it's my hope that it will make them proud of being active actors in the creation of one of the world industry leader of the upcoming carbon-neutral economy. For our customers, our renewed focus on key technologies and upgraded customer focus, will not only make us an indispensable partner for their own growth but also, I hope, will make us the easiest supplier to work with. And then for government authorities and regulatory bodies, it will show our resolve to bring a Japanese company to a top level of the chemical industry. It will demonstrate our dedication to carbon neutrality and environmental protection. And as also, as you will see later, he will clearly emphasize that we will live up to our responsibilities in restructuring an important part of the Japanese economy. So what you will hear today is not a grand deal strategy driven by huge CapEx spending, but rather it is a thorough repositioning of the company through basic manufacturing, commercial and digital excellence. There were a few driving forces guiding a new management policy thinking. And let me start with the first one, sustainable technology, and there is 2 words there, sustainable and technology. As far as technology is concerned, we must get back into being a technology-driven company. Margins are created through technology. Margins are created to differentiation, through specialization and through intellectual property. As a company, we have the intellectual capabilities to be a leader. Developing and designing products and technologies with built-in sustainability. It is a mass now, and you need to look always toward the lenses of performance and environmental impact to be successful in the future. As far as focused portfolio is concerned, after several months studying the company followed by now close to 9 months in the company, and after numerous meeting with employees and executives, it is and it became obvious that: One, we are trying to do too many things and we are pretty dispersed; two, that we have very large mature businesses that need rethinking as far as their long-term future in a low-carbon economy; three, we do not have sufficient focus on faster and growing higher-margin product lines; and four, to bring back the company to a growth trajectory as I said, a larger focus on fewer market segments and product lines. In terms of lean organizational structure, a company must have a clear organization, an organization that is conducive to streamline decision-making, but has also low overhead costs. As you will see later on, our work -- the work that we're sharing today addresses these issues head on with a significant cost reduction program and a step change in organization clarity and efficiency. I need to upgrade our digital infrastructure to not only improve our productivity, but also improve our customer experience will be a major effort. We need to turn all aspects of the company digitalization efforts into a competitive advantage, and I will cover that also later. But at the end of the day, our people will make the difference. We need and will create an environment of openness, creativity, optimism and a sense of purpose. A great company culture is conducive to extraordinary results. Our role as leaders is to provide a place to work for our employees where they feel listen to where their opinions matter and where diversity of gender, ethnicity and thought our reality, we are a global company. To me, this is the #1 challenge, the creation of an open culture where everyone feels valued and where hierarchy and seniority does not get in the way of people's potential contributions. This is a picture of our group today. We cover and we have 31 business units. We touch pretty much everything. We have over 600 group companies or affiliates. We have about 70,000 employees and we have about 15 million tons of CO2 equivalent emissions. Our expected financial performance for 2021 is a definite upgrade compared to 2020, but we are nowhere near a satisfactory level for a company like ours that spent close to $3 trillion on CapEx and M&A over the last 6 years for essentially no improvement in performance. We expect that our new strategy will lead to a noticeable reduction of the business segments that we will see a strong reduction in legal entities through mergers. That cost reductions will inevitably drive a reduction in employment across the geographies where we operate. And that finally, that are pushed to reduce our CO2 emissions will be in line with our recently announced 2050 carbon neutral pledge. In financial terms, we will drive the company to achieve results on par with best specialty chemical companies with an EBITDA close to 20%, a core operating income consistently in 11% to 13% range, a return on invested capital above at all times, our cost of capital and a deleveraging of the company. That will give us investment options should we decide to pursue them at the end of the planning -- the plan that we are showing you today. Let me shift now to the key pillars of forging the future strategy. And I will now cover them into a little bit more detail. I mean, as you are well aware, a good strategy is dictated not only by what you do, but also what you will not do and what you will stop doing. In point one, I will clearly explain our future focus as far as target markets, key product lines, our sustainability and digital efforts. Point two, I will cover the business that we plan to exit. Point three, we'll talk about significant cost reduction that we will execute across the company and across the operations. Point four, I will cover a new streamlined global organization to deliver this plan and that will provide clarity in terms of decision-making. And finally, on point five, I will walk you through our capital allocation between now and 2025 and a summary of our financial targets. Let me share with you upfront the execution road map of what I will cover next. As of December 1, our focus will shift to execution of this strategy. And this page will become our most important document. As you can see, there will be 3 phases in our strategy deployment. Phase 1, simplify streamline. And the key words here are cost reductions, streamlined organization structure, decomplexify the company. Phase 2, exit the Petrochemical & Carbon business and start redirecting our investment towards growth business. Phase 3, with the business now realigned and restructured, we will be in a position to accelerate growth by using a recovered financial strength in 2025 and beyond. And all along the way, we will improve our financial returns. Let's talk more about what we expect our future to be a future, as I said, of renewed growth with a strong focus -- strong focus on financial performance and sustainability. Our decisions of where the company will direct its investment and focus over the future is the result of a thorough and long internal analysis of all our current business. We did combine that with an analysis of long-term trends. We did that with external consultants. And we summarize the process of this portfolio analysis and selection on this page. We looked and analyze every business we are currently participating in. To be part of the future of this company, any market segment or product line or future opportunity need to satisfy 3 criteria. One, is that market attractive? Is there growth? Can we make money long term? Two, do we have strength in that market? Can we be successful? Do we have the technology? Can we win? Is there anything that we have that will form a competitive advantage? And then three and very critical for the future, can this business thrive in a carbon-neutral economy? If a segment an opportunity or a business can answer yes to these 3 questions, it will be part of the future. If any of these questions cannot be answered with a yes, it will not be part of our portfolio of the future. Based on this analysis, we decided to gradually turn the company into a specialty materials company with a name at several key market segments and product lines. This means moving away from commodity materials in large part. And I will talk about the implication of that decision later. But let me start with the market and where our focus will be in terms of growth, R&D resources and CapEx for the future. We will focus for growth on what we call electronics. This is a broad definition of electronics that include semiconductors and beyond. It does end, we will also focus on life science and health care. That is not to say that we will stop investing in everything else. It is to say that the vast majority of our R&D, CapEx and M&A resources will be redirected towards these potential fast-growing markets. Some business where we are currently present and where we have strong existing financial performance will continue to be supported for sure. And we give you a few examples here, mobility living and a few industrial segments will be there. We will not walk away from strongly performing businesses. Let me give you a few -- a little bit more color about these markets and why we think they are important for our future. Under a broad definition of electronics, I mean EV will be a key market for us. As you know, the shift towards renewable resources, the world is on path to accelerate the use of electricity and energy source and everything will be based on electricity, hence after electronics. It is a fast-growing world with plenty of opportunities to add value, and that fits perfectly into our strength. We have shown here a sample of the technologies we have developed that are ready for prime time and that are already sold to our customers. As far as the digital world is concerned, we have heard about computers for more than 50 years in reality. You will know that the massive digitalization of our life is just started, and that there is no end in sight to that revolution. As a company, we have a significant success in a broad range of materials and services from epoxies to films to OLED to wafer cleaning. We will accelerate our development to become the prime material supplier to serve this market. Let me continue now and talk a little bit about Life Science and probably a little bit more about health care. In Life Science, we will redirect our attention towards the Food Nutrition segment for various reasons. With a world population reaching 8 billion, food supply is one of the critical area for the well-being of people. The food industry constantly creates large opportunities from packaging materials to proteins. It is also a defensive business and a defensive industry. So one of the opportunities certainly around specialized nutrition from prebiotics to probiotics to fibers to specific food ingredients to really that are designed really to enhance our quality of life. As you all know, we also had the dawn of understanding the microbiome and that to me and in itself will create opportunities on par with the pharma industry. As a company, we are already actively present in the food industry through sales ranging from ester, sugar esters, protective films, gases. And for the last several years, R&D has also made significant advances in gene and enzyme technologies. Let me finish now by covering health care as a target market for the future. Since I joined the company, we have spent significant amount of time with the executives in the pharma market to understand what business we are into, to understand better our pipeline and to how to turn our investment into bigger profits. And let me give you a few comments about pipeline. In my mind, our pipeline is nice. It's solid. And it is based on our strong drug discovery teams located in Japan, in Israel and U.S. and in Canada. We expect several launches and we expect that these launches will contribute to our financial performance, leading to 2025. And let me give you a few examples. COVID-19 vaccine and what we call the VLP platform. We are about to complete the analysis of the Phase III clinical study that we finished early September. It is being finalized as we speak. We will communicate the results of the Phase III next week. But clearly, the signals are very promising. The independent data monitoring committee has recommended that the ongoing Phase III study should continue without modification. And accordingly, we are on track to file regulatory application in Canada by mid-December and U.S.A. right after and other jurisdictions soon after. We are also conducting Phase I and Phase II study in Japan and plan to file an application for regulatory approval in Japan next spring. But without going into more detail for now, you will hear more next week. We are really hopeful that this development will generate significant profit certainly over the next 3, 4 years or more. That is based on our current level of contracts and on whether the pandemic turns into an endemic disease. Let me move now on to our second drug with a new oral form of our successful drug, Radicava. This is the new development. It will launch next year and that improved delivery will greatly expand the pool of patients suffering from ALS who can really benefit from this medicine. The next one, MT-7117 is a drug used to treat rare disease caused by a person sensitivity to UV. It will be launched in 2023. It's part of our immunotherapy platform. And in simple terms, it's a drug that helps patient who normally cannot be exposed to sun light and have to cover themselves at all time. For these patients, this is a life-changing drug. And the last 1 for which we have great hopes is ND0612. It's the NeuroDerm medical device. And it's a device that is used to treat Parkinson's Disease. It's in the final stage and will be launched very soon. So besides our pipeline work, we are also actively studying on how to grow our pharma business beyond its current size. Because in the medium to long term, it is our opinion that staying as a pharmaceutical company with most of its sales in Japan is not really a viable option. And then I want to conclude the health care chapter about Muse cell. After a very thorough evaluation, we have decided not to apply for uncondition -- for conditional approval in Japan based on our limited clinical trials, because we think it would have severely restricted our market potential in the U.S. and Europe. So for the time being, we will continue to develop our scientific understanding of the mechanism of action of Muse cells and we will work towards full Phase III clinicals when we are ready. Instead of going for conditional, we will go for unconditional approval in the future. I caution all of you that we are not expecting any contributions of Muse cells to our bottom line before the end of the decade. Our product offering are vast. They are based on our strong foundation. All the market segments that I talked about will use that strong foundation and they will use the vast product offering and all the product platform that we've had for many years. We will continue to invest in this product platform. They will be the basis for technology and margin expansion. We have one of the largest chemical product offering. We will continue to invest in R&D, and we'll redirect most of our R&D efforts to support growth market and growth platforms. A few words about gas and our investments in Nippon Sanso Holdings. As you know, we are a majority shareholder in the company. Now they're a publicly traded company with their own Investor Relations Day. And so I will not go into detail about them. You all know that they are the fourth largest player in the gas industry in the world. Together with them and through discussion, we have really asked them to improve their profitability and to focus on closing the gap with their peers. There is a gap in terms of EBITDA margin with EPS that is probably 6% to 8%. There is a gap in terms of return on invested capital that is significant. And there is a large gap in valuation. Through strategic initiatives that include cost reduction, financial discipline in terms of improving the balance sheet, reducing the leverage by focusing on growth in higher margin geographies like in Asia Pacific, in Europe and in the U.S.A. and by continuing to expand in semiconductor materials and medical gases, we are hopeful that they will over the next few years reduce that gap and create large value for Mitsubishi Chemical Holdings. Let me shift gear now, and let's talk briefly on the next 2 slides about the incredibly important topics. Two incredibly important topics: Digitalization and sustainability. Success in digitalization and sustainability will separate the winners and the losers of the chemical industry. So let me talk about our digital efforts first. Like a body, and I always use that expression, like body, a company needs a digital backbone to operate, 1 strong backbone. Once you have a solid backbone based on clear, simple business processes, you can start creating competitive advantage by attaching other parts of that backbone, web order entry, CRM software, limb software, HR management, regulatory. I mean, the list goes on and on, and the list is endless. But when they work seamlessly they create a huge competitive advantage. And I lived in that world. There it creates a huge competitive advantage by lowering your cost, by reducing your defects, by reducing the cost of quality, and by improving dramatically your customer experience. So together with the change of our organization, we will undertake this major effort to make ourselves the supplier of choice for our customers in the 21st century. Let me close this first chapter by talking about sustainability. I will not spend a lot of time on it because we shared in detail our goals last month in a KAITEKI forum. And we shared our 2050 carbon neutral pledge. And as I said then, this is a serious commitment. We were not the first 1 to make that pledge and we waited to make that pledge because we wanted to make sure that we could deliver on that pledge. As I said, this is a very serious commitment. And it's made up of 2 periods. The first 1 leading to 2030, will call for a 29% reduction of CO2 emission versus 2019. And then a second phase of 2030 to 2050 time frame that where we will drive the company towards carbon neutrality. To achieve that, several new technologies will have to be adapted and rolled out across the company. Now the framework that you see there is for the company as it is structured. The goals and objectives will be distributed accordingly as we exit some businesses. So let me now focus my attention on the business that we will exit. We will exit for petrochemicals -- from petrochemicals and coal chemicals. So why do we do this? Now there are several reasons. Some are listed here on the slide, but let me focus on 2. With a world focusing on carbon neutrality, the cost of energy will more than likely continue to rise significantly and very significantly in Japan where both of these commodity businesses are located. This is on top of an existing contraction of these businesses. It is inevitable that it will result in a consolidation in Japan. As a leader, as I said before, it is our duty to recognize the situation and to drive the consolidation. Our goal is to provide clarity and a future for these businesses and their employees. The second reason for this is that neither of them fits the specialty materials profile we want to achieve. Going on ongoing, they will require dedicated management teams as they merge with other industrial actors in their respective business. The exit of the petrochemical business will consist of probably 2 steps. One, probably a merger to industry consolidation with other major Japanese petrochemical actor or actors. And second, an exit to a share sale or an IPO or any other method. In the medium term, it is our goal to completely exit this business. So we will exit this business. So let me talk now about shorter-term actions that will improve our cost structure and are really important for us. We will engage into a company-wide cost savings of about JPY 1,000 million. This is a cost reduction and improvement program, but most of the savings will come from cost reduction. And it will tackle all parts of our cost structure. This program will be spread over several years, probably 4 years as you can imagine it will trigger significant labor cost reductions. These reductions can be achieved with different degree of speed, as you know, depending on where you operate. As an observation and a lead into our next topic, our current complex organization through more than 600 legal entities, lead to very high cost and few opportunities to utilize our global size to lower down our cost. That is why the first step in rolling out our new strategy will be to change our management structure in order to clarify, simplify, improve the speed of decision-making and also ultimately bring our top operational management directly in contact with our Board of Directors and our investors. Now if you look at this slide, the most important sentence is 1 company, 1 team. To that effect, we will be considering to rename the company to Mitsubishi Chemical Group to strengthen that 1 team feeling. And as of fiscal year 2022, we will run the company through global functions and global business. We will start rolling out this new organization structure in several steps with the first 1 starting next April with the rollout of the global functions. And I want to spend just 1 minute on this slide because the way I'm sure there is quite a few questions. So we will have a leadership team that will be made up of corporate functions and businesses. The corporate functions will have worldwide direct responsibility. So if you look at finance, the finance, the EVP will have complete finance direct responsibility across the globe. And it will have relayed in every area where we operate. Likewise, for all the different corporate functions. At the same time, we're going to keep 5 businesses. So Performance Products, I mean, chemicals, you see PC, that's the petrochemical and carbon, pharma and gas. And in terms of gas, nothing will change because they are different and listed company. But all the other one, we will run the company on a single management structure. You can see and all these businesses will have global responsibility, again, with very strong relay in the different geographic area where we operate. You can see that the petrochemical and carbon business will form their own its own business, and that's because we wanted to be ready for carving out. So -- and as I said, no change for gas and Nippon Sanso Holding. So we really think that this will accelerate decision-making. We'll simplify decision-making. We reduce the layers between the C and D operator on the shop floor. And our goal will be to reduce the layers in the company from where it is now to about 5 or 6 from the CEO. This will drive a thorough simplification of how we operate the company and will be one of the key factor of driving cost out of the company. The final chapter of my presentation will focus on capital allocation until 2025 and expected improved financial performance. So in terms of capital allocation, you can see that we will generate about JPY 3,200 billion of operating cash flow, excluding R&D. And we'll generate that between fiscal year 2021 to 2025. We will use extreme financial discipline to allocate that capital. And that will guide us spending with a constant thought on improving shareholders' return. About 60% of that money of the JPY 3,200 billion will be spent on organic investments with a nearly even distribution between maintenance CapEx, growth CapEx and R&D. Maintenance capital will just represent 2% per year of the replacement cost of our installed assets and we'll bring discipline in this one. Growth capital will be directed towards growth market or opportunities that will deliver more than 12% internal rate of return. It includes about JPY 1,500 billion for a new MMA facility in North America. This MMA facility once approved by our Board of Directors, we'll start in late 2025, early 2026, and it will not contribute financially during the period of this strategic plan. After many review, this is a sound and exciting opportunity to invest in MMA to keep a large market position -- leading market position, and to strengthen our lead in that market and to really continue to improve our financial performance as we roll out the best technology in the world. R&D investment, again, will be mostly directed towards growth business. Now about JPY 500 billion will be -- will go to financial deleveraging, just paying down debt. And if you put that together with what we call unallocated capital, it will lead to a significant reduction in our net debt to EBITDA and net debt to equity ratio. Please note that what you see there in terms of the brackets reflect the use or not use of the JPY 500 billion of unallocated capital. Our dividend policy, as explained here is based on our current 30% ratio. It is worth noting that we have started a conversation with our Board of Directors to relook at our dividend policy. And as I mentioned, we have not allocated about JPY 500 billion . And at the end of the period, this could be used if we are successful with the rollout of this new plan to target selected M&A opportunities in our growth market. But we will only do that if we have delivered first this plan, the cost savings, and the exit from the business we're talking about. Because another use of this money could be potentially share buybacks, but that will be evaluated together with our dividend policies to increase our shareholders' return. All in all, we expect that our new strategy and the growth it will induce, combined with significant cost cutting, will lead to a step change in our financial results. That is despite our exit from previously announced alumina, carbon products and now petrochemical. Then if you put them all together, we'll shave off about [ JPY 800 million ] from the numbers you have in front of you. In 2025, we will have a Mitsubishi Chemical Group that is smaller. Sure. But they will be a lot more focused, more profitable, and a company that will be back on a growth trajectory with a repaired balance sheet. And that repaired balance sheet and these results will really set us up for 2025 and beyond. You can see at the bottom of the page, then the business that we are talking about, performance product, MMA, healthcare and industrial gas, will significantly increase their EBITDA margin. Beyond 2025, it will be a goal to further improve performance products. But the other one will definitely be in nice EBITDA margin territory. Let me conclude this slide with -- this presentation with 2 summary slides. We strongly believe that a shifting focus from cost cutting early in the plan. Cost cutting, portfolio rationalization, organization restructuring, in other words, restructuring and reengineering the company in Phase I that doing that, we lead the way to building the foundation for growth in Phase II. We need to fix first before we earn the right to grow again. And that ultimately will lead to Phase III where we will then accelerate the growth on the back of a repaired company. And as I said, we really hope and are optimistic that further on in the decade, you will continue to see and you will see an acceleration of growth. So 2025 company that's profitable, and we will have recreated the financial flexibility it needs to face the future with optimism and from the position of strength. So let me conclude this page -- let me conclude here by saying that our focus on redirecting the company, on exiting some business, on implementing strategic cost cutting, on improving the decision-making of the company, and on why is reallocating capital to growth area, that will lead to a new company and a company that will lead -- that will deliver by 2025 very interesting performance -- financial performance. But more importantly, that will be really set up for future growth and future profit. Thank you very much for your attention.

[Operator Instructions] This is a hybrid meeting. First, we will accept questions from the participant in this room. Then later, we'll entertain questions of online participants. [Operator Instructions] Mr. Watabe, you can start.

Watabe from Morgan Stanley. At 1:00 in the afternoon, the announcement was made. The stock market was not very positive for you. This strategy may sound a bit abstract because you sent a strong message but specific measures and actions may not be easy to understand 1 team, but industrial gas companies still maintaining the listed position, and then there are some requested numbers. So it was a kind of lukewarm presentation. And you said you are looking to -- the specialty chemical marketing with EBIT margin of 19%, we see here to Kagaku -- we see to chemical -- that is 40% EBITDA margin. That's a global leader. You are far away from [ Shinryo ], for example. So MMA and film you have the strong technology in terms of competitive advantage may be possibly only MMA. I'm sure you have other competitive asset, but how do you enhance corporate value? Can you explain that once again? Your message, please. That's my first question.

So you want me to redo the presentation. The -- all right.

Specifically, please.

Quickly, I think I said a few things that will really transform the company. We will exit from some business that we have not been exiting in the past that have carried very low margin and have used a lot of capital in the past. So capital efficiency is very different. If you look at the last 6 years, we've used 30 -- I mean, JPY 3 trillion to generate no profit. That era is gone. We need first to fix the company fix the cost structure before we can earn the right to grow again. So this strategy is about #1, and that's what I explained today, fixing first the company. That's number one, fixing the cost structure, improving profitability before we can underwrite to start again. You're talking about Shinryo, they've been doing that for the last 25 years or 30 years. And Shinryo is not a specialty company. It is a super specialty company. I mean they were competitors when I was at Dow Corning, I know them very well. They are one of the best managed companies in the world. This is a dream to be what they do. But like silicon business, this is not specialty. This is super specialty. We will probably never get there as a company. But there is something in between, between commodity player and a super specialty player. We think that we have the technology, the strength to get there. But first, we need to organize, reorganize, reduce the cost and operate. We can make a lot more money with what we do now if we operate the company more efficiently. That is my goal now. As I said, I will not present a grand deal strategy about going here and there. First, grind and fix what we have. That's what we -- that's what I'm proposing. And then only after we will go, and we will continue to grow. And so that's why I specifically came back twice on the slide talking about the 3 steps. First fix, then start growing and then only start accelerating the growth. That's what it is. We will significantly deleverage the company. So they will be just by that, good value creation for the investors. But overall, the company you will see in 2025 will have nothing to do and will be very different from the company that you have seen in 2021 and before. When you talk about Nippon Sanso Holdings and the fact that people are thinking we're going to spin-off or whatever, it would be a crime for investors to spin off that company before they have closed the gap with their closest competitors because that would leave a lot of money on the table for our own investors. So the goal before we will even think about doing that, and we are not thinking about doing it is #1 for them to close the gap. And we are putting all of our efforts working with them and talking to them to close that gap first.

My second question, regarding health care number, JPY 130 billion. For next week vaccine announcement, I suppose, and 80 million dose cap and by '25, it would increase, and with that this number is achieved. Can you explain more about assumptions for this pharma business?

So the assumption for pharma business right now is, we took a very conservative view of -- I mean, the pharma business, frankly, in the -- there is 3 parts. There is the existing business that is slowly declining. There is the pipeline ex COVID-19, that is coming up. And then we have COVID-19 vaccine. And yes, we are fourth 1 or -- but -- we have taken in what we're showing you today a relatively conservative approach of what we think is going to happen. Having said that, just that we already generate probably JPY 1,500 million additional COI over the next -- before 2025. But it's very difficult for us to predict this COVID-19 pandemic and what it will do. So right now, I prefer to be very conservative, and that's what we are sharing with you today. Over time, it could be better, it could be worse. But there is so much uncertainty that we wouldn't -- I don't want to say things that I don't think will happen with 90% probability.

My name is Go Miyamoto. First question is about the transformation of the portfolio, petrochemical and carbon are going to be carved out and other portfolios, especially health care related. The chemical industry or the chemical company, is it really necessary to have the health care business as well. What's the reason for that? In 2020, it became the fleet subsidiary. Is that the restriction or the synergy with the other business area? Why did you decide to remain health care in your business portfolio?

That's a good question. I did not buy the MTPC, but you deal with the hand you've been given. And the hand we've been given right now with health care is, first, we need to turn that business around. And for the last 8, 9 months, we've made some decisions that I think will help us turn the business around. And it's a little bit the same as gas; first fix and then you have options. So 100% of our attention right now is to improve the profitability of that business so that it can contribute to the company and it can justify the price that we paid several years ago when we acquired the rest of the business. Spinning it off now like a desire to spin it off now, like the business Nippon Sanso business would drop the investors of significant value until we have a chance to thoroughly fix it and improve its performance. That's what we are focusing on between now and 2025. And we are cautiously optimistic that there is a nice path for MTPC.

Looking at the global chemical make, the pharmaceutical products or health care products and the chemical, there are no companies with having high-quality products for both. What do you think about that situation?

I know. So yes. And again, what I said is, we need to fix first to create options and opportunities. And that's what we will do. And it is our duty now to do everything we can to grow the -- and fix MTPC. In the long run, I cannot speak for what's going to happen. But I think we will all be pleasantly surprised by the value that the pharma business will create over the next few years.

Next is about the performance product growth. That is about Page 24. So EBITDA margin performance product of 15% and JPY 180 billion, it's what you are aiming at. And looking at the past, the performance product business is not really growing. So now in that further future you also put your focus into the electronics as well. So for example, DuPont, recently acquired Rogers and putting effort into the electronics is something other companies are doing as well. In such a situation, I feel that this existing business is not so much competitive. So how are you trying to expand this business, grow this business? So please share with us your perspective for performance product.

You are completely right. The financial performance as they stand right now in performance products are not at the level of what we call a performance product. They are significantly lower to what they need to be. Again, I go back to what I say. It is not that we don't have nice variable margin in this product. It is that we have a very, very significant cost structure. We need first to tackle the cost structure in this business, and it will give us a very different picture. And it's my experience that once you drive cost out suddenly things happen. It's not going to happen overnight, and I cannot promise that it will be a top, top performer and in the 20%, 25%, 30% range that you can have in some of this business. But we will improve and simplify this organization. When I talk about legal entities and streamlining operations, this is also what I'm talking about. We have all these small companies doing small things on the side with very limited coordination between everything. We need to coordinate our electronic business. We need to have 1 face, 1 face in the world and approach the market as 1 company. Once we do that and remove cost, we will have a very different conversation.

Then Page 25, for example, cost improvement that has contributed to EBITDA margin. But the organic growth with that perspective, will you please mention for performance products, for example, the semiconductors cleaning look at agent for the register and the touch kind of products, what just you have. And for display, Clearfit, I think it has the competitor reach. But for other business, what kind of growth picture can you draw?

So the growth that we have taken right now is a very conservative growth for Performance Products. Because as you said, I mean, predictor of the future, immediate future is the past. And so that's why I'm putting so much action of fixing the cost structure first before we earn. Over time, this business will grow in our business plan. It will not grow very fast overall over between '21 and '25. I think it's 2.5% to 3%. But it will be set up in '24, '25 to significantly accelerate its growth.

Is it okay? I talk in English.

Of course, you can talk in English.

My name is Mikiya Yamada. I have 2 questions. Number one, the -- you are talking about the resource allocation as well as capital allocations on Page 23. I think the -- this page doesn't much to some degree. If I understand you correctly, you are paying approximately 30% of dividend of the income. That means your total 5-year net income after tax should be around JPY 1 trillion. If you add back the R&D cost, then that's approximately JPY 1.57 trillion. And if you add back the depreciation, that's approximately JPY 2.6 trillion. Yet you are talking about JPY 2.8 trillion cash generation through operations. So this seems to be a bit optimistic. On top of that, the -- if you take look at the R&D, the health care business itself requires massive amount of R&D, especially if you're trying to penetrate U.S. market, which requires big investment through clinical testing. So are you compromising the R&D in some other areas? Or you are confident to reduce the R&D and improved deficits of the clinical testing? And for the capital expenditure, if I understand it correctly, the Nippon Sanso Holdings competition like Takeda as well as Linde or spend approximately 15% to 20% of sales revenue CapEx including, I think so because I checked the number. So if you are allocating more than JPY 100 billion, I'm sorry, JPY 100 billion CapEx to Nippon Sanso Holdings in order for them to compete against the competition like Linde or Applexus. Then you have allowed JPY 700 billion to JPY 800 billion for the rest of the operations, which looks to me a bit insufficient for Performance Chemicals. So how do you reconcile those numbers?

Yes. I mean this is a good question. The -- I will hand it over -- the cash flow, it's financed and it's I'm sure that they do the work correctly. So the -- as far as the capital spending for gas, maybe we have different sources. But we are spending and we are planning on spending probably 10% or north of 10% in total capital. Please remember that when you talk about capital, there is maintenance capital and there is growth capital. So please make sure that you look at the 2. That's one. Two, the money we spend in gas is about is north of 10% of sales, which is very realistic with what being spent. And if you want to improve your return on invested capital, you're going to have to be really looking at the projects that we do, which is exactly what Linde and Air Liquide and Air Products are doing. And I know these companies pretty well. So the goal here is to give enough money for them to grow, but at the same time to be very, very financially disciplined in terms of getting the returns that they've been having. And also to really look at the cost that Nippon Sanso has in general. And they have great performance in some area and not great performance in others. So they need to do -- I don't think that we are starving them at all from capital spending this year, like last year, they've been getting pretty much everything that they requested that generated more than 10% internal rate of return. So we are not starving them at all and they will have their own IR day, and you can ask them the same questions. But they will show you similar numbers because we work with them.

Understood. But if you take a look at the Linde disclosure as well as Praxair disclosure, I think they're spending more than 10% of the sales revenue. And I think it does make sense because the industrial gas industry is extremely capital intensive. Asset turn is approximately 0.5x. So in order for you to grow by 5%, then you need to spend something like that.

Yes, but we are not planning on growing by 10% and neither Linde nor Air Liquide is growing at 10%. None of them are growing at 10%.

None of them. None of them.

And so that's why I find it interesting. If they spend 20% of their sales, but growing only 3%, 4%. That's why I think they close to 10% to 12% in terms of capital spending. This is not very different than what we have in our numbers. It's very similar. And frankly, we're reviewing every project at Nippon Sanso. Their capital spending is well done. And now they made an acquisition that cost them a lot of money, which is what dragged down the return on invested capital. And because they didn't have much synergies either. But overall, I think the business there is well managed, but it continues to show -- we need to continue to show financial discipline and closing the gap in terms of financial performance, returns compared to their competitors. There is no justification to have 7% to 8% difference between them and the 3 others. That's all. That's the #1 priority. When they do that, they will generate immense value for the shareholders.

Of course, we welcome those challenges as well as disciplines and also improvements. So thank you very much for the elaboration. Could you please elaborate the R&D side as well.

The R&D side, you're absolutely right. So in total R&D value now, we're probably spending JPY 1,200 million to JPY 1,300 million per year. The vast majority, probably 800 to 900 is going to Nippon Sanso -- to MTPC -- to Tanabe. And this year, maybe even more, I mean, a lot more because we spent so much money this year on COVID-19.

Yes, clinical testing.

Clinical testing, pre-clinical testing and everything is. I mean we spend way over our budget to make sure that we bring this product to market. In the future, we have also -- we look completely into the pipeline and portfolio and assigning probability of success, and we will support anything that has a good probability of success. That doesn't mean that there is no area for improvement in how they spend the R&D money. But we are completely aligned in terms of pharma business. Pipeline is the lifeline of the business, and we are managing them that very clearly with them. So...

That basically clarify those things. I still feel a bit inconsistent with the numbers cash resolution.

Yes. I mean we have a financial team preparing these. So I will handle the challenge to them.

Let's see. Probably in the past 5 years and the future 5 years going forward and the inflow of capital and the source is the same, and you are saying that's wrong, I suppose. Well, for the next 5 years, including this year, JPY 1,000 million cost reduction every year. Well, in the last year, it's JPY 1,000 million reduction. So a reduction progressively will be reflected and increased very much in the past, and that is reflected in the cost reduction. So that makes sense. I don't think inconsistent. The numbers are very consistently built. In that case, bottom by -- bottom line should be increasing. So I suppose possibly dividend will increase.

Correct. We are trying to divest the carbon and petrochemicals. And those businesses are basically hated by almost everybody. So how do you think it's possible without recognizing big losses on your balance sheet?

Okay. So first, the -- We still have -- I mean, there's still worth a certain money on our balance sheet, more for petrochemical than for carbon. We understand that. I think your question applies more to carbon than to petrochemicals.

Correct.

Petrochemicals, I mean, that industry is the future, it is shrinking, but it needs to be consolidated. Now I would frankly -- I mean, I have changed slightly in my opinion, about carbon products because of what I've seen in the last year. This is a business that has faced an enormous challenge with the steel industry reducing the demand and the usage of coke dramatically in Japan for the last several years. And starting next year, we faced a situation with very big situation with the carbon product. Surprisingly, and surprisingly, and I think it relates to the strength of the team, they were able to sell pretty much everything outside Japan now. So they have completely substituted the sales from Japan to outside Japan. My opinion on this one is that they will always be a need for carbon product in the world for high-purity carbon product in the world for Coke. That will never disappear, and they are in a very high niche of high-purity carbon product. So whether it fits with us? It doesn't fit with us. But I think that we will. And based on what I've seen so far and the people who've talked to us, I don't think that there will be many problems in finding people who are interested in that business. And I hope that it will not lead to any write-down on our side. I cannot guarantee, but I hope that it will not lead to any write-off.

Please allow me to be a bit sarcastic. Because it reminds me of the situation back in 1995 of ICI. So I really like Mitsubishi Chemical Holdings, not for the path and be a great one.

You will have to remind me what ICIs did at that time.

Okazaki, please.

Nomura Securities. I have 2 questions. First question. That is Page 19, cost reduction, JPY 100 billion and according to your presentation, HR cost is to be reduced. And what's the breakdown of that? For example, 70,000 people in a group. What's the breakdown of that? Or the cost reduction other than HR cost, would you please explain the breakdown?

It's not the policy to disclose the number of employees down. We have made a complete analysis of where the costs are and where they are and the timing and everything, but we will not share these details until we have time to share them with our employees.

Basically, HR cost is the main area for the cost reduction. Is this understanding right?

Yes.

The second question, the specialty chemical is also the question that I have, this is a core business. And there from the outside perspective, we see that the year competition is not strong enough. For example, car battery or the carbon composite materials, looking at them, competition is quite fierce and the profitability is not so favorable, not only with those areas, but also within this specialty chemical carve-out might happen. Or how do you make a decision with that regard?

And so...

Specialty Chemical. There might be some areas that the competition is not strong enough. Your competitive edge is not strong enough. So those might be also considered as a part of the -- your carve-out strategy? Do you have such a possibility?

What I didn't say today is that this is the end of our portfolio restructure. There are still some pieces probably that we need over time to be -- continue to be restructured. We need to have more discussion about what I would call segments that are on the edge, okay? And that will come with time. And I think we have 90% -- 95% clarity on our portfolio, but there might be other pieces that do not really fit. In terms of your comment on carbon products and composites and things like that, we have some really good products. We need -- probably we need to manage them, continue to improve the way we manage them. We are on a trajectory where I'm very optimistic we're going to -- we will never compete in aviation, in place like that because there are other players. But there are many other opportunities where I think we are well positioned to be a good player with significant profitability.

Page 25, we should please show up the Slide 25. Under the Phase 2, you can see the petrochemicals or chemicals and noncore Performance Products business carve-out. That's what I said. So to put it in a short answer, yes, those are included.

One additional comment for the cost reduction. Basically, on the Page 19, there are items described and those are the numbers accumulated from each business entity. Other than this, furthermore, well, this -- what's accumulated here is about the half. And including the details, some portions, that's the remaining half. So in total, JPY 100 billion is calculated. But as our revenue and accounted, well, based upon the cost reduction, of course, for them, further investment will be necessary. In that case, the depreciation due to the investment of being necessary and the tentative increase of the cost to be incurred. So in our calculation in all, 85% is the net cost down portion. That's the way of the calculation.

Omura Shunta, go ahead.

My name is Shunta Omura from UBS. I just want to ask you about Nippon Sanso. First of all, how do you think about parent-child listing problem in Japan? And this relates to you and Nippon Sanso. And also, how does the Nippon Sanso fall into on Page 8 of your presentation? I don't see any criteria that falls into Nippon Sanso. So I got feeling that you are rather thinking like private equity and improving Nippon Sanso for the future spin-off. Is that the right thing? Or I'm not seeing any synergies between you and Nippon Sanso.

No, you are right. I mean, the -- I mean, we are not looking at private equity or anything spin off or anything like that. They were -- their business were part of the review here. So we ask them to position the business in terms of market attractiveness, trying carbon neutrality. As I said again, and I will repeat myself, I mean, there is no intent whatsoever to change the situation now, whether I like it or not, it doesn't matter. What matters is the value that it can create to our shareholders. I don't think we should ever entertain a discussion about Nippon Sanso or anything like that until they have significantly closed the gap with their competitors. And I keep on repeating the same thing. Otherwise, it would not be fair to our investors.

Okay. I don't think you got the translation right. I was saying that you are acting like private equity rather than the corporate.

With them.

You are. So improving our profitability...

Yes, but this is normal. We are 51% shareholder. It is absolutely a right to ask them to improve their performance. I don't think that we are stepping out of our boundaries. We completely and 100% respect the fact that the private -- a publicly listed company, they are managed to our board, that person is sitting on their Board of Directors. At the same time, we have investors, and we must respect. And I must convey also our investors feeling and the fact that for us there is a large gap and they need to close the gap. We are not doing anything that is outside our corporate responsibility by asking through the board and through our Board representative to improve performance and nothing that we cannot do.

Okay. And just a follow-up question on that. Since the -- for the last 5 years, what was achieved for Nippon Sanso from the synergies between Mitsubishi Chemical?

I don't think there were much synergies. I don't think there were synergies. I mean, they make acquisitions, they didn't get synergies. There is no real synergy between the 2 companies. But I will say again the same thing. Please look at the gap of valuation between the 3 top companies and Nippon Sanso. My eye is solely focusing on that. Because I represent the interest of our investors, and we are -- we have a large share in Nippon Sanso. That's all I say. We are -- it's a publicly traded company, and they do what they do. They have their own management team, and we never interfere with anything. We are just relaying what we think they should be focusing on.

Okay. And my question -- second question would be on the cost cutting. I read in an article in April, I think, when you first got to interview from the newspaper. And you said that the cost reduction should be done within a year or 2. And this Page 19 shows whether like a consistent cost cutting in 5 years. How you -- what was the change you have since the appointment and 9 months now?

I think it's -- I mean I -- we will do some cost cutting in 1 year in some places. And in other places, it takes time. So if -- I mean, as you know, I mean, we operate in different geographies and geographies have different time line. And if you operate in some geographies, you can do cost cutting overnight. And in others, it's really complicated to do and it takes time. That's just a reflection of that. And we have law to respect, and we will do.

Okay. So simply, the company was too big to accomplish it into 1, 2 years?

It is that the cost cutting is more -- there is more need to look at cost in some areas than others.

Nakahara, please.

Shuuichi Nakahara is my name. All those analysts are giving you the very harsh opinions. But to me, I support you 120%. Thank you so much for your perfect answer. For the carve-out of petrochemical, I didn't expect that you told us about the year that you are aiming at? And also, I mean divestiture sellout because gas car, so it is not necessary. So European perspective is included for the improvement of portfolio. So completely in line with that situation and your judgment is very wonderful. And now into the future, what is important is execution, execution, execution, execution. That's what you mentioned. So based upon the past success case, I would like to introduce you some and I would like to hear what you are going to do? Within my knowledge, the company, which made a success in such a big regeneration form of the company is Shiseido and the Caleso Nissan. The Shiseido, there are so many talented people and the technology skill wise, they are really strong, but there is no strong plan, and there is no good control of the cost. So what they've done is sell-in, sell-out. I don't know if you understand it, but the seller in push the products to the wholesalers in order to stop that, they consolidate to sell out. With that, you cannot cheat your accounting at the end of the fiscal term. So that's been introduced throughout the world. And at that time, what was terrible -- worst is Japan and China, and what's been done there is that the present check each voucher one by one and identify the waste and introduce the appropriate cost management. That's what the President mentioned. So likewise, or in this way, very severe cost management is done. And because of this -- because you want to do something like this strict, you introduced a new CFO. So what kind of cost down are you thinking about? What's your image? So that's my first question about the cost cut. But I have additional question about the cost cut as well.

I mean, first, thank you for your support. And I mean, this is normal to have harsh questions. At the end of the day, we are responsible for the money of many people and they are responsible for the money of many people. So this is normal. And I take 0 offense to have any harsh question. This is what I'm paid for. I'm paid for to get tough questions and to make some time tough decisions. So no concern whatsoever. In terms of the cost cutting, I mean, there is a -- one of the reason why I think we need to have an evolution of our organization is to have everybody on the same page in terms of cost cutting. What doesn't work is if there is a decision and then there is another company that has to decide also then have another one, and then it takes forever and nothing happens. So we will have a very strict management in terms of following up the cost cutting. We will announce the cost cutting that are included in budgets. You will see some of the cost-cutting measures that we are doing. And this is not the first time for me that I do it. And we will. Otherwise, I would not show it. You can be 100% sure that everything that we showed today, we're going to do 100% efforts to accomplish them. This is not some kind of a fairytale or whatever. And that's why I said from the beginning, this is not a grand deals plant that's going to look into solving all the world's problem. This is a plan that's going to bring us back by doing blocking, what they call blocking and tackling and doing operational excellence, manufacturing excellence and to become excellent and reduce costs everywhere. That's what we need to do. This is based on a concept of earning the right to grow. We need to first fix the company before we can think about really accelerating growth and spending more money. So that's what we will be focusing on. And we will have the whole team tracking everything and all of us, all of them. Everybody in that team will have targets that they're going to have to accomplish. That's 1 thing that we didn't talk about. We will continue to roll out performance management in the company, strong performance management. People who don't perform, I mean they probably will not be here. So -- and they will not be there in the future. So yes, it is a different era, and it's a different way of managing. But let me tell you, when I got interviewed for this job, I explained very clearly from the beginning that this is what I would do. I studied the company a lot before I decided to -- when I accepted the offer. I spent 9 months now to really study the company. And my opinion is no change as far as what needs to happen. You first fix and then you grow. And that's what I'm presenting today is we will fix and then we will grow. And all along the way, we will create value.

Okay. Another cost reduction question, that's about human resources. I didn't quite understand. Mitsubishi Chemical you do the ordinary decision-making, that's what we believed in. However, your organization is quite complicated. And you say that you simplify the decision-making process, you repeated that sentence of rate. But what is going to be changed in what way? Could you share with us 1 specific example? In the past, decision-making was in this way. So you are going to change it to in other way.

There will not be any more Mitsubishi Chemical Board and management team, everything will disappear. There is only 1 team that's leaders. That's all. That's all you're going to have. You will not have any more MCC with its own board and then Mitsubishi Tanabe Pharma with their own board and they make their own decision and the legal entities and their mid-air decision. This will disappear. There is only 1 team. That's all. Clarity and execution. You are absolutely right. The accent will be put heavily on execution. And to do that, we need to have direct control relay to make sure that the execution is happening.

You mean at appropriate timing, appropriate decision-making was impossible in the past. But to make it simple, the speedy real-time decision is going to be now possible to be done. Is that basically what you mentioned?

Will accelerate decision-making for sure.

The second question that is about the battery. Battery is still remained. That is my surprise -- that is a surprise for me. So the battery material business where the cost down is always required to the future for the automobile. So hyper stability is difficult to be expected. But this business is decided to be maintained. Personally speaking, I'm happy about that. But on the other hand, BASF is a European chemical company taking place in center and acquired Toda, Cogan Shansheng Group in China, they established alliance, they acquired a patent very aggressively working for this segment. And today, Nikki Sangyo newspaper also says that they are going to do for cover for recycling as well. So their business plan is quite established. And especially in the Europe market, acquiring locally and consuming or recycling locally. That's what they are doing. So Mitsubishi Chemical, if you go into the battery business in a flash manner, OEM is going to be different, right? Volkswagen, BMW, they are doing, but Toyota, they are not doing. Country Support is different, especially the support for new energy is quite different. In such a situation, as Mitsubishi Chemical, you decided to maintain this business. Why is that? Is there any very good trigger that you have or you see now good conditions to continue this business?

A very detailed question, so I'll give you my answer from what I know. We've been in the electrolyte business for quite some time, and we made very nice money in this one. As it got more and more commoditized, I think the profitability went down with a lot of Chinese players entering the market. We still have a nice business in this one. Having said that, there are many different parts in a battery. We would never produce battery or anything like that. But there are many parts in batteries that are interesting from anode, cathode, from a lot of different things that require specialty materials. That's what I mean by the fact that we are absolutely still interested in looking in there whether we can have a position that has high margin, high profit. As I said, I mean, we are not really interested in game, heading into high-volume, low-margin business. That's not it. But there are many parts of -- in a battery. Whether we will be a very large supplier of batteries? No, they are -- no, never. This is not -- that's not us. We will be focusing on specialty materials wherever they go.

Meaning that rather than the battery itself, the accessories surrounding parts are also taking into consideration.

Where we can bring value and where our products really make a difference, we should be looking into. This is a very fast-growing business. So we cannot not look into it. It is a very fast-growing business that uses a lot of chemical that is highly specialized and where some elements will really make the difference. I mean, you can look at some of the cathode anode or whatever or even so it stayed batteries. Some of the product there will sell for very, very high price. I'm not saying that we have an answer for everything, but it is our duty to look at least in this kind of market. I will make sure that you have a different -- I mean more from people who know it better than I do.

Okay. Okay. Then I make additional explanation. Getting into the battery business, so far, we are not getting to that. We are looking at the business or the customers, so we do not get into the battery. But the electrolyte liquid and also anode materials for automobile for the electrolyte liquid we have a new technologies of the mixing. So that is also what we have and we have new anode materials and technologies that I've explained in the February. So that's going to be the business for us as well. So we are going to continue in this way, the nonautomaterial business.

Next question should be the last one. From online, Mr. Umebayashi.

Umebayashi from Daiwa Securities. Do you hear me?

Yes.

Just 1 question. Slide 24. By segment, you have goals. And for MMA, I have a question. EBITDA margin, when you calculate that sales by '25 would be JPY 270 billion. Against this year, it would be down by JPY 40 billion and EBITDA, well, I don't know how much depreciation, it may not be accurate, but by '25, close to what you have now for the EBITDA. That would be the target. The sales will go down by JPY 40 billion because the market will be slow and EBITDA should be maintained. What's the reason that is because of the cost down. Can you explain more about that?

Well, you have a detailed analysis. I'm surprised. For 1 thing, MMA market situation and by '25, what is our projection of the market? That's the key point. As of now, a bit lower than $2,000 at the market. And do we think that this will continue or should we have a conservative view? As we see it, we have a conservative approach. And then up to '25 and FX and the crude oil assumptions, they also impact for the short term. We look at the situation and by '25 -- in the 4 years, we built these numbers in August this year around that timing. So in step 1, this is the plan, $55 was accrued or assumption or FX now JPY 115 to the dollar, but it may be JPY 105 on the range. So depending on those assumptions, the number would vary very much. JPY 2 billion EBITDA M&A by '25 that's the number here. And compared to the current market situation and crude oil market, it is a conservative view. I hope you understand that. That's all.

Well, I ask this question because JPY 40 billion reduction in sales, and I understand FX or oil may go down. But profits can be maintained that's your -- what you're showing here. And what kind of cost reduction is possible to achieve that? Can you comment on that?

As for the room for cost reduction, for MMA operation now is based on optimal cost for production. And as you know, we have 3 processes and optimization of those 3 processes can achieve several billion yen cost reduction.

Thank you very much. With this, we would like to close today's meeting. Thank you very much for your participation. Because of the COVID pandemic, I hope you refrain from additional questions on individual basis here. Please fill in your question here. Those who participate online, we sent you a questionnaire. I hope you will fill it out. Thank you very much for your participation today.