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

Earlier today, we released our consolidated financial results for the fiscal year 2021 and our forecast for fiscal year 2022. And before I hand it over to our CFO, Nakahira who will do a complete review of our results and forecast, I would like to share with you in a few words the state of the company as we stand today and also, my expectations for the year to come. So let me start with fiscal year 2021 that ended last March. Overall, we met all the financial targets that we had set for ourselves at the beginning of the year. We delivered a strong rebound from 2020, with a combination of good sales growth of about 22% versus last year, and a good increase in COI of about 56% above the previous year and 19% over our initial budget. We also delivered a strong net income attributable to parents of the company, in excess of JPY 1.7 billion notably and also, that's very encouraging. Virtually, all of the markets and product lines that we have experienced good growth in fiscal year 2021. It is worth noting that all the future-focused segments that we include into our Forging the Future, a new strategy, and that includes semiconductor, display, EV, sustainable polymers, food additives, all of them had solid growth last year, and I expect it to continue. On the Pharma front, we had a year of extremely heavy R&D spending. Now, the result is that it drove the positive conclusion of 2 very important Phase III clinical, one for COVID-19 vaccine, and the other one for our oral Radicava drug for ALS disease. We received the FDA approval of that drug yesterday. These 2 products together with strong advances at NeuroDerm are all pointing to a return to solid and sustained profitability of our Pharma business in coming years. Also and as announced separately yesterday, the importance of holding our gas business had a solid year and so also improved profitability. Last but not least, as promised last year, we took strong measures to deleverage the company. And as a result, our net debt to equity decreased from 1.73 to 1.4 as a result of strong retained earnings, but also net debt repayment. To cap a good year, we also restored our dividend to JPY 30 per share for the full year. Now, as we look into 2022 you all know that the global economy and thus, our company are facing serious trading conditions. First, we are still after 2.5 years, going to a painful exit of the COVID-19 pandemic. That is driving soring inflation and generating really complex supply chain problems across the world. Secondly, the Ukraine war has induced a global energy crisis that is driving energy prices to record high around the world. Despite all of that, I am and our team are confident that our company will be able to navigate 2022 in a resilient manner and will continue to deliver increased profit compared to 2021. Our '22 forecast include all the initiatives that were described in our December presentation of our new strategy Forging the Future. All of these initiatives will be resulting in '22 and increased profit in our selected market that will more than offset the headwinds that we will be facing in our petrochemical business. As such, we will be looking for solid top line growth for the company, driven on one hand by a disciplined pricing methodology and actions across the markets that are mostly impacting -- being impacted by surging raw material costs and energy prices. There, we are mostly talking about our commodities, petrochemical, carbon chemical and MMA. On the other hand, we're going to continue in 2022 to see solid growth in our key market segments and product lines where we will invest the bulk of our growth CapEx in '22. Indeed, we expect to see continuing growth in semiconductor, display, EV, electronic materials and food ingredients, among others, and these would also post sustained earnings growth in '22. We are also expecting our Pharma business to start reaping some of the benefits of extremely heavy investment through the launch this year of 2 proprietary drugs, namely Covifenz, our COVID-19 vaccine, where shipments will start next month and the ramp-up of our newly FDA-approved oral Radicava. These 2 drugs are expected to be strong contributors to our top and bottom line in the future. In addition, the announced simplification of our structure will also lead to significant cost cutting and containment that will result in about JPY 300 million savings in line with our expectations and in line with our Forging the Future strategy. Finally, we will continue to see a reduction of our debt in 2022. In closing, we expect the coming year to be a year that will confirm the soundness and increased resilience of our new strategy, despite the significant headwinds that are and will be impacting our businesses across the world. Thank you very much, and I'd like to turn it over to [ Simi ] Susan.

Thank you very much. Now, I give the floor to CFO, Yuko Nakahira.

Thank you. I am Yuko Nakahira, CFO. I would like to explain the business results for the fiscal year ending March 2022 and business outlook for the fiscal year ending March 2023. Please look at Page 5 of your English script. This is the consolidated financial results for the fiscal year ended March 2022. Revenue was JPY 3,976.9 billion, an increase of 22% from the previous year, the highest ever. In addition to the increase in sales in the domestic market, sales overseas drove the growth significantly. Overseas revenue accounted for 47% of the total, up about 2 points from 45% in the previous year. Core operating income, which indicates the profit of the business itself was JPY 272.3 billion, up 56% year-on-year. And operating income was JPY 303.2 billion, up 538% year-on-year. Core operating income was JPY 27.7 billion lower than the forecast announced in November, of which approximately JPY 20 billion was due to Health Care, in which sales of COVID-19 vaccine, which was expected in the second half was pushed back to the fiscal 2022, and the high cost of clinical trials under the impact of COVID pandemic. Business segments other than Health Care were affected by the sharp rise in raw and fuel costs and supply chain disruptions from the situation in Russia and Ukraine in the fourth quarter. However, each business work to secure profitability by promoting price pass-through and sales expansion activities responding to trends in raw and fuel prices. Next slide, please. This shows revenue and core operating income by business segment. Revenue increased in all segments. Performance Products were up 14%, Chemicals were up 45%, Industrial Gases, up 17% and Health Care, up 3% year-on-year. As for core operating income, down by JPY 24.9 billion in Health Care, but core operating income was up significantly in Performance Products, Chemicals and Industrial Gases, resulting in an overall increase of JPY 97.6 billion. The core operating margin increased 1.4 points from 5.4% in the previous year at 6.8%. Next slide, please. This is the breakdown of core operating income increase of JPY 97.6 billion. On a full year basis, soaring raw material prices were more than offset by the effect of the increase in MMA and export coke market prices, as well as price pass-through and price hikes, resulting in positive JPY 5.5 billion in price differential. In terms of volume differential, demand for automobiles, electronics, such as EVs and semiconductors, general industry and food-related demand was favorable, resulting in strong growth in Performance Products, Chemicals and Industrial Gases. Priority pharmaceutical products also contributed to the increase in volume. Cost reductions contributed JPY 18.9 billion, especially through structural reform efforts at Chemicals. The number of affiliated companies of the group has been reduced by 41 companies from the beginning of the term. Next slide, please. The following is a breakdown of core operating income for each business segment. In Performance Products, we raised prices in response to soaring raw material costs, but the difference between sales and income was slightly negative. In terms of volume demand for semiconductors, EVs and other electronics applications was strong. And sales of films for optical applications, epoxy resins for a semiconductor encapsulation, semiconductor materials, electrolytes and other products grew substantially. Sales of high-performance engineering plastics and films for food packaging grew, reflecting a global recovery in demand for general, industrial and food applications. Demand for environmentally-friendly products was strong in businesses such as DURABIO, a bio-based polycarbonate and BioPBS showed strong growth rates. In addition, we took portfolio actions such as the sale of the polycrystalline alumina fiber business -- alumina fiber business. As a result, the Performance Products segment reported a JPY 19 billion increase in earnings. Next page, please. In Chemicals, MMA, petrochemicals and carbon all posted increases in revenue and earnings. In the Petrochemicals business, the company made a strong effort to pass on the cost of polyolefins to customers, and market prices for MMA and export coke growth in line with the recovery in demand, providing a tailwind. Volume increased substantially due to a recovery in demand from COVID-19. Cost reductions contributed to profitability as MMA closed its Beaumont plant in North America and the petrochemicals and Carbon Business, making decisive moves to consolidate production facilities in lines. Inventory valuation gains further boosted profits due to soaring raw material costs and foreign exchange effects, resulting in a significant overall increase of JPY 86.4 billion, since inventory valuation gains will be smaller in FY 2022 than in FY 2021. We will promote further price actions and cost reductions. Next slide, please. In the Industrial Gas business, sales and operating income increased in all regions. Industrial Gases performed well overall, reflecting strong demand for electronics applications, and a recovery from COVID-19. Next is Health Care. Profit was down JPY 24.9 billion. The price difference of minus JPY 8 billion was due to the NHI drug price revisions. Wholesales of STELARA, a domestic pharmaceutical priority products and CANAGLU, a diabetes treatment drug increased steadily. Profits declined overall due to delays in the commercialization of the COVID-19 vaccine and an increase in R&D expenses. Regarding royalty income in Gilenya, we continue not to record income because of ongoing litigation. I will skip the details of revenue of pharmaceutical priority products. Next slide, consolidated special items. Gain on the transfer of the alumina fiber business totaled JPY 56.6 billion, impairment losses totaled JPY 20.4 billion, including the JPY 15.8 billion impairment loss on the osteoarthritis treatment, MT-5547. Net total was JPY 30.9 billion. Next is cash flows. Cash flow from the operating activities was net inflow of JPY 346.9 billion, cash used for investing activities was JPY 128.8 billion, and free cash flow was net inflow of JPY 281.8 billion on real terms, an increase of JPY 38 billion from JPY 180.1 billion in the previous year. Cash flows from financing activities was net outflow of JPY 336.3 billion with repayment of interest bearing debt. As a result, the balance of cash and cash equivalents at the end of the period decreased by JPY 118.2 billion from the beginning of the period at JPY 245.8 billion. Next slide. I'd like to explain the consolidated financial positions at the end of March 2022. Total assets were JPY 5,573.9 billion, up JPY 286.7 billion year-on-year. Total liabilities were JPY 3,729.6 billion, an increase of JPY 13.5 billion. Equity was JPY 1,844.3 billion, an increase of JPY 273.2 billion. Regarding assets, trade receivables and inventories increased significantly, due to the effective market conditions, soaring raw materials costs and foreign exchange. Asset increased due to the exchange rate fluctuations, was JPY 196 billion. On the other hand, interest-bearing debt, including leasing decreased by JPY 192.5 billion year-on-year due to the transfer of the alumina fiber business and the sale of strategic shareholdings. As a result, the net debt-to-equity ratio was 1.40, an improvement of 0.33 points from 1.73 in the previous year. The exchange rate was also a tailwind, and we were able to further improve over 1.43 forecasted for FY '21 under the new management strategy Forging the Future announced in December. ROE based on profit margin attributable to owners of the parent was 13.2%, a significant improvement from the previous fiscal year. Next, I would like to explain the full year earnings forecast for the fiscal year ending March 2023. Next slide, please. The exchange rate assumption is JPY 125 to the U.S. dollar and the naphtha prices seemed to be JPY 81,000. Revenue for the full year is expected to reach JPY 4,436 billion, 12% higher than the record high set in FY 2021. Core operating income is expected to be JPY 275 billion, up 1% year-on-year. Operating income is forecasted at JPY 277 billion, down 9% year-on-year and net income is expected to be JPY 194 billion, down 7%. Excluding special factors, such as the transfer of the alumina fiber business, the profit is expected to increase on real terms, and earnings per share will improve by about 5%. Next slide, please. The breakdown of sales revenue by segment is as follows: Performing Products, up 10%; Chemicals up 23%; Industrial Gases down 1%; and Health Care, up 6%. The outlook is in line with our Forging the Future managing policy, which identifies growth in our most important strategic markets, EV, digital, such as semiconductor materials, food and health care. In core operating income, overall profitability will remain healthy, but other segments will compensate for the substantial decline in Chemicals in FY '21. Although the sale of the polycrystalline alumina fiber business will have a negative impact of several billion yen on Performance Products, we expect an overall increase of JPY 6.3 billion. In Chemicals, inventory valuation gains are expected to shrink by about JPY 24 billion, and the difference in the scale of scheduled maintenance turnarounds is expected to have a negative impact, resulting in JPY 27.2 billion decrease. Industrial Gases is expected to increase by JPY 6.1 billion due to price action and cost reductions. In Health Care, we expect an increase of JPY 21 billion, mainly due to investments in R&D and the commercialization of COVID-19 vaccine. Next slide, please. Breakdown of the core operating income forecast is as follows: under the forecast that raw material prices will remain at high levels, we will secure gains from price difference by promoting more prompt price transfers and price hikes. In the current fiscal year, we expect volume growth in the most important strategic markets of EV, digital, food and health care. The commercialization of a vaccine and the FDA's approval yesterday of an oral suspension for the indication of ALS are expected to contribute to growth in health care. Of the JPY 100 billion in cost reductions by 2025 that we have outlined in Forging the Future, we will achieve JPY 32 billion in company-wide cost reductions by the end of the fiscal year, ending March 2023. Through activities such as eliminating duplicated activities and promoting simplification, standardization, structural reforms by becoming a one company. Although there will be a contraction in inventory valuation gains, a decrease in profit due to the profit portfolio review and an increase in R&D investment in growth businesses, overall core operating income is expected to be JPY 275 billion, up 1% year-on-year. Finally, I will explain about dividends. As announced, on November 2, 2021, the year-end dividend forecast per share for the fiscal year ended March 2022 is JPY 15 per share, which will be resolved at the Board of Directors meeting to be held on May 19. This is an increase of JPY 3 from the previous year. For the fiscal year ending March 2023, we forecast interim and year-end dividends of JPY 15 per share, the same amount as the year-end dividend for the fiscal year ended March 2022. As a result, the annual dividend forecast for the fiscal year ending March 2023 is JPY 30 per share. Now, we will review our dividend policy in the future in accordance with the strategic capital allocation set forth in our new management strategy, Forging the Future. This concludes my explanation.

Thank you. We will now take questions. So the first question is from Daiwa Securities, Mr. Umebayashi.

Umebayashi from Daiwa Securities. I have one question on Health Care. In FY '21, the profit was lower than your expectation. And I understand that, that was due to a delay in vaccination? Or is that the only reason for that? And in this new fiscal year, you are expecting a big growth in profit. Is this to come from the contribution from vaccine? And what else would contribute to this expected growth in profit?

Thank you. Yes, this is Kobayashi. I hope you can hear me.

Yes.

Before that, Nakahira, the CFO, would first take that question.

Yes. For FY '21, Health Care results. The sales from vaccine had been delayed, that's one factor. And the clinical trial expenses, the R&D expenses were much larger than expected due to COVID pandemic. As for the growth in profit this year and the revenue growth this year, vaccine would be one factor of contribution. And yesterday, FDA approved the oral ALS treatment. And this should contribute to an increase in volume as well. In addition, last year, the vaccine-related R&D expenses was very high, but this is going to be reduced, which should be a positive factor.

I see. Thank you. Regarding this vaccine sales. When do you expect the sales to actually start? Looking at the guidance, not much for the first half, you seem to expect the launch in the second half. Now generally, the R&D expenses are concentrated in the second half. So I think lots of sales would be recorded in the second half. So could you elaborate on that?

Thank you for your question. Regarding the vaccine sales, booking. In the second half, yes, we expect a rather large but commercialization will start in the first half, with the majority taking place in the second half. That is our current expectation.

Kobayashi-san, do you have anything to add on vaccine?

No, nothing to add. I think Nakahira-san responded sufficiently.

Next question comes from Mizuho Securities Mr. Yamada.

This is Yamada, from Mizuho. I have 2 questions. Perhaps, you can interpret 3 questions, but I hope you can bear with me. First question relates to R&D expenditure. So it relates to R&D. So when we look at the trend of the cost for health care, this fiscal term, as you rightly mentioned, it is actually larger than the expectation. Well, actually, in comparison to the previous year, it has actually increased by JPY 6 billion in comparison to the initial guidance in terms of the R&D, putting a downward pressure on the performance. So in terms of R&D, it's down by JPY 18.3 billion. In Health Care, you're expecting about JPY 21 billion in terms of the operating income increase. So my question is, there seems to be no other factors pushing up the operating income. So where exactly will we see the impact from the launch of the COVID-19 vaccine? Also, when you look at the R&D cost, with JPY 16.6 billion. So we initially thought the amount is necessary. But of course, if you add the amount together, it's about JPY 30 billion. But according to Forging the Future, you're looking at JPY 570 billion for the whole duration. So what sort of time frame you have in mind in terms of R&D expenditure?

Thank you for that question. So this is a question related to Health Care. Actually, no, this is not just for health care. I'm just looking at the R&D as a whole, according to the Forging the Future policy. So CFO, Nakahira, would you please answer to that question.

So let me first begin by saying Health Care. So perhaps, the number we have posted for Health Care did not really match or does not align. But as far as this fiscal term, we will continue to see impact from the NHI pricing revision. So we would expect to see increase in the volume to offset. And also we would contain the level of R&D. So I think that way, you can actually see the number aligns with our explanation.

So even after launch of the COVID, are you able to perhaps barely offset the impact from the NHI price revision? With that be it? Even after the launch of the vaccine, would that be just barely sufficed to offset the impact from the NHI price revision? Is that the right way to interpret this?

In terms of the NHI price revision, it's about JPY 16 billion of impact, JPY 16 billion. So yes, indeed, this would pose a large impact on our performance.

Thank you for that number. Also, another question. This is related to of JPY 570 billion in the 5 years. But already, you will be using more than JPY 30 billion for the initial JPY 200 billion to JPY 300 billion for the next -- for the first 2 years. So are you actually trending differently in comparison to what you expected to spend for Forging the Future? This is the investment.

R&D investment for this year. Well, we have actually stipulated in Forging the Future. It is within the framework of the R&D amount, JPY 570 billion. It is within that framework. So if that's the case, in the second half, 3 years, so you will only be using JPY 270 billion then, if you were to do a simple substraction. First of all, we would need to really generate the profit through our core businesses, that is of essence to us. So while we generate those profit accordingly, we would like to consider the investment. But right now, as we have shown in Forging the Future, we are trending just as we expected within the plan. So there's no different standard or no different time frame than okay. I'm not ready to share that.

Another question relates to the Performance Products. You have JPY 31 billion of various increase in the profit, and you give us different factors. So if you can actually lift up the factors that have contributed to the profit increase and the terms on the contribution. So if you can start with the factor that has contributed the most. And if you can give us a couple, that would be helpful.

So thank you. So this is a contribution to the volume increase. So if you can give us some of the important factors contributing to the volume increase for the Performance Products for the last year. So in terms of volume increase, advanced materials and alumina fiber products, also, the battery-related materials, those are high in terms of the contribution, business unit-wise.

Thank you. So in terms of the alumina fibers then, of course, we will be divesting those. So in terms of the carbon fibers and also lithium batteries volume, will continue to be large in terms of the contribution from volume, then?

Yes, that is correct. And also, semiconductor-related materials, across the board, it is trending well. So of course, we cannot really divide those by different business units. But generally speaking, the semiconductor-related materials, have fairly high contribution. So in terms of the general industrial materials then, you're not seeing much of an increase.

And you've talked about BioPBS and DURABIO. So perhaps, the growth rate is quite strong, but of course, the denominator is quite small. So perhaps the contribution is not so large.

Yes, your understanding is correct.

Thank you very much. Next is from Morgan Stanley MUFG, Mr. Watabe, please.

Watabe from Morgan Stanley. Two questions, plus one question on Health Care. Mr. Gilson, you said at the very outset that everything under Forging the Future are incorporated for this JPY 22 billion, I think about JPY 20 billion or JPY 25 billion, over JPY 100 billion. So to become the true one team, what else, as factors, are being incorporated? I'm looking at Page 18 on the Japanese version, which I think would be Page 19. And when you exclude the alumina fiber business impact as well as the inventory valuation gain loss, what else would be the factors.

Nakahira-san would respond?

Thank you. Regarding cost increase. Are you talking about FY '21? I'm looking at Page 18 on -- Japanese version, JPY [ 857 billion ] or JPY 85.7 billion.

On the English version, Page 19, you said that alumina fiber impact was there. So if you exclude those factors, I think this could be rather negative.

Yes. Let me explain the inventory valuation gain and the transfer of business, this accounted for some of the differences. And also on a global scale, the personnel cost increase is also incorporated. So JPY 24 billion is the inventory gain and alumina is several billions of yen.

So are we talking about JPY 50 billion difference?

Well, in addition to alumina business, there will be some of the business transfer impact. And in addition, labor cost is rather substantial, and we are expecting increase in sales. And then accordingly, the sales activities would increase and associated cost is being incorporated.

I see. My next question is on MMA. You're expecting growth in profit this year. And compared to other petrochemical, I think the margin is improving right now. So what is your prospect now? The market price as well as spread for the rest of the year? What is your projection.

For MMA, for FY '21, it was very strong, for FY '22 we started very strongly. Still, there are differences from region to region, especially in Europe. The natural gas prices are going up and reflecting that, the European and the U.S. suppliers are going to reduce the supply. So we expect the supply and demand to remain tight. And the cost competitiveness that we have will leverage that for increased sales and profit. As for the market price, $2,100 is the market price projection that we have.

My last question is on health care, the COVID-19 vaccine. Since approval, the launch itself is being delayed. I think that's to do with the production structure. I think you're expecting over JPY 20 billion in sales oversees. It could be vaccine, but it means that only 10% of the capacity is going to be used. What is the background? And also, that decision by WHO. Compared to your capacity, what is your expected production volume so? Can you answer that question on vaccine?

Yes. Kobayashi would respond.

Thank you for your questions. At this current moment, for commercial, the purchase by Canadian government has already been decided. And so based on that contract, we will be supplying accordingly. And -- so we are making a rather conservative estimate. Regarding the impact of WHO position -- Oh, by the way, the government -- there is the original contract plus additional for the Canadian government supply. So that's reflected. As for WHO impact, we will continue or Medicago is continuing the negotiation. That is all I can say for now.

Why is the launch being delayed?

In February, the approval was made and supplied to the Canadian government from there, is the plan, and that is taking more time than expected. But as was explained earlier, we expect the supply to start in the nearest future.

And the minimum amount, would all be shipped? Are you expecting that? Or are you making even more conservative estimate?

Well, I can't give you the details, but we are showing the conservative expectation.

Thank you very much. Next, SMBC Nikko, Miyamoto-san, please.

This is Miyamoto from SMBC Nikko Securities. I have 2 questions. First question again relates to MMA. So in Q3, there was an impairment. In Q4, the profit seems to be on the decline. So I believe the market was trending in line with our expectation. But why the profit was below by JPY 3 billion for MMA? Why is that the case? Was that, there was a cost increase more so than expected? If you can explain. And also, if you can share with us the utilization rate for Q4 as well as for the new fiscal year for MMA.

Thank you very much. So the question was related to the results for MMA and also, the current operating climate for MMA, then -- so our CFO, Nakahira would answer.

Thank you. For MMA -- So there's been an increase in the raw materials price. And of course, the natural gas pricing has been on the rise. So the maintenance turnarounds that we were initially planning, but that has been pushed out in terms of the timing of the repair. That is one of the biggest factor. Also, MMA, as a whole in terms of utilization, 67% was FY 2021. This year, we're looking at 74%. That is the expectation.

Understood. So in terms of the results, then. So because of the repair maintenance was actually longer than expected, and also because of the raw material increase, the margin had deteriorated. So those are the 2 reasons?

Yes, that is correct.

So just to add on that, we should say -- so [ Rowan ] -- they conducted [ forced module ] because of the lack of the raw materials in the U.S.

So we are seeing some shortage of raw materials. So what sort of risks are we seeing for MMA? So as far as you know, if you can share with us what sort of risks that you foresee?

So we cannot comment on the competitor situation. But as far as we're concerned, as explained for the time being, we do believe the tight market to continue for some time.

Understood. So for this fiscal term, so you are seeing increase in the utilization rate, that is a positive. And also, we have $2,100, that is the assumption. So you are expecting a certain high level of margin, then?

Yes, your understanding is correct.

Understood. So second question relates to Performance Products. So Q3 into Q4, if you can share with us the trend. So in terms of polymer and compound, it was pretty much in line with your expectation. But in terms of films and molding materials and also, advanced solutions. In those subsegments, there's been improvement by JPY 2.5 billion Q-on-Q. And I think there's been better than our guidance. So of course, we've seen increase in the crude oil price and also, the automotive production has been down. So perhaps, the operating climate was not so positive, but why were you able to improve your performance?

For Performance Products, what has really contributed the most to our performance was pricing. The price increase was actually conducted better than our initial expectation. In addition to that, the demand is [ frisk ]. Also, we have more concentration of different projects in Q4. So that is why we have seen a fairly strong results for Q4.

So in terms of films and molding materials and also, for advanced solutions, both of them, so the passing on the price was better than expected, then?

Indeed, indeed.

So for Q3 results, if you do look back, the performance products has suffered because of the increase in the fuel price. But it seems as if you are succeeding in passing on the price increase. What are some of the reasons you've been able to do so?

Well, in terms of negotiation, it is bound to take time. So we do need to catch up and the time is required.

Especially during the fact that we are seeing increase in the raw material price?

We have been trying to increase our pricing as well. We have been identifying this as major issues. Of course, by no mean, we are complacent with the current situation. Depending on some of the products, we may be engaged in negotiation on the fifth or sixth or even seventh round of the negotiation. So we will continue to address this so we can secure profitability.

Understood. Well understood. Thank you.

Next, from Nomura Securities, Okazaki-san, please?

Okazaki from Nomura. I have 2 questions. First, about Performance Products. Q4, of course, cost increased, I think. But more or less, I think the cost issue became more full-fledged, triggered by the Ukraine situation since the beginning of this fiscal year. I'm sure some are doing better. But are you sure that you can pass-through all the prices for all of your products?

So cost and price transfer or the price pass-through for performance products for FY '22. Right. In Q4 of FY '21, we engaged in very difficult negotiations. And since April, we saw some being concluded successfully. So regarding the prices for Q1, we believe that we are on top of that. We are controlling the prices very fairly. Regarding the soaring raw material prices, of course, in Q4, it went up very rapidly. Compared to that, I think we are seeing the prices hovering at the high level. Not increasing, but we will continue to pay close attention.

Q4, are there any special profits -- some profits that resulted from special factors? Or are they all fundamental factors?

There were no special factors. They were all fundamental factors.

I see. My next question is about the Health Care vaccine. To the extent possible, can you talk about the sales overseas to increase by JPY 20 billion? Are they almost all attributable to vaccine, Canada, U.S.? And what -- where else is my question? And the U.S. and Japan, when do you expect the approval? How much time needed?

Thank you. Regarding the volume increase. Of course, we do expect volume increase in vaccine. But last year, the priority products, they were very strong. In addition to that, yesterday, the FDA approval was acquired for oral ALS, Radicava. And that would be a contributor as well. Regarding the vaccine sales, Canada would be the main market.

How about U.S. and Japan?

With regards to the sales for this fiscal year, you're not expecting sales to be recorded, right, very limited. That is correct.

Thank you very much. Are there any other questions? [Operator Instructions] So Yamada-san from Mizuho Securities, please.

Sorry, and thank you very much for giving me the second round. So I have 2 questions. First is ND0612, about the clinical trials. So this time around, it is trending as expected, ND0612. So you're not expecting any additional impairment. So if you can share with us the current state?

So Kobayashi from Pharma would answer that question.

Thank you very much for that question. So under COVID-19, we have concerns related to clinical trials. But as we have shared with you, it is proceeding as expected in terms of the entry. So the entry is favorable, and I believe some cost is entailed here.

So you've conducted the clinical trials for vaccine. But because of those issues -- because it's Phase 3, we expect to see increase in the cost, then?

Indeed. For clinical trials on a global basis, yes, we do factor that in.

Understood. So I understood. Another question relates to improvement in the financial condition. And congratulations on making that improvement. But in terms of Nippon Sanso Holdings, I think the contribution is quite large from Nippon Sanso Holdings. So we do have the number already official. So with weaker yen, the capital increases as far as their financial structure is concerned. So I think it's a follow [ with ] now given the current ForEx state, so no issues right now. But what if ForEx plays against you? In that phase, do you perceive any issues? But it actually oppose any issue related to progress and the improvement of the financial structure. If not, you could also tell us that as well. So what is the ForEx is against the financials? How would that affect your performance?

So this is from Nakahira.

So in terms of foreign exchange, the equity will become larger. So in that sense, it has, as you mentioned -- yes, they have improved in terms of the financial condition.

Yes. But my question is the improvement in Nippon Sanso Holdings, I think it is because of the equity exposure. So now, it is inflated because of the weaker yen. And as of March end -- so now, it's positive because it's -- our yen is weak. But what if yen becomes stronger? What if yen appreciates? Do you need to change any target or sort of a plan?

First of all, and one of the largest factors were improvement last year was the reduction in the interest-bearing debt. But that was one of the largest factor. So there was a deleveraging. There was a reduction in the EBITDA. But of course, that's within JPY 192.5 billion. And also, cash and cash equivalents have been declining. So you have JPY 270 billion increase in the equity. And the largest portion becomes from Nippon Sanso Holdings. The retained earnings has been on the increase from Nippon Sanso Holdings. And also, the equity translation has been increased as well. I think those are some of the reasons behind that.

So about 3/4 of the total?

Our contributions from ex Nippon Sanso Holdings. So 3/4 comes from factors outside of Nippon Sanso Holdings.

Understood. So we expect for further improvement. Thank you very much. We do expect that. Thank you.

We're getting close to the end time. So the next question will be the last question. From UBS Securities, Mr. Omura, please.

Thank you. Omura from UBS. Towards the beginning, I could not hear the translation -- or I could not hear the voice. So I was wondering if you mentioned that. The cost reduction for this year, JPY 32.5 billion was mentioned in relation to the question by Watabe-san. Can you elaborate on what the main factors are the cost reduction of JPY 32.5 billion?

JPY 32.5 billion cost reduction. The breakdown, right? CFO Nakahira will take that question.

Thank you. First, in distribution, logistics, supply chain efficiency improvement, is one factor. And CapEx and repair, we are going to improve the efficiency and reorganization towards one company. We'll be consolidating the offices and some of the functions, and they are to contribute, resulting at JPY 32 billion.

Which are the main items? Can you elaborate on that?

Well, as projects, they are all very important. And I'm afraid we can't give you the details.

I see. Thank you. One more. Over the next 4 years, over JPY 100 billion reduction over a 4-year period is your strategy. I think the initial year is to have the largest amount that is -- would that be fair to expect the largest chunk to be taking place in the initial year? Or can we continue to see major cost reductions in ensuing years as well?

We are improving on the financial structure and specialty materials with higher profitable products, that's what we are aspiring to be. So cost reduction efforts will continue in that sense. So I think the nature might change, but productivity improvement efforts will continue.

I see. Just one more thing, if I may. The sensitivity to foreign exchange, on an overall basis, what is the sensitivity? Foreign currency sensitivity? And by segment, if you have breakdown, can you share them with us?

For this fiscal year, sensitivity, the depreciation of the yen, JPY 10 per dollar would be COI impact of JPY 11 billion.

I see. How about by segment? Can you give us the breakdown? Or any difference in significance?

No. No difference.

Thank you very much for the questions. It is time. So we would now like to conclude the Q&A session. So finally, CFO, Nakahira would like to extend her last remarks.

Thank you, [ everyone ]. For the year ending March 2022, we would actually continue to execute the policies for Forging the Future as one company. So thank you all for joining us today.