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

Good afternoon, and welcome to our IR Day. Today, it's been a long time since December 2021 and really glad to meet you again today. So let's jump right into it. So what are you going to hear about today? So the presentation that I'm going to give is really an update on forging the future. It's been 14 months now since December 2021 and what we're going to do today is really talk about the achievements and the solid progress that we've made. I think that what you're going to see is that our focus is really on execution about Forging the Future and we're going to talk about the 5 pillars of our forging the future strategy. And out of the 5 pillars, we will deliver both, on one hand, organic growth. We're talking about EBITDA of about JPY 70 billion and we will also deliver cost improvements of about JPY 135 billion by 2025, and that's an increase from the number that we communicated to you in December 2021. We are also committed and are making progress on petrochemical and carbon, and the exit from this business. At the same time, with the change in the chemical industry, we must become leaner as a company. We must become more digital and we cannot achieve this whole transformation without the help of our employees and empowering our employees to drive this transformation is really key for us. What you're going to see also is that we are investing for the future. We are and we will improve our balance sheet, and we will improve shareholder returns. I mean long term, the purpose of our company is clear and it's more than ever, as you will see, our KAITEKI vision and a relentless focus on the well-being of people and the planet. So I'm going to cover 4 chapters over the next 45 minutes. I'm going to talk, and I'm going to start and talk about the new Mitsubishi Chemical Group. This is a very different company than the one you used to know. I'll give you a detailed update on the 5 pillars of Forging the Future. I will spend time on the business growth plans and then I'm going to wrap it up into our vision for the future. And you have and all our stakeholders have our commitment that we are driving this change despite the fact that there are some serious headwinds in the chemical industry right now. So let's talk about the new Mitsubishi Chemical Group. So we are, and you know, we are transforming our company, and we are really transforming our company to become a specialty materials in the future. That was the main key point in December 2021, moving away over time from its historical base of a commodity company. And to do that, we updated our purpose and a slogan -- and now in our purpose, what you see is that we lead with innovative solutions. Innovation is now completely core to our purpose. On the right-hand side, you can see also that our slogan is very direct and explicit. We are a scientific company. So we lead with science. Now improving life in all its form is our goal. But as we do both, we really have a duty to create value for our shareholders and a larger terms for our stakeholders, our shareholders, our employees, our customers, and society at large. So why are we optimistic about this transformation? The reason why we are optimistic really find in foundation on the following 3 reasons. Number one, all of our focus markets, as we spell them are completely aligned with key trends that you see, not only in Japan but across the world. 2, all support a strong sustainability agenda. And 3, as a company, we have very strong capabilities to be successful in each and every one of them. So we are committed to deliver both financial and nonfinancial targets. For our shareholders, and I mean, specifically on the left-hand side and financial returns, despite the exit from petrochemical and we are treating it in the whole presentation is a 50-50 JV that is deconsolidated. The profitability will be up in terms of core operating income, EBITDA, return on invested capital and earnings per share. And by 2025, with this kind of level of profitability, we will be well on our way to become a specialty materials company. In terms of the nonfinancial targets, these are the ones that are really directed to the rest of our stakeholders. Sustainability goals, our customer, employees, and we have some very strong nonfinancial targets for each and every one of them. You cannot continue to operate in the chemical industry if you are not focused on GHG reductions, so our pledge is there to reduce by 30%. One thing that we upgraded is waste reduction. It was not enough part of what we were doing. So we have now raised really the focus on which reduction as a company. Customer satisfaction, we always have been pretty good, but we need to continue to improve. Employee engagement and going to close to 80% of employee engagement is a key goal for us. We need to have our employee to understand where we go and be committed and drive the process and the transformation of our company. And in terms of diversity among management, it is critical for us and we have set ourselves a goal of about 40% in terms of diversity among management. So let me shift now to an update of our forging the future goals. I'm sure that you remember affording the future at 5 very specific pillars. And since December 2021, we have focused 100% of our attention as a management to drive the execution of these 5 pillars. So let me summarize them again one by one. So number one talks about growth performance and sustainability. Our company must grow organically. Growing by just M&A is not growth. We must grow back again organically. We must grow back because of our innovation. We must grow back because of our commercial presence, but we must send more of what we have. At the same time, we need to be more selective. We need to be more global, and we need to be more profitable. About strategic cost management, in the chemical industry, cost management is everything. I have spent 33 years in the chemical industry, and for 30 years, I have heard every day about cost management. That's one thing that I really want to bring into our company is cost management. We can only spend money on what we need. We need to eliminate all unnecessary costs and we need to restructure all nonessential activities. Now part of the refocus that I talked about is about the exit that we talked in December 2021, the exit from petrochemicals and carbon product, and I would say a few words about this. Now to go to 2025 and beyond, as I said, we need to have a leaner workforce. We need to be faster in decision-making. We need to have less management but we also need to be a lot more digital, and I'm going to spend a little bit of time talking about that, and that's a big area of investment for us. And we need to empower our workforce. Workforce, digital are major investment area of investment for us. And the last pillar talks about strategic capital allocation. We must have the right balance in our company between reinvesting, investing into the business, and making sure that we are rewarding our shareholders the right way. So 3 of the 5 pillars that I just talked about will contribute to that increase in profitability at the same time as they will help reduce volatility in our earnings. Growth out of the 3 pillars will contribute to about JPY 70 billion. As I said, compared to the original goal of Forging the Future, the cost transformation has been increased to JPY 135 billion. And the exit of petrochemical and carbon compared to 2021, will reduce the EBITDA by about JPY 110 billion. So by 2025, you will have a more profitable a lot more focused and less volatile company. Now all the business will contribute to the improvement of the company and each business will deploy its own tactic to achieve their goal. In terms of performance products, the strategy is very clear. This is all about geographic expansion, commercial expansion, and transfer of responsibility to the regions. Decision-making needs to be very close to the market. We do have a lot of products. We need to sell them more. In terms of our gas business, we need to continue to grow. We are winning large projects. We are winning large projects across the world. We need to win large projects at the same time as maintaining a very high profitability in the U.S., in Europe, and in Asia Pacific. But we must also fix and restructure the low profitability business that we have in Japan. In terms of health care, we need to continue the strong growth that we've seen in the core business in Japan and in the U.S. this year. But we need also to focus on fewer indications. We need to stop over extending. And so we need, and as you know and you've seen it, we are taking decisions to exit from noncore business. In terms of MMA, we need to strengthen this #1 position. We need to do that to shift our assets to a low-cost technology, and I'm going to spend a little bit more time explaining how. So we're going to do that by supporting all the sustainability goals that I talked about. Emission reduction, net zero is still a focus for us. I talked about waste and water management. We are really pushing also the growth of what we call sustainability-related products. And we are confident that we can achieve both profitability and meeting all of our sustainability core. Now in terms of innovation, our long-term growth can only be sustained with a strong culture of innovation. To that effect, over the last 15 months, we have completely realigned all of our R&D capability from business focus to external collaboration to our venture fund; we have realigned all that with our key focus markets. We have established for each platform markets, short, medium, and long-term goals to always be ahead of the competition across the world. And we are also constantly investing in new capabilities, whether digital, whether infrastructure with a new talent joining the company. On the right-hand side, you see one of many examples that we could share with you in terms of realigning from a now technology that you see that we have for EV mobility, I'm talking here about electrolyte for EV battery. We are one of the world leader in terms of electrolyte. We have unique capabilities, but we are also working on tomorrow, working on gel electrolytes, and we are also working on the day after tomorrow with solid-state electrolytes. This is just one of the many examples of realigning completely your capabilities along market and with a horizon short, medium, long term. In terms of the cost transformation, there is a massive change in the chemical industry. You have very high energy costs. You have very fast digitalization, as a company, as we cannot sit idle, and we must bring our cost in line with global standards. So we have been accelerating the implementation of restructuring. We announced restructuring in our health care business. We have been exiting for unprofitable business. We have closed the plant, and we announced that in the U.S., in EU, in Japan. In procurement, we are doing major efforts to aggregate the demand across all the businesses that we have and really leverage our size, which was never done before to buy from a position of strength. In terms of the general and administrative, we are consolidating very fast, A lot of legal entities. We have announced a workforce optimization in the U.S. and in EU. We have announced plans to outsource a lot of noncore activities. And altogether, this is why we have increased the target to JPY 135 billion. And by the end of 2023, we will have more than JPY 80 billion that will be delivered, and we are expecting this to be a significant contributor to a step change in profitability. We are also committed to exit the petrochemical and carbon business. As far as petrochemical is concerned, I'm not going to go back on the logic of industry consolidation. I think this has been discussed many times. My only comment here is that since December 2021, all the events across the world have been very supportive of what we were recommending and the discussion now are really gathering pace. In terms of us, in 2022, we did the detailed planning. In 2023, when you're going to look at our results, we're going to carve out completely the results of petrochemical and carbon. They will be reported separately in terms of P&L and balance sheet. Fiscal year 2024, our goal is unchanged, and it is to create a JV with a strong goal of early deconsolidation from our results. We are making progress. I think we are on track, and the talks about postponing are simply not true. As for carbon chemical, we have multiple discussions and multiple potential partners or buyers and our target is still for sale in fiscal year 2023. The fourth pillar talks about main, it talks about digital, and it talks about empowerment. So in terms of a leaner structure, every single acceleration that you see right now in terms of structure reform has only been possible because of all the changes we've made over the last 2 years. We have eliminated multiple management layers. We have dramatically improved decision-making, and now we're at a point where we will be moving business growth responsibility to the regions. Part of the simplification is the reduction in the really high number of legal entities that we had in this company. A very big number of legal entities drive a lot of very high cost, and our goal day is to reduce the number of legal entities by 25% across the world. Now simplification also means workforce reduction. Through natural attrition, outsourcing, some of the cost reductions that I talked about. Some workforce reduction like the one we announced in the U.S. So we are expecting that by 2025, we will see a 10% reduction in the workforce in our company. Let me talk now a few minutes about digital because it is really key for the future. In the future, there will be no more chemical industry. There will only be a digital chemical industry. Digitalization at every step from order entry to shipping, to R&D, to HR; digitalization everywhere. Wherever you can automate, you must automate and remove costs. To achieve that goal, we are investing JPY 70 billion over the next 3 years to do 4 things. One is to standardize the business process across our company. We are consolidating all of the systems in just a few systems. Meantime, we're moving everything also to the cloud. We are building a very strong data management structure in the company so that we can use and exploit that data for much better business decision-making. And to do all that, we are training and hiring people who are really digital savvy because we need a workforce to be completely capable to work in what I call a total digital age. Now to drive this transition, we need our employees to be with us and to take the lead. To do that, we're going through a very significant cultural transformation. We are developing our next-generation leaders. We've established 3 distinct new leadership development program in the company. We are training our employees to work in a global company. We are implementing rules and making sure that in the future, promotion will only be given to people with very strong performance, and we are moving away from a seniority-based system entirely. We are also, as I said, accelerating diversity in leadership. We must do that if we want to become truly a leader, a global leader in the chemical industry and we need also, are pushing and are doing, we are promoting a cultural change that embraces value creation, where every employee understands what it means to create value in our company. But to do that, we also need to provide an environment that is safe and healthy, and that's why we also have a very strong goal. We are in the chemical industry and safety is #1 priority. We have a very safe company to work at, but you are never safe enough. So we have a very strong goal to continue to improve our performance. So let me now go and shift and go a little bit deeper into our business growth plans. But first, let me share with you maybe some new faces, new business leadership team. If I can describe that team, I would use 3 words; strength, experience, and maybe the most important high-energy. And all this energy directed to building the Mitsubishi Chemical Group of the future. So as I shared a few times, the transformation is really governed by a shift towards specialty materials. All and every business will improve profitability through a mix of growth and cost reduction. Performance product will grow and pass a core operating income of 10% on a sustainable basis. I mean, gas business, we are #4 in the world, but we need and it will close the gap with its close competitors. And you all know better than I do that our close competitors, Linde, is the #1 most valuable chemical company in the world. Air Liquide is the #3 most valuable chemical company in the world. Air Products is the #6 most valuable chemical company in the world. So we are #4 and we really have a lot of potential to increase our value tremendously and close the gap. There is zero reason why there is a 1:10 ratio in market valuation. The refocus of the pharma business, combined, so the refocus is there, and I will talk about it. But the refocus is not just by itself. The pharma business has been doing in its core business very well this year in Japan and in the U.S. and is expected to continue to do very well. The story now of MMA is the one to me of a business in transition. We need to maintain a healthy level of profitability partly driven by market and market economics, while at the same time; we are starting and embarking on to a major asset shift towards an asset base with much lower operating cost. In all the presentation, Petro is treated as equity earnings and the equity earnings there in 2025 is about JPY 10 billion, assuming a 50-50 JV. So let's talk about performance product. I mean, we had a long presentation in September. And so the numbers, it didn't change. Our Performance Product business, frankly, is ideally positioned for growth. We are present and we are reinforcing our position in key markets. We have really thousands of great products available. We need to sell them globally. The strategy is simply, we need to invest in global commercial infrastructure to give responsibility to the regions. Some pilots that we have run this year, mostly in the U.S. have really proven the point to us that this is the right way to go. And also, we need to reinforce our innovation to sustain growth. Our EV and mobility and then digital and food business will all grow at a higher growth rate in line with the market growth. In EV and mobility, we just highlighted there are a few of the products. There are many more; just highlighted Electrolytes, Fiber reinforced plastics and composites. In digital, semicon cleaning, I mean high-end epoxy, equipment component, fans. You might have seen also that we are ready to double the capacity and introduce a brand new dry resist in the electronic industry first time. And in food, we have some very good position, both on an ingredient level, mostly emulsifiers, but also on food protection; PET films, barrier materials, [ Guacenol ], Soarnol, a lot of these products. The growth of EBITDA for Performance Products will be driven 30% by pure growth at the speed of the market and then a strong contribution from price and mix as we are expecting that the growth will come from products that have significantly higher margins than existing ones. We are also counting on a 25% of that increase in EBITDA to come from cost transformation that we are driving across the company. To highlight the shift to a global market approach, we are radically changing the way we do business, and we will announce a completely different organization starting in April. An organization where the shift of responsibility will be given to regions. We want to put boots on the ground in the regions. We need to work closely with customers that are growing fast. We need to have better key customer management practice. Value pricing is a key topic for us. In my experience, it is always a key topic for a company that has its root in commodities, where historically, pricing is cost plus is the norm. We need to rewire our company to think differently, and we need to have a much better, and that's what we're doing, streamlined innovation. You can see on the graph that over time and rather quickly, and this is just a phenomenon that has been happening, this is not new. The sales in Japan are really diluted over time because most of the growth is happening actually in these markets outside Japan, and we need to capture it. Special attention also to a range of fast-growing products and we call them the sustainable brands. These products are being specified in multiple applications and these products have something special because they are the proof that at the same time, you can have product with very high specifications, products that are highly sustainable, and products that are also highly profitable. Let's talk now about the gas business. The gas business will continue to grow to the 4 regions. It's going to continue to grow by winning on one hand, large projects. We are winning large projects across the world for a separation unit. Very new to us and very recent, we are starting to win also very large projects for blue hydrogen, HyCO units. We won a very big one in India in December. We also have part of the business supplying specialty gases for medical and semiconductor applications with very high margin. And as you can imagine, we are actively exploring and engaging in technical R&D and digital synergies between Nippon Sanso and MCG. The pharma business, as I said, is going through a significant transformation. We are investing in the pharma business but we are refocusing the pharma business. We are spending money on AI to speed up drug discovery. We are spending money on developing precision medicines around 3-plus-1 indication. We are spending money on digitalizing the business and doing things like real tracking, data tracking, real-time data tracking of patients so we can adjust medications. But our health care business, and I want all of you to really understand that our health care business really had 2 phases last year and even before. Our core business in Japan and the U.S. is doing very well. And with the success of RADICAVA ORS in the U.S. is doing better in the U.S. than expected. We're also continuing to see the growth of Stelara, Canaglu, and a few other products in Japan, and profit and sales are up in Japan, even with the cost reduction that we have to beat every year. So we are optimistic about the short and medium-term pipeline. Now on the other hand, in our pharma business, we have had what I would call an overextension into feeds that were outside core strength of the company. This led to severe losses and nearly completely offset the profit that was done made in our core business. So after several years of large impairments, a deep analysis of the business, we have decided not to restructure the business along 2-axes. We need to focus on fewer indications that are in line with our R&D and clinical strength. We also need to focus on Japan and the U.S. We cannot do everything. Our pharma business is a JPY 400 billion business. It is not a JPY 4 trillion business. We must be selective into what we do. So as a result of all these changes, we will grow R&D again. We will do it in Japan. We will work on our core indications. We will now focus on central nervous system, autoimmune disease, diabetes, and kidney, and selectively on oncology and mostly for rare diseases. You will see a step change in profitability starting next year. And we are looking forward to the new leadership of Mr. Tsujimura to rejuvenate our pharma business. MMA is all about cost leadership, and it is about what do we need to do to defend our #1 position? We do have the best low-cost technology with our alpha process. We have the largest capacity. We have the largest share of the merchant market. The business is growing. I mean, this is the "queen of plastic" as it is called. It has found its way across multiple industries; mobility, building materials, displays, transparent sheets, coatings, it's everywhere, but we are not the only one investing. So in order to retain our position and our leadership position, we must transition to fewer plants, ultimately, most of them alpha process. The alpha process as such a huge cost advantage that it can be 2x to 3x cheaper on a cash cost basis. So this is all about a race to cost leadership. And it's that race to maintain global business leadership. In the plan, we have a little bit more than JPY 200 billion on in CapEx to support the construction of a brand-new plant in the U.S. But what you will see also is that while we execute that plan, you're going to see more of the older plant's closure. You have seen over the last several years, the closure of a plant in the U.S., the closure of a plant in the U.K., we're going to keep on shutting down these old plants because they are uncompetitive, and it's about making that transition. Now if you put all together and all the business combined and through a mix of growth and cost reductions, we will reach by 2025, a level of EBITDA that has never been achieved either in an absolute term or as a percentage. And by 2025, as I said, you will have a very different business with different options in front of you. Now the last pillar is about capital allocation. So as we bring back the business to an acceptable profitability level, we're going to generate significant cash flows, excluding R&D, in the amount of about JPY 2.150 trillion and we're going to allocate the capital as follows: about 50% will go in CapEx with the lion's share going in Performance Products and in Gas. But as I said, a little bit more than 200 billion is also going in MMA. About 18% will be reinvested into R&D with, for sure, the largest share going to our pharma business. So remember that in 2021, we had 2 big problems. We had a lack of profitability and a mountain of debt. So we are working to improve profitability and through this plan, we are also working to reduce our debt and to put back the company at a better place. So we have included about JPY 270 billion in debt repayment and we are aiming for a net debt-to-EBITDA below 3x, also net debt to equity below 1x. And part of the plan is to increase our payout ratio from about 30% now to 35% in 2025. When we do all that, we will still have JPY 250 billion uncommitted capital by 2025. Now implementing this forging the future strategy will accomplish 3 key and critical financial goal. One, it's going to bring back growth, profitability, and very importantly, productivity. 2, it's going to fix our balance sheet. And 3, it's going to generate, as we progress towards 2025, significant capital and leverage potential for targeted M&A or share buyback. But this is all linked together. We need to improve profitability. So we can reduce our debt, and we can create more options for us. So our vision for the future is very clear. We will be a leading specialty materials company. We will be a global innovator. And we will be a leading specialty materials company that takes good care of all its stakeholders, we will take good care of shareholders, take good care of employees, of customers, and society. So Forging the Future is our strategy to pivot towards that vision of becoming a specialty materials company. We planned this in 2021. Since December 2021, we have started execution. We are accelerating now the execution. On the 5 pillars, you have seen a lot more announcement about what we're doing. Our aim and our commitment are to deliver fully on each pillars and that will lead us in 2025 with 4 strong business, a stronger balance sheet, and many options to go forward. In conclusion, we have made significant progress since December 2021. As a management team, as a company, we are committed to the dual implementation of growth and cost reduction, and we understand very well that cost reduction, some of them are one-off, but we need to bring back a mentality of cost control and productivity in the company. We will exit petro and coke. We will have a leaner digital and more empowered company and ultimately, we will create value for our shareholders. So KAITEKI will continue to be our north star above all of that. And as a company, we are really committed to achieving our vision. So thank you very much for your attention. Arigato gozaimashita.

Thank you very much. We will now take questions.

[Interpreted] Morgan Stanley - MUFG. It was a very powerful presentation. Thank you. And I think your stock price went up a little, probably reflecting that strong presentation. My first question is on M&A. Is MMA specialty. I think it's really turning into commodity to use it as a specialty for the business in U.S. and ACH4 with the closure of that, is it going to get better? And then is already using the ethylene process that is close to alpha process. So I'm afraid they are ahead of you in the U.S. What is your take on that? And FY '25 onwards, would the supply and demand balance get better? So any comments on MMA business?

[Foreign Language] For the question -- good question. I mean, in terms of the MMA balance going forward, I mean, we think that the it's impossible for the MMA business to continue the way that, I mean, we really hit rock bottom the last quarter. There were many reasons for it that have been explained, I think, in our last meeting. And it was mostly driven by Chinese demand and supply complete imbalance. Is MMA specialty business? No, it's not. It is not a specialty business. It's not, but it's also a crown jewel. And we need to do -- there are not many businesses where Japanese chemical companies have a leadership on all the front, as I explained. The other one is PVC at net. So for us, we really think that there is a way when we have such a strong technology that has been demonstrated at scale already in Singapore and in SAMAC, in Saudi Arabia to go and grab that leadership. In the U.S., a lot of the existing facilities have a limited shelf life because of the cost. So the key in MMA is to be bold. It's shut down all the old assets while you build. If we are not bold enough, we cannot retain our leadership. We have to be very bold. And for us to make that investment, we're going to have to see that the market stabilizes and that we have a great game plan to shut down old assets. And many people have asked me, I mean, why don't you divest? Why don't you -- it's a good business. We need to focus on it. There is money to be made here if you play your cards correctly.

[Interpreted] [indiscernible] is ahead of you? Or did not feel that [indiscernible] is ahead of you?

Not really. I think there is plenty of capacity of demand in the U.S. to fill more than one plant. This is the first plan that they build. This is the third one we built, and we don't feel -- I mean we need to make the decision when it makes sense financially. So we got to other have a great return on investment, internal rate of return, and we got to have an acceptable payback time. So at the end of the day, this is about economics as well as strategy.

[Interpreted] I see. My second question is on Performance Products. Your strategy, I was very clear. Thank you very much. But for the next 3 years, JPY 100 billion profit improvement. I don't know about others, but I personally have a question mark on that. It's going to be a tall order. So what product areas, what products do you think would grow? And I think your plan includes M&A as well. So can you talk about that?

Yes. I mean the product that -- I mean, again, this is a market-driven strategy. So you can point that only one product, but specialty materials doesn't grow like that. Specialty Materials grow by focusing on an industry, riding the industry across more type products. So I can go again and cite you what I think will be growing very fast. I'm pretty sure about the fast growth that we're going to see in electrolyte business. It's growing super-fast right now. It will continue. We are investing to double capacity. We're going to bring again some -- and the MCG's product is another one. We have our semiconductor cleaning with the building of fabs. We are sold out right now. So we are seeing a lot of growth in some of these businesses. So remember this year, in in Performance Products, we are better reserves than last year, even though the economic environment is really bad. So in a normal environment, I think we are ideally positioned to really get the growth from the EV and mobility from digital and from the food market, on the ingredient side as well as on the film side. Remember, we just built 2 brand-new plant. We finished one in Indonesia, just built, just started up, and we will start construction of a PET plant also in Germany. So we have a lot of investment ongoing. Epoxy is the same also where we have investment ongoing right now. We're building a big -- I mean, a huge plant in the U.K. based on really strong demand for this product in Europe. So we have multiple opportunities to grow.

Yamada-san, go ahead.

This is Yamada from Mizuho Securities. Please allow me to speak in English. I have 2 questions regarding -- the first one is health care. According to your presentation, your expectation in ROIC in health care seems to be just around a few percent, which I think is not enough. And in order for us to judge the value of health care, obviously, the short-term profit is not everything. However, could you please elaborate how are you planning to increase the value of health care and why health care has to be within your group. This is not a specialty materials business. This is health care. This is life science, different science in my opinion.

Thank you very much for your question. So in terms of health care and in terms of pharma, we have the business. And as I said, we're going to -- I said it last December, and I repeat it now. We're going to fix all these businesses. You cannot have options until you fix businesses. So for this plan, as I explained, until 2025, it's about creating options also, we are fixing that business. And fixing that business is 2 things: one is refocusing the business and eliminating everything that we've done, maybe in the past that has not paid off and is huge a huge amount of money. That's one. The other one is refocused on indications where we have been successful in the past. It is not that our pharma business has no pipeline. We have a pipeline that beyond 2025 as a value that is higher than JPY 400 billion. So we have been working on quite a few things that have value even though we removed some of them like Medicago that had significant value for us. But it's -- we do have a pipeline. And as the proof, I mean the business is growing right now. And it's not only an internal pipeline. We also have a very strong in-license business, too, with the licensing that has been done to us based on a really strength of our commercial footprint in Japan, having Montero being licensed -- I mean, being the in-license in Japan. I mean, this is the #1 big, I mean, blockbuster nearly in the world, and we are going to be the one commercializing it in Japan. So it's a mix of different things. but we need to reinvest in the pharma business, and that's why we are doing what we're doing. We cannot continue to spend all that minute and forgetting about what's our core business. So we are refocusing reinvesting into our core business, and we're going to be reinvesting in R&D in Japan.

If I understand it correctly, the pipeline seems to be slightly deteriorated compared to 1 year ago, thanks to the termination of the virus, a vaccine and also termination of the new cell topical developments as well. And also according to this page, I can't see the ND0612, which is basically the Parkinson. So there seems to be some delay in the pipeline. And please correct me if I was wrong. And as far as new sales therapeutical payment is concerned, if I understand correctly, the doctors involved seems to be unhappy with your stance, not to share the full detail data. And this could potentially be harmful if you do not treat it well for the future open innovation, including clinical trials. So could you please wipe out my concerns.

I mean, yes, thank you for your opinion. And we are obviously aware of the position that certain other parties have, I mean, patients are always our #1 priority. And so, we take this issue very seriously. But we refrain from specific comments regarding clinical trials. We refrain and we will announce the results at the appropriate time. So we had a press release, and we stand by our press release and our press release was very carefully crafted and it says we have been investing since 2015. However, after a comprehensive review and careful consideration of the latest clinical developments, the time line for commercialization and the pharmaceutical business strategy going forward, we have decided to discontinue the development. That's our official statement.

Understood. And how about the vaccine termination as well? Is it something...

I mean, we always look at the net present value that something can contribute. We have invested -- this company has invested way in excess of JPY 100 billion in Medicago. For us, it is about what is the future? How much money to get to that future? And is it creating value for our shareholder for any program, anywhere with a pharma or anything. When we reach a conclusion that the net present value is negative, we cannot work on projects like that for our shareholders.

Understood because if I understand correctly, you are spending approximately -- you have spent approximately JPY 90 billion to JPY 100 billion for clinical testing for the vaccine as well as basically building the new plants. So I understand it. One more thing. This is just a clarification of some numbers. If I understand you correctly, the numbers shown on the capital allocation page is the accumulation of the March 24 to March 26, right? 3 years? And if I understand it correctly, if you could achieve everything you said in this presentation, you can base approximately JPY 2 trillion or JPY 100 billion on or something like that. However, if you couldn't make it, could you please prioritize the capital allocations?

We will prioritize capital allocation to make sure that we don't overspend. And that's it. As I said, we are committed to this. So we will do it, but it's a good question. If things happen, I mean, I cannot predict what the economy is going to do, but the strength of the company is its reaction, and you can be absolutely sure that we're going to react and prioritize capital spending to make sure that we do not overinvest and underachieve. So I cannot give you a typical list of what we're going to cut, but you can be sure that we'd be adjusting our spending in light of different economic conditions.

Well, options will go down.

Our options will go down yes.

Miyamoto-san.

[Interpreted] Miyamoto from SMBC Nikko. I have 2 questions. First is with regards to your policy on petrochemical exits. Initially, you were considering integration with another petrochemical company. What is your view now? With what kind of companies are you negotiating right now? And looking at Page 32, I understand that again on the divestiture is included and does this include petrochemical and what amount? And I understand that now you are buying -- establishing a joint venture which would be different and if it's going to be 50-50 equity with a similar-sized company, I'm afraid it's not going to be very effective. So as I understand is that for FY '25, it will be joint venture but as a next step, you will be selling that correct?

So our goal is to exit from petrochemical. It's going to be done in steps. It's going to be done with JV. Then it's going to be done in creating that JV running it. And at the end of the day, it's going to be for us to leave and exit from that JV. I cannot share the details of what we are doing right now. We are under nondisclosure agreement. And so, I will not share any detail about the negotiations that are taking place.

[Interpreted] Originally, you were thinking of integrating with petrochemical company. Are you looking at a wider industry as well? You have a cracker in Kashima. So I'm afraid it will be very difficult to integrate with other players. But over the last 18 months or 14 months, where do you see the difficulties? And where do you see a potential? I think the business environment is getting worse. So I think it's getting even more difficult. So can you talk about that?

Again on the nondisclosure agreement, and so I will not share any more details.

[Interpreted] Understood. My second question is on Performance Products. You talked about electrolytes. So I think it's unlikely that you were selling that business. Are there any plans to reform the portfolio of performance products? You did sell and announce the sale of some of the businesses. So could it be that maybe you sell some high-value business and use that cash to invest into a greater growth potential business? So can you talk about the policy for Performance Products?

No, you are correct. I mean we are looking, as we said, I mean whatever is not target in terms of market and whatever doesn't have the right profitability, we are looking to exit. that's for sure. What I said also is that we need before we reinvest and make targeted acquisitions, which I really hope we're going to do. We need to be on the right track in terms of profitability and debt reduction. I will not support any new M&A before we have proven to ourselves that we can have a much higher profitability business and that we have an ability to reduce our debt. After that, when we are on track, we're going to do, and that's the goal. That's why I said on the slide of capital allocation that by the end of 2025, when we accomplished this, we have room to maneuver, and we have capital and potential leverage again to make very targeted acquisitions in the specific markets where we want to operate.

Okazaki-san.

[Interpreted] I have 2 questions. First, performance products, Slide Page 23. -- from '21 to '25 on the right-hand side, growth and performance in the cost reform. And then '22 is over and for the next 3 years, what's the proportion for those 3? Growth this year was not big. So you expect more growth in the next 3 years in terms of performance and cost transformation, how it's going to progress? And the performance and cost transformation, any specific idea as much as you can disclose towards JPY 2.5 trillion level of achievement and -- can you give some numbers in the quantitative manner in going ahead?

I mean we are not disclosing the cost reduction by businesses. I mean we are -- we -- I explained all the cost savings, and we are on track, and we will deliver these. And this is the allocation for performance products. And so we will deliver that. Now your question about 2022 is a real one. I mean we -- 2022 is a difficult year. You've seen it. I would say this is probably one of the most difficult year in the chemical industry for a very long time. But it's not going to continue like that forever. It's going to bounce back and it's going to go back to normal at one point. You will see a jump in earnings in our company but also in performance product once the economy goes back to normal. As I said, I mean, we didn't see any lowering of our COI this year, even though the economic conditions, and we shared that with you, I mean, display was just nonexistent. Some of our driver from the past disappeared, they will come back, and so that's why we are confident in our projections.

[Interpreted] If I may add, the numbers on this page, there are no specific numbers, but you can see the percentage, the proportions. So that is right. And regarding cost transformation, overall JPY 135 billion. Well, for health care, it will go into health care. But other than that, the performance products would have most of that.

Another point also is it's 16% of EBITDA. So I mean, I've run, and I've seen going from 8 to 16 in 3 years, you make the right decision, you can do that. So it is a challenge, but that's why we have a management team that's committed to doing that. We have the product. I think we are deploying the right strategy, and we will do everything to achieve that goal. It's 16%. It's not 35%. It's 16%, which is just the limit for me to get to the point of being a specialty chemical. So there is a lot of things that we need to do, but it's there. The variable margin in that business is there. It's not as if it's not there. It is there. It's about us and how we manage it.

[Interpreted] This year, particularly this year, energy and material cost increased, and you could have very good pricing, and that contributed to performance. And in '23 and August, do you think this can be achieved? What is your feedback on this? Mr. Gilson, I understand that you talked to sales forces very actively. So what's your forecast for the next year and onwards?

This is one point that I tried to convey before. When you shift from a commodity type mentality to a specialty type mentality, the first thing you talk about is commercial strategy. There's 2 parts in commercial strategy that you need to get correctly. It's your market and marketing strategy and your pricing strategy. Because historically, companies that are coming from a commodity angle do not have the right pricing strategy. We have started this year with pretty good success of rolling out pricing strategy, pricing similar to all our workforce. It's not enough. We need to move into a value pricing mode. Value pricing means it is a detailed line-by-line by line-by-line item. Is my pricing correct for this customer? Yes, no. Should I increase, shouldn't I increase? There is tremendous potential in our company because it's never been the focus. And so there is a lot of money on the table that we're going to fight for to get because our products have actually a lot of value.

[Interpreted] The second question, Page 32. Regarding the dividend, just to confirm year-on-year dividend EPS, DPS was JPY 30 and FY '23 are going to increase. And for FY '25, 35%, do we need to wait until '25. It depends on profit level, I suppose, can you give us more explanation on that? And regarding JPY 250 billion, this must be case-by-case, buyback, and MMA and others, what are others I wonder? Can you explain also the priority of those, please?

So in terms of the dividend, dividend policy is we're going to increase to 35% in 3 steps. I mean, it's -- so we're going to increase 1%, 2% a year until we reach 35%. We're going to see where we are, and then we're going to think about, again, is this the end? Or do we continue? I mean, historically, I mean, Japanese companies have been paying very, very low dividends. So I mean, we are a mature company that should be paying a higher dividend, but we need to approach it in steps in line with our increase in profitability and fixing our balance sheet. We cannot be ahead of our turnaround goal. So turnaround first, dividends slightly after, but not the other way around.

[Interpreted] DPS will increase from JPY 30 and also regarding priority, which comes first MMA, share buyback, and others.

I mean you are a good - you are analysts. So you know numbers very well. So you can use the dividend rate and the earnings per share, and you can look and you can see where it is now and you can make your own calculation. So if we deliver this plan, it's going to be a significant growth in dividend per share. But we need to deliver and we are committed to delivering it. In terms of what comes first I cannot tell you now. We will see when we are there. But...

[Interpreted] In our plan every year, we will increase the absolute amount. That's our plan.

Umebayashi from Daiwa Securities.

[Interpreted] I have some number-related questions. Looking at Slide 16 on the extreme rates with the simplification of organization. Workforce reduced by about 10%, it says. Currently, you have about 70,000 people, meaning you're going to reduce 7,000. Medicago, I think, 600, 700 people. And then where else, Petrochemical exits? Is that part of this projection?

No, no... No. I mean, it's one. To answer to your question. First is this is ex-Nippon Sanso. We are not talking about Nippon Sanso in that number. So the base is 50,000, not 70,000. The rest is 5,000 in net reduction. This does not include exiting from petrochemical. So this is a real net reduction. So we've announced already, I mean, way over 1,000 directly this year. We have natural attrition in this company that is in the range of 1,500 to 2,000 per year. So we're going to manage the attrition. I mean, Medicago was, as you said, 500, 600, and then we had case plan, that was 300. And then we just announced the workforce reduction in the U.S., which was a more than 200. We are doing a lot of things. We have an outsourcing that we just announced with our systems. It's going to be several hundred people. So overall, when you put all this together, we will be at 5,000 in terms of workforce reduction.

[Interpreted] Very helpful. Another question. I'm looking at Slide 21 again, related to petrochemical exit. The equity and the profit in equity from JV, about JPY 10 billion. And I think that seems about JPY 20 billion JV. It seems JPY 20 billion, half of that will be JPY 10 billion. So core profit, I think you have to have about JPY 30 billion to achieve this figure. In your petrochemical business, last year was very good. Before that, I don't -- I think the value is smaller. So you're trying to raise your current petrochemical business to JPY 30 billion or are you thinking of combining with other company for a total of JPY 30 billion?

It's a good question, but the assumption that we've made here is the JV. I'm sure JV is with partners, and we will have, I mean, 50% of the net income. That's all I can say...

Well, we need to close on. So the next question would be the last. Nakahara-san, go ahead.

[Interpreted] Tokai Tokyo - Nakahara, is my name. Very strong presentation. Thank you very much. First, for FY '21 in December, you mentioned Shin-etsu Chemical and super specialty company. That's what you said. And I wonder if you are not willing to catch up for that. But I heard the presentation today and pricing can change to react and I feel much better now. This is Shin-etsu Chemicals spirit and then you need to improve the quality of your business. So for pricing, you had much work and by products for customer, item by item, you have worked and instead of cost class approach in the past, you have shifted, depending on customers, you get whatever you can get. So that was a very strong remark. And in terms of cost reduction, the digitalization must be very effective, and I read this digitalization exponential by exponential. So you can expect a very big change according to that book that I read recently. It's written by an American. Regarding [indiscernible] and you have some good quality and maybe you don't need human intervention at all, because digitalization is getting better. And also, you have reduced layers of management and the top management, including cross-selling and pricing can directly be engaged in various activities and decisions. So that must have been very effective in improving margin. What did you do exactly and what are the actual outcomes? Can you show some examples?

I mean 2 things. One about [indiscernible] first. And I mean, I've known them for many, many, many years. They were our #1 competitor and customer when I was at -- so I've known them for many years. For many years, this is, in my mind, my most admired chemical company in the world; the best managed chemical company, constant attention on price, on cost, lean, efficient, customer-focused. This is definitely a good, not for us, for anyone in the chemical industry. So it can be done, even though some of the business are a little bit commoditized, but it's all about how you do. You can extract money from anything as long as you manage it well. So that's for Shin-etsu. I'm a big admirer of what they do. In terms of digital, what you are saying is absolutely correct. I mean, I've been in companies before that taken all these steps 10, 15 years ago, and I could see what it did today. We are behind. Many companies are behind in terms of digitalization. We got to go. We must go. So that's why we're investing so much to digitalize as many steps we can on the business process side and on the manufacturing process side. It is not normal that in these days, we still do not have online channels for sale. We got to go there very, very fast. So that's why I said there is no more normal chemical industry in the future. They will only be a digital chemical industry. And we cannot let all the other companies do that and us fall behind. So we must be in part of the leaders in terms of doing that. Hence, a real focus to do that because from it will come efficiency, productivity and quality also. So I am a very strong believer based on previous experience.

[Interpreted] And in midterm plan, you say you invest JPY 70 billion, you have 20 ERP and you need to consolidate and you need to go through the utilization. I don't think JPY 70 billion is not enough. And there is this small amount of investment, do you have a very engineers way?

But it's the next 3 years. I never said that we're going to stop after 3 years or that we're going to be completely done after 3 years. We have some catch-up to do and we have started on that catch-up. We have started to put everything together to migrate to common systems. There are steps -- I mean, we are not starting now. We started in December 2021 and with the hiring of [ Tim Ross ] and he's been driving a great process across the company. But I don't think you can do that in 3 years, it's not going to be enough, and it's going to be more expensive than JPY 70 billion, but it must be done. Otherwise, you're going to be left behind.

Thank you very much. With that, we close Mitsubishi Chemical Group Investor Day 2023. Thank you very much for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]