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

Thank you very much for attending the Mitsubishi Chemical Group earnings presentation. We would like to start the meeting now. First, Mr. Jean-Marc Gilson, President and CEO, who will start with opening remarks. And then Ms. Yuko Nakahira, CFO, will present financial results the fiscal year ended March 31, 2023. The entire conference, including the Q&A is scheduled to last 60 minutes. I'd like to remind you that the presentation may contain forward-looking statements based on the current expectations, all of which are subject to risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements. Please also note that the audio recording of today's conference, including the Q&A session, will be posted on our website. Now let's start. Mr. Jean-Marc Gilson, please.

[Foreign Language] to all of you, and welcome to our fourth quarter and end of fiscal year 2022 earnings presentation. So my name is Jean-Marc Gilson. I'm the Mitsubishi Chemical Group CEO. So let me make a few nonfinancial introductory comments before I hand it over to Nakahira CFO, and she will take it from me for a detailed review of our results for fiscal year 2022 and explain in detail our forecast for fiscal year 2023. So I could choose to look at fiscal year 2022 as a glass half empty year. And I could say, I mean, it was a really tough year. It was probably one of the worse year for the last 30 years for the chemical industry. There's a war in Ukraine that's driving high energy costs. There is a low demand in China. We have high inflation everywhere. And so on so forth. But instead, I really prefer to look at a half at a glass half full. And really focus on the progress and the positives that we made, and we had in fiscal year 2022. Indeed, as a company, we delivered the highest ever sales in our history. We combine -- we continued to grow fast internationally, both in sales and in profits, with international sales for the first time ever equaling our sales in Japan. Very importantly also in this time of high inflation and high prices, we also relearned on how to raise price quickly and aggressively. We also reduced our cost by JPY 500 oku on going beyond our promises and our initial targets for fiscal year 2022. Along the way in 2022, we also made -- have decisions to exit unprofitable business. And these actions will contribute to generate another JPY 800 oku in savings in fiscal year 2023. With a very keen eye on cash management, we generated in excess of JPY 1,000 oku in free cash flow through strong working capital management and very high discipline across the company. We also invested into the future with our investment CapEx at JPY 2,900 oku dedicated mostly for growth and primarily directed to our gas and specialty business. In our gas business, we want 3 large and profitable projects for hydrogen supply and other gases in Peru, in U.S. and India, showing again the global nature of our business. In our specialty materials and that in line with our strategy, we invested into our anode business for electric vehicle. We also invested into our fast-growing specialty polymer business. We significant capital outlay for Soarnol in U.K. -- in the U.K. and for Gosinol in Japan. And that is just to name a few. We also invested heavily in building a world-class digital infrastructure. As regards to our balance sheet, and as promised, we continued to improve our net debt-to-equity ratio in these difficult times. And last but not least, we also got a complete victory in our Gilenya arbitration in our pharma business after a great work by our legal teams. So yes, it was a very tough year for us and for the chemical industry. But all the actions that we executed and that I just covered demonstrate that we are relentlessly implementing affording the future strategy and that we are positioning MCG for great financial success as the economy finally and gradually recovers and goes back to normal over the next few fiscal years. Shifting now to fiscal year 2023. We all know that this coming fiscal year is full of unknown. We are all unsure about the world economy. Based on our market intelligence, we are forecasting a slow recovery for our key markets while being conservative we are also confident that a combination of sales increase in most of our businesses, coupled with continued cost reductions will lift our core operating income by 25% and up to JPY 2,500 oku on in fiscal year '23. Our confidence is also reflected in a preliminary plan to increase our dividend by about 7% and up to JPY 32 per share on an annual basis. In closing, fiscal year 2022 was full of accomplishments for our company. In 2023, we will continue on an accelerated pace as we implement all the elements of our affording the future strategy. And our team, like this year is ready to deliver on all the challenges. Thank you for your attention, and let me now hand it over to Nakahira, CFO, for a detailed review of our financial results.

I'm Nakahira, CFO. I would like to present our financial results for the fiscal year ending March 31, 2023, and our full year forecast for the fiscal year ending March 31, 2024. The business environment surrounding the fiscal year '22 was very challenging. We concentrated on activities that we could control, such as pricing costs and working capital to protect our core operating income and cash. We also took bold steps in portfolio management and structural reforms as indicated in forging the future and make decisions such as closing the MMA plant in the U.K. and exiting from the COVID-19 vaccine business. Although the severe business environment has continued into this fiscal year, we will continue to manage prices, costs and working capital, this discipline and strive to secure profits and cash until the Vina recovery is in full swing. We will also prepare for the coming recovery by making investments in a disciplined manner so that we will be able to capture the demand when it arises. We will continue to implement key measures to achieve the financial targets outlined our 3-year action plan in forging the future. First, here are the results for the fiscal '22. The average exchange rate for the full year was JPY 136, 20% lower than last year. The unit price of naphtha was JPY 76,600, 35% higher than the previous year. Revenues totaled a record high of JPY 4.6345 trillion, up 17% from last year. Core operating income increased by JPY 325.6 billion or 20% due to the lump sum of royalty income of JPY 125.9 billion in the current quarter following the arbitration award in Gilenya. The levels of revenue and core operating income are in line the revised full year forecast for the fiscal year ending March 31, 2023, which was announced on February 16. Nonrecurring items of special items totaled JPY 142.9 billion in losses of which JPY 126.1 billion was due to impairment and provisions resulting from closure of the MMA plant in the U.K. and the withdraw of Medicago business. In the fourth quarter, a decision was made to discontinue the development of regenerative medicine product using new sales and about JPY 5 billion was newly added here. As a result, income before income taxes was JPY 168.0 billion and net income attributable to owners of the parent was JPY 96.1 billion, down 46% from the previous year. Revenues and core operating income are shown for each business segment, revenue increased in all segments due to price pass-through and foreign exchange effects. In the segments, revenue increased in all segments, except MMA. Core operating income decreased 35% year-on-year in Performance Products. While polymers and compounds posted an increase of JPY 6.6 billion, films and molding materials was strongly affected by the sharp decline in the display market, especially in optical films in addition to the difference in profit from the alumina fiber business, which was already -- which had been already divested. Advanced solutions, which had outperformed the previous year through the first 9 months of the fiscal year was affected by the decline in for semiconductors in addition to displace in the fourth quarter, resulting in decline for the full year. Chemicals posted a significant year-on-year due to sluggish demand and worsening spreads in all segments of MMA, petrochemicals and carbon. Of the JPY 93.0 billion decrease from the previous year, JPY 25.8 billion was due to reduced inventory valuation gains in petrochemicals and carbon. On the other hand, industry gases and health care contributed to the company-wide core operating income with an increase of JPY 22.1 billion and JPY 22.9 billion, respectively, even excluding the impact of actuation in Gilenya. Here is the breakdown of core operating income, royalty recognition from Gilenya contributed very much, JPY 53.3 billion, but with profits and pricing activity, we were able to reduce the impact. The price difference was a positive JPY 33.6 billion. As shown on the right, chemicals was down JPY 22.7 billion and health care was down JPY 7.5 billion due to chart price region and so forth, but Performance Products and Industrial Gases were able to generate a positive price difference. Volumes were all largely negative in Performance Products and Chemicals, Health care was positive, even excluding the impact from Gilenya, revenue recognition, cost reduction totaled JPY 49.4 billion with approximately JPY 19 billion in Q4. We stepped up our efforts in response to rapid inflation and accumulated more than JPY 17 billion against the JPY 32 billion in annual reduction projected for the current fiscal year. We are proud of the results of our accelerated company-wide efforts in the severe market environment. Other factors include inventory valuation losses of JPY 27.1 billion, equity earnings, our affiliates and sales of the alumina fiber business, more than JPY 15 billion and increases in labor costs and various expenses due to inflation and foreign exchange impact of overseas R&D and various activity costs. As for the core operating income or performance products, press pass-through activities despite including demand contributing JPY 41.3 billion. In price difference, volume was minus JPY 27.1 billion due to soft demand in the automotive and display markets compared to last year as a sharp drop in demand in semiconductor market from the fourth quarter. By subsegment, polymers and compass reported higher earnings, while films and molding materials and base solutions reported lower earnings. In polymers and compounds, price difference improved as a result of price pass-through throughout the period. But in the second half of the year, in addition to a slow recovery automotive market, there was a correction phase in display and semiconductor markets and the decline in demand from this spread of pandemic after lifting of zero-COVID in China and softness in the building material market in U.S. and Europe, due in part to the impact of JPY 1.3 billion reduction in inventory valuation, income increased only JPY 6.6 billion versus last year. Films and moldings was hardest hit by the drop in demand for this place. Although engineering plastics, mainly in Europe and the U.S. and carbon fibers offset the decline in profits from polymers and engineering plastics and carbon fiber made out for that, but the fourth quarter was not as strong as first half of the year. In addition, I mean, the general trend of higher food prices in Japan, demand for films for packaging material is also sluggish as consumers are reluctant to buy. Meanwhile, the company has been working to optimize this portfolio mix in this environment, including the decision to withdraw from the acrylic fiber business following the motor fiber business. Advanced solution had been supported by the strong semiconductor-related business separation materials and building material business, which had supported the sluggish display market until the third quarter but was affected by a downturn in semiconductor demand in the fourth quarter. In Chemicals, the overall decline in profit was due to a combination of factors in both volume and price, resulting in a significant decrease of JPY 93.0 billion from the previous year. JPY 35.5 billion in M&A, JPY, JPY 42.0 billion in petrochemicals and JPY 15.5 billion in carbon were recorded as sort of the decline in demand. Market price for M&A continued to deteriorate throughout the end of the period with ICIS prices at historic low of $1,520 in March. Market has recently recovered somewhat, and we expect a moderate recovery the future. Metro chemicals were affected by a significant deterioration in spread, especially for bisphenol A amid generally weak demand. The impact of inventory valuation was JPY 15.9 billion. Carbon sales decreased by JPY 15.5 billion versus last year, of which JPY 9.9 billion was due to a deterioration in valuation of inventory. Although the coke market was soft, we were able to mitigate the negative impact to structural reforms implemented from 2020 to 2022. In gas business, core operating income increased JPY 22.1 billion versus last year. Core operating income increased in regions of the gas business as a result of price management and productivity improvements to cope with rising fuel costs and the inflationary trends. The U.S. and Europe made particularly strong contributions. In the fourth quarter, Japan also saw the effect of price pass-through while lower electricity prices also contributed to higher profit. In the Health Care business, Radicava overall formulation in North America showed a very strong sales growth contributed to increase in profit structure reforms underway, including the withdrawal of Medicago business and consolidation and elimination of offices. With regards to the arbitration of Gilenya, which had been some time in lump sum royalty income for the past fiscal year was recognized after the arbitration award was issued. We will recognize royalty income every fiscal year from now on, but sales have been already declined significantly from the peak period due to the presence of competing products. Partial items posted a net outflow of JPY 142.9 billion, including JPY 68.7 billion in losses related to the closure of the MMA Castle plant and JPY 57.4 billion for the liquidation of Medicago. In addition, [indiscernible] special item expenses include about JPY 5 billion related to the discontinuation of development of regenerative medicine and other expenses related to structural reforms, such as the elimination and consolidation of business sites. Cash flow from operating activities was an inflow of JPY 355.2 billion, and cash flow from investing activities was an outflow of JPY 247.6 billion, resulting in an inflow of JPY 107.6 billion in free cash flow. In response to the free cash outflow in the first quarter, which was partly due to the sharp rise in raw material prices, the entire company worked to reduce working capital and generate cash. In the fourth quarter, we made production adjustments in many businesses and reduced inventories by more than JPY 60 billion from the end of the third quarter, raising free cash flow by more than JPY 100 billion. We will continue to be highly disciplined in our working capital management. Financial cash flow stand JPY 60.8 billion. This is the balance sheet. Total assets were JPY 5.7739 trillion, up JPY 200 billion from the previous fiscal year, of which foreign exchange impact of JPY 179 billion. Inventories increased JPY 52.7 billion but were reduced by more than JPY 70 billion from the end of the second quarter. Total liabilities amounted to JPY 3.7858 trillion, up JPY 56.2 billion from the year before. And total equity amounted to JPY 1.9881 trillion. As a result, the net D/E ratio was 1.33%, an improvement of 0.07 points from 1.40 at the end of the previous fiscal year. Next, I will explain about full year forecast for the fiscal year ending March 2024. The forecast assumes an exchange rate of JPY 130 Bmillion to the U.S. dollar, and last revenue price of JPY 67,000 billion. Full year sales revenue is projected to be JPY 4.555 trillion, down 2% from the year March 2023 and up 1% excluding the impact of Gilenya. The core operating income will be JPY 250 billion, down 23% year-on-year, but up to 25%, excluding the impact of Gilenya. Demand is expected to recover in the second half of the year in all businesses and we forecast an increase in profit from JPY 108 billion in the first half, JPY 142 billion in the second half. Operating income is expected to be JPY 239 billion, up 31% from the year before. Income before taxes is expected to be JPY 201 billion, up 20% year-on-year, and net income attributable to owners of the parent is expected to be JPY 97 billion, almost the same as the previous fiscal year. This is the forecast for each business segment. From this fiscal year, we have aligned our segment structure with that are forging the future 3-year business plan. Specifically, we will change our business segments to Specialty Materials, Industrial Gases, Health Care, MMA, Basic Materials and others. In addition, some businesses were changed in segments they belong to. And the results for March 2023 have been reclassified for comparative purposes. In Specialty Materials, we forecast an increase of JPY 21.5 billion, taking into account an increase in the volume of each product reflecting a gradual recovery in the automotive, display, semiconductor and other markets as well as an improvement in price gaps. Industrial Gas is expected to increase by JPY 4 billion by continuing to improve customer satisfaction and productivity. In Health Care, we forecast an increase of JPY 1.7 billion, excluding the impact of onetime regulation of Gilenya. In addition, we expect negative effects, including absence of gain on sale of intangible assets posted in the previous fiscal year. NHI price revisions and changes in contracts with some in-licensed products to be offset by cost reductions from withdraw from the COVID-19 vaccine business as well as the launch of Mounjaro and oral LS treatment drug in Japan. MMA is expected to increase by JPY 13.7 billion, including the cost reduction effect from the closure of the U.K. plant, although ICIS prices are in the recovery trend after bottoming out at the end of the previous fiscal year, recovery during the first half is expected to be limited. On the other hand, we reduced inventories by JPY 10 billion at the end of the previous fiscal year so that the recovery in demand will quickly lead to profits. Although we expect a shrink of JPY 16 billion in inventory valuation gains in Basic Materials, we forecast an overall increase of JPY 10.2 billion. The following is breakdown of the core operating income. On -- of the JPY 325.6 billion in core operating income for March 2023, it was JPY 125.9 billion in onetime recognition of Gilenya. So core operating income, excluding this amount was JPY 199.7 billion. This is the breakdown that leads to the JPY 250 billion forecasted for the current fiscal year. We assume a JPY 16 billion increase in price differences. We'll strive to maintain prices in the face of increasing downward pressure on prices in general due to falling naphtha unit vice and fuel costs. We assume a JPY 37 billion increase in the volume difference due to recovery in demand in each market. In terms of cost reduction, we'll continue to make steady progress toward the JPY 135 billion cost transformation target by fiscal 2025, and as indicated in forging the future. In an uncertain business environment, the JPY 82.7 billion decrease in other costs includes inventory write-downs of JPY 17 billion as well as an increase in labor costs and other activity costs due to inflation. We'll strive to improve profitability through cost reduction effects of JPY 80 billion promoting business structural reform, productivity improvements, supply chain optimization, and purchasing cost reductions. Lastly, but not least, I would like to talk about dividends. As announced on May 13, 2022, the year-end dividend forecast for March 2023 is JPY 15 per share which will be resolved at the Board of Directors meeting on May 19. For the fiscal year ending March 2024, we raised the second quarter end and year-end dividend per share by JPY 1 to JPY 16, in line with the policy outlined in forging the future. As a result, the annual dividend forecast for the fiscal year ending March 2024 is JPY 32 per share. This concludes my presentation. Thank you for your attention.

We would like to receive your questions from Morgan Stanley, MUFG, Watabe San.

I have 2 questions. First, Specialty materials. For FY '22, you reduced the inventory at the end of the year. Fourth quarter, you have a loss, and by the reduction of the inventory, the operation deteriorated, is that the part of reason for the loss? So for FY '23, could you see significant recovery at the back plan? So Q4 to first half and second half, can you elaborate on that?

Thank you very much for your question. You're right. In Q4, we have made a correction introduction and that decreased our income that is resulted in the fourth quarter. For example, utilization is lower and utility cost impact and also absorption of fixed costs. And because of those factors in the first quarter, we have lined up and the inventory level is now optimal. So Q1 and onwards that impact will disappear, we can capture the recovery. That is our expectation. But still, for the short term in Q1, we will not see the impact of recovery, we don't incorporate that. So for the short term, price and cost would be the main factors. And when we start seeing recovery, we make sure that we capture the benefit of the recovery, and that is the basis for our assumption.

Second question, MMA. So U.K. improvement, that seems like everything. But for the short term, you need a big recovery. Otherwise, average price spread is much lower than before. So in the second half, you would expect good recovery for the short term, you do see some recovery compared to other products segment. It looks like there some recovery. What's the background here? And MMA first and the second half, what its your market outlook?

As you mentioned, for the year ended in the Q4 compared to Q3, volume-wise, we do see some recovery. As for the price end of March compared to that for the short term now, there is some recovery. And going forward, demand in China has bottomed out and gradually their same slight recovery, but generally speaking, clear panel for home appliances in those segments and others, it's not in full recovery hold yet. So in the first half, we don't see a full recovery. Having figured we bottomed out, and we are in the trajectory of recovery, and that is incorporated, and U.K. cost reduction is also incorporated. So we don't have exceeding expectation.

For the second half, what is your market outlook?

In terms of the prices?

Yes.

Well, in the first half, JPY 1,500 billion to JPY 1,600 billion. For the second half, JPY 1,700 billion and hopefully, JPY 1,800 billion.

Next, SMBC Nikko Securities, Mr. Miyamoto.

I am Miyamoto from SMBC Nikko Securities. I also have 2 questions. The first question is about Health Care. In the new fiscal year, JPY 20 billion core operating income seems to be a bit conservative. On Page 44, STELARA, there is a significant decline expected in Radicava in the previous fiscal year. It has been increasing rapidly, but in a new fiscal year, there's only slight increase expected. So in Health Care, it doesn't seem to be much of a growth, excluding Gilenya. You seem to be a bit more conservative. So can you explain about the background for this conservative?

In terms of profits, we will continue to be subject to NHI price revisions. So that's one factor. But in terms of sales revenue, as you said, for example, Radicava in the U.S. was performed well last year. But this year, we will continue our activities to make sure that will continue. But in the last fiscal year, there have been patients that have been waiting for the launch. So there was a strong ramp-up after the launch. So that was taken into account. So we have come up with this forecast. And also, we have to closely watch the competitive landscape. So we haven't captured too much of expectation in the forecast. Now for Gilenya, there are generics available. we are not expecting as much sales as we had enjoyed previously. And that's the reality?

Can you also comment on STELARA?

I would like to hand this over to Mr. Kobayashi.

Kobayashi from Pharma. I will talk about STELARA. As you know, it's a forgone disease and alternative disease [indiscernible] and from '22 to '23 there are 5 competitive products that have been launched or are expected to be launched. Oral drug, there are 2 and also antibody drugs, 2 of them. And then those are different mechanism of action, but there will be subcutaneous drug that is expected. So about 5 competitor products coming out or expected to come out in 2 years. So we may seem a bit conservative, but that has been taken into account I see.

I see. My second question is about petrochemicals. In the fourth quarter that ended, there was -- you're behind the forecast. Market prices are very strong, but JPY 6.8 billion and in this first half, but you are getting into the profitability in the second half. So can you explain more about the profitability curve that you're expecting and the background for that?

As for the fourth quarter, so I was saying, inventory reduction has been done and the production has been reduced significantly. And so that's why we have seen worse results and forecast. And -- but in the forecast going forward, DURABIO recovering demand, but polyolefin margin or spread will improve and that has been taken into account. But still compared to fiscal 2021, it was too weak, but that has been taken into account partially. So in the fourth quarter, production adjustment and inventory reduction was significantly down. And so there was -- the production that has been started in full scale in the first quarter.

So is there any quantitative one for utilization? For fourth quarter. The other companies, 80% utilization ratio was seen, and we don't think you have gone down too much, but phenol chain or polyolefin, anything that you can comment on capacity utilization ratio.

Well, for each of the products, we cannot comment because there is a variation from part of the products. But the utilization ratio is mostly according -- in accordance with the production volume.

In terms of capacity utilization, about 20% reduction is more or less the average but in the new fiscal year, it is going to be a 10% decline. Is that correct?

Well, in some cases, that is the truth. And in some cases -- some other cases, the full capacity. So there was a significant production adjustment in the fourth quarter, that is correct.

Next, Mizuho Securities, Mr. Yamada San.

Yamada from Mizuho Securities. I have 2 questions. First is about Health Care budget. Page 44, Gilenya royalty, it's just not mentioned. Do you have numbers? It's just not mentioned here for FY '22. Gilenya's royalty, you said about JPY 20 billion, I suppose. So patent is not expired yet. So for a few years, you would have some royalty revenue. What's the situation here in the SGLT2 inhibitors? GLP, GLP-1 receptor agonist is coming out, and that is good news, but CANAGLU is maybe happening. CANAGLU is expected to grow. So what's the situation? What is your idea here?

Thank you. First about the royalty revenue. Well, this is -- as we do, we do not disclose forecast should we disclose actions. So on Page 44, numbers are not mentioned, but as you mentioned, there would be some numbers included here. Another question that you asked would be answered by a Kobayashi.

Kobayashi speaking. CANAGLU and GLP and others and cannibalization. CANAGLU, as you know, is for diabetic nephropathy and it's indication expansion, and that will give us growth. In combination therapy is possible, so we don't think cannibalization would happen globally, the same idea. And regarding royalty, it's not your company, but the GLP-1 receptor agonist will increase, and that would not be a negative factor for you. Well, there are various MOA in diabetic trend diabetic trend -- diabetic drugs, but recent trend, the CLP-2 inhibitor GLP-1, those globally in growing.

I see. So insulin activity and the excretion of mechanism is different.

That is right.

And I would like to ask one question, news related, and you have JPY 5 billion in impairment loss. Kanagawa CPC and other impairment all included in this number, and R&D in the past, they will 0. If not, there would be additional impairment loss going forward?

More or less everything is settled.

IG and CPC book value all included in this impairment loss. So there would be no additional losses regarding this.

That is right.

Now the second question, Specialty Materials or clinicals. Specialty Materials this fiscal -- in Q4 of FY '22 inventory adjustment. Yes, quarter-on-quarter shows lower by JPY 60 billion company-wide. So you reduced inventory to a much lower level and being Q4, then you will have a recovery from Q4. But even compared to Q3, you expect the recovery in the second half? Were there any special factors? Or basically markets recovery is incorporated that's a difference between the first and the second half.