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

Thank you very much for joining us today. This is the earnings conference call of Mitsubishi Chemical Group. It is time to start. Our CEO, Mr. Manabu Chikumoto, will say a few words; which will be followed by the presentation by our CFO, Mr. Minoru Kida, about the Q2 results of FY 2024. After the presentations, we will take Q&A. We plan to have this meeting for about 60 minutes. Before we start, we'd like to say the following. The presentation will include the forecast for the future. There will be some risks and uncertainties involved and actual results could be very different from what we present today. Please keep that in your mind. The audio of today's conference, including the Q&A will be available from our website. Now we'd like to start the conference. We'd like to invite our CEO, Mr. Chikumoto.

Good afternoon, ladies and gentlemen. This is Chikumoto, CEO. Thank you very much for taking time out of a very busy schedule to join our financial earnings conference call. And we also like to thank you again for your continued support and understanding for our business. Firstly, I would like to make some brief comments at the outset. And then our CFO, Kida, will give you a detailed account of the first half results. The results for the first half of FY '24 exceeded the group's initial forecast by around 40%, largely due to the impact of the rising MMA market and increased demand in the display market. But we are relieved at the strong start to the year. In the 6 months as I took over as President, a new management team has been set up and various discussions have been taking place. In the petrochemical business, three companies in Western Japan have joined forces to start a joint discussion to achieve carbon neutrality for ethylene production facilities. On the carbon business, which continues to suffer from difficult performance, we have decided to downsize the cokes furnace at Kagawa works and transfer affiliate company -- and to transfer affiliate companies. We will firmly implement structure reforms to achieve profitability in the coming year. In the Specialty Materials business, a decision was taken to transfer the triacetate business to the best owner. In addition, other optical sites are being rationalized. In addition, in order to achieve sustainable growth, we have decided to increase production capacity for photosensitive polymers for photoresists for semiconductors and exchange resins for production of ultrapure water and semiconductors and OPL films for displays. We will accelerate the selection and concentration of our businesses based on growth potential, competitiveness and profitability. We are currently preparing to summarize our new mid- to long-term management policy in preparation for the management briefing to be held on the 30th of January, so that we can explain this to our investors. We will do utmost to improve our corporate value and would like to ask for your continued support for our company.

Thank you very much, Mr. Chikumoto. Moving on to Mr. Kida.

I will present the financial results of the second quarter of year ending March 31, 2025. And this is the summary. The business environment during the first half of '24 generally remained stable despite some different levels of strength in demand among regions and industries. Display-related sales remained brisk on the back of a high operating rate of panel manufacturers and semiconductor-related sales remained on a moderate recovery path, driven by demand related to generative AI. On the other hand, sales were sluggish in some regions and sectors, such as automotive and food-related markets. Compared to the same period of the previous year, price improved as a result of efforts to promote price management in each business and significant increase in the market prices for MMA monomer, leading to an improvement in sales volume for Specialty Materials and Pharma. In addition, our cost reduction efforts continue to contribute to income. As a result, looking at the Group on a whole, our sales revenue increased 4% year-on-year and core operating income rose 44% year-on-year. Net income attributable to owners of the parent decreased 39% year-on-year due mainly to the recording of structure reform expenses under special items investor. Core operating income for the first year of FY '24 was 57% higher than the initial forecast. On the other hand, in the second half of FY '24, business performance is expected to fall behind the initial forecast, mainly in Specialty Materials and Basic Materials and Polymers due mainly to a reactionary decline in demand related to displays, which have been brisk during the first half of fiscal '24, a delay in the recovery of demand related to semiconductors for consumer, industrial and automotive applications, intensified competitions for carbon fibers and the delay in the recovery of market prices for petrochemicals and carbon products. We predict that core operating income for the fiscal '24 will increase 16% compared to the initial forecast of JPY 290 billion in light of brisk results in the first half of FY '24. We reiterate our initial forecast of JPY 52 billion for net income attributable to owners of parent as several business structure reform projects are considered in the second half of FY '24 and losses under special items are expected to be recorded. Dividend forecast remains unchanged from our initial forecast of a year-end dividend of JPY 16 per share, and an annual dividend of JPY 32 per share. This is the overview of the P&L for the first half of FY '24. Average exchange rate in the first half was JPY 152.5, 7% lower year-on-year. The unit price of naphtha was JPY 77,700 (sic) [ 77,900 ] up 19% year-on-year. Sales revenue was [ JPY 2.421 ] trillion, an increase of JPY 92.2 billion or 4% year-on-year, including an increase of JPY 79 billion due to FX, an increase of JPY 46 billion due to higher selling prices and an increase of JPY 11 billion due to volume factors and a decrease of JPY 44 billion due to business reorganization. Core operating income was JPY 172.4 billion, an increase of 44% year-on-year. The detail will be explained later on. Special items amounted to minus JPY 35.7 billion, down by JPY 54.7 billion year-on-year. Operating income was JPY 136.7 billion and income before tax was JPY 106.1 billion. Net income attributable to owners of the parent was JPY 40.9 billion. This was a decrease of JPY 26.3 billion year-on-year but a significant increase compared to the forecast of JPY 10 billion for the first half of the year announced in May. Now allow me to show the sales revenue and core operating income by business segments. Specialty Materials recorded a 4% increase in sales and a 30% increase in profit year-on-year. As I mentioned -- as was mentioned in the beginning, demand from disparate markets was particularly strong with advanced films and polymers and advanced solutions performing better than expected at the beginning of the period. Industrial gases continued to perform well with 5% increase in sales and 14% increase in profit compared to the same period last year. In Pharma, sales of RADICAVA in North America remains strong. Sales increased by 6% year-on-year and profits by 28%, which was high performance than expected at the beginning of the year. MMA and derivatives achieved a 25% increase in sales and JPY 23.7 billion increase in profit year-on-year, significantly higher than expected at the beginning of the year due to higher market prices of MMA monomers. Basic Materials and Polymers recorded a 1% year-on-year decline in sales and a reduction in the deficit of JPY 4.2 billion. Among the factors contributing to the year-on-year improvement was JPY 1.5 billion impact from inventory valuation gains and losses. Materials & Polymers business recorded an increase in profit year-on-year and secured a double-digit surplus despite scheduled maintenance and repairs at Ibaraki Distribution Center. While the Carbon Products business continued to see no improvement in the cokes market and recorded a loss of JPY 16.3 billion. The table shows a breakdown of the JPY 52.8 billion increase in core operating income year-on-year. Price was positive by JPY 28.4 billion. Of this amount, JPY 9.9 billion was due to FX, mainly in industrial gases and pharma. Excluding FX, the market price increase of MMA monomers and in MMA and derivatives made a significant contribution. In Specialty Materials, the price improved as a result of efforts to maintain an improved selling prices across the board. And the volume was positive by JPY 17.4 billion. The positive contribution from Pharma was positive. In Specialty Materials, the volume was negative year-on-year in the first quarter, but by the end of the second quarter, it was positive in all subsegments. Cost reductions was positive by JPY 26 billion. Progress is being made as planned towards the annual reduction target of JPY 47 billion for the current financial year. And other differences were negative by JPY 19 billion. Inventory valuation gains improved by JPY 3.9 billion, but this was offset by increases in labor costs in each business, fixed costs due to inflationary effects and other factors. Now let's take a closer look at the different segments. Specialty Materials recorded a year-on-year increase of JPY 5.7 billion. And the price was positive by JPY 3.6 billion. Barrier packaging applications deteriorated year-on-year, but efforts were made to generally maintain an improved selling prices in other products, resulting in an improvement in this price. The volume was positive by JPY 4.8 billion. In advanced films and polymers, demand for polyester film and OPL plate film increased as panel manufacturers increased their operations due to large commercial campaigns in China and the expected increase in demand for TVs due to international sporting events. In Advanced Solutions, demand for semiconductor-related products recovered moderately at varying degrees depending on the products and segments. Volumes increased in materials for semiconductor manufacturing process in the precision cleaning business and water treatment equipment. In advanced composites and shapes, sales volumes increased due to recovery in demand for high-performance engineering plastics, particularly for semiconductor manufacturing equipment applications. In carbon fibers on the other hand, sales volume increased for wind power generation and other applications, but sales volumes declined in the relatively high margin pressure vessel application due to intensified competition from other companies, resulting in a negative volume. Cost reductions amounted to JPY 4.8 billion, building on the effects of business restructuring, including the withdrawal from the acrylic fibers business and self-help measures such as procurement, optimization and productivity improvements. The other difference of minus JPY 7.5 billion is due to labor and other fixed costs as well as increased amortization of intangible assets following the consolidation of CPC as a subsidiary. Moving on to Industrial Gases, increased by JPY 11.6 billion year-on-year. In terms of profit, although there was softness in volume, mainly in the United States, foreign exchange effects as well as price management, productivity improvement and other initiatives developed in each region resulted in a price of plus JPY 2.8 billion and cost reduction impact of plus JPY 14.6 billion resulting in a year-on-year increase in profit. Pharma increased by JPY 9 billion year-on-year. Price was positive JPY 3.5 billion due to the positive effect of FX despite the negative impact of domestic NHI price revision. And the volume was positive by JPY 8.9 billion. North America remains strong, supporting the profitability of the pharma business. Mounjaro, influenza vaccine and GOBIK penta vaccine in Japan also grew. And the other difference of minus JPY 4 billion is due to labor and other cost increases. Next is MMA and Derivatives. The core operating income went up by JPY 23.7 billion year-on-year. This is a significant increase. Price factor was positive JPY 21.4 billion. MMA monomer market prices increased year-on-year, spread widened. In addition, in coating and additives business, the price gap improved. Next is Basic Materials and Polymers. The deficit decreased by JPY 4.2 billion year-on-year. The price gap was minus JPY 2.6 billion. Materials and polymers slightly improved with lower coke market. The carbon products were negative and total number was negative. The volume factor in materials and polymer, there was a negative impact of the scheduled maintenance repair in Ibaraki ethylene center, but the impact from the troubles of the previous year was reduced. And volume factor was positive of JPY 3.4 billion. Positive impact of cost reduction was JPY 2 billion in petrochemical derivative business, business restructuring and also the optimization of the equipment procurement and the improvement of the repair expenses. Others include the inventory valuation of JPY 4.1 billion. The overall number was JPY 1.4 billion increase. And as for the carbon product, coking coal was declining and the inventory valuation was negative for materials and polymers, the naphtha price increase from the end of last fiscal year to quarter 1. So that was positive overall. . The special items, the first half total was JPY 35.7 billion. In Q1, it was JPY 2.4 billion. In Q2, we booked the special loss of JPY 38.1 billion. Now let me talk about the major items. Gain on sales of the shares of subsidiaries and associates was positive JPY 11.1 billion. The Mitsubishi Chemical Indonesia, the share was transferred. This was operating TPA and the ForEx translation realization profit was JPY 5.6 billion, and the gain on transfer of Mitsubishi Tanabe Pharma in Tianjin was JPY 5.5 billion. Impairment loss was negative JPY 27.6 billion. In industrial gases, the hydrogen production facility construction by Matheson Tri-Gas was suspended. And with that, we booked JPY 10.8 billion impairment loss. In carbon products, the decision to reduce the coke production in Kagawa was made and the impairment loss of JPY 7 billion was booked. Other than that, there are multiple temporary losses in relation to the closure of some profitable sites. Special retirement, minus JPY 17.9 billion includes Mitsubishi Tanabe Pharma's voluntary retirement program. Next is cash flow. Operating cash flow was JPY 275.1 billion cash in. Operating receivables and payables was JPY 33.3 billion positive. Inventory was outflow of JPY 42.4 billion. The working capital total was the cash out of JPY 9.1 billion. In some of the pharma, due to the brisk demand, the inventory was increased, and this was one of the reasons. We will continue to appropriately manage the working capital of each business. Investment cash flow was minus JPY 145.3 billion. CapEx cash flow minus JPY 172 billion. Industrial Gases, Special Materials, there was growth investments mainly in those segments. And also in Basic Materials and Polymer, there was an investment for the maintenance and the update of the facility in tandem with the scheduled maintenance in Ibaraki. Asset sales, cash flow was JPY 24.3 billion positive and we conducted a review of the business portfolio and we booked a gain on sale of shares of subsidiary and affiliates. And there was a cross-held share sales as well as unnecessary asset sales. As a result, free cash flow was positive JPY 129.8 billion. Financing cash flow was minus JPY 124 billion. Next is balance sheet. The total assets were JPY 5,945.2 billion, down JPY 159.3 billion from the end of last fiscal year. Major reasons include foreign exchange in all the currency. Yen strengthened from the end of March. So that was the negative impact of JPY 103 billion on assets. And the end of the last fiscal year was a holiday and that was about JPY 45 billion difference. Net interest-bearing debt was down by JPY 115.2 billion. Net D/E ratio was 1.11, which is 0.05 point improvement from 1.16, which was the end of last fiscal year. This shows the core operating income trend from Q1 to Q2 of FY '24. Q2 core operating income was JPY 89.8 billion, which was up by JPY 7.2 billion Q-on-Q. In Specialty Materials, in Q1, it was JPY 11.5 billion. In Q2, it was JPY 13 billion, so up by JPY 1.5 billion. Barrier packaging and all, last year, there was -- the demand was sluggish due to the inflation. But at the end of the last fiscal year, it bottomed and is gradually recovering. From Q1 to Q2, both sales and profit increased. And the water treatment equipment for electronic devices in Q2, we booked relatively large orders and this led to the higher profit. Advanced Composites and Shapes segment continues to be in red. High performance engineering plastics for the application of the semiconductor manufacturing equipment, the demand is recovering. But in Q2, we -- there is a seasonality in Western markets, so the deficit increased. Industrial Gases continues to be strong, but from Q1 to Q2, there was an impact of the strong yen and also higher fixed expenses. And that led to the lower profit of JPY 2.9 billion. In Pharma, in Q1, it was JPY 18.5 billion; in Q2, JPY 22.9 billion, so an increase of JPY 4.4 billion. In Japanese ethical drugs, there was an impact of the lower sales of the long-listed products, but the Mounjaro sales grew and the flu vaccine contributed to the higher profit revenue. In overseas ethical drugs, the North America RADICAVA sales continue to be strong, and there was a positive impact from ForEx. MMA and Derivatives in Q1, it was JPY 10.5 billion. In Q2, it's JPY 15.4 billion. So up by JPY 4.9 billion. MMA monomer in the first half, there was a supply-demand balance in Asia. And from Q1 to Q2, the market price has increased and the profit improved further with the price gap improvement. In Basic Materials and Polymers, in Q1, it was minus JPY 6.8 billion. And in Q2, it was minus JPY 3.7 billion. So deficit was reduced by JPY 3.1 billion. In materials and polymers, from Q1 to Q2, naphtha prices declined and the inventory valuation worsened. But polyolefin and other price gap improved and the -- as the impact of the scheduled maintenance decreased, the profit increased. In carbon products, the coking coal prices came down. Coke price difference or gap improved and inventory valuation worsened. So it was about the same as Q1. Next, about the revision of the full year forecast for FY '24. Now the assumption for the second half is the exchange rate of JPY 145 billion to the dollar and naphtha price of JPY 72,000. Full year sales revenue forecast is JPY 4.470 trillion. So compared with the beginning of the fiscal year, 3% lower sales revenue is expected, but the core operating income is expected to increase by 16%. So we are revising upward to JPY 290 billion. Segment-wise, information will be shown on the following pages. Special items in the second half, together with the business structure reform, we expect to book our losses, we are revising the full year forecast of minus JPY 40 billion to minus JPY 72 billion. As a result of operating income is expected to be JPY 218 billion, Net income attributable to owners of the parent is expected to be JPY 52 billion. Bottom line, full year forecast remains the same. Now this page shows the core operating income, our first half results of the JPY 172.4 billion, and the forecast of the second half, JPY 117.6 billion is shown. I will explain by segment. First about the specialty materials. First half, it was JPY 24.5 billion. Our forecast for the second half is JPY 9.5 billion, so down by JPY 15 billion. Display market in Q1, the utilization was high by the panel manufacturers, so we are likely to enter into the adjustment period. In the second half, our polyester film, OPL film display-related products, we expect sales to decline. Based on the EV demand trend in the Western market, lower sales of the battery material is also expected. As for the semiconductor market at the beginning of the fiscal year, we expect that the demand in the second half to recover. But aside from AI demand, consumer, industrial and auto applications are still weak. So we expect a similar trend for the second half. So the second half, semiconductor-related material as well as the precision cleaning service business we expect about the same sales level as the first half. Also, there will be some delay from the first half and we will have higher expenses in the second half. And also, there will be an impact from the scheduled maintenance and repair. We expect the profit to decline in the second half. Industrial gases in the second half due to the ForEx as well as seasonal impact, we expect a lower profit. In Pharma, in the first half, it was JPY 41.4 billion. Our forecast for the second half is JPY 19.6 billion, so down by JPY 21.8 billion. Out of this, about JPY 16 billion is due to the higher SG&A and R&D in the second half. RADICAVA sales will continue at the high level. But in the second half, due to the ForEx impact, we expect a lower profit. MMA and Derivatives, in the first half, it was JPY 26.7 billion, and our forecast for the second half is JPY 18.3 billion, so down by JPY 8.4 billion. Starting with October in China, other companies, MMA monomer plant utilization rate increased. So the MMA monomer Asian market prices came down and there is some trend of just making adjustments again. Although we expect some recovery of the market toward the end of the fiscal year, in comparison to the first half, we expect the profit to be lower in the second half. Basic Materials and Polymers, the first half was JPY 11.3 billion. The second half forecast is JPY 9.7 billion, so up by JPY 1.6 billion. The deficit will shrink. Materials and Polymer. There will be a smaller impact from the scheduled impact in Ibaraki, but with the lower naphtha price and inventory valuation worsening and higher expenses, we expect a deficit in the second half. Carbon products, the carbon coking price will stabilize. And we expect that the price gap as well as the inventory valuation to improve. In the second half, we expect a deficit. So we will continue to make efforts to reduce costs. Lastly I would like to talk about the dividend. The interim dividend payment for FY 2024, as we announced the forecast previously, we have resolved at the BOD on the 1st of November, the interim dividend payment of JPY 16 per share. As for the year-end dividend, this is expected to be the same as our expectation, that is JPY 16 per share. And as a result, the annual dividend payment in FY '24 will be JPY 32 per share. As for the dividend policy for the future, on the 13th of November, we will have a briefing session on the management policy. And we will announce the new growth strategy as well as capital allocation. With that, I'd like to end my presentation. Thank you for your attention.

Thank you very much, Mr. Kida. And now we would like to open the call for questions. First on the question is Morgan Stanley MUFG Securities, Watabe-san. Please ask your question.

This is Watabe, Morgan Stanley. I understand that the start was very strong, congratulations. New organization started from April. And my question is what has changed in terms of positive and negative? I'm sure that there are not many negatives. But can you please explain what the changes have been? And are you ready for the January 13 meeting, are you perfectly ready? Can we have high expectations for that meeting?

Mr. Chikumoto, please.

We are steadily getting ready and working up details as we speak. The biggest change we have observed is, well, if there are too many meetings, sometimes you would feel that may be you just doing meeting is not making money. But actually, even despite the many meetings, things are progressing forward very quickly. So we would like to continue to make fast decisions. That's all from me. Thank you.

I am looking forward to the meeting on the 13th.

Next question from Daiwa Securities, we have Umebayashi-san, please.

This is Umebayashi speaking. From the first half to second half, in many businesses, profit is likely to worsen, but the carbon product, the deficit is halving. So we mentioned that the spread improvement in the inventory -- the profit and loss improvement was mentioned. Other than those factors, in the first half, there was an impairment loss, so amortization expenses being reduced. Is that one of the factors? When you look at the sales from the first half to second half, it's less than 50%. So I think that toward the March next year, I think you mentioned this trend. But from the second half, is this something already starting and the sales volume coming down? Is that what we see or expect?

So first half to second half, a trend of the carbon products, Kida-san, please.

Yes. Thank you for your question. About the carbon products. Unfortunately, first half compared with the year before, the deficit expanded and right now how are we going to make improvements toward the second half. So let me answer to that question. First of all, the first half, what was painful was inventory valuation loss, this was a major negative factor. The carbon products 1 transaction lasts long. So 3 months before we set the price. And then after 3 months, it will come in, and we would make the coke and so forth. So something that we did in the past. There is always a time delay of 3 months or 4 months. So frankly speaking, there were some room for improvement in our operations. So we learned that. So price gap when the spread improves, as I mentioned, we would like to revisit the operation. As for the second half, about amortization depreciation about this, it would increase in the second half because there was an impairment loss, the fixed cost, the repair and maintenance and capital related, they will be handled. So this amortization depreciation would increase. So as you said correctly, this is not yet implemented. And from April, this will start. And so we will continue to make coke. And as for the lower sales at the Kansai Coke which is the joint venture with Kobe and these shares transferred to Kobelco was something that we announced. So about this, about the JPY 70 billion sales -- consolidated sales were incorporated. So this would be going away, and that would push down the sales revenue.

I see. Now it's clear. Just one thing towards the next fiscal year, so the second half, the second half the deficit. There will be a further improvement, and we start to see the profit. Is that what we can expect in the next fiscal year?

Yes. That's the image that we have.

Moving on to the next question, SMBC Nikko Securities, Miyamoto-san. Please ask your question.

This is Miyamoto, SMBC Nikko Securities. I have a question about MMA. You provided us with some outlook for the market. But in the last 1.5 months, it declined very rapidly. What do you think is happening? And also toward the end of the year, I understand that the market may improve. But where do you see the demand expectations? And also investment in North America, please update us with the current status. And as for the operation, 70% in the second -- first quarter and then 80% was mentioned for the second quarter. So what was the actual utilization in the second quarter? And what is the outlook for the third quarter? Please update us on the current situation of MMA.

Thank you for your question. Kida-san, please respond to this question.

MMA, allow me to explain what's happening recently. In the first half, $2,000, $2,100 so a very high-level trend. I don't think I need to explain the background. Demand was tight in China. [ Nitrile ] utilization was low, material was not being supplied. These are the major factors. And just before the major holiday, there were some manufacturing being done. But the tank was maybe overflowing and the situation between demand and supply changed since then. But maybe tank was going overflow and there was a lot of shipment and then the price declined. So the prices basically went down because of the situation in China. And now the price is down. C4 manufacturers recently started to increase the utilization, but the price is actually coming down and they cannot continue the operation, so they had to stop online, for example. So at a low level of price, they cannot continue to run deficit. And therefore, the supply has to be adjusted. Now the adjustment will go further and during the second half, that will -- that is what we will see. In terms of demand, it is actually very difficult to see whether the demand will increase rapidly in the second half, especially for polymer injector material or sheets, whether it's Japan or Southeast Asia, the demand seems to be slow, sluggish, and we may see this situation continue for some time. As for the utilization on average in total 75% was achieved in the first quarter -- sorry, 89%. 75%, this is for the joint venture. So across the board, approximately 89% or 90% is being maintained. And that's from July to September. And from October, we are expecting high level operation. So for MMA, I know that compared to the first half, second half profit will be smaller, but it will not be a disaster. This is what we expect.

Profit on price was quite low at one time. And the acetone shortage was maybe addressed and that had an impact. As each material costs have come down for you, so your margin would not be suppressed that much? Would that be the right interpretation?

You are correct that acetone status has changed. Phenol and polycarbonate was bad and acetone was quite tight, but now the situation has recovered, and there is an extra supply of acetone. But rather than impact of acetone, ACH Chinese competitors. [indiscernible] is used a lot and [ nitrile ] is trending low still. And the [ nitrile ] situation NVR, AVS, acrylic fiber, none of them are very strong right now. So acetone factor could be positive or slightly negative, but anyway, there is an impact. But more than that the other material is going to have a bigger impact.

And can you please update me on the new investment for the new factory capacity?

Yes, we're negotiating. And we will -- we should be able to decide relatively early what to do. But we are basically talking with potential buyers, potential customers about the terms of contract. We're negotiating the terms of the contract now.

Next question is from Mizuho Securities, Yamada-san please.

Yes, this is Yamada speaking. About Pharma I have a question. Usually every month, the R&D and others would be booked, I think that was a seasonality. But this time, the profit increase and R&D cost is not increasing. So seasonality is not there. So could you explain the background? Is it the rebound from the weaker sales before. And we expect that the cost to come down, but lower profit is expected in the second half. Is there any onetime factor? Also about the listing of timing ND06 and other pipeline products are included for the oral drug. So what is the probability of that? This is, I think, something that you might know the details. So could you talk about the launching of those products?

Tsujimura-san, please?

Yes. About your first question about the R&D cost, I believe -- so usually, as we did last year in the second half. There are some special -- no special items and also the R&D items just like last year and this year as well. As for this second half, as we made a press release of NeuroDerm additional testing was conducted, it will be conducted. So the second half, the R&D expenses will be higher. Also the second question about the Canaglu and also for the Canalia, right, yes, the possibility of getting approval. It's a new drug. So about approval probability, I cannot give you a specific number but we are continuing the development so that this product can be approved.

ND0612 the cost increase, is that going to be the -- putting the negative pressure in the second half?

There are several projects that are starting the clinical testing, so the second half the R&D cost would go up. It's not ND0612 only. So in the pipeline, Phase II to Phase III are the ones that are moving toward that, it's not so many.

But there are some starting in the pre-clinical?

Yes, there are several. So the rebound is not something that we see, but rather a vaccine becoming available and profitability might be low, but the sales is increasing for Mounjaro, yes Mounjaro is growing as expected. And the flu vaccine, Daiichi Sankyo stopped providing the injection type and some withdrawal from the market. So our shipment has been higher because of that.

Next question UBS Securities, Omura-san, please ask your question.

This is Omura, UBS. I have an overall question, Specialty Materials volume impact. Looking at Page 7, it's JPY 4.8 billion this is a positive number. Now this was JPY 4.7 billion last year. So when compared to first half of FY '22, I think the situation is still quite bad. What would be the ideal volume trend and also capacity utilization? And what is missing? What is the gap? Where do you see the gap on challenges in which specific products against what you would consider ideal?

Specialty Materials first half demand trend, Kida-san, please respond to this question.

Thank you. I think you're looking at the difference of the difference. And the difference of the difference is not necessarily very accurate because we may see a big gap against what we had in FY '22, but it really depends on the products, so much variance between different products. And generally speaking, we don't see any major gap with any single specific product. So 2022, now some of the products exceeded the performance of FY'22 in the first half of this year. For example, display, you could consider this bubble. Why are the TV manufacturers making so many TVs? We may want to even question the situation they're making so many. And I talked about Soarnol, for Soarnol, it's true that we have not really recovered to the '22 level. But compared to the disaster situation last year, we have seen a major recovery. So across the board, one of the big gaps is high function engineering plastics. The advanced materials company is deploying this quite quietly. Semiconductor-related products are recovering. So there's a huge recovery compared to FY '23. But if we go back all the way to FY '22, a lot of automotive applications existed. So that's a little bit slower now. And that is why there is not a high recovery compared to FY '22. And the carbon fiber pressure vessel, this is not the market status but fierce competition. And we are dropping some of the businesses because of that. So that is why we're not seeing a recovery to the FY '22 level in that particular segment. But generally speaking, we don't think there is a huge gap between what we are doing and what we had in 2022.

I see. Just to confirm, Soarnol and display, have we already exceeded the FY '22 level or not?

Display has already exceeded level, but Soarnol is a little bit lower than what we had in FY '22. But in the first and second quarters, we are seeing gradual recovery, steady recovery. So we believe that we will recover to that level sooner or later.

Let's move on to the next question. JPMorgan Securities, Nakada-san, please.

Nakada speaking. About the petrochemical, more recently, utilization rate, what is the level? And the July, September, the second half, there was one of the things that has stopped due to the other companies, but it's still 80% as an industry average. So Kashima, I think it's pretty good, but what about Mizushima. And from January to September, ethylene production added compared with last year, production speed is lower. So maybe it's going to be below 5 million tons. So maybe I should ask this on the 13th, but in Mizushima, [indiscernible] some discussion in Chiba, 1 or 2. So excessive supply in Japan probably will not be solved. So could you talk about utilization and also the reorganization in petrochemical.

So about the petrochemical utilization, Kida-san, please.

Yes, thank you for your question. And thank you very much for your concerns. Well, about other companies, of course, we don't know the details. But as far as we are concerned, July, September, utilization is about -- or above 90%. So it's very high. So I cannot give you the details very much. But the Ibaraki much higher than 90% and Okayama is a little bit lower than 90%, but late 80s, so it's very close to 90%. We are maintaining that level. So our situation is like that. And for the reorganization of the petrochemical, Chikumoto is a better person to answer to that question. But Chiba and Maruzen was mentioned. And Mitsui and Asahi Kasei we are discussing with them from the beginning of the year. And as we said before, within the end of the fiscal year, we should be able to show you some specific plans. Does that answer your question?

Just one thing, about Okayama utilization being high. Other companies, when they resume the operations, does it go down? Or would it continue in the second half as well?

Well, the second half overall demand has not yet -- will not recover. So maybe it will come down a little bit. But as you said, Eastern and Western customers, the applications or the use are different. So I think you're right. So the trend in Japan is exactly what you described.

Next question. Nomura Securities, Okazaki-san. Please ask your question.

Apologies. Specialty Materials first half versus second half. It's going to be a big drop. You talked about the display and other factors already. Looking at Q2, it was better than 3 months prior to that. So I'm sure that there are many factors, but the -- I think in the first half, maybe some of the factors were brought forward or happened earlier, I wonder is that the case. And maybe you're being conservative because of lack of visibility to the market. Is that true? And I don't think this is about the specialty materials, but structural reform is mostly focused in the big chunk of Specialty Materials. And 3 months ago, Mr. Chikumoto, you gave us a very passionate comment. But in terms of the structural reform, I have not really seen any progress in the last 3 months. So carbon fiber and the electric materials, it seems that there are some struggles still. So looking forward to hearing something about that on the 13th and the specialty materials structure reform in the last 3 months, what has happened? Can you please share that with us?

Okay. First half versus second half. Can you please respond to this question, Kida-san?

Thank you for the question. First half versus second half. Specialty Materials business includes a lot of different products. So it's very difficult to generalize. But display, as we have mentioned already, during the first half, there was a bit of a bubble going on. So therefore, we expect to see some adjustment starting from the second half. So that's included in our outlook. And EV application, there is going to be continued lack of visibility in terms of battery materials and also electrolytes. We believe that the demand will drop towards the second half. And also, I'm sure that you're paying attention to semiconductor. Semiconductor is growing. Everybody says that it's growing, but generative AI and high-ticket products are growing. But in terms of volume, we have not really seen a full recovery yet. So if you look at semiconductors, materials that are close to service sales will continue to stay strong from the first half to the second half. But when it comes to photo resists or real materials, this is totally dependent on volume. And therefore, from the second -- first half to second half, well, in the second half, we expected the demand to recover in the second half and we will see bigger numbers. But it seems that the recovery of demand may take a little bit longer than we had expected. So yes, we are applying a slightly more conservative view. And this is a little bit different. So advanced materials, carbon fiber, composites and shapes -- advanced composites and shapes. In this business, volume will continue to stay strong because of semiconductor-related businesses. And in terms of profit, CPC's intangible asset depreciation was quite big in the first half. Some of them are only single year impact. So the depreciation will be much smaller in the second half, which should push up the overall profit. So we have to take that into account as well. And you may think that there's a big gap from the first half to the second half, but this explains why we have this outlook. So the second half outlook is actually relatively conservative. Now with regard to the structural reform, we are trying to pick up the pace of structural reform. That is the current status. For example, semiconductor cleaning business in general is quite solid. But looking at the details, some sites are still unprofitable. For example, in the United States, a closure of multiple sites may be decided within this fiscal year and some losses actually have been already posted in the first half. And with regard to the structure reform, we are basically trying to dig up all the long buried problems and resolve them as quickly as possible one by one. That is what we're trying to do.

We are running out of time. And with that, we'd like to end Q&A session. Mr. Kida, would like to say a few words at the end?

Yes. So thank you very much for taking the time out of your busy schedule to join us today. At the full year results earnings in May, we said that those are the targets that we must achieve. And in the first half, we exceeded those expected results. And for the second half, in order to make sure that we realize the updated forecast, we will work the most. We try to improve the capital efficiency and profitability and take measures so that we can respond to your expectations. So I hope you will continue to support us. Thank you very much.

Thank you. Today's conference will be archived, and you'll be able to access it any time from our website. So with that, we'd like to end the earnings conference call. Thank you very much indeed for your participation.