Mitsui Chemicals, Inc. (4183) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Nakajima, CFO of Mitsui Chemicals. Thank you very much for joining us today for our financial announcement. Today, we announced our financial results for the fiscal year 2023 and our forecast for the fiscal year 2024. Although the total growth domain secured an increase in profit, the Basic & Green Materials segment saw a large decrease in profit due to global demand trends and raw material price fluctuations, resulting in company-wide operating income before special items of JPY 96.2 billion and net income of JPY 50.0 billion. In FY 2024, we expect operating income before special items to increase from FY 2023 to JPY 125.0 billion and net income to JPY 73.0 billion due to recovery in volume and price increases in each domain. I would now like to explain outline of our performance, business overview and financial statements based on the materials provided. This is today's agenda. First, I would like to present a summary of our financial results for fiscal year 2023, followed by a summary of our forecast for fiscal year 2024. Page 1, this section describes the trends in the major related markets of our business in the financial results. First, here is the outlook for the eyeglass lens market in relation to the life and healthcare segment. While there were some inventory adjustments until the first half of FY 2023, customers' inventory level returned to normal from the third quarter of the year, and the demand recovered and remained firm. Following the resolution of the inventory adjustment issue, we anticipate that demand will remain firm in FY 2020. Agrochemicals also performed well in FY '23 despite inventory adjustments in some regions due to weather conditions. We expect demand to remain firm in FY '24 and later. Next is the outlook for global automobile production volume related to the mobility business. Global automobile production volume recovered in FY '23. For FY '24, we expect it to remain at the same level as in FY '23. In the semiconductor and smartphone markets related to ICT, demand declined in FY '23 but gradually recovered from the second half of the year with some signs of bottoming out. In FY '24, we expect a recovery trend for semiconductors and demand for smartphones is also expected to recover, although the recovery would be slower than that for semiconductors. Market conditions for polyurethane related to Basic & Green Materials have not changed significantly with TDI remaining low and MDI remaining stable. Cracker utilization rate remained low in FY '23 and are expected to remain low in FY '24 with no major recovery in demand expected, although it will improve from FY '23. Please see Page 2. This is about the status of major investment projects. Projects in yellow are those that entered commercial operation in FY '23. Those in blue are projects for which decisions were made in FY '23. In addition to investing in growth domains, we have also been active in restructuring and optimization. Please see Page 3, summary of financial results. Sales revenue for fiscal year 2023 was JPY 1,749.7 billion, a decrease of JPY 129.8 billion from the same period of the previous fiscal year. Operating income before special items was JPY 96.2 billion, a decrease of JPY 17.7 billion from the previous year. Net income attributable to owners of the parent was JPY 50.0 billion, a decrease of JPY 32.9 billion from the previous year. The exchange rate was JPY 145 to the dollar, representing a depreciation of JPY 10 from the previous year. The domestic naphtha price was JPY 69,100 per kiloliter, a decrease of JPY 7,500 from the previous year. Please see Page 4. This is a summary of our operating income before special items for the fiscal year just ended in comparison to the previous year. Regarding sales volume, we observed a decrease in vision care sales during the first half of the year due to inventory adjustments. On a positive note, automotive applications saw an uptick as auto production recovered. However, semiconductor applications experienced a decline due to the delayed recovery of demand in the semiconductor and smartphone markets. Additionally, polyolefin and phenol sales declined due to a decline in demand. Regarding terms of trade, there was an improvement due to price revisions and yen depreciation. However, inventory valuation gains that occurred in the first half of FY '22 due to raw material price fluctuations were eliminated. Fixed costs and other expenses increased due to higher repair and maintenance costs resulting from rising material costs as well as higher development and other expenses. Furthermore, equity earnings declined due to unfavorable market conditions and lower demand. Consequently, total profit decreased by JPY 17.7 billion from the previous year. The volume difference factor contributed a negative JPY 12.9 billion, while terms of trade and fixed cost and others, each contributed a positive JPY 13.4 billion and negative JPY 18.2 billion, respectively. Please see Page 5. Sales revenue and operating income before special items by segment. The following pages will explain in detail the factors behind the increase or decrease in each segment. Please see Page 6. The Life & Healthcare Solutions segment reported an operating income before special items of JPY 30.0 billion for the fiscal year, an increase of JPY 0.8 billion versus the previous year. The impact of volume differences was a negative JPY 3.7 billion. Sales of vision care products declined in the first half of the year due to inventory adjustments in some areas. However, inventory adjustments have been resolved since October. Sales of nonwoven fabrics primarily for disposable diapers declined due to a decrease in demand. Terms of trade improved by JPY 5.8 billion, in part, due to price increases in vision care and the impact of the yen depreciation in agrochemicals. Please see Page 7. The Mobility Solutions segment reported an operating income before special items of JPY 57.7 billion for the full year, an increase of JPY 8.4 billion compared to the previous year. The volume difference factor was a positive JPY 5.4 billion, primarily due to growth in solar cell encapsulation materials and the volume growth associated with the recovery in automotive applications. The terms of trade factor was positive JPY 9.6 billion, reflecting the overall effect of the exchange rate difference and the shift to high value-added products in elastomers. Fixed costs and others were negative JPY 6.6 billion, primarily due to a decline in the equity in earnings of affiliates. Please see Page 8. The ICT Solutions segment's operating income before special items was JPY 22.4 billion, a decrease of JPY 1.4 billion from the previous year. Regarding the volume difference, while sales of EUV pellicles and an increase in sales volume due to the acquisition of the pellicle business was solid as well as strong sales of coating engineering materials, the semiconductor and smartphone markets were significantly affected by slowing demand, resulting in a negative impact of JPY 2.0 billion. Terms of trade were positive, amounting to JPY 6.9 billion. In addition to the positive impact of exchange rate fluctuations, terms of trade improved due to lower raw material prices in coatings and engineering materials. Fixed costs and other expenses decreased by JPY 6.3 billion due to an increase in development costs for sales expansion. Please see Page 9. In the Basic & Green Materials segment, operating income before special items was minus JPY 10.3 billion, a decrease of JPY 28.1 billion versus the prior year. The volume difference was minus JPY 12.6 billion due to lower sales resulting from generally sluggish demand. The terms of trade were negatively impacted by the elimination of inventory valuation gains that occurred in the first half of FY 2022 as a result of raw material price fluctuations, resulting in a loss of JPY 8.9 billion. Fixed costs and other expenses were minus JPY 6.6 billion, primarily due to a decline in the equity in earnings of affiliates. Please see Page 10. This page contains information on nonrecurring items. Nonrecurring items totaled negative JPY 22.1 billion, a decrease of JPY 37.2 billion versus the previous year. This was mainly due to impairment losses as a result of restructuring in the packaging film business and Basic & Green Materials. Please see Page 11, consolidated statement of financial position. Total assets reached JPY 2,215.8 billion, an increase of JPY 147.6 billion from the end of March 2023. This growth was driven by the depreciation of the yen and the more aggressive investment strategy. Please see Page 12, cash flow statement. Cash flows from operating activities were positive at JPY 161.3 billion. In comparison to the previous year, working capital, primarily in the form of inventory, has seen a notable improvement. Cash flows from investing activities were negative JPY 123.9 billion, and the level of capital expenditures was approximately the same as the previous year. Consequently, free cash flow was positive at JPY 37.4 billion. Cash flows from financing activities were negative JPY 26.0 billion. I would now like to discuss the outlook for FY 2024. In FY 2024, we made changes to the segmentation of some of our affiliates in the ICT and Basic & Green Materials segments, including Honshu Chemical and others. The figures for fiscal year 2023 presented in the following pages are based on the new segmentation following the aforementioned changes. Please see Page 13, highlights of financial outlook. For the full year, sales revenue is projected to reach JPY 1,850.0 billion, representing an increase of JPY 100.3 billion compared to the previous year. We anticipate that operating income before special items will be JPY 125.0 billion, representing an increase of JPY 28.8 billion over the previous year. Additionally, we project that net income attributable to owners of the parent will be JPY 73.0 billion, an increase of JPY 23.0 billion from the previous year. The exchange rate for the full year is JPY 145 representing no change from the previous year. The domestic naphtha price per kiloliter is projected to be JPY 75,000 for the full year, representing an increase of JPY 5,900 compared to the previous year. Please see Page 14. This is a summary of our forecast of operating income before special items for the fiscal year. In terms of volume, we anticipate that sales of vision care will increase as the effects of inventory adjustments in FY 2023 are resolved. We also expect sales of agrochemicals to remain strong. Sales of automotive applications and the solar cell encapsulant applications to be firm and increase, and sales to increase as demand in the semiconductor and smartphone market recovers. Regarding terms of trade, we anticipate an improvement due to the elimination of inventory valuation losses incurred in FY 2023 as a result of raw material price fluctuations in addition to price increases due to higher utilities and the logistics costs. However, fixed costs and others are expected to be negative even with the potential benefits of business restructuring due to anticipated increases in repair and maintenance costs with rising material prices and R&D and other costs. Consequently, the projected increase in profit of JPY 28.8 billion over the previous year is attributable to a number of factors, including a positive volume difference of JPY 41.5 billion, a positive terms of trade impact of JPY 9 billion, and a negative impact of fixed costs and others of JPY 21.7 billion. On the other hand, in the growth domain, we expect an increase in profit, mainly in the healthcare and ICT segments with a forecast of JPY 126.0 billion, an increase of JPY 14.7 billion from the previous year. Page 15, outlook for sales revenue and operating income before special items. Both sales revenue and operating income before special items are projected to increase due to an increase in sales volume, resulting from an overall recovery in demand. Overall, sales revenue is expected to increase by JPY 100.3 billion from the previous year, and operating income before special items is projected to increase by JPY 28.8 billion. The following pages will provide an explanation of the factors behind the increase or decrease in each segment. Please see Page 16. Operating income before special items for Life & healthcare Solutions is expected to be JPY 36.0 billion, an increase of JPY 6.0 billion from the previous year. Volume difference is expected to be JPY 10.5 billion positive. We expect volume growth overall but particularly in vision care with elimination of FY '23 inventory adjustments and the steady increase in agrochemical sales volume. Terms of trade is positive JPY 1.0 billion. We expect the effect of price increases mainly in nonwoven fabrics. Fixed costs and others are expected to be negative JPY 5.5 billion due to an increase in fixed costs associated with the operation of a new plant at vision care and an increase in SG&A and R&D expenses, mainly registration and maintenance expenses associated with the expansion of agrochemicals. Please see Page 17. In the Mobility Solutions business, the full year operating income before special items is expected to be JPY 60.0 billion, an increase of JPY 2.3 billion from the previous year. Volume difference is expected to be JPY 14.5 billion positive due to expanded sales in automotive applications and the strong demand for solar cell encapsulant materials. Terms of trade is expected to be minus JPY 7.0 billion due to temporary easing of supply and demand, mainly in elastomers. Fixed costs and others are expected to be minus JPY 5.2 billion due to an increase in costs for business expansion and other items as well as an increase in repair expenses. Please see Page 18. ICT Solutions is expected to post JPY 30.0 billion in operating income before special items for the full year, an increase of JPY 6.4 billion versus the previous year. Volume difference is JPY 12.5 billion positive. We expect overall sales volume to increase in line with the recovery of demand in the semiconductor and smartphone markets, and we also expect continued strong sales of EUV pellicles. Terms of trade are flat. Fixed costs and others are expected to be negative JPY 6.1 billion due to an increase in fixed costs associated with the operation of a new plant at ICROS Tape and cost for business expansion. Please see Page 19. Basic & Green Materials segment is forecasting a full year operating income before special items of JPY 4.0 billion, an increase of JPY 15.6 billion versus the previous year. The volume difference is positive JPY 4.0 billion. Demand continues to be sluggish, and we do not expect a major recovery. Terms of trade is positive JPY 15.0 billion due to the elimination of inventory valuation losses incurred in FY 2023 as a result of raw material price fluctuations in addition to price increases due to higher utilities and logistics costs. Fixed costs and others are expected to be minus JPY 3.4 billion due to an increase in repair and maintenance costs resulting from higher labor and material cost despite the positive effect of business restructuring improvements. Please see Page 20. Next, I will explain the changes between the first half forecast and the second half forecast by segment. Since the first half forecast is JPY 52.0 billion and the second half forecast is JPY 73.0 billion, this means we expect an increase of JPY 21.0 billion from the first half to the second half. The main reason for this is the increase in volume in the growth domains, and although the Basic & Green Materials segment will be affected by the regular repair and maintenance work in the first half, we expect an increase in profit in the second half due to the effect of the price increase. Please see Page 21. We will continue to aggressively invest resources for future growth while maintaining financial discipline. Investments are expected to total JPY 205.0 billion, and R&D expenses are to be JPY 47.0 billion, an increase from the previous year. Please see Page 22. Regarding the dividend forecast for FY 2024, we plan to pay a dividend of JPY 150 per share, an increase of JPY 10 from the previous year based on our return policy. Please see Page 23. The following is the projected cash flow for the full year. Cash flows from operating activities are positive JPY 180.0 billion. Cash flows from investing activities are negative JPY 205.0 billion. As a result, free cash flow is expected to be negative JPY 25.0 billion. Please see Page 24. Finally, we will present the operating income before special items by segment. We anticipate that profit growth will be achieved in the growth domains in FY 2024. We will continue to make steady progress in portfolio transformation by restructuring our Basic & Green Materials operations. That's all for the explanation about our financial results for the fiscal year 2023 and our forecast for the fiscal year 2024. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]