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

Good afternoon. I'm Hashimoto, President and CEO of the company. Thank you very much for coming to this session of CEO presentation despite your busy schedule. And I also thank you for your continuous strong support to our company and the business. As introduced, based on the material presentation slide, I would like to give an explanation. First of all, on July 27, we had Omuta [ TDI ] plant accident or the gas leakage. So to those who really suffered in the health condition, and so we really caused the sort of troubles and anxieties, and we sincerely apologize for that. Our company has been depleting sort of this type of trouble in past years. We sincerely sort of take this matter -- seriously take this matter, and we are pretty much determined to prevent the reoccurrence of this type of incident and -- by changing the sort of our organization structure by setting up the sort of task force and with those task force teams with mid- to sort of long-term sort of countermeasures and also the sort of frontline sort of countermeasures are made and to be executed to prevent the reoccurrence of this kind of matter. And together with that, in terms of our long-term sort of business plan, so as for the sort of our target of the sort of 2025, the current condition or the current numbers are really sort of different far apart from the reality, so that we review those numbers. And especially sort of due to the external environment changes recently, one of them is the -- with the emergence of the very strong sort of competitor like sort of China with the market changes, we really need to change the sort of our development of R&D sort of system. So even though it's the middle of the year, as of October 1, we separated the sort of R&D division. And R&D sort of function is now included as a part of the sort of business sectors. And also in terms of the sort of B&G, due to the sort of overcapacity in China, market has been impacted significantly. So our B&GM sort of business environment has been sort of tough. Under the circumstances, in my last time, the CEO presentation, I explained about idea about the sort of separating our portfolio with sort of B&GM and the specialty chemicals domain. So we are continuing the sort of two-way the business management. So as we made explanations of the last time, so this time, so I would like to explain about the progress of that idea. And first of all, as for the most recent sort of performance update, as described, in terms of the FY 2025, so ongoing fiscal year, as we made announcement just recently, so today, we expect JPY 1.7 trillion in sales and JPY 110 billion in operating income and the net income of JPY 55 billion. In last year, in 2024, so the sales was JPY 1.8 trillion with a core operating profit of the JPY 101 billion and the net profit of JPY 32 billion. From last year, the numbers are improving. However, I think the sort of issue is in terms of the core operating profit and the net profit, the gap between the two are really large. So basically, we really sort of need to improve the capital efficiency. So we are striking the sort of measures to make that sort of improvement, and I would like to explain more in detail later about that point. Then in terms of the sort of measures to prevent the reoccurrence of these troubles, within our company, we set up the sort of project team with the expertise -- experts. And with them, we make plans -- sort of mid- to long-term sort of plan to prevent the reoccurrence. But -- so the members of those committees are not really sort of enough. And so we are going to move down sort of these measures to the sort of line managers and the line staff. And also in terms of the issue in front of us, so line managers and line staff are sort of executing the countermeasures for the prevention. And also, we have been experiencing those issues in the sort of chemical plant. But as we are sort of working and collaborating and together with the other companies in the industry, and we also sort of use the sort of other companies sort of knowledge and sort of learnings. So we are striking this wide range of measures to prevent the. And also in addition to that, as AI is really advancing very much, so plant operation is really changing very much. Based on this background, so we -- by adopting the AI and sort of robotics, we are building up the sort of very strong and sort of robust system. Anyhow, the troubles we have been experiencing sort of every year for our -- really the core plan, so we really never should have experienced this. So we are striking measures. In terms of the shareholder returns, we explained this slide as our B&GM restructuring has been really progressing so far. And also for the sort of growth domains, and we are going to accelerate our growth. And based on this growth, we decided we are going to start the sort of stock split so that the investors can feel really easy to buy our stock. So we are implementing sort of two-for-one stock split. With this stock split, so retail market investors and other investors sort of feel easy to sort of buy our stock, and we have a wide range of stock shareholders. And in terms of dividend, so JPY 75 interim and JPY 75 year-end, so the full year is going to be JPY 150. But as we explained at the beginning of the year, at the beginning of the year, so there were actually the factors of the impact of Trump tariff, sort of we stayed the amount. And in the first half of the year, so there are some sort of parts we were not really able to achieve. But in the second half, if we were able to build up this good enough profit, so we are also going to sort of consider about the opportunity to increase and to pay more sort of dividend. In terms of the return policy, we have not really made significant changes. So this is our shareholder return policy. And as for the buybacks, so depending on the conditions and the situation, by looking at the sort of balance, and we are going to use the return and flexibly. And also, as the cash flow improvement is sort of progressing and if we were sort of able to sort of progress the sort of cash flow improvement in a steady manner, of course, for the DOE, we are saying the 3.0% or more DOE as a target, but 4.0% could be an option for that. Now in terms of our long-term vision, one of the core is providing a solution to the social challenges. And as nonfinancial indicators, we have Blue Value and Rose Values. In this regard, we are making betterment in numbers. For 2030, we have a 40% sales ratio, which is quite aggressive. In light of that target, the new businesses and new product development has to be promoted and expanded. That's an unavoidable route for us. In this regard, the reorganization of the R&D will help us to accelerate this endeavor. As I said earlier, on May 30, when we had a CEO presentation last time, I told you that for the specialty chemical domains has to be considered separately from B&GM business because two business domains have different goals for FY '30. In specialty chemicals, we would strive to become a high-growth, high profitability global specialty company. And in B&GM, we try to be a strong basic and green material company that supports Japanese industry. Quite different goals. We see the emergence of strong rivals. We have first to compete intensively. And we would like to take various measures to be a survivor in it. And we would like to be a global specialty company with a reasonable scale in the global market. On the part of B&GM, so far, we worked on our own restructuring. Going forward, we would like to collaborate with other partners, including the industry alignment. And finally, we would like to serve as the essential industry players that support Japanese industries. We would like to speed up the pace of such restructuring. As I said in our long-term vision, we set forth JPY 200 billion as the operating profit target for FY '25, but we are behind. So we revised our strategy last year. We did the rolling of that business plan. And as is shown with the letters, we revised our strategies. Performance-wise, as you can see on the slide, in the specialty chemicals domains on left-hand side, ICT, Mobility and Life & Healthcare, back in 2020, when I became the President, we've made profit growth steadily year-by-year. On a CAGR basis, we've achieved 11% so far. And looking into the details, Life & Healthcare nearly doubled. [ In April ], it achieved 18% growth, and Mobility and ICT has achieved 8% to 9% growth so far. For FY '25, the pace of the growth has slowed down somewhat, but still the profit is expected to grow further. On the part of B&GM, unfortunately, as you can see on the graph, we saw a big fluctuation. Especially over the past 3 years, business was in quite a difficult situation. One misjudgment on our part was the incidents that occurred in our production plant. But to turn this into profitability as quickly as possible, so as to hit the JPY 35 billion level of profit so that this can be a self-propelled entity is our goal. So far, things are moving reasonably well. In the first half, there still was a big losses. But more recently, it's almost profitable. In the second half, we would like to make positive profits as we had targeted. Resultantly, overall ROIC for the company is shown on the right-hand side. Operating cash flow has grown, but the investment cash flow also was quite active. And from that bottom, we are working with the various measures to improve our capital efficiency. So ROIC, we would like to make an improvement on it as well. Regarding the cash flow, it's shown on the slide, post great financial crisis, it was around JPY 50 billion, and then it expanded to JPY 120 billion. Now last year and this year, we are looking at JPY 200 billion level of operating cash flow. On the other hand, investing cash flow, we've switched our gears to a more aggressive investment since 2020. We need to make an recovery of the investment. But by having a dynamic cash flow for investments, we would like to achieve the further growth. So this chart depicts the cash flow management, both in terms of generation and allocation. From the business, we expect to harvest the cash. And we take an asset-light approach, and we would diversify our financing means. We aim to produce this much cash, and it will be used to reinforce the existing businesses. And that's about JPY 900 billion together with the growth investment and another JPY 150 billion will be spent on the enhancement of shareholder return. If we can continue to generate that much cash flow, we would like to consider to improve our DOE to 4% level. Let's talk about asset-light approach. If I were to give you a breakout, it would look like this. The low-earnings capability business will be dealt with. We've already set a certain milestone to manage those businesses better. We check the results every year. Especially in oral care and ARRK and nonwovens, these main product business as well as affiliated companies, we are severely managing their milestones in the turnaround to see through their business liabilities. In terms of B&GM, what we can do on our own regarding the restructuring has nearly done, we need to move into the Phase 2. And in terms of CCC improvement by reducing the inventory and shortening the AR correction time. We aim to reduce the asset by JPY 50 billion. And we are also working on to reduce the core shareholdings. These are the way with which we take the asset-light approach and reduce assets tied to our businesses. Through these capital efficiency improvement measures, I've already talked about ROIC, but we aim to improve our ROE as well. Ultimately, we would like to achieve a 10% or over 10% ROE. And further out, we would like to exceed 13% in ROE. By different business sectors, there are strategies depicted in this page. There were a rolling of the strategies. We are revisiting some of these strategies. But with regard to growth or specialty chemical domains, our key scenario is volume growth, i.e., organic growth. And to make it happen, we have to deliver new product and new brands through development activities to add the new values. Through the reorganization and other measures, we'd like to deliver this growth. And in terms of M&A, we described it here. And for large ones, we have some opportunities in the shopping, restaurant, but we have not included the name. For the business sector or the business division level, M&A are listed. And those opportunities are included in this chart. And in terms of the organization changes we implemented in the middle of the year, so this is about the R&D sort of system. And in order to secure the competitiveness, the R&D divisions are now sort of part of the sort of business sectors. With this, we are going to respond to the sort of customers in a speedy manner and by really working closely with the sort of customers. And in terms of R&D, so enhancement of the platform to accelerate the R&D and also sort of seeking the sort of real terms sort of innovation is necessary. So R&D is going to be implemented from the long-term sort of viewpoint. Another point is sort of seeking for the localization. As competitions are sort of now intensifying and the economies are sort of to be really the sort of [ block ] economy, and so from R&D to sort of sales, so in each region, so that those sort of flow should be sort of completed within the region. So for the R&D resources currently in Japan could be sort of spread and assigned into the sort of U.S., India and Korea and Taiwan. So we are going to allocate those R&D resources for those business sectors. And as for the R&D, collaboration with start-up, academia has been mainly in Japan, but with a sort of broader sort of perspective in the western part of the world or sort of company like Singapore, where the sort of start-up companies are concentrated; so we are looking for the collaboration opportunity there. So that we are going to promote the R&D activities there. With that, so this page is about the sales breakdown in the specialty chemical domains based on our global strategy. After the Lehman shock or financial crisis, Japan accounted for 70%. But right now, so the Japan only accounts for 30%. And this trend really continues, this shift really continues. And so in 2028, the Japan should account for just 1/4 of the total. And by each business sector in our basic markets, Asia, Americas and Europe, also in terms of our white space, the EMEA; we are striking sort of these measures in these major key markets and key areas. And in reality, in these EMEA sort of markets, our products are currently sort of on sale. We have this track record. And sort of based on the sort of business conditions, we are going to start treating sort of these as sort of office space regions, so we -- by really sort of expanding our business with the sort of geographical sort of base, and we are going to expand the sort of total business. And then I'd like to move on to the sort of subject of each businesses, each business. In terms of health care, I have been sort of explaining about this repeatedly, and the core in the health care business is the vision care and then the agrochemical businesses. And -- but however, only with these two sort of we will not be able to achieve the levels that we want to achieve. So in the medical area, dental and medical diagnosis and also the sort of surgical sort of materials, and so these are the sort of we are working on. And by narrowing this down to the specific sort of ones, so we are going to build up the sort of another sort of third sort of core business area. So as for the core vision care business, we are going to expand the sort of our value chain we currently own. So in addition to the sort of lens monomer, we currently own, we are also going to use coatings and coating equipment. So on surface -- on area by area, we are going to expand our business. In terms of this type of business, especially for the lens monomers business, our polyurethane based monomers are in the market of the sort of China and India, U.S., there's more room for this expansion. We are not really taking the majority share yet in those markets. So there should be room for expansion, we are going to expand our sales in those markets. And at the same time, as for the coating material and equipment, by growing the coating equipment, we are going to also increase the sales of coating materials. So Coburn, we recently sort of acquired. So this is a company with sort of very unique equipment. So in South America, Africa, so in those white space for us, we now expect the sales recognization in those areas. So coating materials with those equipment are also promoted in those markets. And as this business overall, we are looking at the sort of 6%-ish growth based on the market condition today. And by expanding the value chain, we have sort of additional sort of expansion opportunities that are available. Then in terms of agrochemicals, so there are sort of four important sort of ingredients and we identify as sort of growth on. And in each sort of region of the market, we are working on to register those ingredients. There are white space of the market we have not really registered, those ingredients. And so we're expanding this. And by getting together with the basic pharma, and so bio related pipeline, so that to reduce the environmental sort of burdens, are also there. So with them, we would like to further expand this agrochemicals. And also in this market domain, there are several other sort of players in the market, many other players. So by looking at the sort of further opportunities are there, we are looking for the expansion. And as for the oral care business, as I explained, so this is one of the candidates to expand the sort of next important pillar. Back in 2013, we acquired the Kulzer, it's a dental business. But unfortunately, we have not been sort of able to reach to the level we originally wanted. So back in 2018, we did really the significant restructuring, but that was not really sort of good enough. So we really sort of continued additional the restructuring works. In our [ first ] restructuring sort of program, the profitability really improved. And so now we are able to make this double-digit sort of profit. But as for this acquisition, so company like Dentsply and [indiscernible], we really expect the sort of high-level profitability just like them there. So with this current sort of additional sort of restructuring, we would like to improve the profitability even higher from today, so the sales office and the manufacturing plant sort of integration and also sort of sales staff, the restructuring, so that we are working on the execution to use those measures. Once -- so by implementing these, we have been sort of really improving the profitability. Then we are going to expand this business further, in order to do that as a market that we expect the U.S. should be very important sort of promising market. So our U.S. President now sort of became the sort of Vice General Manager -- Deputy General Manager of this business sector. And so with M&A and alliance, we are going to expand this business in America. So this is the sort of story and scenario that we are thinking about. And also in Europe, we are going -- we are really sort of strong. And in Asia, so some medicals that we own. And also, [indiscernible] we are going to collaborate with these companies. And together, we are going to expand this as a dental material. Moving on to Mobility, well, I would touch upon elastomer later. We have to establish a collaboration with elastomers. When it comes to compound or composite materials rather, aside from BP compound, we have Admer, Milastomer, Arlen, Aurum. These are more functional compounds that we own as our products. In each site, excluding white spaces, we already have established business sites in an important market. And to be closer with our customers, we are striving to grow our sales. And in our communication with our customers, the compound alone would not address their needs. And when it is discovered, we would work backwards to the upstream so as to develop necessary materials for them. And there, our R&D facilities are utilized to develop a polymer with new functionalities and capabilities. That's what we are working on now. And in this manner, we are taking advantage of the compound resources. And on the upstream, we are working to develop new polymers. Especially [indiscernible] as a part of elastomer, there are various products, but the sales to solar sales did not materialize as we had anticipated. So we are reshuffling our portfolio of applications. But this value chain is working for us. Taking advantage of this value chain shifting from solar sales, we would supply products to auto sector or consumer or healthcare sectors. In such a way, we are strongly promoting the change in our applications. And geographically speaking, plasma -- before the [ 6F ] in Singapore come into stream, there was some capacity shortage. So we had to allocate our capacity. We were not able to address the white space sufficiently. But including those white area or white space, we are working on the development. And the product portfolio, which were more skewed towards the sealant for solar sales have now -- is now being shifted. And thanks to such diversification, we were not as much affected. Moving on to ICT, we have products for semiconductor and displays and eco-friendly packaging materials. One of them -- for semiconductor field, we have two main products. One of them is ICROS Tape. Conventionally, it was used for the back grinding of wafer, but it's now expanding into other processes like dicing and molding processes. We are working on the expansion of the applications in such a way, as we speak. Through this, we managed to discover greater demands on the part of customers. We are expanding capacity in Phase 1 and Phase 2. The Phase 2 has been rather slow in ramping up, but now it's more utilized. We are now considering to further expand our capacity. Furthermore, it's important to have a joint development with our customers, especially in Nagoya, we've opened up technological service basis afresh. And in Taiwan and in other locations, we need to set up such technological sites to accelerate the pace of development. Moving on to PELLICLE, the conventional DUV pellicle to carbon EUV pellicle to carbon nanotube type, we have a whole suite of products with an eye on next-generation products as well. Looking towards CNT pellicles, we are setting up the new production capacity. And once it's done, we shall be able to produce CNT pellicles as well. In the shift from DUV to EUV pellicles, the shift has not progressed as much as we had hoped, but we've had a business integration with the Asahi Kasei business in DUV pellicles. Driven by that, even with the delay of a shift from DUV to EUV, we are able to address a wider or broader-based customers. Going forward, working together with ASML and IMEC, we mean to strongly promote EUV pellicles and CNT pellicles. Lastly, coating and engineering materials, which is a business for eco-friendly packaging materials. So unlike semiconductor and display, we cannot expect a jump up in revenue or profit like a product for semi or display, but it's more -- it represents a more steady growth. The production region with the yellow bubble, we already have a production capacity and work with our customers. But in the blue bubble area, which is a white space for us, we do receive some inquiries, and we exported to a certain extent. But eventually, we would like to add capacity on those areas to address the local needs. Already, we've started our surveys of the local areas. Another key point is now that we have Omote-san as CTO. We used to have more silo-like structure, but we have a wealth of technological know-how. By having a cross-functional organization, we should be able to provide diversified solutions to our customers. With that in mind, we've established this cross-functional organization for the development. For example, in the eco-friendly packaging materials, PUD which belongs to ICT or POD as well and ADMER, TAFMER, which belongs to Mobility Solutions, we can combine these materials to satisfy customers' needs. So through the combination of multiple IP that we have or material that we have, we can address the customers' demand better and while raising the competitive edge and raising the bar for the new entrants. Another example is AR or VR glasses and head-up displays or EOL display -- excuse me, OLED displays. So these are optical materials. We have some Cs for multiple products, Diffrar, APEL. In health care, we have MR or SDC. By combining these, we should be able to deliver the functions and capabilities through multiple approaches in a sense that we can serve as the one-stop solution providers, which is a unique position that we can assume by raising the bar for the new entrants. And we're working on the specific and concrete collaboration project with our customers for various applications, we are providing solutions, and we would like to be more aggressive and forthcoming in this regard. Let's move on to B&GM. In terms of B&GM, as I have been explaining, what we really need to do is pretty obvious now -- by now. And then now sort of collaboration with others, other companies are there in front of us. They are going to be more specific now. But one of them is the polyolefin. For polyolefin, so prime polymers, we are working with [indiscernible] now Sumitomo are joining. And so the range of this sort of activity is really wider. And so now we are able to the wide range of customers. And also, we can rationalize this further. Osaka and Mizushima in the western part of those western sort of market, so we set up the LLP. And with this LLP, so the consolidation, so integration sort of actions program is accelerating. And so at the beginning of the year probably around that, I hope we will be able to give a more specific explanation about what we can do. And so by promoting the sort of project like this, so we would like to sort of create the sort of basic chemicals of the company so independently running the company. Well, this is quite the essential industry for Japan. So we would like to make this company as an essential core player in this industry. So by realizing this as quickly as possible, we build up the sort of strong foundation in the domestic Japan. And that means that we can really move forward for the further growth in the future. More specifically, in Ichihara with Idemitsu, so that we have had so much discussions already. And by the end of the year, I think that we will be able to explain the sort of specific sort of directions about what to do. So we set up the sort of LLP and sort of moving forward in western part of Japan. Anyhow, we are improving the sort of foundation and also at the same time, so we turn those crackers to be sort of green ones. But also so that we have to pay attention to the sort of Anti-Monopoly Act. So we closely contact the regulators. And by looking at the sort of future opportunities for industry consolidation and as I just explained, for the core petrochemical sort of company is to be really sort of created and sort of built up as a result of these actions. And then this is about numerical sort of factors for the point just as explained. In the first half, we had a really difficult time. But in the second half, we have some positive factors. We are going to turn them into the blocking in the second half. And then beyond that, we are expecting sort of these benefit as an outcome. To make it happen, the troubles we really sort of caused in the last sort of few years, once every year, so we need to prevent that reoccurrence. And so by making sure to prevent that reoccurrence, again, we would like to realize the numbers we showed you. So this is the summary of sort of what I explained. So business portfolio reform, which is really the essential sort of starting point, and B&GM, we apply the sort of restructuring and to strengthen the sort of foundation. And in the Performance Chemical domains, for any sort of business or divisions which are not really reaching to the sort of our sort of target area, so that we are going to apply these measures to turn around. And for -- and then so this might also include the sort of divestitures by finding out the best owner. And also improvement. So for B&GMs, by including this collaboration, we are going to move ahead. As I explained the previous CEO presentation, by 2027 or in fiscal year 2027, so we are going to sort of turn them to the 100% subsidiary. And if possible, we are going to sort of work together with the other companies and with a partner to set up the sort of new entity. And so by the end of 2027, so we would like to realize this happen. And in addition to that, in terms of the cash creation that I already explained and as for the capital policy, we have sort of stock split. And the DOE sort of target is sort of to be changed upward potentially by adding aggregating of these measures. As I explained earlier, so one of the really important sort of management issue of the sort of capital efficiency improvement is going to be sort of realized. With the cash -- strong cash creation, those cash will be turned into the investment and for further cash creation. So this cycle sort of should be boldly implemented and -- to accelerate our growth. So that's all from myself. So thank you very much for your attention.