Sumitomo Chemical Company, Limited (SOMMY) Q1 FY2026 Earnings Call Transcript & Summary

As it is time to start, we will now begin the conference call for the presentation of the financial results of fiscal year 2025 first quarter. Thank you very much for you participation. Today, Mr. Yamauchi, Executive Officer and General Manager of Accounting Department, will give a briefing of the financial results for fiscal year 2025 first quarter, and he will later take questions. We will conclude the call at 4:50 p.m. Mr. Yamauchi, over to you.

Good afternoon. I'm Yamauchi, responsible for the accounting department. Thank you very much for attending our conference call today despite your busy schedule. I would like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for that. Now let me start with a briefing of our financial results for FY 2025 first quarter. Please turn to the slide, Page 4. Before explaining the details of our financial results, I'd like to give a brief update on the status of profit and loss for the first quarter. On the left, core operating income in 2023, '24, 2025, for 5 years, you can see the figures. In FY 2023, we had a large loss ever since the start of the company. We faced a very difficult situation from the first quarter. For FY 2024, we achieved a V-shaped recovery, and we're able to secure profitability in the first quarter. And this fiscal year first quarter, the profit we made last year was further expanded. For the first quarter, Sumitomo Pharma performed well and Essential & Green Materials improved its profitability. And in addition, shipments of Agro & Life Solutions and ICT & Mobility Solutions were strong. On the right, you can see the net income attributable to owners of the parent for the quarter for the 3 years. With appreciation of the yen in this quarter, we had a slight loss. For each term, there was a big impact from foreign currency, as you can see in parenthesis, excluding the impact of foreign currency transactions, just like the core operating income, we're able to achieve steady improvements. Now next, please turn to Page 5. Let me begin by explaining the business environment around our company in the first quarter of FY 2025. With regards to economic situation, also the global economy is continuing to show signs of gradual recovery. Uncertainty is high due to such factors as policy management, and because of this, the future continues to remain uncertain. And below our perceptions of the business environment in our major business fields using weather symbols. The first one, crop protection. Although Q1 is an off-season for demand, there was solid growth in India. The methionine market bottomed out at the end of the last fiscal year and currently shows signs of recovery. For displays, there is still no impact from the backlash of shipments brought forward because of tariffs. And there was solid growth in mobile device-related components. In semiconductors, demand for semiconductors varied by field, but there are signs of gradual recovery. Petrochemicals and raw materials, the market continues to have low margins. So next is the outline of the consolidated financial results, Page 6. Sales revenue was JPY 526.1 billion, down JPY 86 billion year-on-year. Core operating income expressed in recurring earnings power was a profit of JPY 27.7 billion, up JPY 22 billion year-on-year. Nonrecurring items not included in core operating income was a loss in total of JPY 2.2 billion. In the same quarter of the previous year, there was JPY 10.1 billion gain on sales of fixed assets from the sale of land for dormitories and company housing, leading to a total profit of JPY 5.8 billion compared to the same quarter of the previous year. Nonrecurring items worsened by JPY 8.1 billion. As a result, operating income was a profit of JPY 25.5 billion, up JPY 14 billion year-on-year. Finance income had a loss of JPY 19.6 billion, down JPY 45.6 billion year-on-year. Gain or loss on foreign currency transactions included in finance income or expenses had a loss of JPY 16.4 billion because of a strengthening of yen worsening by JPY 45.4 billion year-on-year. Income tax expenses had a loss of JPY 1.9 billion, down JPY 1.7 billion year-on-year. As a result, the net income attributable to owners of the parent for the quarter was a loss of JPY 4.5 billion, down JPY 28.9 billion year-on-year. Exchange rate and naphtha price, which impact our performance, average rate of U.S. dollars during the term was JPY 144.5 billion to dollar, and naphtha price was JPY 65,500 per kiloliter. Yen appreciated and feedstock price decline compared to the same period of previous year. Next, sales revenue by business segment, Page 7. Total sales revenue was down JPY 86 billion year-on-year. By segment, sales revenue decreased in all segments except Sumitomo Pharma. As for year-on-year changes of sales revenue by factor, sales price decreased by JPY 12.5 billion. Volume decreased by JPY 47.6 billion. Foreign exchange transactions variance of foreign subsidiary sales revenue decreased by JPY 25.9 billion. Next is Page 8. Total core operating income increased JPY 22 billion year-on-year. Analyzing by factor, price was minus JPY 500 million; cost, plus JPY 9.5 billion; volume variance, including changes in equity in earnings of affiliates was plus JPY 13 billion. Next is performance by segment, Page 9. Agro & Life Solutions segment, core operating income was a profit of JPY 2.2 billion, down JPY 2.7 billion year-on-year. Price variance, profit margin deteriorated as the methionine market price dropped. Volume variance, there were lower income from exports due to stronger yen centered on overseas crop protection products and stronger yen effect. Next page. ICT & Mobility Solutions. Core operating income was a profit of JPY 18.4 billion, down JPY 2.8 billion year-on-year. Price variance, selling prices of polarizing films dropped. Volume variance, there was a onetime gain on the sale of the large LCD polarizing film business, but lower income from exports due to stronger yen offset the gain. Next page, please. As for the Advanced Medical Solutions segment, core operating income was a loss of JPY 1 billion, a decrease of JPY 1.5 billion year-on-year. Shipments decreased due to a change in the shipping timing of some active pharmaceutical ingredients and intermediates compared to the same quarter of the previous fiscal year. Please go to the next page. With regards to Essential & Green Materials segment, core operating income was a loss of JPY 5.5 billion, an improvement of JPY 14.1 billion year-on-year. As for the price variance, profit margins improved and synthetic resins due to the drop in price of main ingredient, naphtha. As for the volume variance, et cetera, there was an improvement in refining margins at PetroRabigh, an equity method affiliate, resulting in an improvement in profitability and investments accounted for using the equity method. Next page, please. As for the Sumitomo Pharma segment, core operating income was JPY 21 billion, an increase of JPY 20.1 billion year-on-year. With regards to price variance, sales prices decreased due to NHI drug price revisions in Japan. As for the cost variance, due to the progress of operational streamlining, SG&A expenses decreased. With regards to volume variance, shipments increased due to the expansion of sales of Orgovyx, a therapeutic agent for advanced prostate cancer; and Gemtesa, a treatment for overactive bladder. This concludes the overview of the business performance by business segment. On the next page, I will explain the consolidated statement of financial position. Total assets at the end of June 2025 amounted to JPY 3,329.5 trillion, a decrease of JPY 110.2 billion year-on-year. Decrease in cash and cash equivalents due to repayment of interest-bearing debt, seasonal factors affecting the crop protection chemicals and the decline in sales due to the impact of scheduled maintenance at PetroRabigh were the main factors behind the decrease in notes and accounts receivables. Interest-bearing debt amounted to JPY 1,248.1 trillion. This was a decrease of JPY 38 billion year-on-year. Equity was JPY 1,061.4 trillion, down by JPY 13 billion compared to the end of the previous fiscal year. Next, I will explain the consolidated statement of cash flows. Please go to Page 15. Cash flows from operating activities resulted in a positive inflow of JPY 24 billion, up by JPY 36.3 billion year-on-year. Mainly due to an increase in collections of accounts receivable for crop protection chemicals caused by seasonal factors and a decrease in sales associated with scheduled maintenance at PetroRabigh, accounts receivables decreased resulting in an improvement in working capital. Cash flows from investing activities resulted in a negative JPY 45.9 billion, a decrease of JPY 128.4 billion year-on-year. During the same quarter of the previous fiscal year, there were incomes from the sale of investment securities and fixed assets. As a result, free cash flows was negative JPY 21.9 billion, a deterioration of JPY 92.2 billion compared to the JPY 70.2 billion positive in the same quarter of the previous fiscal year. Cash flows from finance activities resulted in a negative JPY 49.2 billion due to repayment of borrowings, a decrease of JPY 13.8 billion spending year-on-year. Next, I will explain the outlook for fiscal year 2025 1st half. Please go to Page 17. At the time of the previous financial results announcement on May 14, the impact of tariffs was highly uncertain. Therefore, we only disclosed full year forecast for fiscal year 2025 and did not disclose forecast for the first half. At this time, annually, we are going to disclose the first half forecast. And as for the full year financial forecast for fiscal year 2025 announced on May 14 have not been revised. We will be reviewing it at the first half and disclose it for the announcement of the second half. For the first half of FY 2025, the forecast is sales revenue, JPY 1.100 trillion down, JPY 141.4 billion year-on-year; core operating income, JPY 90 billion, up by JPY 60.5 billion year-on-year; operating income, JPY 85 billion down by JPY 36.2 billion; net income for the quarter attributable to owners of the parent, JPY 25 billion, up by JPY 31.5 billion year-on-year. These are the forecasts. As for the exchange rate and naphtha price assumptions, they are as listed on the slide. I will explain the core operating income in the next slide by business segments. Please go to Page 18. For the first half performance, if we look at the segment, Sumitomo Pharma sold the business and Orgovyx milestone income will be recorded. So on a year-on-year basis, we are forecasting a large increase. And for the other segments, Essential & Green Materials is expected to see an increase in operating income year-on-year due to the improved profitability at PetroRabigh and improved profit margins for synthetic resins. With regards to ICT & Mobility, the impact of a decrease in export earnings due to the strong yen and a decline in profit due to the conversion of overseas subsidiary profits into Japanese yen will be significant and profits are expected to decline compared to the same period of previous year, which was extremely strong. Agro & Life Solutions will be affected by the strong yen. However, we profits to remain at the same level as last year due to an increase in shipments. Furthermore, for the other segments, experiencing a decrease in profit year-on-year is due to the recording of significant profits associated with the sales of business in the first half of fiscal year 2024. Next page, Page 19. This will be the last slide. This will be the summary of the performance forecast. Regarding the outlook for the first half of the fiscal year, as I have explained, Agro & Life Solutions and ICT & Mobility Solutions segments, they will remain strong in shipments in the second quarter. In addition, we expect the gain from selling Sumitomo Pharma business will also contribute. And therefore, the first -- against the first half forecast, it is a 60% progress. What is in the parentheses? And the outlook, excluding gains on the sales business, we are making progress towards improvement compared to fiscal year 2024. And the net income attributable to owners of the parent company, despite the adverse impact of foreign exchange losses remain positive and is progressing steadily towards the achievement of the annual forecast. That concludes my explanation.

Thank you very much. Now we'd like to go into a question-and-answer session.

Then the first question from Mr. Watabe from Morgan Stanley MUFG Securities.

I'm Watabe from Morgan Stanley MUFG Securities. So I have one question. But from first quarter to the second quarter, for each segment, what is your way of thinking, excluding Sumitomo Pharma and Agro, ICT, Essential chemicals, in particular, in these places, what is the movement? In particular for Essential Chemicals, deterioration is expected because of Rabigh's periodic plant maintenance and the glyphosate market in China is getting better. And what is your situation in South America as well?

Thank you for your question. So let me answer one by one. First, for Agro & Life Solutions, for the first to the second quarter, we expect a large increase in profit. In the first quarter, it is an off-season and profit tends to be lower. In our company, in case of North America, it is more concentrated in the second half. Recently, we are also emphasizing South America and India. In these places, relatively speaking, demand starts from the second quarter. In case of India, first quarter is advancing steadily. At the moment, as planned, shipments is expected to be firm in the second quarter. And from Q1 to Q2, we expect a large increase in profits. For ICT & Mobility Solutions, from the first to the second quarter, slight decline in profit, is projected. I cannot mention the concrete figures, but with the restructuring, a onetime gains from sales is included in the first quarter and risks that we expected -- tariff-related risks. Last year there was increase in shipments towards the end, and we expected some backlash from that, which were risks, but that didn't happen that much as things are progressing relatively steadily. For Essential & Green Materials, from the first to the second quarter, loss is increasing under the current situation. As you have mentioned, Mr. Watabe, second quarter, from April to June, in case of PetroRabigh, there is a periodic plant maintenance where profit will drop. And we plan to post that in the second quarter. That is one factor included. That is all.

One confirmation. South America recovery and the ratio of investments into Rabigh, what is the percentage that you are using in calculating in Q1 and the first half?

For South America the inventory is gradually moving towards improvement, but to a certain extent, there's still some level of inventory. So we will watch the situation with caution. In PetroRabigh, the ratio percentage, 37.5% as of the first quarter.

How about the second quarter?

For the second quarter sales of shares, when will that happen? It depends on that. After selling, it will be 15%. Before that, 37.5%. It takes time for the procedures. So compared to our projections, the timing of sales is being delayed slightly. But the price of selling remains unchanged from the price we announced last year, 37.5%. Based on that, the income or loss, or loss in terms of equity affiliates gets large. But the sales price will decline. We can offset that with the gains on sales. So until when we will maintain the level of 37.5%, even if there is a delay, that will not give a negative impact on our performance.

I understand that. But in second quarter, you are calculating 37.5% to come with these figures. I understand.

We would like to take the next question from Mizuho Securities. Mr. Yamada, please go ahead.

The full year forecast, you said that you have not revised it. So the first half, you made the forecast. However, for the full year, you have not revised it. So if you subtract the first half from the full year, there is no meaning. It's what I wanted to confirm at the start. And after I confirm that point, for Agro & Life Solutions and ICT & Mobility Solutions, in these two business segments, the current situation against the forecast at the start of the year, how different is it is what I would like to know.

So the first assumption regarding the full year, we have not revised it. Therefore, subtraction, it is -- actually there is -- they're not aligned exactly. And for Agro & Life Solutions and ICT & Mobility, from the original forecast, there's not a large deviation is how we understand. The first quarter, Agro & Life, the profit level was as expected. And for the second quarter, there's a contribution from South America and India. That comprises the forecast. And as for ICT & Mobility at this point, they have not changed from the original forecast.

So if that is so, Agro & Life Solutions, methionine, on a year-on-year basis, it's deteriorating. But against the first quarter of the previous year, it is improving. So it's not going to do anything bad. And regarding the new drugs or new drug material, n-vinyl pyrrolidone, it is steadily performing. And for ICT & Mobility Solutions, even though you consider tariff impact, the business performance is going to steadily expand. Is that the correct understanding? Sorry, I wanted to confirm that as an addition.

For Agro & Life Solution -- sorry, for ICT, regarding the tariffs impact, at this point, we're not seeing any adverse impact. Therefore, probably for the second quarter, it will be all right. However, regarding the second quarter onwards, what kind of impact will we be experiencing? We need to take a closer look. And at the third quarter announcements, we will make revisions necessary. Methionine in the first quarter, on a year-on-year basis, it's deteriorating. But against the previous year quarter, it is improving. So it has not changed from the original thought that it has bottom lined. And for the new drug, it is performing as originally expected.

And is it the same way currently?

Yes. For methionine, at the end of the last fiscal year, it has bottomed out and it's improving. And for the new crop protection chemicals, yes, it is steadily performing.

Next is Mr. Miyamoto from SMBC Nikko Securities.

I'm Miyamoto from SMBC Nikko Securities. I have a question about Agro & Life Sciences. Towards the second quarter, on a Q-on-Q basis, you expect an increase of JPY 11.4 billion. You mentioned about seasonality. But last year or compared to the previous year, it seems that the increase is larger. What are the factors for such a large increase? In your presentation material, Page 27, North America, you mentioned that sales is being carried backwards. How much is that impact? And in Central and South America, there's a drop because of price competition. How will that trend going forward? And for INDIFLIN, you made a comment. But for biorationals, is that expanding steadily? And for distribution inventory, you mentioned about the situation in South America, but what is the situation of inventory in other areas?

Yes. Thank you. For crop protection chemicals, from the first to the second quarter, compared to the past, the increase in profit is larger as you mentioned. Yes, exactly as you mentioned. For this fiscal year, there are some sales of businesses and that is included as a part of the factors. And for INDIFLIN, so far, it is progressing as we have planned. And for the inventory level, gradually, there is an improvement trend which has a positive effect. The stronger competition in South America and how about the situation of biorationals. Stronger competition in South America, that factor is already taken consideration. In the second quarter, we don't think the situation will change that much. And compared to a profit we have projected, we are not seeing any worsening. And for biorationals, also, there are no major changes. We are expanding sales as we have planned.

In terms of inventory by region, do you have any information of improvements by region?

Inventory by region? I'm sorry, for such a detailed question, but well, in all regions, there are -- the trends are improving. We are seeing improvement trend. But Latin America and South America is relatively large. Yes, inventory level is relatively large. There are improvements but it's relatively large, so we need to pay attention.

We would like to take the next question from Daiwa Securities, Mr. Umebayashi.

I am Umebayashi from Daiwa Securities. I have a question related to ICT & Mobility Solutions. It may overlap with the explanation you have provided up to now and year-on-year explanation was given to us right now. Regarding the polarizing film, there is the sales gain that came in of TV and that disappeared, I understand. But for the used mobile devices, the polarizing film volume year-on-year, how did it perform? And also regarding the semiconductor materials, though there may be an impact of the FX, in terms of the volume, how did it perform? I would like to receive the performance. And towards the first quarter to the second quarter, ICT & Mobility, it's going to increase about JPY 5 billion in revenue, but profit is going to decline by about JPY 5 billion. So on a Q-on-Q basis, can you explain the reason of the decline in profit and also increase in revenue?

Thank you very much for your question. On a year-on-year basis, each explanation, regarding the polarizing film, TV, we have restructured the business. So that has declined. Regarding for the mobile devices and also for automobile usage, it is slightly declining. Last fiscal year, they performed quite strongly. So including that situation, this year compared to last year, the level is slightly lower. And also regarding semiconductors, the overall picture is that the recovering phase is continuing. However, if we look at the situation year-on-year, photoresist is increasing. And in the semiconductors chemicals, it's around the flat range. That's improvement. And increase in revenue and decline in profit, well, one thing is, as I have explained, the temporary profit is included in the first quarter. That's one reason. But for the other aspects, there's a mixture or composition by product. So it's not that there is a large difference. Well, the sales is increasing. So from the first quarter to the second quarter, the overall picture is that there's an increase in polarizing film for mobile devices and the semiconductor will improve as well. Compared to the first quarter, the second quarter, seasonality-wise, we're getting into the demand season, so that way of thinking is correct.

If that is so, so the first quarter onetime profit was quite of a size, you mean?

It wasn't that large. It was the low several billion yen. So it is in that range.

Next question is from UBS Securities, Omura-san.

I'm Omura from UBS. I have a question on Essential & Green Materials. In the second quarter, you expect losses. PetroRabigh may be the factor. In the second quarter and for a full year, as fundamentals, non-PetroRabigh businesses, how should that be considered? On Page 12, the sub-chart you have on Page 12, improvement of profit margin of synthetic resins, is that a onetime effect or do you expect a gradual improvements? Could you explain that?

The EGM market situation and profit margins. Overseas businesses like in Singapore in the first and second quarter and the second half, we don't expect large changes. On the other hand, domestically, with naphtha slide in many contracts, price is determined. So with a drop in price, there's a time lag reflecting that in the selling price. So the first half, that is positive, but that factor will disappear in the second half. In the first and second quarters -- in the first quarter, naphtha price declined, and there are accounting factors, negative factors. For the first or second quarter, there is a slight positive factor. And in the second half, the Chiba factory has a periodic plant maintenance which will be a negative factor in the second half.

Overseas for confirmation. On Page 26, the polyolefin company and PCS, the direction of the profit are different. For this direction, as you have explained, you don't expect large changes. So PCS will be facing difficulties and the polyolefin company is in an improvement trend?

For PCS, there is an accounting factor in the second half. So that is slightly worse. For TPC, we don't have such a factor. So this trend continues.

We would like to take the next question from JPMorgan Securities, Mr. Nakada.

This is Nakada. I just wanted to confirm the onetime factors. Last time you looked at JPY 50 billion. And the Sumitomo Pharma part is second quarter and agro is second quarter and ICT is only first quarter, and from what you saw at the beginning of fiscal year, the amount has not changed. But from the year, you'll start to see the effect of it. Is that the correct understanding?

Yes.

And next from Morgan Stanley MUFG Securities, Mr. Watabe.

I wanted to ask a question about that onetime factor, and the nonrecurring item was negative JPY 5 billion for first half and minus JPY 45 billion for the full year. This figure remains unchanged. And Singapore and the domestic market, you didn't discuss about restructuring of the sector. What is the situation?

As onetime factors, as I have already mentioned, about JPY 50 billion per year, and basically, everything will be reflected in the first half. ICT -- for some part of ICT will be the second half, but pharma and agro second half -- or second quarter, it's in the second quarter. And nonrecurring items, JPY 75 billion for the full year. In the first half, we plan to make a review of this figure.

Do you expect a decline? Or do you mean you will review?

Yes, we will review the figures. Structural reform of petrochemicals. For petrochemicals restructuring, we are taking many measures. But at the moment, there is nothing that we can newly announce. We need a little more time.

We'd like to take the next question, SMBC Nikko Securities, Mr. Miyamoto.

This is Miyamoto from SMBC Nikko Securities. Regarding the inventory, at the first quarter, it seems that it has increased by JPY 21 billion. And with what kind of products is this naphtha-related product building up this much? The inventory assets, okay, from March to June, you're talking about the increase during that period, correct?

Yes. Well, this part, Agro & Life, led by Agro & Life Solutions towards the demand season, little by little, they are building up the inventory. Therefore, that is the main factor behind this. In a continuous manner, regarding the inventory, the direction is to compress it. But within that, on a necessary basis, we are building up the inventory, if you can understand in that way.

Okay. Understood. So naphtha and from the FX situation, it seems that it is at a higher level than the other years. But is there a particular product that has a high level of inventory or special factor why it's buildup?

No. There is no special factor why there is a buildup. It is just that we are building up the necessary product.

The next question is from UBS Securities, Mr. Omura.

For agro, for confirmation, you mentioned about the distribution inventory. The level of inventory, in your case, what is the level that you expect for each region? And this distribution inventory, you said is improving, but currently, when do you expect there will be improvements from the situation of excessive inventory?

Well, I'm sorry, I don't have information about the actual level. That is my situation.

Well, not in concrete terms, I know it may be difficult. But last year -- compared to last year or the previous year, what is the level of improvement? Is that information also difficult?

We are seeing improvements here. And in Central and South America, the levels is still relatively high. But what is the appropriate level or -- I don't have that information at the moment.

I understand. So basically, the salespeople for your company, I think, would collect that information qualitatively, and you gather that information and that is the basis of your comments.

Yes, you are right.

And from JPMorgan Securities, [ Mr. Nakamura ].

This is related to Mr. Watabe's question as before. Recently, I read the interview articles of your CEO and President. Even for the petrochemical, from the proprietary production to outsourcing and looking for the best partner, it seems that there seems to be a deeper structural reform that will be going ahead compared to what was originally -- compared to the medium-term plan. So within the initiatives, within the medium-term plan, are there areas that you can go even further?

Sorry, the first part I was not able to hear. Before Pharma, you said -- what did you say? That your CEO said he's going to be focusing on the winning route. And from proprietary internal in-house production to outsourcing, well, we've just started the new medium-term plan, and Mr. Mito is making an appeal to the outside. Whether we're making progress that would change the content of the medium term, that is not the situation. We are steadily going aligned to the medium-term plan.

But Sumitomo Pharma, they are a listed company, may be difficult. But when you look for the partner, if your corporate value or the stock value goes up, it's easier to find a partner. So can you comment on that?

It's difficult to comment about the share price, but the performance of Sumitomo Pharma is starting to improve. And various structural reforms are going well and their fixed cost is going down. And sales-wise, for the three main products, especially for the two products, for us, they are performing strongly, and we understand that in a positive manner. So looking for a good partner, they will have to have a good foundation in terms of business management. Therefore, in that sense, we are taking that in a positive way. In the sense of partner, when we think about the future of Sumitomo Pharma, the areas that Sumitomo Chemical can support, there's a limitation to that. So looking for a partner that is appropriate for Pharma. That policy or direction has not changed. And their performance improving, maybe it is becoming easier for them to move forward on that. And as I think so, as what Mr. Mito was saying.

Thank you very much. So it's now time to conclude the conference call. There are still some people raising their hand, but with this, we'd like to conclude the Q&A session. So this concludes today's conference call. Thank you very much for your participation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]