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

It is now the time to start, so I would like to start. My name is Kobayashi from the Corporate Communications Department. I will serve as the moderator. Thank you very much for attending today's investors' meeting for the Current Priority Management Issues and Business Strategy despite your busy schedules. Today, from our President, Mito, there will be an explanation given followed by a Q&A. We plan to end this meeting at 4:00 p.m. President Mito, please go ahead.

And once again, thank you very much for attending our Investors' Meeting for the Current Priority Management Issues and Business Strategy despite your busy schedule. Since I assumed the position of the President, it is my first meeting for the Current Priority Management Issues and Business Strategy. So I'd like to give you a thorough explanation. As Kobayashi mentioned right now, we have set aside time for a Q&A. So I would like you to feel free to ask any questions. Please move on to the next slide. This slide is showing today's agenda regarding the progress on the corporate business plan at the first part. I'm excited about the upgrade business portfolio with new growth strategies. There are 2 factors in here. One is something that I've been talking about is the winning business rooted in our organic synthesis technology, how are we going to grow that. And the other is cultivating new growth businesses. More specifically speaking, it will be the regenerative medicine and cell therapy. And we still have challenges that we have to overcome, so by responding to those issues, we're going to build a greater resilience. And lastly, this is another issue that we need to tackle, which is improvement of the financial and capital efficiency. So I would like to explain about this as well. Next page, please. This slide is showing the content that I would like to convey to you as key points. Since I have became the CEO, it's been 6 months. And until now, in order to realize the businesses where we can win, we have been saying that we want to work on strengthening the employee engagement. And what I will be sharing with you today, I would like to allocate plenty of time to explain to you the focus on business where we can win. Specifically speaking, the business where we can win is utilizing our strength in organic synthesis technology. And we would like to strengthen our ability as well as upgrade our business. And also Petro Rabigh and as we have announced recently, the business integration with Prime Polymer, the P&P business reorganization is steadily progressing. So I would like to touch upon that as well. The other structural reform challenge, which is Sumitomo Pharma, especially at the small molecule area. Recently, the 3 key products, sales expansion and the 2 oncology drugs development is progressing. However, on the other hand, in the medium- to long-term direction, what are we going to do about the small molecule drug business? The direction of this, at this point, it's not that something solid, has been decided. However, I would like to organize the content and convey that to you. And also Sumitomo Pharma or our pharmaceutical business regarding the regenerative medicine and cell therapy business, this positioning is different from the small molecule business. This is going to be one of the group's growth business, and we would like to develop it in that way. Our pharmaceutical business, we would like to separate the small molecule business and the regenerative medicine cell therapy business when I give you the explanation. And also, we would like to thoroughly put efforts to redouble efforts towards ROIC-oriented management, and I would like to explain about strengthening the investment management process. So next, please. This may be repetitive. However, the slide is showing that what I would like to achieve and aim for as a CEO. The first is a thoroughly play where we can win. Conventionally, there are cases where we have attempted in various businesses. However, recently, the resources for investment is unlimited. So on a thorough manner, we would like to focus on where we can win and where we have a strength so that we will be able to return to the growth trajectory. And the engine for that is going to be the engagement of our employees. So we would like to strengthen that. And this is going to be the objective as the CEO. Next slide, please. Actually, what is supporting our businesses or what is supporting our company's businesses, the majority of them is based on the organic synthesis technology. For example, for the crop protection products, chemicals is based on that and also the accounting liquid crystals and also filters of semiconductors as well and P&P business-related catalysts. And as the CDMO business for Pharmaceuticals, we are using advanced small molecule APIs and the oligonucleotide. And this is also based on our organic synthesis technology as well. And the technology that we have a strength on having that as a basis and the businesses who have -- has that as a basis in a medium-term perspective, the core operating income of JPY 200 billion; ROE, ROIC, 8%, 6%, respectively. And G&A ratio, we would like to bring it down to 0.8x. So we would like to go back to the growth trajectory and show the future path for us. That is the objective of the medium term for us. Next slide, please. Over here, once again, I would like to explain about our winning path or where we can win. If you look at this slide, if we look at the exit of our businesses, we are working on various type of businesses. We have growth solutions business, semiconductors, and we have pharmaceuticals as well as P&P business. So if we just look at the exit of area, we have this variety of businesses or distribution businesses. And there are some criticisms that we have a conglomerate discount. However, as I've explained before, it is based on organic synthesis technology, all other businesses are based on that. Therefore, us fine-tuning and brushing up the organic synthesis technology and conducting these businesses has a consistency. And we don't think we have a discount because of that at all. Next page, please. So winning business is rooted in organic synthesis technology. Regarding this, I would like to explain each one of them from now. First is the winning in Agro & Life Solutions. What you see on this slide is something that I have touched upon in the past several times. In the past, from 2020 to 2024 within the 5 years, globally, there are 33 new crop protection products, API. And Out of that, 5 is developed by our company. Our R&D expenses [indiscernible] compared to them, the major players were 1/3. But in the last 5 years, we have been developing the largest number of products. And each one of them are not small scale, but as you can see, the INDIFLIN, Rapidicil, and Pavecto, we have 3 of them. So our drug discovery capability in terms of the crop protection products, we are no less than the major players globally. Regarding these 3 products, I would like to give you an explanation. Regarding Pavecto, in Europe, it's a product developed for wheat. And in Europe, in the last several years, there is no registration that is rolled out for the chemical crop protection products. We have confidence in the safety of Pavecto. However, we are struggling for the approval of that in Europe. And that is a fact. But on the other hand, this product I would evaluate in the largest agriculture market, which is Brazil. And recently, the target spot, which is the cap damaging disease and this product is quite effective towards that. And in the late 2020s in Brazil, and also up to now, by then, we were expecting the registration in Europe. However, this Pavecto newly -- we have expectations that it is going to grow into a blockbuster. And for INDIFLIN and Rapidicil, I would like to explain them individually using a different slide. So next, please. First of all, regarding INDIFLIN, already in terms of the sales, it is getting close to JPY 30 billion. It has grown to that level. However, as you can see on the left-hand side chart, it's not unnecessary the fact that we have a full lineup of this product. What I mean by that? I'm talking about the mixture product. And towards 2030, the lineup of the products, we would like to enhance that. And through that, we would like to further increase the current sales. On the other hand, on the right-hand side, here, we talk about how we want to expand geography, crops and applications. At this moment, we're looking at Brazil soybean, and this is supposed to be a blockbuster product. But other than soybean for Brazil, in Japan and U.S. we're trying to look into specialty crops like fruits. We're trying to obtain applications to these. And depending on crops, we already do have top share. And so there are regions where we have very good shares in revenue. But last year in India -- but this year in India and also in last year, we have also been able to obtain registration in Australia. And so we do want to make sure we'd be able to expand the revenue of INDIFLIN. So together with more product, we hoped we'd be able to double our revenue by 2030. Next page, please. Next is Rapidicil. Globally, glyphosate roundup is the top-selling product. But glyphosate, it works as a herbicide for any green plants. But it doesn't mean usually -- usually it doesn't mean specific product would only be able to work to some specific plants and weeds. So that is why you need to make sure you'd be able to mix several products. But glyphosate, it does have very good effective -- efficacy, but it does also damage crops. And so at the beginning of this development, we use this at the roadside and somewhere close to rail tracks. But as you can see, at this moment, we have this no-till farming, and that is where Roundup would be able to increase revenue. And in other words, there is -- this is a place where you have no crops. It's only the weed that you have to kill. And so in other words, it is really used before planting. In other words, preplant burn down. And this is exactly where glyphosate has been able to increase -- the Roundup was able to increase its revenue. And after that, there had been some opportunities in no-till farming. But what about -- is there any possibility where we'd be able to use the glyphosate gene so that it will be applicable to also some specific crops and so that is where we have been able to obtain a product that would be able to be used in other crops. And so Roundup is now able to -- so we already do have glyphosate, which is the generics, but this is now the top-selling type of the product. Now in this market, Rapidicil just like glyphosate, it works to various plants. It is a nonselective herbicide. And at the same time, it exhibits efficacy in low doses, 130 of glyphosate. And that means there is low impact to the environment. Glyphosate is used globally and so therefore, at the same time, there have been various problems identified. In other words, you find weeds that will be resistant to this Roundup. Now Rapidicil would be able to show efficacy in these type of weeds as well. And so therefore, we're going to follow where glyphosate had been selling with Rapidicil. And so in 2024, we have been able to obtain registration in Argentina. And in the U.S., we're hoping to be able to do this in 2026. Perhaps this is a conservative view. But perhaps during FY '25, we might be able to obtain registration within U.S. and followed -- what follows would be Brazil. And so in other words, we know that U.S. and Brazil is going to be the main market when it comes to these type of soybeans and corn crop, and so we expect that this is going to be a product that would be able to obtain several billion in revenue. Now I mentioned that there are weeds that would be resistant to Roundup. But then at this moment, we're trying to go through some research. There are crops that would be able to stand to Rapidicil so there will be resistant weeds to Roundups. And so from 2030 and onwards, we're trying to see if this new research would be able to be utilized. So in other words, doing preplant burn down or perhaps then could be used for over-the-top. If we'll be able to generate revenue through this over-the-top scheme, I'm sure this is going to enable us to see further opportunities for revenue increase. Next is about Biorational. So we had been trying to find a winning business rooted in organic synthesis technology. Now you may think Biorational, it's not exactly about organic synthesis technology. With that said, I will still say it does have link to our organic synthesis technology. Biorational can exist in nature. And so Biorational to development, this is an area where our organic synthesis technology could be put to use. So oftentimes, fermentization (sic) [fermentation] is the type of technology that will be used, but downstream technology would be very similar to chemical process. And also Biorational can exist in nature. However, there are -- it is a product that cannot be fermented. In other words, chemical synthesis is the -- could be the only way to develop a specific Biorational product. For example, we had Accede. It was a product for plant -- PGR and amino acid and this is a product -- that could not be made through fermenting -- fermentization (sic) [fermentation] procedure. But we had been able to provide the first PGR using this amino acid, carbonic acid, and so within the Biorational, our technology is being put to use. And so brand capability from the perspective of market share, we are leading the market, but we do want to make sure we'd be able to accelerate the performance. And to do that, it is going to be important that we win in the Brazil market, which is the largest in the world. And we already do have $100 million worth of revenue, but we do want to make sure we'd be able to expand our footprint into crops such as soybean. There's also a biostimulant. This is the missing piece. But through the acquisition of FBSciences, we are expecting to be able to go into this area as well. At this moment, we already do have more than 40 projects that is going on. And within the botanical, we have Polytrin. We have outstanding share here. But anything other than Polytrin, this is also something that we're trying to accelerate the development in terms of botanical portfolio. At this moment, Biorational, we have revenue of JPY 70 billion but we do want to make sure we'd be able to double this by 2030. And next, this is about ICT & Mobility Solutions. So in this field, our organic synthesis technology is put to good use. So when it comes to semiconductor materials, they will be photoresist. And so ArF immersion and also EUV resist are the areas where we have very high share. One topic that I'd be able to introduce, especially we have high share in ArF immersion but in creating a specific pattern, there is this negative type development. That is preferred. However, there will be organic treatment required for the development, which means there could be higher cost associated. But we are now able to provide a photoresist that could be used for alkaline development. And by utilizing this nature, we do expect to increase our share. And also for the EUV area, this is an area where it is getting more advanced. So within the high photoresist areas, we know there's more miniaturization happening at this moment. And so in the molecular, you need to make sure we'd be able to provide resist materials at molecular size to support this miniaturization of semiconductors. And these resist -- recently, we have metal resist, there is a high attention to metal resist. However, there is this good affinity with the existing process. For example, if you wanted to become metal-free or even for the cost perspective, this organic photoresist is becoming favored. So within this photoresist area on a volume base, we're aiming for a 20% market share. Next slide, please. And regarding the high-purity chemicals, this area with the upfront investments, we have established the supply structure as the first ones to do so, and we are establishing the global procurement structure. But in the U.S., the foundry makers are entering that market. And it's becoming one of the largest site of semiconductor manufacturing. And from China, that the front-end process is going to be start -- excuse me, in India. And through this, we would like to strengthen our platform as well. Recently in Texas, our own company's manufacturing plant is going to be constructed and the -- excuse me, the prototype has already started. However, we are aiming for the mass production starting this fiscal year. And aside the Texas site in the U.S. we believe that it is going to become one of the major sites for semiconductors. So we are considering the further enhancement. And regarding India, the 1 benefit we have is that the crop protection products manufacturing and selling, we have Sumika which is a very strong manufacturing company. And from semiconductor side, we -- it is reported that it is going to start in Gujarat. But our company in Gujarat, [indiscernible], we have a manufacturing site as well. So in India, having the manufacturing and selling company there is going to become one of the -- our strong benefits for us to be rolling out this high-purity chemicals business there moving forward. Next will be display materials, OLED polarizing film. This is using our organic synthesis technology, which is the liquid crystal compound. And also from compound to film, we have integrated from design to production technology. And utilizing this, we are holding a #1 position. And as for OLED, other than the application to smartphones, they're applied in tablets and notes. So it is a medium-size display, is the area that is rapidly being applied. So this medium-size area utilizing our proprietary unique technology within the OLED polarizing film, we would like to steadily hold the #1 position. As for automotive polarizers, we are seeing quite of a high growth rate. On the other hand, for the automotive applications, high durability polarizers are necessary or the wider view angles needs to be met. So there is a quite of the stretch requirements. So at a high-end pricing range, we don't have that much of a high market share. But responding to this manufacturing requests, we would like to expand our high-end priced market share as well. And also foldable display. Recently, panels that are not using the polarizing film, we are seeing an increase of those. And of course, in that case, our OLED polarizing film cannot be used. But on the other hand, the color resist, regarding that, we have an experience of a long-term R&D. And this foldable, this is a CoE technology that does not use polarizing film. So there is this -- that is used for the CoE. The sealant or for the organic materials, the heat stress can be avoided. And from that sense, the low temperature process or low temperature of rigid color resist is asked for. So we have a color resist that will meet that low-temperature requirement. So CoE that does not use the polarizing film in that area as well, we would like to show our presence there surely as well. Next, is the Advanced Medical Solutions. So CDMO for the medical area in modality, this is showing the target for our CDMO. This middle part -- the antibody drug, we are not going to enter this area. That decision has been already made. This area is made using fermentation technology. For crop protection products, we do have experience for fermentation. But for antibody, it does use the animal antibodies. And also, it requires several hundred billions of yen of investments. So we're not going to enter this area. So small molecules area and the nucleotide area that can be used for gene therapy are the areas that we will be entering. And also, regarding the CDMO, are utilizing small molecules. So the small molecules APIs as a modality, there is some way of looking at it. It's a legacy, but I personally don't think that is not necessarily the case. One thing is that for the small molecule APIs, the market itself still has more than half of the gigantic medical or pharmaceutical market. Although the growth is gradual, it is still continuing to grow even now. And as shown on the left-hand side, the small molecule APIs are being advanced more and more. The conventional is 300 and 400 compounds, but that is becoming more complex and the precision is increasing. And for the molecule itself, it exceeds 1,000 of small molecule APIs are being developed. And also the technology itself is not inhibiting the protein only. But it will actually guide the protein discarding and which is PROTAC. And the technology ADC is also entering and so it is advancing. So within this advancing technology area, we would like to use our small molecule technology and grow this business as well. Another strength that we have is something that's already depreciated in Okayama, Gifu, we have a strong site. And in Oita as a plant, we have 3 sites. So the stabilizing the supply. And regarding the compost requirement from the customers, we are able to respond to that. So we do have those capabilities, and we would like to utilize these capabilities to further grow this business. Next is the guide RNA, which is used for the gene therapy. So this guide RNA for gene editing, it can cut and edit the genome and it will guide the process. And the size is far smaller than messenger RNA. And guide RNA, how it's made is through the chemical synthesis. And also, it's not rewriting the genome, but it's suppressing the genome expression. The monomer usually is 20 to 30 linked, which is the nucleic drug is 20 or 30 connected, but guide RNA has about 100 to 150 linked. And creating nucleic acid through that or making RNA is very difficult, making it pure is very difficult. But for us, from 100 to 150 nucleic acids with a high purity, we have a special monomer technology to realize it. So using this technology, currently, the start-up companies are the mainstream in terms of the gene therapy drugs, but we would like to enter that area. And when it comes to the commercial production, we would like to rapidly increase the business. So with our technology and with collaboration with the start-up, we believe that, that can be useful for developing new drugs. And our customers, majority have their sites in the United States. So recently, we have established a supporting site in the United States for this business. And therefore, moving forward, major players are starting to enter this area towards the start-ups and the major players, we would like to promote and appeal, our technology is what you're thinking. Next, please. And next is Essential & Green Materials. So in this field, it's the Chinese players that we have to go through a very tough competition. And so developing your product on your own, paying your CapEx and fight, that is becoming even more difficult nowadays. But on the other hand, in the past, we licensed out our technology to another company and the catalyst could be then offered, and we have been able to expand our footprint that way. And so again, we'd be able to use our organic synthesis technology in coming up with a new process. Target would be a next-generation type of technology that would be a low impact to the environment. And so by developing this technology, it may not be a project that we have to pay capital expenditure, but we might be able to license out. We might be able to provide a catalyst in expanding our own footprint. For example, KBR and Lummus, we're partnering with these companies so that we'd be able to put some license agreement. And we have not been able to exactly commercialize. But then we still are trying to do some feasibility test with the partners. We're hoping that we'd be able to -- we hope to be able to create some transaction through this initiative. Next, I'd like to talk about developing some new business portfolio. So in the past, we had been focusing on chemical synthesis and trying to expand our business. However, when we speak of the new field, it may not always be about utilizing organic synthesis technology. But for example, in terms of the regenerative medicine cell therapy, we do believe this is another winning story for us. It's almost 20 years ago or around in 2003, when we started to study regenerative medicine or cell therapy for safety reasons. And it was not that we started to work on something totally new. It was to make sure that we'd be able to address safety of what we provide. It was really an extension of what we have been researching. We have been thinking whether or not this technology could be used for medicine or cell therapy. And so this is something that we -- we do iPS cells or neuro regeneration research. And when iPS cells were developed in Kyoto University, we were also able to brush up this technology. And so therefore, we now have a presence enough to lead this field. It does not use our organic synthesis technology. However, we do have a technology that is -- that has a great presence in the world in this area. Regenerative medicine or cell therapy that will be using this technology. We know that it has a high barrier for new entrants later on and generative products. We utilize -- we protect this technology through patent groups, and that is why we have this very high entry barrier. And there is a tremendous amount of knowledge required to do this regenerative medicine. And compared to generic, there is quite a limited amount of capital expenditure required. Of course, there will be this specific patent cliff that you'd have to face. And whenever that happens, you'd have to put in a lot of investment when it's about small molecule drug business. But then regenerative medicine business will be quite different. And so I even would believe this could be one answer to how Sumitomo Pharma, our business would be able to find a growth passage, the winning business. And so that is why we do want to see what more we'd be able to do. Next page. So in order to make sure we'd be able to spearhead this business, Sumitomo Pharma and us, for example, if it's about drug discovery, we have created RACTHERA based on iPS cell, we're trying to see, like, for example, Parkinson's disease treatment therapy drug. And in August, we have been able to obtain the pre-approval, and we hope to be able to obtain a final approval so that by 2030, it would be able to grow into a blockbuster after this obtaining approval. And for CDMO, we're also -- we also have high expectation to our CDMO business. There are many companies who would come into this field. But what is different from us, we actually do have a very strong basis for this medical business. And by utilizing what technology we have, we have already been able to have a surplus for 4 years in a row, while other peers would have quite difficulty in trying to create a profit. And we know there are various inquiries here. In order to respond to the growing need, it's not just about completing our third plant; for this, we are now starting to build our fourth plant. But then the investment here is just JPY 15 billion. So compared to antibody products, we know that this investment is quite small. We are using -- leveraging METI subsidies to further limit the amount of investment required as we try to develop this business. Next, I'd like to move on to speaking about our structural reform. First of all, about Petro Rabigh. On August 2024, we announced our financial improvement plan. And so a total $1,500 million amount of loans have been wrote off. And this is mitigating Petro Rabigh's interest burden. And also we have completed sales of 22.5% of our stake to Aramco. And including the proceeds from this, a total of $1,404 million is expected to be contributed to PRC, which again would further mitigate Petro Rabigh's interest burden. We know it did take some time but at the end of this month, once we'd be able to obtain the approval from the shareholders at the end of this month, we should be able to complete this transaction. And so therefore, our stake of Petro Rabigh would be 15% afterwards from October 2025. Again, this interest burden is going to be -- is going to become much smaller. But then at the same time, it's not only that we need to make sure we'd be able to strengthen the ability of Petro Rabigh to obtain revenue. So for example, ethane cracker de-bottlenecking or by changing oil type, we're trying to seek whether or not we'd be able to find margin improvement. And what we're trying to show here is just an example of ways to strengthen earnings power of Petro Rabigh. There are several other projects underway so that Petro Rabigh's earnings power would be improved in the short time frame. And even in the mid- to long term, the issues around the Petro Rabigh, one issue was about refinery capacity. And so upgrading the facilities is something Aramco would have experience in and would be able to take initiative in working this together with Petro Rabigh so that Petro Rabigh's refinery capability would be upgraded in again in the short time. Next page. And now domestic and P&P reorganization, this is also something that we did announce quite recently. So the polypropylene and LLDPE business is now integrated into Prime Polymer. And through this integration, we expect there will be a cost reduction totaling to JPY 8 billion. That is the amount to be enjoyed by Prime -- PRM. And this enables for us to find a more resilient essential business. Next page, please. Now here, on this slide, I would like to introduce you once again our direction of P&P business. The direction that we're trying to aim is exactly what you find on this slide. In other words, we're going to be concentrating on high value-added products. At the same time, we will be phasing down commodity businesses. We will strengthen ties, reorganization with the peers. And we would like to accelerate shift to solution business that reduce environmental impact. That is exactly what we're trying to do. And within these efforts, if we look at the action plan execution status, upper stream is optimized operations at Keiyo Ethylene at the bottom stream or the lower stream or downstream, excuse me, having a business integration with Prime Polymer and also Petro Rabigh financial improvement plan and the performance improvement project. And for Singapore, PCS cracker area, that is going to be considered in a continuous manner. But regarding MMA, we will stop 2 lines and achieving profitability. And as for downstream, polyolefin at TPC, high value-added grade by expanding the sales of it this fiscal year and next fiscal year, we would like to achieve this turning into a profit-making business. Next slide, please. So having said that, the P&P business direction, as shown here, it will be divided into 3 phases. Phase 1 is to strengthen the competitiveness of Chiba Works. Ethylene close the ethylene plant and polyethylene oxide capacity enhancement and also commodity resin, polyester, PVC and polypropylene, polyethylene and ABS business, synthesized rubber, we will either withdraw or integrate with other companies and strengthening it. And as for Phase 2, the collaboration with companies and optimize the production, we would like to further move forward with structural reforms. And following the structural reforms, the direction that we will be heading towards is, as mentioned before, R&D and implementation to society that has a reduced environmental impact. So within Phase 1 and Phase 2s, recently upstream and downstream's structural reforms or withdrawing from the commodity products in the most recent situation, in Japan, we're able to move this forward in the fastest speed. Next slide, please. Next, the issues of the small molecule drugs. However, this business area in the most recent situation, FY '23, it has occurred with a large amount of losses. However, in a rapid manner, the business is recovering. For the key 3 products against our original expectations, they are increasing their sales and very successful at it. And the next generation's new drug development, enzomenib and nuvisertib, the 2 drugs in the oncology area, the development of that is also accelerated. So in the recent situation, they are achieving quite of a strong recovery. However, on the other hand, moving forward, this small molecule drug. At some point, the LOE, it is going to come about to LOE. And the small molecule drugs blockbuster, it is going to require an enormous amount of development investment, even though we are going to licensing in it from a different separate company, outside company, it's going to require a large amount of investment. So whether that ability to make those investments exist in Sumitomo Chemical, this is something we need to consider. And also the new -- the drug discovery of the small molecule drugs, the synergy of that with our company business is limited. Therefore, for the small molecule drugs in a short-term perspective, these are 3 key products and the 2 drugs that will develop moving forward, the stability of the profitability is what we're going to aim for. And from the medium- to long-term perspective, we are going to explore partners. So we need to pursue these 2 routes. So within the medium to long term, we would like to show a clear direction of this business. So lastly, I would like to talk about the improvement of the financial and capital efficiency. In the past, if we look back to our company's performance, the impairment ratio was high. So the process of investment or the governance of it, whether that was adequate or not, those are the reflection points that we have. So the investment management process, we are going to further strengthen it and enhance the probability of investment success. There are 3 key points in this effort. First will be data-driven, next objective and the agile response. As for the data-driven, based on diverse scenarios, we are going to assess the risk in a quantifying manner. And when we can do it, we will not miss the opportunity. So we are going to make a decision based on the quantitative data. The other one is objectivity. This investment matters for the business units. We do -- we have been respecting the proposal from the businesses. And regarding that, bring in the external expert's perspective, are always bringing the external expert's assessment or the corporate planning's involvement, we would like to increase that involvement. So we'd like to make an objective decision. And for the last part, agile, and this goes more for the CapEx or capital expenditure investments. And for the large-scale investments, when the project is ongoing, there are times that the business environment will change. And once we say it's a go, it's not necessarily the case that we will continue to make that investment. However, in a timely and appropriate way, grasp the changes of the environment. And depending on the case, depending on how the environment changes, we need to make the decision of halting that project in an agile manner. So through these 3 factors, we would like to enhance the investment management and investment efficiency and that is going to lead to the improvement of ROIC as well. And as for the shareholder returns, FY '23, we had a poor performance. And from the perspective of shareholders' return, we ended up with an undesirable result. And this year, we are planning JPY 12 of dividend. So it is not a sufficient level yet. So in the future, the payout ratio 30%; annual dividend JPY 24 per share is what we would like to realize as soon as possible. The image we have in mind is JPY 200 billion of core operating income and the net income is JPY 140 billion. If we can achieve that, EPS is going to exceed JPY 80. So the payout ratio of 30% and JPY 24 per share is going to become possible. Therefore, at that level, the final net income that target we have, we would like to achieve that as soon as possible, and we'll put efforts towards that. And lastly, towards enhancing enterprise value is something that I would like to share with you. Conventionally, in this session of the meeting for Current Priority Management Issues and Business Strategies, we did not touch upon this that much is my impression. And this is the ROIC tree, the textbook diagram. It's showing how a company can improve its corporate or enterprise value towards the capital efficiency by thoroughly focusing on improvement of capital efficiency. ROIC and ROE will improve. And through that, enhance the enterprise value is what we would like to do. And I believe the next slide is the last slide. And if I may summarize today's explanation regarding the upgrade of the business portfolio, as for the crop protection products, we have expectations for 3 blockbusters chemicals. For ICT, we will have a world-class semiconductor and display material business. We have that. And for the pharmaceutical area, we have the advanced small molecule APIs and gene therapy, regenerative medicine, cell therapy. We have the strong CDMO business that is representative of these. And as for the regenerative medicine and cell therapy, Sumitomo Chemical as a whole group, it is one of the segment of the overall pharmaceutical business that the whole Sumitomo Chemical Group should focus. And also from the commodity, the resin product business, we will withdraw ourselves as soon as possible, and we will pivot towards developing the technologies to reduce environmental impact and can be deployed into society. For restructuring, the P&P business restructuring that we are doing right now, we believe that it has made significant progress domestically and internationally. And the other issue regarding the small molecule drugs, recently, it is showing quite of a strong recovery. However, in the medium- to long-term perspective, being prepared for the patent cliff, we need to come up with a clear path towards that within the medium to long term. And that concludes my presentation. We will now start the Q&A session.

[Operator Instructions] First of all, from Morgan Stanley MUFG, Mr. Watabe.

This is Watabe from Morgan Stanley MUFG. Allow me to keep my camera off. And my first question, I'd like to ask around the major change that you are going through. For the past few years, I think you had been working on enhancing your profitability, for example, P&P business or perhaps Petro Rabigh as well as pharmaceutical areas, and that's exactly where you have been putting a lot of resource. I think there was like a lost 1 or 2 years. But now you're coming through some improvement. You talked about how you're trying to go for a winning passage through your organic synthesis technology. And you said -- you also mentioned about elephant in the room. But you have been going through some town hall sessions. You probably have spoke to many people. But do you feel any change within your organization? That is what I would like for you to share with us. That's my first question.

Yes. Thank you very much for your question. Ever since joining this company, I had basically been in agrochemical business. And for example, P&P or ICTM (sic) [ICT&M] or perhaps medical area. I did not have much chance to engage with the members there. But ever since I have assumed this post as a CEO, I have been able to have a lot of dialogues with these people. And I realize what great talent we have, what great technology we have in this company. One more -- another thing I would like to talk about is about enhancing engagement. It is something that I have been pointing out to as many times. And I do believe there are many highly engaged employees. It's just 6 months ever since I assumed this post. But with all these great employees, great technology and with great motivation by everyone, if we'd be able to have all these, I am very confident that Sumitomo Chemical would be able to come back to a growth trajectory. I am very confident about that. But on the other hand, there was this very difficult time during FY '23. And the damage there still have not been recovered fully. If you look at our financial performance, D/E ratio our target this year is 1.1x. Hopefully, we'd be able to have this even be better controlled, but it is still over 1. And ROIC, ROE, it's still within the 2% range. It is still low. And so capital efficiency or financial status, I do have to believe we still are very vulnerable. This is where we need to have a sense of urgency so that we'd be able to improve our financial status with speed. What I feel the most challenging at the moment is how we'd be able to pedal through. We have great seeds for growth. We have great people. But if it is really about creating financial improvement, we have to also understand that we do not have much ability to invest as much into these growth areas and how to keep the right balance is going to be very difficult, but I hope I'd be able to do my best here.

You mentioned about the ability to invest. You talked about Sumitomo Pharma, a small molecule business, and you're trying to make sure you'd be able to create some results during this year and next. So for example, any divestiture of the business so that you'd be able to use that amount for a more stronger business. And of course, that's exactly what the capital market is paying attention to what you'd be able to do. And I guess that is something that you're trying to honing into. But can you also share with us a little more about what you think about Sumitomo Pharma?

Yes. So in terms of what options we have, I'm sure there are various options at this moment. Compared to a year ago, the conditions behind Sumitomo Pharma has changed drastically. And I will say many times this, but it is making a truly strong recovery at the moment. Amid this situation, the small molecule pharmaceutical business, what can we do with this? But then at the same time, how do we want to be is also something that we have to think about. Especially during this presentation, I talked about what we'd be able to do within the regenerative medicine or cell therapy. And again, this is an area where we don't use our organic synthesis technology, but it does have to do with our long years of development and experience. And finally, we're starting to bear fruit. And again, as I have mentioned, there is this issue of a patent cliff. But then in terms of this regenerative medicine cell therapy, there isn't really much patent cliff that we'd have to work about. And R&D expense, the clinical trials, for example, in RACTHERA, it's not going to cost too much. And so again, regenerative medicine, I know I have said this many times, but I feel like this is one answer to how we'd be able to proceed this pharma business. And so what we do with Sumitomo Pharma, this pharmaceutical business, the foundation of Sumitomo Pharma is very much living in this regenerative medicine and cell therapy business. And with that experience, we also can create this aspect of how we'd be able to now grow our small molecule business. And it's going to be important that we find the right response. There are various options to find a capital partner that we'd be able to have a capital alliance with. And just like you mentioned, another option is perhaps to divest this business. So again, it's really these aspects that we need to have in analyzing the current status of Sumitomo Pharma. And again, it's really about making sure we find an answer, the optimal, the correct answer in the end.

Thank you very much, Mr. Watabe. Next from Mizuho Securities, we would like to invite a question from Mr. Yamada.

Yamada from Mizuho Securities. I have 2 questions, please. The first, regarding focusing on the business area that you can win, I think it is quite rational. And within the question and answer with Mr. Watabe, your company's D/E ratio, ROIC and ROE, you have not reached a satisfying level. Therefore, you are in a situation where you cannot make investments in various areas. And saying having that as the condition you're in right now, sorry that I'm repeating. So in this situation, why this regenerative medicine in this financial situation, in this management -- business management situation, why are you going to go into that area? I question that. Currently, at this point, the clinical trial, the reason why it's not costly is because you're doing it in Japan and you don't do placebo. And also, the expansion size is not that large. Therefore, in the iPS which has the oncology risks or the ophthalmology risks of that iPS, you don't have to roll it out at the mass production level. And that is allowing you to do so. And I believe your achievement till now is wonderful. However, I think you should look at where it has a more affluent management capital. It's better to sell the business to them. I think it is going to be better to provide the growth opportunity for your employees and the company and your employees as well. So what do you think about that?

Thank you very much for your question. The question that you have asked and the points that you have pointed out, I think is quite of a rational statement. Having said that, our company's strategy -- excuse me, investment strategy or investment capability, allow me to explain it once again. I did mention this in the medium-term explanation as well. Our company's depreciation cost on an annual basis is around JPY 150 billion. Recently, it is showing a slight decrease, but it's around JPY 150 billion, let's say it is. And then in 3 years, is JPY 440 billion and maintenance is JPY 190 billion and JPY 130 billion for strategy -- excuse me, JPY 230 billion for strategy. And the majority of this JPY 230 billion, of course, AGL and ICTM. These are 2 growth areas. That is the plan. But within the AGL, in the past, enhancing the footprint mainly in India and Brazil and developing new drugs and the strengthening the Biorational with a biostimulant company. And through that, we're able to take care with the legacy negativity. And so regarding the JPY 230 billion for the regenerative medicine, and we can also invest that in ICTM. So in a rational manner without increasing investment and we will be able to invest them in the new areas such as regenerative medicine or ICTM is our way of thinking. But medical products development, as you have pointed out, requires quite an amount of capital. That is true. Therefore, we would like to make thorough management of the investments that we make. Furthermore, you may skull me for this is that we are really focused on this, meaning that in year 2025, for the 20 -- several years, we have spent for development. And this is something that we can be proud to the world. This is the first attempt of utilizing iPS cell from Japan. So we would like to realize that. We are focused on that.

And related to that, I would like to ask my second question. Personally, your strength as a company, it was in AGL. You have been talking about that for 20 years, and now you're having capital to move it forward, and I'm really happy for you. But the gene editing area, I think maybe you should be putting more investment there in ICTM, the semiconductor related, a rather more broad solution to be provided, you need various measurement equipments and you need investment in the open innovation as well. So including those investments is JPY 230 billion is all right. So for regenerative medicine, you want to do it on your own. And related to that, Sumitomo Pharma is something that you would like to make considerations is what I thought. Is my understanding correct? Personally, especially towards AGL, I want you to specialize in that more, and you'll be able to downsize the conglomerate discount. And you will be able to show the demonstration that you're focusing on that area. And I believe that it's going to be quite of a strong positive factor for the shareholders and the market. So as for your company, in a long-term perspective, it's better to have a regenerative medicine and cell therapy. Can you actually explain your thoughts towards that more?

Well, I myself, as you, Mr. Yamada pointed out, the conglomerate discount or the criticism regarding that towards our company or comments towards our company, I think that does make sense. However, one of my response to that is technology-wise, the organic synthetic technology is a consistent foundation of all of what we are saying. And within that, are we going to go into the medical pharmaceutical area? Well, yes, it is true, and I am aware that such criticism does exist. Right now, you mentioned 3 businesses right now in your question. So AGL, ICTM, which is pharmaceutical, AGL Crop Protection products. And outside Japan in the global arena, there is no company that does both together. That is a fact, true. If I may say, the medical CDMO and the ICTM has an affinity, high level of affinity, meaning that both require a high level of quality and with the customer, it requires a very close communication to roll out the business. So from that perspective, both have an affinity, a high level of affinity as businesses. And so crop protection products or AGL using the organic synthesis technology, using that, it also has a high level of synergy with ICTM. But currently, if we look at the world, the global companies, the majority of them are the specialty companies for crop protection products. Therefore, I am aware of the fact that such opinions do exist. But for the medium to long term, with this structure and plan that I have explained right now using the backbone technology and also the technology that we can be proud of towards the world, how we can utilize that moving forward to grow the businesses is what I would like to focus on.

When I introduce your company, the diagram on Page 9, based on that, I say that you're not a conglomerate. I think I can do that. However, for regenerative medicine and Sumitomo Pharma, we have to think that is a conglomerate. So including that within this current running and medium-term plan, I hope that you will revisit this area. Thank you very much.

Thank you.

Thank you, Mr. Yamada. Next, we'll take a question from Mr. Miyamoto from SMBC Nikko.

This is Miyamoto from SMBC Nikko. And I also have 2 questions. My first question, I think AGL is your strongest business that you would have. Now when it comes to your crop protection products, you have great pipeline. I look forward to what you'd be able to do. But then if I look at the past 10 years' revenue growth, I feel like it's not really growing on a dollar basis. And I know INDIFLIN is really growing. But then still, you are not really finding much growth in your revenue. And so Mr. Mito, how do you take that? That is something I would like to hear from you. And also, if we're trying to go for nonselective herbicide, don't you think you need to go for -- so like when you try to go here, is this not what you're trying to look into? For example, if you look at the Agro & Life past track record and what do you see into the future?

So first of all, going back to your first question, if we look at the dollar-based revenue growth, you're not really finding much positive track record. I think that is what you're trying to point out to. And first of all, yes, that is a fact. We talked about B2020, A2020. Until we'd be able to complete the development here, there was a time for like 10 years where it had been really difficult to come up with a new product. And the final hit product was [Flumioxidine] (sic) [Flumioxazin] and protein and gene herbicide and pesticides. But these 2 products, the patent had expired. And so therefore, we find a lot of pressure from generic products nowadays. And because of that, there was some time when the revenue growth had been stagnant. So that is true. That is true. But again, the investment that we made in the past to develop new products are now finally bearing fruit. So A220 -- A2020, B2020, the 5 products by making sure that we'd be able to find growth, that is going to become a milestone for the next growth trajectory. Now your second question, if I may point to the point of your question. If I may speak a bit of what has been happening internally, Rapidicil development -- this goes back like 20 or 25 years ago. Roundup already succeeded. And so therefore, in this Roundup area, we wanted to create a herbicide that would have different mode of action. And so we wanted to create some herbicide resist system. And together with that, we worked on this. It was a major project for us. There have been many events that happened. And the product development itself had been stopped. And to -- and I feel like there already is like Bayer and Syngenta, Corteva, they already do have -- they already do have all these products in place, they already do have the market. And so if we're trying to go into this business now, it's almost impossible. It is quite difficult. And so that is why we have decided to partner with Bayer. And that is how we have been able to develop Rapidicil. And that's exactly how we changed our course through the years. And your final point, I guess your point of the question is, is there not going to be any M&A within our AGL business? As we try to look into the further future growth of AGL business, I do believe we have already been able to put in all the necessary actions. But again, I have been speaking to the investors ever since I was responsible for AGL. But then if there is any missing piece, it could be how we'd be able to enhance Biorational within Europe. Maybe there could be acquisitions required for there because Europe, there is a farm to fork strategy. In other words, it's about using more -- it's going for more organic procedure in this agro business using less chemicals. And so therefore, our Biorational business seems to have great potential in this time, in this environment. And it's not just about the product portfolio, but it could be about production method or it could be about registration, it could be about the supply chain. But we have to make sure we have that foundation. And if we wanted that foundation, it's not about creating this from scratch. It could be about acquiring a company that would already have these functions, and that could be one strategy we may want to opt for. And we do want to see what investment capacity we'd be able to have in thinking what options are on the table.

My second question is about Chinese chemical manufacturers. Now they're becoming more advanced. And so can you share with us your take on this part? In your case, in life science or agro areas, AGL, this is an area where we do have quite a good capability. And for photoresist, I think you do have a strength here. But for example, photoresist, I feel like there's a lot of Chinese players really coming into display. And we know that there could be some risks behind some of the development in high-purity chemicals. So especially when you look at the Chinese peers -- Chinese players, how could they impact your performance in the end?

That is a very tough question, but it is also a very important significant question that we have to really identify. If we underestimate Chinese players, if I may, that will hurt us in the end. When it comes to advanced technology, Chinese players, many of them would have a lot of areas that would exceed -- excel the capabilities of Japanese players. And how could we keep on winning in this environment? It's really about always managing what could be the worst-case scenario. In the end, perhaps the golden rule could be something that I've already mentioned. For example, when it comes to organic synthesis technology, we do have a top capability globally, a top capability in the world. And so the golden rule is to make sure that we'd be able to have like a linear type of ultimate novel innovation in this organic synthesis technology. And that's exactly what I would tell to our researchers. It's not just about trying to come up with something that is slightly better or slightly easy to use because it will take no time for the Chinese players to catch up. It's going to be important that we have something ultimately different, ultimately innovative. One another thing, if I may. Chinese players certainly are threat. But on the other hand, it's also important to think how we'd be able to partner with these Chinese players. I think that thinking is also important. For example, when it comes to autonomous driving for automobile, I think that's a great example. Toyota and Honda would have their own technology development going on. But there's a lot of Chinese players that would be using start-up capabilities. And so I think there's something we can learn from there. For example, if there's any technology made by some start-ups in China, I'm sure there are some geopolitical issues that we'd have to resolve, but there could be an opportunity in aligning with these people. Of course, we have to make sure that we comply with all the regulation in each market. But if there's any way we'd be able to partner or collaborate with Chinese players, that could also be one option down the road.

Mr. Miyamoto, thank you very much. I would like to take the next question Mr. Okazaki from Nomura Securities.

This is Okazaki from Nomura Securities. My first question is regarding AGL, the agro part. INDIFLIN and Biorational, the strategy of your company, I heard it very well. However, the market is difficult to predict. So North America, Asia, South America, some markets, especially for the tariffs and inventory adjustment. And since you became the President, Mr. Mito, the morale, the business units are increasing is what I've heard. So including all these points, how -- what is your take on the business environment right now?

Thank you very much for your question. First of all, I would like to explain about the business environment. The largest market for us is Brazil. From FY '22 to '23, it experienced quite a volatile up and down due to the effect of COVID. They actually ran to build up the inventory. So they had accumulation of the distributable inventory and they crashed. And looking at the past, in the case of Brazil, they have a cyclical environment. When it's good, each manufacturer put a lot of products in the market. And then from then several years, they face a stagnant time. But the market growth going through this cyclical trend repetitively. So for the last 2 years, '23, '24 and this fiscal year, this distributable inventory situation has been improving, and we thought that the market will move. But that area is still not resolved. So continuing from last fiscal year, Brazil is still facing quite a difficult situation. And next, the North America, which is another focusing market for us. Originally, the Trump administration tariff due to that with the relationship with China, the corn and soybean export to China is going to decline is what was predicted. And that is going to have a negative impact on the farmers, therefore, have a negative impact on the purchase of the crop protection products. But in fact, well, China does not buy soybeans or corn from the United States that much at all. So the impact of tariff, the U.S. manufactured soybean and corn sales, I believe there's a minimum impact on that is my personal opinion. And also on the other hand, the bioethanol demand is increasing quite a bit. If that is so, even though the price for soybean and corn and feed goes down, it will go over to the ethanol usage. Therefore, in that case, with that type of a relationship of this, the U.S. market this fiscal year is not at its best, but it is going to proceed steadily is how we look at it. And the next important market is India. There's quite a large impact from the climate. When they have sufficient amount of rain during the monsoon season, then the agriculture activities will be quite active, and we'll be able to sell agricultural products. During the monsoon period or season, if there's no sufficient amount -- there was not much of a sufficient amount of rain at the start. But since then, up to now, it is raining in a steadily manner. So in a total perspective, the largest market, Brazil is facing difficulty. So we cannot -- we need to keep paying attention to the market, but we would like to thoroughly respond to the situation. And regarding the tariffs, it's very difficult. For example, it's 15% for Japan. But for crop protection products, even though it is in the same crop protection products, depending on the particular product, the tariff rate will differ. So we do need a close management of it. And we have 3 supplying sites for crop protection products is China, India and Japan. And we are looking at the tariff rate in detail. And when it's more advantage to export it from Japan, we will export it from Japan. If it's more beneficial to export it from India, we will do so depending on the product. And by doing such of these movements, we will minimize the impact.

My second question is regarding P&P business direction on Slide 28. I wanted to confirm Prime Polymer for domestic business, well, the comprehensive direction has been solidified. And for Rabigh as well, and for Singapore, for upstream and downstream, I believe there is various discussions. As like a farmer way of thinking, do you have a similar way of thinking? If you can give us a clue of what your thoughts are on.

As for P&P business, as I have mentioned right now, Keiyo Ethylene and Prime Polymer within the domestic [ combinat ] we are able to do this in the fastest way. But this is not the end of the story. Moving forward, in addition, the collaboration with other companies is something that we need to have a forward-looking perspective. That goes for Japan and also the combinat for Singapore as well. The stakeholders, there are quite many stakeholders in Singapore, there is going to be importance on the communication we have with the Singaporean government. So all the complex of Singapore or the complex in the Keiyo area for all of them, if things don't move forward unless we have all the agreements through the collaboration, it should not be the case. So with Mitsui and Idemitsu, where we were able to have a collaboration agreement and move things forward, that is one good outcome. And the way of thinking regarding the antimonopoly law is also one of a positive outcome as well. So regarding the remaining areas in a parallel manner, of course, we're going to work on strengthening our competitiveness. But a further collaboration with other companies is something that we would like to accelerate as well.

So you are starting from where you can start for upstream, downstream in Singapore?

Yes.

Thank you very much, Mr. Okazaki. It is now close to the time to end. So with that, we'd like to conclude the investors' meeting for the Current Priority Management Issues and Business Strategy. Once again, thank you very much for your attendance today. So today's session, you will be able to see the video stream within our website. Please pay attention if that is going to be helpful. And at the very end, I'd like for you [Audio Gap] This concludes today's session. Thank you very much for your participation today.