Mitsubishi Chemical Group Corporation (4188) Earnings Call Transcript

I am Minoru Kida, the CFO. Thank you very much for joining us in this hot weather. First, I'd like to explain the financial results summary for the first quarter of fiscal year March 2027. During the first quarter for FY March 2027, I'd like to give you the summary. During the first quarter, Specialty Materials continued to perform steadily. Amid unstable situations in the Middle East, the business environment remained challenging with naphtha price soaring and risk of raw materials procurement rising. However, we're seeing inventory valuation gains and a temporary increase in demand. The core operating income for the Chemicals business increased year-on-year by JPY 48.4 billion to JPY 60 billion. Contributing factors to core operating income were the effects of sustained pricing strategies and strong performance of semiconductor-related products in specialty materials and improved conditions in the MMA monomer market in MMA. In Basic Chemicals, inventory valuation gains resulting from rising raw material prices contributed to higher profits despite the expanded scale of scheduled maintenance where we had a scheduled maintenance in Ibaraki. This year, a production slowdown to prioritize continued operation of cracker plants in response to the situation in the Middle East and a decrease in sales volume caused by an influx of lower prices overseas products. Partly due to the solid performance of Industrial Gases, the overall core operating income for the group increased year-on-year by JPY 57.5 billion to JPY 114.1 billion. Net income attributable to owners of the parent increased year-on-year by JPY 38.1 billion to JPY 57.7 billion. Next, I'd like to discuss our earnings forecast. In light of the first quarter results and current business environment, we have revised upward our first half forecast for core operating income and net income attributable to owners of the parent from JPY 139 billion to JPY 194 billion and from JPY 59 billion to JPY 86 billion, respectively. Meanwhile, our full year forecast remains unchanged from the previously announced figures due to uncertainties in trends in raw material prices. We have not created any new forecast, and there is no change. From the previously announced figures, our dividend forecast also remains unchanged, a year-end dividend of JPY 16 per share and annual dividend of JPY 32 per share. We'll continue to rigorously adhere to the 3 disciplined approaches in business operations, concentrate our management resources on areas that serve as next-generation growth drivers and steadily implement proactive growth initiatives to achieve sustainable growth and enhance corporate value. I will now explain the overview of the first quarter of FY March 2027. The average exchange rate for the full year was JPY 160.7 to the dollar, representing a 12% depreciation of the yen year-on-year. The naphtha unit price was JPY 118,900, up 79% year-on-year. Sales revenue totaled JPY 1,042 billion, up JPY 123.5 billion or 14% year-on-year. The breakdown of the increase was as follows: JPY 88 billion increase due to higher selling prices; JPY 33 billion decrease due to lower sales volume; and JPY 68 billion increase due to foreign exchange effects. The core operating income was JPY 114.1 billion, up JPY 57.5 billion year-on-year. This represents 82% of the first half earnings forecast announced in May. I will explain the details of this later. Special items amounted to positive JPY 4.3 billion. Operating income was JPY 118.4 billion, and income before taxes was JPY 111.8 billion. Quarterly net income attributable to owners of the parent was JPY 57.7 billion, up JPY 38.1 billion year-on-year. Next, I will explain sales revenue and core operating income by business segment. For the Chemicals business as a whole, revenue increased by JPY 76.5 billion and profit increased by JPY 48.4 billion year-on-year. As for revenue, despite shipment restrictions at some sites due to the situation in the Middle East and expansion and scale of scheduled maintenance and repairs compared to the previous period, there was an increase of JPY 76.5 billion due to soaring product market prices, an increase in sales volume driven by customers' efforts to secure inventory against the backdrop of situation in the Middle East, higher selling prices for various products, particularly in Specialty Materials and the impact of foreign exchange rates. The core operating income for the Chemicals business increased by JPY 48.4 billion, driven largely by strong performance of Specialty Materials as well as significant inventory valuation gains in basic materials resulting from rising naphtha prices. Industrial Gases segment showed steadily progress -- steady progress with revenue up 15% and profit up 20% year-on-year. Details for each segment will be explained later on a separate page. The following is a breakdown of the JPY 57.5 billion year-on-year increase in the core operating income. The price gap was positive at JPY 4.6 billion. While the price gap deteriorated for polyolefins in the basic materials amid rising naphtha prices, it improved due to improved selling prices in Specialty Materials and rising market prices for MMA monomers in MMA and derivatives. The volume resulted in a drop of JPY 1.2 billion. In Specialty Materials, although sales of various products were expanded, the volume worsened due to restrictions on shipments from certain MMA sites caused by the situation in the Middle East as well as an increase in the scale of scheduled maintenance and repairs in the basic chemicals. Cost reductions resulted in a positive impact of JPY 13.8 billion with Industrial Gases and Chemicals segments each achieving cumulative effects. Others resulted in a positive impact of JPY 40.3 billion. This figure includes a JPY 48.5 billion gain on inventory valuations due to soaring naphtha prices. I will now explain the details by segment. Specialty Materials posted a year-on-year profit increase of JPY 20.9 billion. The sales gap was positive at JPY 11.9 billion, improving across all subsegments, including semiconductor-related products. The volume contributed to a rise of JPY 9.1 billion. In Films and Performance Materials, the volume improved due to increased sales of polymers for barrier packaging materials and films for multilayer ceramic capacitors. In Composites and Shapes, the volume improved due to increased sales of higher performance engineering plastics for semiconductor manufacturing equipment and carbon fiber composite parts, primarily for robotaxis. Cost reductions totaled JPY 4.9 billion, driven by the cumulative effects of rationalization measures such as the Next-Stage Support Program and the review of production sites across business units. The others of negative JPY 5 billion was attributable to cost increases resulting from inflation. MMA and Derivatives posted JPY 4.3 billion increase in profit year-on-year. The sales gap was positive at JPY 7.7 billion. Market prices for MMA monomers improved from a year before, leading to a widening of spreads, as I said before. In functional chemicals as well, sales gap improved due to higher sales prices for additives. The volume resulted in a drop of JPY 5.5 billion. On the other hand, in the MMA segment, the volume deteriorated due to shipping restrictions at some sites and sluggish operating rates caused by the situation in the Middle East. Core operating income in Basic Materials increased by JPY 21.5 billion year-on-year. Prices had a negative impact of JPY 17.7 billion. In Basic Chemicals, polyolefin selling prices lagged behind rising naphtha prices. Volumes had a negative impact of JPY 6.3 billion. Volumes worsened due to larger scheduled maintenance in basic chemicals and lower sales from an influx of low-priced overseas products. Others had a positive impact of JPY 44 billion, which includes JPY 48.4 billion in inventory valuation gains from rising naphtha prices. Lastly, Industrial Gases. Core operating income increased by JPY 9.1 billion year-on-year. Earnings grew, thanks to business expansion through acquiring industrial gas businesses in Australia and New Zealand as well as cost reductions from productivity initiatives across regions. Next, Special Items. Special items in the first quarter had a positive impact of JPY 4.3 billion. We recorded a JPY 12.8 billion gain on sale of fixed assets from the land transfer for Nippon Sanso Holdings head office location offset by losses from structural reforms, special items totaled positive JPY 4.3 billion. Now let me explain cash flows. Operating cash flow was an inflow of JPY 35.1 billion. Inventory cash flow was an outflow of JPY 38.1 billion, mainly due to higher raw material prices such as naphtha. Other cash flows were an outflow of JPY 98.7 billion, including severance payments for last year's Next-Stage Support Program. Investing cash flow was an outflow of JPY 26.3 billion. Capital expenditure was JPY 66.2 billion. Growth investments in Specialty Materials progressed, including capacity expansion in carbon fiber and composite engineering in Italy. Cash flow from asset sales was positive JPY 42 billion, driven by proceeds from selling cross shareholdings. As a result, free cash flow was positive JPY 8.8 billion. Financing cash flow was an outflow of JPY 93.4 billion, mainly for interest-bearing debt repayments and dividend payments. Here is the consolidated statement of financial position. Total assets increased by JPY 4.4 billion from the previous fiscal year-end to JPY 5,881 billion. Cash and cash equivalents decreased by JPY 82 billion due to debt prepayments. Meanwhile, inventories rose by JPY 41.8 billion on soaring raw material prices and foreign exchange impacts also lifted total assets. Netting these factors, total assets increased by about JPY 4 billion. The net D/E ratio stood at 0.83, remaining at the same level as the end of the previous fiscal year. This page supplements the change in core operating income for FY 2025 Q4 to FY 2026 Q1. Q1 core operating income reached JPY 114.1 billion, up JPY 74.7 billion compared to Q4. Specialty Materials posted JPY 38.3 billion in Q1, an improvement of JPY 47.8 billion from negative JPY 9.5 billion in Q4. Earnings grew significantly, reflecting the reversal of the JPY 30.3 billion impairment loss on Soarnol-related fixed assets recorded in Q4, steady sales centered on semiconductor-related products and higher sales volume as customers build up inventories amid the Middle East situation. MMA Derivatives posted JPY 80 billion in Q1, turning profitable by JPY 11.2 billion from negative JPY 3.2 billion in Q4. This was driven by rising MMA monomer market prices and increased sales volumes from customer inventory stockpiling and functional chemicals. Basic Materials recorded JPY 14.8 billion in Q1, up JPY 19.3 billion from negative JPY 4.5 billion in Q4. In addition to resolving the JPY 5.2 billion impairment loss on ethylene oxide and ethylene glycol production facilities in Q4, earnings through these inventory valuation gains improved despite worse price differentials for polyolefins from soaring naphtha prices. Industrial gases decreased by JPY 2.2 billion from JPY 56.3 billion in Q4 to JPY 54.1 billion in Q1, mainly due to reduction of electronics-related equipment and construction concentrated in Q4. Next, I'll explain the revised financial forecast for first half of FY 2026. Based on Q1 results and current business conditions, we have revised up our first half forecast. In our May 13 forecast, first half core operating income was set at JPY 139 billion. Q1 core operating income reached JPY 114.1 billion, showing strong progress of 82%. This strong performance was driven by robust demand for semiconductor products, higher sales volume from customer inventory building amid Middle East tensions, higher MMA monomer prices and inventory valuation gains from rising naphtha prices. Our Q2 assumptions are JPY 155 to the U.S. dollar and naphtha price of JPY 86,000 per kiloliter. Sales revenue is projected at JPY 1,038.8 billion. Despite lower sales volumes following Q1 customer stockpiling, sales are expected to increase over Q1 as scheduled maintenance in basic chemical ends. Our operating income is expected to decline quarter-on-quarter due to smaller inventory valuation gains and payback from customer stockpiling. But the first half total will reach JPY 194 billion, upside of JPY 55 billion from the May forecast. Our new forecast for operating income is JPY 189 billion and midyear income before tax is JPY 175 billion. Net income attributable to owners of the parent is projected at JPY 86 billion, an upside of JPY 27 billion. Here is the first half forecast by business segment. Specialty Materials core operating income is expected at JPY 65 billion, up JPY 27 billion from the May forecast. Factors include robust semiconductor demand, volume growth from customer inventory stockpiling due to Middle East conditions and improved selling prices across products. MMA and Derivatives is forecast at JPY 10 billion, up JPY 5 billion, driven by rising MMA monomer market prices, which I've been explaining. Basic Materials is forecast at JPY 12 billion, up JPY 18 billion, mainly due to larger inventory valuation gains from higher naphtha prices. Industrial Gases is expected at JPY 107 billion, up JPY 6 billion, partly owing to a weaker yen. That concludes my presentation.

Thank you very much. Now I'd like to move into Q&A session. Now we'd like to move to the first question from Morgan Stanley MUFG Securities, Mr. Watabe.

Watabe from Morgan Stanley Securities. Yes, you really produced profits, didn't you? Specialty Materials, especially was performing well, but the temporary demand increase, where in the products did you see that? And if quantitatively, there will be all segments where there will be decreasing from first quarter to second quarter, this will be true, but can you explain more? And what would be the recovery of the shipment restriction sites? And what about inventory valuation gains and losses in the second quarter? If you can explain all these special factors.

Well, thank you very much. As for temporary demand increase, the first part of your question, so we cannot really specify which products that we have seen this in. For specialty materials products, well, for semiconductor-related products, we have not seen them too much. But even in those products, partially for this emergency situation, customers are all, in general, wanted to secure their inventory, so we cannot really specify which products. And quantitatively, basically, it's very difficult to specify that. But in the second quarter, what will be the turn that we are expecting? Well, there will be some reactionary decrease that we are expecting. And from the first quarter to second quarter, probably the numbers are expected to decline, as you can see from the numbers that we have shown. But what about -- what does those -- do those second quarter figures mean? Well, basically, we are expecting these numbers to go back to the original budget. We have seen much increase in the first quarter in sales, but we're not expecting that much decline in the second quarter because of that in Specialty Materials. So in the panic buying effect impact from the first quarter is, as I just explained. And with regard to shipment restrictions, more specifically, the biggest one is in MMA. And maybe you are aware of this, but from April, the plant in Saudi Arabia has not been operating. And this is really natural, but rather than securing the operation, we are giving top priority safety. And at the other end of the Hormuz Strait and where there is a risk of missile landing, we cannot really operate the plant. So unfortunately, Saudi Arabian plant has been in suspension since April. But rather than shipment restriction, there is some shortage in raw materials in some sites in Southeast Asia. So we may -- it may not be so appropriate to say shipment restriction, but we were not able to produce products because of shortage of raw materials. And so there is some decline in volumes. And we cannot expect the Saudi Arabian plant to restart the operation because of uncertainty, and that is the assumption that we are using for second quarter. And with regard to naphtha is the next part of your question. So in the presentation, you've seen this, but 111,000 -- JPY 118,900 is the naphtha price and JPY 86,000 is the first half assumption, and there is some decline because of that. It's very difficult to specify the amount. We did come up with JPY 86,000 for naphtha price. But for the past 12 days or past 10 days, U.S. forces have started the attacks in Iran. And so crude oil Brent has also recovered from $90. So it's very difficult to tell what is going to happen. So have you seen this reactionary losses or decline already from June? Yes, we have seen this from June for some products. But in April, I'm not going to exaggerate this. But just simply put, just for the purpose of making it easier to understand, the panic buying, so to speak, was to some extent, seen. But in Japan, crackers and other derivatives, we had assured the customers that we are going to continue to operate the cracker plant and others. So there was some panic buy in April. But from May onward, customers have a bit settled down. So there is some reactionary decline even within the first quarter in some products. But for overseas products, especially, especially this tendency was prominent in China. So the Chinese players have come to buy in large amounts, especially in MMA. So the customer inventory levels has been increased as we can see. So in the second quarter, there might be some reactionary decline that you might expect.

Next, we will move on to Miyamoto-san from SMBC Nikko Securities.

I'm Miyamoto from Nikko -- SMBC Nikko Securities. Congratulations for the strong performance. I'd like to ask you about the composite and shapes. From the fourth quarter to first quarter, the profit increased by JPY 1 billion. And on Page 22, when you look at the breakdown, the profit increase in all subsegments, but could you elaborate on them? And on the second half -- in the second quarter, Q-on-Q, you expect a profit decline of about JPY 3 billion. So why do you expect such a large decline? You talked about buying. Is that happening in this segment as well? And for ZOOX, they said that they will soon start the mass production. So can you tell more about the shipment for us, ZOOX as well?

So I feel a little bit impressed when you say it was a very strong performance because it was only for the first quarter, but we hope that we will be able to sustain this performance as much as possible. Now regarding your question, composite and shapes, last year, in the fourth quarter, we were able to turn profitable in the fourth quarter finally. And in the fourth quarter of last year, it was JPY 5 billion. And this year, JPY 6.4 billion, we were able to build up the profit potential up to JPY 6.4 billion. And if you add up, it went up about JPY 1.4 billion. But if you look in detail, we call this engineering shapes. This -- the large one is engineering plastic for semiconductor manufacturing equipment. The shipment for those really increased in the first quarter. And I think this part will include some panic buying. So because it's for semiconductor manufacturing equipment, they don't want to fall short and customers were sort of rushing to buy, and I think that's more intense compared to other products. And in the second quarter, we expect some reactionary decline. On the other hand, for the carbon fiber composite for ZOOX, it's coming as expected and the monthly production is also increasing. And we believe we will be able to deliver as we planned for this fiscal year. As you just mentioned, yesterday, I think ZOOX, they said that they will get license for running operations in United States as well, meaning that the project overall is progressing steadily, and they also need to increase the vehicles. So we want to make sure that we can deliver so that they do not fall short of the products. So for carbon fiber composite, first quarter, second quarter, I don't think there will be major changes in numbers. But in the engineering shapes, the high-performance engineering plastics, we expect some reactionary decline in the second quarter versus first quarter.

So carbon fiber composite on Q-on-Q, we thought that you'll be able to expect increase in profits, but you're saying that the fixed cost is going to go up? Or are you being a little bit conservative?

When it comes to composite, we're not really being conservative. But if you look first quarter to second quarter, especially in the first quarter, I think we were able to capture higher prices ahead of schedule, especially composite engineering. So we have propellant business as well, and that we expect some decline in the second quarter. But in the second quarter, I think we will be able to increase the new products. And we've been launching those new products. So that's something that we expect as a growth.

I see. JPY 12 billion is the full year forecast. And you already posted -- you expect JPY 10 billion in the first half, which means that it's growing higher than expected. So which one specifically do you think is really growing stronger than what you had expected initially?

Well, maybe this is my personal opinion. But engineering shapes, as I mentioned at the outset. So this is for semiconductor manufacturing equipment. The demand is very strong. So we can expect some upside. And maybe I should not call this upside. But for the carbon fiber over the last 2 years, we've been going through major structural reform. And this impact of supply chain rationalization, I think we're starting those to take effect. And we're also launching new products as well. So those are some of the factors for a potential upside. But how it will turn out on a full year basis, I mean, it's still kind of uncertain. Therefore, for the full year forecast, we have not made any changes.

Next question from UBS Securities, Mr. Omura.

Omura from UBS Securities. I have a question on Page 17, Information Electronics. And this time, you have made upward revision and JPY 5 billion is the upward revision. And you have also revised upward the sales revenue by JPY 5 billion. So probably this will be mainly from the price factor. But if there are any other factors, please let us know. And because the wafer manufacturers or wafer materials are going up in prices, that's what they say. So your silica, the synthetic quartz, maybe you have easier time in revising your price. Can you explain more about silicon materials trend?

Thank you for your question. So with regards to sales revenue and profits, well, were there price factors that are involved? Well, in one word, so the mix of the products has been changed. So as you rightly expected, synthetic silica or quartz is increasing significantly in profits. But do you ask -- if you ask us if we have increased the prices significantly, yes, but volume has also increased. As for synthetic silica, there are not so many customers that we're selling products to. But more recently, from the late half of last year, there have been more inquiries from new customers and shipments from those customers -- to those customers are increasing. So the volume is increasing for synthetic silica quartz. But I cannot give you too much detail, but especially for semiconductor-related products, there are products that are not growing as much as we expected or have failed to reach the volume that we expected, honestly speaking. So for semiconductor processes, there are some materials that they are selling, but the customers have improved their production processes, and they have been able to save the volume of products that we have been selling for use. And so honestly speaking, there was some decline in volume, but synthetic silica and also there's cleaning business that is increasing significantly as well. So the price factors were there, but product mix has been changing. So the competition amongst the different products that we're selling has been changing. That has been a greater factor.

To supplement your question, as for lithography products and also the materials, have you been experiencing easier time in price revision? Or you're talking about resist?

Yes. Well, it's not that easy to price -- to do price revision or convince customers to accept that, but we're not in that much challenging situation in terms of price increase. So we're not feeling that much that it has become easier to convince customers for price increase.

Okay. Then just for clarification. So naphtha price or raw material price increase that has been passed on to the selling prices just for that much.

Well, if you ask us yes or no, then honestly speaking, we cannot tell which one yet. But on the other hand, for the petrochemical-derived basic materials, we have been making sure that we can pass on the cost increase to the selling prices, and we have been able to do that.

Next question is from Yamada-san from Mizuho Securities.

I am Yamada from Mizuho Securities. So in the second quarter, I don't really understand why you expect a decline in profits. So inventory valuation differences and others, I'd like to confirm. So JPY 40 billion or so is expected absolute value. We had a gain of about JPY 40 billion. But if you look at the inventory compared to the year-end of last fiscal year, it increased by JPY 41.8 billion and JPY 600 million is related to Nippon Sanso Holdings. So the inventory increased by about JPY 36 billion. And if you compare fourth quarter, first quarter and second quarter specialty materials revenue. So not much changed from the first to second quarter, meaning that the inventory level went up for the specialty materials. So that means that you curb production in other areas substantially to control your inventory level. Is this correct? And if that's the case, maybe there is some impact from the periodic maintenance. And so in the first to second quarter, I think there are positive impact from the fixed cost allocation and differences in operation and Basic Materials segment. I do not really see such impact in the second quarter. So please elaborate on how I should think about the inventory levels.