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Edited Transcript of 4188.T earnings conference call or presentation 6-Feb-20 8:00am GMT

Q3 2020 Mitsubishi Chemical Holdings Corp Earnings Presentation

Tokyo Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi Chemical Holdings Corp earnings conference call or presentation Thursday, February 6, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Motohiro Oki

Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office

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Conference Call Participants

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* Atsushi Ikeda

Citigroup Inc, Research Division - Director and Analyst

* Go Miyamoto

UBS Investment Bank, Research Division - Analyst

* Hidemitsu Umebayashi

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Mikiya Yamada

Mizuho Securities Co., Ltd., Research Division - Senior Analyst

* Shigeki Okazaki

Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan

* Shinobu Takeuchi

SMBC Nikko Securities Inc., Research Division - Senior Analyst

* Takato Watabe

Morgan Stanley, Research Division - Research Analyst

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Presentation

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [1]

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Welcome to our conference call. I am Motohiro Oki, Executive Officer, General Manager of Corporate Management Office of Mitsubishi Chemical Holdings Corporation. I would like to take this opportunity to thank you for your day-to-day support and for your attendance today. Now let me dive into the consolidated financial results of the third quarter of the year ending March 2020 and the revised forecast for the full year.

Please turn to Page 4. First, on consolidated statements of operations. During the period of the first 9 months of fiscal 2019, the exchange rate was JPY 108.9 to the dollar, an appreciation of JPY 2.4, while the naphtha price was JPY 42,300, down JPY 9,800 year-on-year. Sales revenue was JPY 2,730,800,000,000, down JPY 139.6 billion year-on-year. The fall is accounted for by a negative foreign exchange impact of JPY 40 billion, a negative price impact of JPY 140 billion and a positive volume impact of JPY 40 billion. The price changes include: the drop in price of naphtha that had pushed down the prices of petrochemical products; as well as falling market prices of MMA and phenol-polycarbonate chain. The volume changes include a positive impact of an acquired European business in Industrial Gases segment for JPY 120 billion, as well as negative impacts by the drop in royalty revenue in the pharmaceutical products for JPY 40 billion; and by decline in sales of MMA and needle coke in Chemicals segment; and decline in sales of performance products for semiconductor and automotive applications.

The core operating income was JPY 181 billion, down JPY 83.8 billion year-on-year, primarily as a result of a smaller variance in prices between raw materials and products amid a market downturn. I will explain about the overview by business segment later.

Special items ended up with a net expense of JPY 20.4 billion during the 9 months up to the Q3 due to the recognition of impairment loss of JPY 17 billion for goodwill related to pharmaceutical formulation materials business in the health care. Details will be given later. As a result, on an IFRS basis, the operating income totaled JPY 160.6 billion.

Financial income and expenses resulted in a net expense of JPY 15.9 billion, an increase of the expense of JPY 11 billion. This was due to the increase in borrowings because of the acquisitions of European and U.S. businesses by Taiyo Nippon Sanso, which pushed up the interest payment by JPY 6.9 billion from the year before, as well as a year-on-year decrease of JPY 900 million in dividends received and deterioration of foreign exchange gain or loss of JPY 3.3 billion. As a result, income before tax came in with JPY 144.7 billion. The income taxes were recognized as expenses of JPY 53.3 billion and net income from continuing operations was JPY 91.4 billion.

In addition, in August last year, Life Science Institute, Inc. completed an exchange of shares with PHC Holdings Corporation as part of a strategic capital partnership, which led to the recognition of net income from discontinued operations, including the gain on share exchanges of JPY 16.9 billion. Ultimately, the net income for the 3 quarters was JPY 108.3 billion. And the bottom line, the net income attributable to owners of the parent was JPY 76.3 billion, down JPY 89.7 billion year-on-year.

Share of profit of associates and joint ventures included in the core operating income was JPY 10.7 billion, down JPY 10.9 billion. This was primarily due to the profit declines at affiliates engaged in MMA and phenol-polycarbonate chain businesses.

Please turn to the next page, which shows sales revenue and core operating income by business segment. In all segments except for Industrial Gases, we suffered year-on-year declines in both sales and profit. More details by such segment will be given later. As for the impact by the inventory valuation gain or loss as compared to the same period previous year, there was an impact of negative JPY 1.7 billion in Performance Products, negative JPY 12.7 billion in Chemicals and negative JPY 900 million in Carbon Products. In the same quarter of the previous year, naphtha prices were on an upward trend, while this year, they were on a downward trend. Inventory valuation gain or loss has significantly affected the profit changes in Chemicals, especially Petrochemicals business. Furthermore, if I make additional comment on the third quarter as compared to the second quarter, in functional products, full-scale inventory adjustments by customers due to a slower demand in the panel market resulting in a decline in sales of optical films, sluggish semiconductor market, onetime expenses of inventory disposal associated with our withdrawal from the storage media business, as well as seasonal factors such as Christmas vacations, led to a JPY 5 billion drop in profit.

In Performance Chemicals, sluggish semiconductor-related market, falling sales for automotives applications in the U.S. and Europe as well as a scheduled maintenance and repairs carried out in Fukuoka site in the third quarter resulted in a JPY 2.1 billion decline in profit from the previous quarter.

In MMA, we are affected by falling market prices and sales in Asia, lower demand and selling prices in U.S. and Europe as well as the disruptions in plants in the U.S. and Europe such as SAMAC and saw a decline of profit for JPY 10.8 billion.

In Petrochemicals, though we did see an improvement in profitability due to inventory valuation gain, the margin deterioration in polyolefin and falling market prices of ethylene glycol left the profit out almost flat from the previous quarter.

In Carbon products, lower demand for coke due to the worldwide slowdown in steel production led to declining market prices for export coke and falling prices of coking coal, which resulted in recognition of inventory valuation loss and the inventories marked at lower of cost to our market. Hence, the profit drop of JPY 1.9 billion.

In Industrial Gases, the seasonal difference in carbon dioxide gas was one of the reasons for JPY 1 billion decline in profit.

In Health Care, there was reluctance to buy products ahead of the NHI drug price revisions after the consumption tax hike on October 1. But in the third quarter, concentration of sales of influenza vaccine pushed up the sales of domestic pharmaceutic products, resulting in JPY 10.5 billion increase in profit as well.

On the next page, I will discuss analysis of factors behind changes in the core operating income. The core operating income fell by JPY 83.8 billion year-on-year for the entire company. This consists of minus JPY 56.6 billion from price factors, minus JPY 21.7 billion from volume, plus JPY 13 billion in cost reduction and minus JPY 18.5 billion from other factors. Price differences resulted in a negative impact of JPY 56.6 billion on the companywide profit, of which JPY 50.4 billion was due to the falling market price of MMA in Chemicals. The rest was because of falling market price of phenol-polycarbonate chain in Performance Products and the NHI drug price revisions following the consumption tax hike in Health Care. Volume difference caused a decline of JPY 39.9 billion in Health Care, as royalty revenue on Gilenya decreased despite growth in priority products in domestic ethical pharmaceuticals. While in Industrial Gases, JPY 22.2 billion increase was recorded due to the impact of European and U.S. business acquired.

In Performance Products, lower demand for displays in optical, semiconductor and automotive applications pushed down the profit by JPY 7 billion, hence, JPY 21.7 billion decline for the entire company. Fixed cost reduction generated JPY 13 billion profit, demonstrating a steady progress.

Others caused a negative impact of JPY 18.5 billion. As was explained, inventory valuation gain and loss accounted for JPY 15.3 billion decrease; deteriorated share of profit of associates and joint ventures, JPY 10.9 billion; and the rest was due to differences in expenses incurred.

Next, I'd like to go over the overview of each segment. Performance Products segment posted sales revenue of JPY 821.1 billion, down JPY 48.7 billion. Core operating income, JPY 54.4 billion, down JPY 8.9 billion year-on-year.

By subsegment, functional products posted sales revenue of JPY 515.3 billion and the core operating income of JPY 33.6 billion, representing year-on-year decline of JPY 28.8 billion and JPY 1.7 billion, respectively. Despite sales volume increase in the Environmental & Living Solutions, absence of the impact from a fire of polyester film, which occurred in the previous year, sales were down in high-performance, engineering plastics owing to weaker demand, primarily for semiconductor and automotive applications and optical films for use in displays.

Performance Chemicals posted sales revenue of JPY 305.8 billion, down JPY 19.9 billion and core operating income of JPY 208 billion, down EUR 7.2 billion, respectively. Revenue and profit decreased year-on-year, amid a decline in the market for phenol-polycarbonate chain materials, which have been strong in the previous year, and sales of perform materials were down due to a slowdown in demand for semiconductor applications, while the impact of scheduled maintenance and repairs at phenol-polycarbonate chain plants are being resolved.

Let me comment on the chart at the left bottom. The price factor was primarily owing to smaller margin due to falling market prices for phenol-polycarbonate chain materials. The impact of volume was evenly split between functional products and performance chemicals. The impact from others mainly include deteriorated share of profit of associates and joint ventures in Performance Chemicals.

Please see the next page. I'll explain about the Chemicals segment. The entire segment posted JPY 826 billion in sales revenue and JPY 38.7 billion in core operating income, down JPY 149.4 billion and JPY 69.1 billion year-on-year, respectively. By subsegment, MMA recorded JPY 219.5 billion in sales revenue and JPY 26 billion in core operating income, down JPY 88.3 billion and JPY 53.8 billion year-on-year, respectively. This was mainly because of a weaker demand and downturn in MMA market. Now the MMA market price was $2,578 on the average up to Q3 in the previous year, while averaging at $1,676 up to Q3 this year and standing at around $1,500 more recently.

In Petrochemicals, sales revenue was JPY 409.1 billion, and core operating income was JPY 2.8 billion, down JPY 50.7 billion and JPY 7.3 billion, respectively. Despite the increase in sales volume, because of smaller effect of scheduled maintenance and repairs at the ethylene production facility, sales revenue declined year-on-year due to lower naphtha prices and other factors. Core operating income was down because, while the effect of scheduled maintenance and repairs has been reduced and the effects of the disruptions at the Kashima polypropylene plant 2 years ago have been resolved, greater was the negative impact from the decline in market prices for ethylene glycol and other products and a deterioration of inventory valuation gain and loss.

Carbon Products posted sales revenue of JPY 197.4 billion, down JPY 10.4 billion and core operating income of JPY 9.9 billion, down JPY 8 billion.

In coke, profits declined due to a decline in coke demand resulting from a global slowdown in steel production and a smaller variance in raw materials and products amid a downturn in the export coke market, deterioration in inventory valuation gain and loss and decline in inventory valuation. The sales volume of needle coke decreased due to inventory adjustments at electric furnace and electrode manufacturers, resulting in a year-on-year decrease in profit.

Next, overview of the performance of the Industrial Gases segment. Sales revenue was JPY 628.3 billion, up JPY 115.9 billion, and core operating income was JPY 66.5 billion, up JPY 24.4 billion. The main factors were the effects of the acquisition of the European and U.S. businesses in the second half of the previous fiscal year and the strong performance of the U.S. gas business. In the gas business in Europe during the same period in the previous year, we consolidated results only for 1 month of December. So year-on-year, sales revenue increased by JPY 112.6 billion and core operating income increased by JPY 18.7 billion.

Overview of the Health Care business. Sales revenue was JPY 321.9 billion, down JPY 38.5 billion and core operating income was JPY 20.8 billion, down JPY 33.6 billion. Although domestic sales of priority products grew, a part of royalty revenue from Gilenya was not recognized as sales revenue, owing to arbitration proceedings resulting in a year-on-year decrease in sales and profit.

A brief comment on the tender offer for Mitsubishi Tanabe Pharma's common stock. It was implemented from November 19 to January 7. The tender offer became successful as the total number of shares tendered exceeded the minimum number of shares to be purchased. As of January 15, 197,355,000 shares were acquired at JPY 397.6 billion, excluding transaction costs, which lifted our voting rights equity ratio from 56.4% to 91.6%. Following a request for stock sale, MTPC is to become our wholly owned subsidiary on March 2.

Next, consolidated special items. Special items recorded in the third quarter totaled JPY 20.2 billion. An impairment loss of JPY 18 billion was recorded. The main reason was that in the pharmaceutical formulation materials business in the health care field, profitability is expected to deteriorate due to the worsening of the business environment. And by conservatively revisiting the plan, an impairment loss in goodwill of JPY 17 billion was recorded, reflecting the amount not likely to be recovered. The book value of goodwill after impairment is JPY 15.5 billion.

Loss on sale and disposal of fixed assets of JPY 2.3 billion came from the planned removal of unnecessary equipment, and a loss of JPY 1.4 billion on sale of intercompany securities was in relation to the sale of the storage media business. Gain on sales of property, plant and equipment totaling JPY 2.5 billion was due to the sale of land.

Next, consolidated cash flows, looking at the adjusted cash flows. Net cash from operating activities for the 9-months period totaled JPY 337.8 billion. Other than income before income taxes and depreciation and amortization, changes in operating receivables and payables resulted in a cash flow of JPY 31.5 billion due to a decline in raw material prices, while tax payments and others resulted in cash outflow of JPY 49.6 billion. Net cash used for investing activities during 9 months was JPY 143 billion. Capital expenditure amounted to a cash outflow of JPY 167.7 billion and sale of assets amounted to cash inflow of JPY 16.7 billion, mainly in relation to the sale of land and the sale of some strategic cross-shareholdings.

Free cash flow for the period was positive JPY 194.8 billion. Cash on hand was reduced. JPY 206.7 billion was used to repay interest-bearing debt and JPY 87.6 billion was allocated for year-end dividend payments.

Next, consolidated statements of financial positions. Total assets at the end of the third quarter was JPY 5,413.1 billion, down JPY 159.4 billion from the end of the previous fiscal year. This was because while there was a net increase of JPY 83 billion in relation to the lease assets following the adoption of IFRS 16 new lease accounting, there were a decrease of JPY 35 billion as the effect of foreign exchange rate, a decrease in trade receivables of JPY 63 billion and a reduction in cash and cash equivalents amounting to JPY 98 billion.

Net interest-bearing debt at the end of the quarter was JPY 1,756.8 billion, an increase of about JPY 20.6 billion from the end of the previous fiscal year. The difference included JPY 100 billion of lease liability, newly recognized as interest-bearing debt due to the adoption of IFRS 16.

As a result, debt-to-equity ratio at the end of the quarter was 1.26% similar to the end of previous fiscal year, and the ratio of equity attributable to owners of the parent increased [1.225.7 percent].

Next, the revised forecast for the full year ending March 31. Please turn to Page 15. The assumptions for the fourth quarter are: exchange rate at JPY 108.50 to the U.S. dollar and the naphtha price of JPY 44,700. Sales revenue has been revised downward to JPY 3.63 trillion, down JPY 135 billion from the previous forecast. This is because the market prices for chemicals such as MMA and carbon products are expected to be lower than the previous forecast, and the demand adjustment phase is expected to continue for the time being in the optical applications for display and products for semiconductor and automotive applications.

Core operating income is expected to be JPY 210 billion, a decrease of JPY 40 billion compared to the previous forecast. I will explain by each segment later. Special items are expected to be net expense of JPY 28 billion, JPY 19 billion more than previously forecast. This is in relation to the JPY 17 billion impairment loss on goodwill in the pharmaceutical formulation materials business recorded in the third quarter as described earlier. As a result, the bottom line net income attributable to owners of parent is expected to be JPY 81 billion, a decrease of JPY 50 billion from the previous forecast. An overview by business segment is provided on the next page.

Full year forecast for sales revenue, core operating income by business segment. By subsegment, regarding functional products, the previous forecast expected that the current business environment would continue into the second half. But now we expect demand adjustment for optical applications for display, semiconductor applications, applications for machine tools and others to continue longer than originally expected. Accordingly, forecast has been revised downward by JPY 9 billion.

As for Performance Chemicals, similar to functional products, we had expected the business environment to continue in the second half of the year. But since demand for semiconductors and automotive applications was lower than expected, we revised the forecast downward by about JPY 2 billion.

MMA forecast is revised downward by JPY 15 billion, given that market prices in Asia dropped compared to the previous forecast, demand in Europe and the U.S. declined, market prices declined and unexpected problems occurred in the third quarter at SAMAC and European and U.S. plants. As for MMA market price in Asia for the fourth quarter, we are assuming $1,530, the same level as the third quarter as, recently, decline in prices has moderated and distribution inventory in China is likely to be at a low level. But we do recognize the need to closely monitor the impact of coronavirus outbreak.

Petrochemicals segment has been revised downward by JPY 7 billion given that price differential and volume differential mainly for polyolefin for automobile applications are deteriorating more than anticipated, market prices of basic chemicals are declining and in consideration of the effects of problems at the Mizushima ethylene plant.

Regarding carbon products, we had expected both the coke and needle coke business conditions to continue into the second half of the year. But in coke, global demand for steel has declined more than expected. Market prices have fallen and market price of export coke is expected to worsen due to production reduction at domestic steelmakers. And for needle coke, production adjustment at electrode manufacturers is expected to continue longer than expected.

In light of these, we revised downward by JPY 6 billion.

Regarding Industrial Gases, sales of equipment and construction are expected to be lower due to slow recovery in user capital investment demand in the domestic gas business, and overseas sales in the thermos business are expected to be lower due to Japan-Korea problems. Accordingly, we revised downward by JPY 4 billion. We did not revise the forecast for Health Care.

While we revised the full year earnings forecast, the dividend forecast has not been revised. We will maintain the year-end dividend of JPY 20 per share and the full year dividend of JPY 40 per share as already announced.

That concludes my presentation. Thank you for your attention.

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Questions and Answers

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Operator [1]

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Thank you very much. Now we'd like to start taking questions. The first question is from Mr. Watabe from Morgan Stanley MUFG Securities.

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Takato Watabe, Morgan Stanley, Research Division - Research Analyst [2]

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I want to first ask about the profitability of MMA. You said it was affected by the disruptions at the plants. In terms of differences in MMA market prices and spread, the biggest fall was seen from April to June period to July to September period. And yet, you earned profit of more than JPY 10 billion. While in third quarter, your profit was only JPY 700 million. Maybe all MMA businesses except for SAMAC were in red, but the market fell by around 4% to 5% quarter-on-quarter, while your sales dropped nearly 20%. So the disruptions you mentioned must have been very significant. Could you give me more details on the disruptions in a more quantitative manner?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [3]

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The MMA suffered a decline in profit of about JPY 10.8 billion from second to third quarter. The Asian market fell from the $1,614 in the second quarter to $1,536, down about $80. This price difference was partly to blame, but the disruptions we experienced had a negative impact of about JPY 3 billion in the third quarter alone between Asia, North America and Europe together.

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Takato Watabe, Morgan Stanley, Research Division - Research Analyst [4]

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Does that include the performance of SAMAC?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [5]

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Yes, it does.

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Takato Watabe, Morgan Stanley, Research Division - Research Analyst [6]

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Even if the factor was excluded, you would have only made JPY 4 billion in profit, while from the first to second quarter, when the fall in the market prices and spread was the biggest, your profit declined only about JPY 2 billion. Is there any analysis done on that point?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [7]

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In Asia, there was some decrease in sales due to the disruptions. But in Europe and North America, where the market prices are not linked to ICIS and where the prices had been maintained at higher levels previously, we have seen a decline in the markets and in the demand more recently. And the degree of decline in profit in Europe and North America was bigger. Furthermore, SAMAC was not operating steadily, which is another negative factor.

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Takato Watabe, Morgan Stanley, Research Division - Research Analyst [8]

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Have you resolved all the disruptions at the plants?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [9]

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Basically, they have been resolved, mostly.

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Takato Watabe, Morgan Stanley, Research Division - Research Analyst [10]

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I see. My second question is about functional products. You have been stressing that the semiconductor sector was weak. But the overall semiconductor market has been making a recovery. Could you elaborate on that?

I would also guess Clearfit was performing well in the first half, but how is it doing currently?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [11]

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Clearfit is still doing well. However, in the fourth quarter, we are going into slow demand season. But up to the third quarter, it had been performing as well as it had previously.

With regard to the semiconductor sector, the performance is varied from product to product amongst the Performance Products. We're seeing slow signs of recovery, but expect to have a full-scale recovery in the second half of 2020.

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Takato Watabe, Morgan Stanley, Research Division - Research Analyst [12]

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How big was the disposal loss of the storage media business?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [13]

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Approximately several hundreds of millions.

Given that small loss, the quarter-on-quarter drop in profit functional products seem big. The decline in profit from the second to third quarter was attributed mainly to the impact of reduced production of panels. High-performance engineering plastics did see slowdown in the market, but was also significantly affected by the vacations during the quarter.

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Operator [14]

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The next question is from Mr. Okazaki from Nomura Securities.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [15]

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Thank you. I also want to ask about MMA. You said the European and U.S. markets have been challenging. Is it your assumption that the markets will stop declining in the fourth quarter? And your forecast for the fourth quarter is a quarter-on-quarter growth of JPY 3.3 billion in profit, and Asian markets have been mostly flat. Do you expect there will be normal disruptions at the plant? And is that the idea behind your forecast for the fourth quarter?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [16]

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In the U.S. and European markets, demand for applications such as acrylic seats, automobiles and artificial marble has been extremely slow, and the market prices are expected to remain weak. From the third to fourth quarter, since we incurred losses associated with the disruptions of about JPY 3 billion in the third quarter, now that the disruptions have been resolved, we can expect to post gains by that amount.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [17]

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So is it fair to say that there will be a quarter-on-quarter profit growth of JPY 3 billion due to absence of disruptions, while downtown in the U.S. and European markets and the recovery in Asia market will cancel each out -- out each other?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [18]

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Yes.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [19]

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My second question, on Carbon business. Could you share with us the production volume and prices of needle coke from the third to fourth quarter in and outside of Japan, and your forecast for the fourth quarter?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [20]

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Did you ask about third to fourth quarter on needle coke?

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [21]

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No, both second to third and third to fourth quarter in terms of production volume and prices in and outside of Japan.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [22]

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From second to third quarter, the inventory adjustments by electrode manufacturers were continued throughout, so needle coke remained flat from the previous quarter.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [23]

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In terms of the volume, I take it that both domestic and export figures are flat quarter-on-quarter. Correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [24]

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Yes. The prices for domestic market have already been fixed in the third quarter. Export prices have dropped on quarter-on-quarter basis by about 20% for the use of electrodes.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [25]

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20% on a quarter-on-quarter basis?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [26]

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Yes.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [27]

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How about the fourth quarter, your forecast?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [28]

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As for the fourth quarter, in the domestic market in this fiscal year, we have reached agreement on prices for the period extended until March, therefore prices will not change. And prices for exports will not change either from the third quarter.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [29]

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Prices will not change in the domestic market?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [30]

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There will be no change in the domestic or export prices.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [31]

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In terms of volume, do you not expect changes between Q3 and Q4 in and outside of Japan?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [32]

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We do not expect any major changes between third and fourth quarters.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [33]

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My last question, you expect the profit to recover by JPY 2 billion in this segment from third to fourth quarter. What are the reasons?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [34]

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As I explained earlier, in the third quarter, the price of coking coal started to decline, which led to the recognition of inventory valuation loss and inventories marked at lower of cost to our market was certainly more than JPY 1 billion. But in the fourth quarter, we expect the price of coking coal to remain unchanged. And therefore, the onetime loss on the inventory will not be posted. So there will be an improvement by that amount.

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Shigeki Okazaki, Nomura Securities Co. Ltd., Research Division - Head of Basic Material Research Team &Analyst of Chemicals, Textiles, Electronic Materials of Japan [35]

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Then I take it that, basically, there will be no change in the fundamentals, and you expect profit to go up due to technical reasons, correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [36]

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Yes, that is correct.

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Operator [37]

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The next question is from Mr. Ikeda of Citi Global Markets Japan.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [38]

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Ikeda from Citi Global Markets Japan. I would like to ask about the way to look at the change from the third to fourth quarter for functional products. Usually, we would see a significant drop in displays, and Clearfit, in particular, during the period due to the Chinese New Year. But this time, you're expecting to post increase in profit. Is it because inventory adjustments in display products is now over, or carbon fiber is expected to start growing? Could you tell me why you expect an improvement from the third to fourth quarter, unlike the usual seasonality at this time of the year?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [39]

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With regard to the status of functional products between third and fourth quarter, basically, optical films are in low demand season, and therefore, will decline. However, high-performance engineering plastics went through a lower demand period due to Christmas vacations in the third quarter, from which we expect it to recover in the fourth quarter. And a slight recovery in the semiconductor sector is assumed as well.

In Environmental & Living Solutions, due to the seasonal nature of the business, recognition of sales is anticipated in the fourth quarter. Therefore, our forecast is an improvement of about JPY 1 billion from third to fourth quarter.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [40]

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In the display business, what would be the split between OPL films and PET films? I would assume, in the third quarter, the progress was made in inventory adjustments, especially in Korea, while there's still uncertainty in China. What are your thoughts?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [41]

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What is suffering a significant drop in profit is polyester films since it is slow demand season, and there has been production cut in panels, leading to even less demand. OPL films were also affected by panels but have not seen such a big downturn.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [42]

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I thought OPL was growing because of acquisition of new customers. But am I correct to assume that based on the performance in the third quarter, OPL will continue to grow steadily in the fourth?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [43]

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Panels are not performing well, with inventory adjustments by panel manufacturers still ongoing. And therefore, we do not assume too much growth.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [44]

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I thought they had come quite far along in the inventory adjustments. But from your perspective, there's still a long way to go for large panels?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [45]

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We came forward with the forecast assuming that inventory adjustments will still go on in the fourth quarter.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [46]

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I see. I have another question, which is on MMA. Originally, MMA was linked to the feedstocks such as acetone and methanol in the U.S. and Europe, and I thought the margin would not change that much. So it was somewhat unexpected for me to see such deterioration in Europe and U.S. And on the supply side, in China, there are 2 players increasing their capacity by 180,000 tons together and a Japanese player, another 70,000 tons. I wonder how it will affect the supply-demand balance in Asia. Could you update me on that?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [47]

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The business in Europe is declining significantly, as cheaper MMA is flowing into the European market from Asia and Middle East. And the demand is sluggish for acrylic sheets and automotive applications, pushing down the market prices. In North America it's falling slightly, but not so significantly.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [48]

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What about the impact on the supply-demand balance? The inventory in the distribution is improving. In the last earnings briefing, you said improvement was likely, but the market prices would not go up. So what is your real view for the market, though it may be hard to tell with the influence of new coronavirus?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [49]

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The domestic demand in China is weak for household items. The future uncertainty has not been fully dispersed, and so we have yet to see signs of strong solid demand.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [50]

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A follow-up question. Is the profit level you're expecting in the fourth quarter what you can normally achieve with the market prices at the current level? Or this is a bit lower as there was Chinese New Year and so on a full year basis, you can achieve a bit more. Which do you think is the case in your gut feeling?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [51]

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Our feeling is that we can do more. It is slow demand season, first of all. And on top of that, we have been faced with various issues. So in our true capability, I hope we could do a bit more.

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Operator [52]

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The next questioner is Mr. Yamada from Mizuho Securities.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [53]

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Yamada from Mizuho. I have a question on Performance Chemicals. The market prices are deteriorating, weighing on the profit from the third quarter to the fourth quarter and on to the fiscal 2020. What are your projections vis-à-vis the market prices and other factors?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [54]

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Well, for the main product, phenol-polycarbonate chain, more recently, we feel that the market price has bottomed out. For polycarbonate, the market price is slightly declining, but is going up slightly for bisphenol A. So for chain overall, we believe that the price has hit the bottom.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [55]

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What about others? Is it your view that in terms of the sales volume, they have hit the bottom, and therefore, it's not likely that we are going to see further deterioration?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [56]

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For performance polymers, in North America and Europe, the automotive applications, somewhat had been sluggish in the third quarter, and the recovery in the automotive applications seem to be rather slow. Some say that it may not recover until 2021. So we're hoping to see recovery in this area.

For Performance Chemicals, we have epoxy for semiconductor applications and others. And we are expecting a gradual recovery in demand in the semiconductor applications.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [57]

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For performance polymers, they include paint and other products. So already, you felt the pressure in the third quarter. So I believe that there is a smaller risk of further downside in the fourth quarter. Although there could be some impact of the coronavirus outbreak. What do you think?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [58]

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From the third to the fourth quarter, we're not anticipating a further decline.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [59]

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And with the inventory valuation gain and loss, you expect the stable situation, albeit at the low level. Am I correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [60]

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Yes.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [61]

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I see. My second question, in Health Care, the Muse cell. The fifth clinical trial has been announced by Nagoya University. Congratulations. For the fourth quarter, you are expecting a loss. So basically, I understand that there will be increased expense at MTPC. I wonder if there are other factors that are going to push up the expenses.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [62]

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No. For pharmaceuticals, we do not expect any particular factors to push up the expenses other than the usual concentration of expenses at the end of the fiscal year.

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Operator [63]

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The next questioner is Mr. Umebayashi from Daiwa Securities.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [64]

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Umebayashi from Daiwa. I only have one question, on the petrochemicals. Since the beginning of the year, there were some disruptions at Mizushima ethylene production plants. I would like to know the impact. To what extent is it reflected in your guidance for the fourth quarter?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [65]

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In petrochemicals, because of the disruptions, we were affected for about 2 weeks, and we are expecting the loss to be around JPY 1 billion, which is reflected in our fourth quarter projection.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [66]

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I see. So on quarter-on-quarter, you are expecting the profit to deteriorate by JPY 2 billion or so, JPY 1 billion of which would be in relation to Mizushima. So what about the remaining JPY 1 billion?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [67]

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Well, towards the end of the fiscal year, we'll see a concentration of the repair and maintenance expenses. And also from the third to the fourth quarter, there is a difference in terms of the maintenance turnaround at Mie plant, and that is reflected.

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Operator [68]

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The next questioner is Mr. Takeuchi from SMBC Nikko Securities.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [69]

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Takeuchi from Nikko. I would like to ask about the capacity utilization rate for main products, the actual in the third quarter and the projection for the fourth quarter. Should I specify products?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [70]

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Yes. We'd appreciate it if you do so.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [71]

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Well, then why don't we start from phenol chain.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [72]

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Phenol chain, full capacity operation, almost.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [73]

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And that is for the third quarter and the fourth quarter as well?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [74]

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Yes, for the fourth quarter as well.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [75]

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What about MMA? I know there were some disruptions which were excluded. So what was the utilization rate, excluding the impact of the disruptions?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [76]

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On average, 60% in the third quarter. And since the beginning of the year, 70%.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [77]

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So when you say average 60% for the third quarter, you were excluding the impact of the disruptions. Am I correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [78]

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It's very difficult to draw a clear line between disruption and operations. So please assume that, that impact is included.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [79]

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I see. So you are going to raise the production, the utilization rate from the third quarter to the fourth quarter, correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [80]

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Yes, that will be the case with the absence of disruptions.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [81]

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What about ethylene and polyolefin?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [82]

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For ethylene, full capacity operation has been continuing, and we plan to continue. For polyolefin, basically, close to full capacity operation with some decline maybe, but more or less full capacity.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [83]

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I see. How about coke? Basically, full capacity operation for coke?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [84]

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80% utilization or load is the rate.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [85]

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That was for the third quarter, and that will be for the fourth quarter?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [86]

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Yes. In the third quarter, around 80%. And for the time being, that is the rate that we have in mind.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [87]

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I see. My second question, I'm looking at the battery materials in the Performance Chemicals. Some of your competitors say there was a decline quarter-on-quarter. So can you talk about the volume projection for the fourth quarter as well as the results in the third quarter?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [88]

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Basically, for electrolyte, it is steadily growing. For anode materials, there is a slight decline in volume due to the reduced sales for ESS. And we believe that this will continue into the fourth quarter.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [89]

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So for electrolyte, you are expecting the same level for the fourth quarter as the third quarter, or even a growth?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [90]

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In terms of the growth rate, it might slow down. But the growth itself is expected to continue.

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Shinobu Takeuchi, SMBC Nikko Securities Inc., Research Division - Senior Analyst [91]

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Some of your competitors are saying that they are feeling the impact of the production adjustment on the part of the customers. But do I take it that, that is not the case in your company?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [92]

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Well, in China and U.S., there is some slowdown, but it's very strong in Europe. So in total, we expect a growth.

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Operator [93]

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Next questioner is Mr. Miyamoto from UBS Securities.

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Go Miyamoto, UBS Investment Bank, Research Division - Analyst [94]

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Miyamoto from UBS, I have 2 questions. First is on MMA, if I may. You revised by JPY 15 billion, which is rather large. So can you elaborate on the factors? You were expecting the market price to be $1,600 for the second half, but now it's $1,530. And I also would like to know what the projection for price for Europe and U.S. and the impact of the disruptions, which was about JPY 3 billion in the third quarter. So can you talk about those factors?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [95]

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Basically, the downward revision of JPY 15 billion, as you mentioned, the disruptions amounting to JPY 3 billion. And for other factors, basically, we are looking at the impact of lower market price. The original assumption was $1,600, now around $1,530. I can't give you the details, but there is a decline in profit in Europe expected as well.

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Go Miyamoto, UBS Investment Bank, Research Division - Analyst [96]

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So market price factor actually accounts for only a difference of 4%. So that shouldn't explain everything. So do I take it that the remainder comes from the market price factor in Europe and the U.S.? What about the factors other than the disruptions?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [97]

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Well, some decline in Europe and the U.S. as well as the problem at SAMAC, which was not included in our original assumption. In Asia, we do not expect a big drop in volume, but in North America and Europe, some decline in volume.

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Go Miyamoto, UBS Investment Bank, Research Division - Analyst [98]

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So for Europe and North America, other than the disruption impact of JPY 3 billion, you do not expect much difference?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [99]

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Well, acrylic sheets, synthetic or artificial marble and paint are rather sluggish in the U.S., which is having some impact.

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Go Miyamoto, UBS Investment Bank, Research Division - Analyst [100]

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I see. My next question is on sustainable resources. In China, the restrictions in disposable plastics have been strengthened. I'm wondering if you are seeing stronger inquiries regarding your BioPBS products.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [101]

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Regarding BioPBS, compared to 2018, we are seeing a close to threefold increase in 2019, and we expect a large increase going forward as well. I cannot comment on the volume, but conventional applications were coffee cups, paper and shopping bag. And there is the marine biodegradable plastics, which has been excluded from the restriction by the government, and we are seeing inquiries on that type of product as well. So there is a diversified requirement and we are engaged aggressively in the development of the next-generation products, and we are hoping to see increase in applications.

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Go Miyamoto, UBS Investment Bank, Research Division - Analyst [102]

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So you expect increase in the fourth quarter as well as into fiscal year 2020, correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [103]

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Yes.

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Operator [104]

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Thank you very much. This concludes the Q&A session. I now invite Mr. Oki for the closing remarks.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [105]

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First, I would like to make some additional comments, a follow-up comment in relation to the question raised by Mr. Yamada from Mizuho Securities regarding the Muse cell product. At Nagoya University, a new clinical trial started, but this is a study that is conducted by Nagoya University and not by LSII. As far as LSII is concerned, its involvement is with regards to the existing 4 clinical trials. And therefore, the clinical trial in relation to this filing is led by the doctors.

And with that additional comment, I'd like to conclude by thanking you for your participation. I ask for your continued support and understanding. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]