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Edited Transcript of 4188.T earnings conference call or presentation 1-Nov-19 8:00am GMT

Q2 2020 Mitsubishi Chemical Holdings Corp Earnings Presentation

Tokyo Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi Chemical Holdings Corp earnings conference call or presentation Friday, November 1, 2019 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

* 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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This is Motohiro Oki of Mitsubishi Chemical Holdings. Thank you very much for your continued support. I also thank you for your participation in our net conference today despite your busy schedule.

I would like to review the financial results for the first half of the fiscal year ending March 2020. Please turn to Page 4. One thing to note before starting the explanation. As described at the first quarter earnings briefing, we have classified the businesses operated by LSI Medience Corporation and its subsidiaries and affiliates as discontinued operations based on the decision to exchange all the shares held by its parent company, Life Science Institute, for a part of PHC Holdings' shares as part of a strategic capital partnership. Exchange of shares was completed in August of this year. Please note that, accordingly, the earnings related to these businesses are excluded from the results for the current fiscal year and the corresponding period of the previous fiscal year.

Now the overview of the consolidated statements of operations. The average exchange rate during the period was JPY 108.7 to the U.S. dollar, the yen appreciating by JPY 2 year-on-year. The price of naphtha was JPY 42,800, a decrease of about JPY 8,300 year-on-year.

Sales revenue was JPY 1.8277 trillion, down JPY 54.2 billion year-on-year. The factors were exchange rates minus JPY 24 billion; price differential minus JPY 86 billion; and volume differential plus JPY 56 billion. The price differential came from the lower prices for petrochemical products due to lower naphtha prices and lower market prices for MMA and phenol-polycarbonate chain materials. The volume differential came from positive JPY 85 billion from the acquisition of European business in Industrial Gases and minus JPY 26 billion from a decrease in royalty revenue on Gilenya in pharmaceuticals and minus JPY 3 billion in others. This, despite a lesser impact of maintenance turnaround in petrochemicals, was mainly due to lower sales of MMA and needle coke and semiconductor and automobile-related products and Performance Products.

Core operating income totaled JPY 130.8 billion, down JPY 56.4 billion year-on-year, primarily as a result of a smaller variance in prices between raw materials and products and mid-market downturn for MMA. Results by business segment will be explained later.

Special items resulted in a net expense of JPY 200 million. This also will be explained later.

Operating profit based on IFRS was JPY 130.6 billion. Financial income and expenses was a net expense of JPY 8.2 billion or JPY 5.6 billion more than a year earlier. This was mainly due to a JPY 4.4 billion increase in interest payments due to an increase in borrowings related to the acquisition by Taiyo Nippon Sanso of European and U.S. gas businesses as well as a JPY 700 million decrease in dividends received and a JPY 400 million decrease in gain on foreign exchange. As a result, profit before tax was JPY 122.4 billion.

Corporate income tax was JPY 37.6 billion. Net income from continuing operations was JPY 84.8 billion. Net income from discontinued operations, explained at the beginning, was JPY 16.9 billion, including a JPY 15.8 billion gain on share exchange after tax. Gain on share exchange is a difference between the fair value of PHC Holdings' shares received in the exchange and the consolidated net asset value of LSI Medience Group excluded from consolidation. Net income was JPY 101.7 billion. The bottom line net income attributable to owners of the parent was JPY 81.3 billion. It was in line with the initial forecast, but JPY 38.9 billion lower than in the previous year.

Share of profit of associates and joint ventures included in core operating income was JPY 8.1 billion, down JPY 8.1 billion year-on-year. This was mainly due to a decrease in earnings at affiliated companies engaged in MMA and phenol-polycarbonate chain materials businesses.

Next page, sales revenue and core operating income by business segment. Sales revenue and core operating income decreased in all segments, except Industrial Gases. Details, including the results by subsegment will be explained later. Gain or loss on inventory valuation, as posted at the bottom, were Performance Products minus JPY 2.4 billion, Chemicals minus JPY 10.6 billion and carbon minus JPY 300 million. While the naphtha price ended upward during the first half of the previous fiscal year, rising from JPY 48,700 in Q1 to JPY 53,500 in Q2, it trended downward this year from JPY 45,200 in Q1 to JPY 40,200 in Q2. As a result, the inventory valuation difference had a major impact on profits for Chemicals, especially petrochemicals.

Some additional comments on quarter-on-quarter comparison. Profit for functional products improved by about JPY 1.3 billion, mainly owing to lower raw material prices and the impact of fires at the polyester film plants having been resolved. As for performance chemicals, while the market prices for phenol-polycarbonate chain materials declined, an increase in sales of some sustainable resources brought the profit level comparable to that in the first quarter. MMA profit was down JPY 2.3 billion, mainly due to a decline in market prices. In petrochemicals, the impact of unplanned maintenance work at the ethylene center in Mizushima was resolved. But due to a deterioration in inventory valuation following a drop in naphtha prices, profit remained almost unchanged quarter-on-quarter. Carbon profit decreased by JPY 3.1 billion. Coke profit decreased due to a decline in sales volume, inventory valuation deterioration coming from a sharp drop in coking coal prices and worsened price spread for exported coke. Needle coke posted a decline due to a decrease in sales volume resulting from inventory adjustments by electrode manufacturers and a maintenance turnaround that is conducted once every 2 years.

Profit for Industrial Gases increased by JPY 2.1 billion due to the seasonal demand increase for carbon dioxide and steady progress in U.S. gas. Health Care profit was down JPY 8.8 billion as the order levels was depressed as a run-up to the drug price revisions in relation to the consumption tax hike on October 1.

Next, analysis of changes in core operating income. Profit decreased by JPY 56.4 billion year-on-year. The factors on total consolidated basis were price differential minus JPY 33.7 billion, volume differential minus JPY 7.6 billion, fixed cost reductions plus JPY 8 billion and others minus JPY 23.1 billion. Of the price differential, main factors were minus JPY 31 billion in Chemicals due to a decline in market prices for MMA and minus JPY 1.9 billion in Performance Products due to a decline in market prices for phenol-polycarbonate chain materials. As for volume differential, Health Care posted minus JPY 26.1 billion despite a growth in sales of domestic priority products due to a decline in royalty income on Gilenya. Industrial Gases posted positive JPY 17.2 billion as an effect of the acquisition of European and U.S. businesses. Chemicals posted positive JPY 1.6 billion, while MMA saw a decrease due to troubles at the U.S. Beaumont plant, and carbon saw a decrease in coke and needle coke. Petrochemicals benefited from difference in the scale of maintenance turnaround and the problems at the Kashima polypropylene plant being resolved.

Performance Products was minus JPY 1.4 billion. While phenol-polycarbonate chain was spared of the impact of maintenance turnaround, demand for semiconductor-related products decreased. Fixed cost reductions were positive JPY 8 billion, reflecting steady progress. Others were minus JPY 23.1 billion. As explained earlier, this was a result of inventory valuation deterioration minus JPY 13.3 billion; a decrease in share of profit of associates and joint ventures, minus JPY 8.1 billion; and an increase in repair and R&D expenses.

Next, overview of the Performance Products segment. Sales revenue was JPY 548.9 billion, a decrease of JPY 26.7 billion year-on-year. And core operating income was JPY 40.5 billion, down JPY 5.2 billion. By subsegment, functional products posted sales revenue of JPY 34.3 billion, down JPY 15.3 billion; and core operating income of JPY 25.3 billion, up JPY 1.6 billion. While demand for semiconductor and automotive applications decreased in high-performance engineering plastics, profit increased owing to strong sales of some optical film products, specifically Clearfit and products related to environment and living solutions, such as ion-exchange resins. Fixed cost reductions also contributed.

As for the 2 polyester film plants that have been suspended due to fire incidents, the Indonesian plant resumed operations in April and began commercial production in May. The Chinese plant resumed production in July. In performance chemicals, sales were JPY 204.6 billion, down JPY 11.4 billion. And core operating income was JPY 15.2 billion, down JPY 6.8 billion.

In phenol-polycarbonate chain materials, while the effective maintenance turnaround was resolved, market prices dropped from the strong level posted in the previous year, and sales of functional materials such as epoxy resins decreased due to the slowdown in semiconductor demand. As a result, sales and profits decreased year-on-year.

Regarding the various analysis chart, the price differential of minus JPY 1.9 billion was mainly due to the decline in market prices for phenol-polycarbonate chain materials. Volume differential of minus JPY 1.4 billion was mainly due to the decrease in sales in advanced molds and composites for semiconductors and automobiles. While performance chemicals benefited from the maintenance turnaround effect being resolved for phenol-polycarbonate chain materials. Others included deterioration in inventory valuation and share of profit of associates and joint ventures.

Next, overview of the Chemicals segment. Sales revenue was JPY 563.7 billion, down JPY 85.2 billion. And core operating income was JPY 36 billion, a decrease of $46 billion. By subsegment, MMA posted sales revenue of JPY 156.6 billion, a decrease of JPY 62.3 billion and core operating income of JPY 25.3 billion, down JPY 38.2 billion. The main factor was a decline in MMA market prices due to weaker demand.

As for the MMA market, the average price in the same period last year was $2,650, and is $1,750 for the first half of this year. Currently, it's trending around $1,550. The U.S. Beaumont plant, which suspended its operation due to the March 8 equipment trouble, has resumed operation on September 20.

As for the petrochemicals, the sales revenue was JPY 271.8 billion, and the core operating income was JPY 1.8 billion. Year-on-year change for the revenue was down by JPY 21 billion and down by JPY 5.4 billion for the profit. Despite the lower impact of scheduled maintenance and repairs at the ethylene production facility and increase of the sales volume, the revenue was down year-on-year due to the decline of naphtha price. With respect to the core operating income, despite the lower impact of scheduled maintenance and repairs as well as the resolution of the polypropylene production equipment issues at the Kashima plant from 2 years ago, the drop in ethylene glycol market price and inventory valuation loss worked negatively and pushed the profit downward significantly. As for the carbon, the sales revenue was JPY 135.3 billion. The core operating income was JPY 8.9 billion. Both revenue and profit was down year-on-year by JPY 1.9 billion and by JPY 2.4 billion, respectively.

Coke saw a decline in sales volume and a sharp drop in coking coke (sic) [coking coal] price in September as well deterioration of export spread. As a result, the profit decreased.

As for the needle coke, the sales volume dropped due to the inventory adjustment by electrode manufacturers. However, the price trended higher than the same period last year. As a result, the positives and negatives offset each other in the first half. For the second quarter, the profit was down year-on-year due to the biennial scheduled maintenance and repair.

Please turn to the next page for the performance of Industrial Gases segment. In the Industrial Gases segment, the sales revenue was JPY 419.5 billion, and the core operating income was JPY 44.3 billion. The revenue rose by JPY 93.8 billion, and the profit increased by JPY 17.4 billion. Major reasons for the increase in both revenue and profit includes the impact of European and U.S. businesses acquired in the second half of the previous year as well as the strong performance of the U.S. gas business. Newly acquired European gas business brought about JPY 85.3 billion of sales and JPY 13.2 billion of core operating income.

Next, I would like to explain about the performance of the Health Care segment on the next page. Sales revenue was JPY 205.3 billion. Core operating income was JPY 9.8 billion. Both revenue and profit were down year-on-year by JPY 24 billion and JPY 24.5 billion, respectively. Despite growth in priority products in domestic ethical pharmaceuticals, some Gilenya royalty revenue, which was in question, was not recognized, owing to arbitration proceedings. Therefore, revenue and profit were down year-on-year. Now as for the royalty of Gilenya, which was under the arbitration process with Novartis, although sales revenue was not recognized, cash was received from Novartis, including the part under question.

Regarding the regenerative medicine using immune cells, as the material says, we have started a clinical trial in July this year, targeting at the fourth indication spinal cord injuries. In the same month of July this year, our cell processing center, Tonomachi CPC was authorized to manufacture regenerative medicine products with an aim to apply for marketing approval in 2021.

Moving on to the next page for consolidated special items. Total special items for FY 2019 first half was JPY 200 million cost. There is no major item. JPY 1.4 billion of impairment loss is mainly associated with the decision to hold production at 1 polypropylene line at the Kashima plant to reinforce profitability. Loss on sale and disposal of fixed assets as well as gain on sale of property, plant and equipment were related to the removal of used equipment and sale of idle land.

I would like to explain about the consolidated cash flow in the next page. Looking at the adjusted cash flows, net cash provided by operating activities for fiscal year 2019 first half was JPY 251.2 billion cash in. Except for income before taxes and depreciation and amortization, the last day of the previous fiscal year was a holiday. Operating receivables/payables was JPY 28.4 billion cash-in due to the drop of raw material price. The JPY 47.5 billion cash-out includes tax payment.

Net cash provided by investment activities was JPY 89.6 billion cash-out. We had JPY 108.2 billion of cash-out associated with the CapEx. However, there is no major CapEx item. There are many investments for production reform and for rationalization. We sold idle land and cross-shareholdings, which led to JPY 9.1 billion cash-in for sales of assets. As a result, free cash flow for this first half was JPY 161.6 billion cash-in. In the meanwhile, we've been compressing the cash on hand. We've repaid interest-bearing debt of JPY 175.7 billion and made JPY 45.3 billion payout for the year-end dividend.

Next, Page 13 shows consolidated statements of financial positions. Total assets as of September 30, 2019, was JPY 5.3388 trillion, down by JPY 233.7 billion from the previous year-end. Major reasons for the decline in total assets are as follows: increase of JPY 100 billion due to the recognition of these assets as per the introduction of IFRS 16 new lease accounting, minus JPY 96 billion due to yen appreciation; minus JPY 96 billion due to the impact of declining raw material price on the trade receivables and drop in trade receivables due to the timing of the fiscal year-end being a holiday. As explained earlier, we are reducing cash and cash equivalent, and that led to minus JPY 76 billion, in total decline of JPY 233.7 billion.

On the credit side, net interest-bearing debt for the first half of FY 2019 was JPY 1.7296 trillion, down by JPY 6.6 billion from the fiscal year-end.

The change is attributable to the fact that lease related to debt, JPY 100 billion, is now newly recognized as interest-bearing debt. As a result, net debt-to-equity ratio was 1.25, similar level to the March 2019. Ratio of equity attributable to owners of the parent was 25.8%, up by 1.1%.

So far, I have explained about the Q2 performance in FY 2019. Now I would like to explain about the consolidated financial forecast for FY 2019. Please turn to Page 15 for full year revised guidance. We assume both second half exchange rate and naphtha price to be equivalent to the current level. Exchange rate is assumed to be JPY 108.5 and naphtha, JPY 41,000. We forecast JPY 3.765 trillion sales revenue, which is down by JPY 315 billion from the initial forecast announced in May. We made downward revision due to the declining naphtha price, lower than initially expected market price for MMA monomer, phenol and polycarbonate chain and due to the deconsolidation of LSI Medience.

Revised core operating income is JPY 250 billion, down by JPY 50 billion from the initial forecast. I will touch upon this later by segment. We increased the special items by JPY 9 billion from the initial forecast.

At the beginning of the fiscal year, we included income from a stock swap in the special items. However, we have reallocated it in net income from discontinued operations. JPY 9 billion cost mainly covers a removal used -- removal of used equipment, which we've been working on in a planned manner. We have revised the financial income and expenses as well as income tax based on the first half result. As a result, the bottom line net income attributable to orders of the parent is now JPY 131 billion revised downward by JPY 37 billion.

Next, I would like to give explanation by business segment. For a full forecast of sales revenue and the core operating income by business segment, please refer to Page 16. Looking at numbers by subsegment, as for functional products, we factored in some sales increase in alumina fiber for automotive sales expansion due to stricter emission regulation for the second half. However, we believe current business condition will continue on for the latter half of the year, yet we initially expected demand recovery in the second half. Therefore, we revised the forecast downward. With regard to the Performance Chemicals, we also believe the current business environment remains the same for the second half. On top of that, we will allocate the prototyping cost to win R&D in sustainable resources for the second half. Although we already assumed some decline in profit from the first half, we further made a downward revision.

As for the MMA, the market price dropped significantly lower than initial expectation, and we've had unexpected trouble at the U.S. Beaumont factory. Due to these reasons, we've revised downward for this segment. Now MMA market price is still trending around $1,550, although price in Chinese market is now on the rise. Our assumption for the second half is around $1,600. We have taken the forecast for the petrochemicals downward from the initial forecast due to the impact of inventory valuation. Regarding carbon products, we expect the current business environment for both coke and needle coke will continue into the second half. Sales volume is expected to come down from the earlier forecast. Therefore, we've made a downward revision. We have already agreed with the domestic electrode manufacturers to keep the current needle coke price until March 2020.

Situation is different for Industrial Gases in the different regions. However, we keep the forecast the same as the initial forecast.

As for the Health Care, SG&A for the pharmaceuticals has slipped into the second half, and we keep the guidance same as the initial forecast. In the Life Science, we made a downward revision due to the deconsolidation of the LSI Medience Group. This is all about the revision of the forecast.

Finally, I would like to explain about the dividend. Our basic policy of returning profits to shareholders uses 30% of the medium-term level as a guideline for the consolidated dividend payout ratio and to make a stable dividend payment. Based on the business performance, which I have explained so far, our dividend policy as well as future business development, we've made a comprehensive decision to pay an interim dividend of JPY 20 per share, same as the initial forecast. We also set year-end dividend at JPY 20 per share, which makes the expected annual dividend JPY 40. Based on the revised forecast, consolidated dividend payout ratio is expected to be 43.4%.

This concludes my speech. We will now take questions.

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Questions and Answers

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Operator [1]

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Watabe from Morgan Stanley MUFG Securities.

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

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My first question is on MMA on Page 5 and the forecast. From the first to the second quarters, market prices fell by about $300, and yet your profit didn't decline much. What do you think were the reasons for that?

And for the second half, you expect the market price to be around $1,600. But currently, the market prices in Asia have not yet recovered. What is your current view on supply and demand?

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

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First, the MMA for the July-September quarter. Since September, market prices in China have improved somewhat, but [ICIS] price has yet to improve, remaining at around $1,550 or so. That was one factor. In addition, there were production disruptions at different facilities, including Beaumont, and some facilities at SAMAC as well between June and September. Due to these factors, overall, the operating profit dropped from JPY 13.8 billion in the first quarter to JPY 11.5 billion in the second quarter. There are many factors involved, the slight decrease in volume and a drop in market prices. But given lower prices for raw materials and feedstock, the decline was kept at this level.

The projection of $600 for the second half for the market prices in China, the demand in China seems to be recovering smoothly. But given the planned capacity expansions in the industry, we do not expect much recovery going forward. We expect a range between $1,550 and $1,600 to continue.

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

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What were the positive factors from the first to second quarters?

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

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Raw material and feedstock prices were slightly lower, including domestic naphtha price, down from JPY 45,400 to JPY 40,100.

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

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And there are no other factors?

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

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That is correct. There were some quarter-on-quarter fluctuations, but nothing noteworthy.

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

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I see. My second question is on functional products. You mentioned Clearfit. Including the Clearfit, what is the current situation and the projection for the second half for optical film products? You aren't expecting much difference from the first half and the second quarter. Can you elaborate on your projection?

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

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For optical film overall, during the first half, Clearfit was strong supported by demand in the emerging markets. Sales progressed smoothly. As for polyester film, due to inventory adjustments at customer sites, sales decreased. But with the effect of fire incidents reduced, we saw steady progress.

As for OPL film in the first quarter, due to the inventory adjustments, sales declined, but recovered in the second quarter. So steady progress here as well. As for the second half, we believe that the demand for Clearfit will continue until the Chinese New Year holidays. As for optical polyester film and OPL film, due to the investment adjustments at customer sites, demand might weaken somewhat. What we believe that, overall, the current situation will continue.

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

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So you're saying that the strong demand for Clearfit is expected to continue?

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

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Yes. We believe this will be sustained until the Chinese New Year holidays.

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Operator [12]

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Umebayashi from Daiwa Securities.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [13]

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My first question is on carbon, the reasons for profit decrease quarter-on-quarter, which amounted to approximately JPY 3 billion. Earlier, you mentioned maintenance turnaround and inventory valuation difference of coke, which I think amounted to around JPY 600 million as well as a decline in sales for needle coke. Can you elaborate on the breakdown of JPY 3 billion decrease in profit?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [14]

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The general breakdown of JPY 3 billion difference, inventory valuation change due to a rapid decline in coking coal price amounted to approximately minus JPY 600 million. In addition, when the coking coal price declines rapidly, the exported spread worsens as well, which accounted for another JPY 500 million or so. And shipment volume declined, especially the shipment volume of exported coke declined in the second quarter as a direct effect of vessel operation schedule, which amounted to around JPY 1 billion. And there was an effect of maintenance turnaround on needle coke, which is done once every 2 years. So these were the negative factors.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [15]

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So the sales decrease in needle coke due to maintenance turnaround would be around JPY 1 billion, am I correct?

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

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Yes, I think that will be a fair statement.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [17]

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I see. As for the shipment volume for the second half for the needle coke, you expect the level to return to the premaintenance turnaround level. Am I correct?

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

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Yes. Since the first quarter, we saw the volume decrease due to the inventory adjustments at electrode manufacturing sites, and we believe this to continue.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [19]

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I see. My second question is on sustainable resources. In the second quarter, sales increased more so than in the first quarter. And for the second half, you said that you will be aggressively investing in the development efforts. Currently, what products are growing? And on the full year basis, what do you expect the sales from the segment to be? And how much growth do you expect year-on-year?

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

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As for the sustainable resources products, basically, DURABIO related products and BioPBS. DURABIO products are being adopted for automotive applications, and it is growing. As for BioPBS, since last year, the business environment is turning favorably, and we see an increase in the number of inquiries from major brand owners. And we are continuing efforts for more adoptions. This is being produced in Thailand. So with cooperation with PTT, we are working on developing new application areas. So compared to last year, we see growth in many aspects.

As for the sales amount, I'm afraid we do not disclose specific numbers.

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Hidemitsu Umebayashi, Daiwa Securities Co. Ltd., Research Division - Research Analyst [21]

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I see. As for the development expenses, they are not for any specific items, but you are going to accelerate the efforts to develop new applications overall. Am I correct?

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

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Yes, that is correct. We do see an increase in the number of inquiries, including this from the major brand owners. So in addition to existing applications, we want to expand the application areas. And so for the second half, we want to increase the number of prototypes being manufactured, which entails larger cost.

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Operator [23]

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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 [24]

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I'm looking at Pages 20 and 16, and I have the following question. You have explained the plans for the second half. What about the third half projections for main products? For example, core operating income for the third quarter, how that compares to the second quarter or how that compares year-on-year?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [25]

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You're asking about the third quarter, the quarter on comparison and year-on-year comparison, correct?

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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 [26]

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Yes.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [27]

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Would the first half versus second half projection suffice? Well, first half-second half comparison has been covered already? Or are you saying that there are no specific information? If you could specify business, maybe I can respond to your question.

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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 [28]

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I'm interested in functional products, performance chemicals, MMA, petrochemicals and carbon.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [29]

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The third quarter for example, for functional products, we expect little change from the second quarter. No change in the business environment either. That is correct. Basically, we expect the current situation to continue. As for performance chemicals, as was explained earlier, in sustainable resources, we are going to increase the number of prototypes, which will have a negative impact quarter-on-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 [30]

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I see. How about MMA? I understand there is a large number of maintenance turnaround in the third quarter.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [31]

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Yes. Beaumont has restarted, but the Memphis plant is in maintenance turnaround -- major maintenance turnaround in the third quarter. And also in Asia, there are some disruptions, and therefore, we expect a slight decrease.

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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 [32]

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What about the operating rates of MMA in the second and the third quarters? I think you said that in the first quarter, it was around 70%. What about the second and third quarters?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [33]

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In the second quarter, July-September quarter, overall, the operating rate was around 60%, as SAMAC had some problems related to the feedstock and raw materials. And therefore, the operating rate was slightly lower at around 60% between July and September. Current leaseback is having some problem again and therefore, the operating rate currently is a little lower. But for the second half, with these troubles being resolved, we plan to raise the operating rate to around 70%.

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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 [34]

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Average, 70% for the second half?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [35]

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Yes, that is correct.

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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 [36]

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What about carbon?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [37]

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For carbon, as was explained earlier, during the second quarter, due to the maintenance turnaround and inventory valuation difference, there were some onetime factors. With the absence of these, we expect a slight improvement.

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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 [38]

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The second half profits [JPY 10 billion], divided evenly between the third quarter and the fourth quarter, am I correct?

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

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Yes, that is correct.

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Operator [40]

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Ikeda from Citigroup Global Markets Japan.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [41]

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I have a question on main products and Performance Products. You explained display applications. How about high-performance film, carbon fiber, high-performance engineering plastics for semiconductors and EVOH, ethylene vinyl alcohol copolymer? How did they do in the first half and the second quarter? And what about projection for the second half?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [42]

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As for the high-performance engineering plastics, we have applications such as automotive, industrial machine tools and also semiconductors. And for those applications, we are not seeing sign of recovery, and demand is weak. And that will apply to the second half.

With regards to the carbon fiber, the major demands are in wind power generation and pressure vessels, and those demand trended relatively strong. And we have increased the prices in the Asian region.

And on packaging film-related business in the first half, second quarter, especially, we had unusually cool summer. Demand for beverage was small. However, for the second half, we believe the demand will be strong, especially in packaging film.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [43]

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What about EVOH?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [44]

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As for EVOH in the second quarter, supply-demand balance remained tight. And for the second half -- second half will have Christmas season, so we expect the demand will grow.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [45]

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And secondly, I would like to ask you about MMA. You said that in China, you saw market was bottoming, and MMA is also used in display as well. So from an application perspective, do you see any trend? And at the same time, I would assume that the Sumitomo Chemical, LG MMA, [WAFA] are working on the capacity expansion. So will you please comment on the supply trend? You said that the supply will increase going forward.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [46]

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As for MMA, well, looking at general merchandise, home appliances, their export are trending weak. However, we believe a shift from recycled to monomer and associated demand is going to trend good, and the government is implementing economic stimulus and MMA for soundproof material in railway, highway. Construction material use or application is relatively strong.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [47]

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Does that apply to paint, like water-based paint? Same? Strong?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [48]

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For paint, I haven't heard that situation has changed. As for capacity expansion going forward, Sumitomo Chemical Singapore plant and a Chinese competitor seemed to be working on the capacity expansion, and we take that into consideration. Currently, overall utilization is about 70% for us. Currently, MMA is looking tight, so we have to take that into consideration, and we are going to increase the utilization.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [49]

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You said that it's looking tight, but Asia and market price is not growing. Why?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [50]

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Oh, that's because of the increased supply will be absorbed. And after all the troubles and after scheduled maintenance and repair being complete, supply will increase, so customers in general are trying to see how it goes.

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Atsushi Ikeda, Citigroup Inc, Research Division - Director and Analyst [51]

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So the real recovery of marketplace, do you think it will -- can be seen next year, around the Chinese New Year?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [52]

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Well, currently, we are thinking that the price will be around $1,600.

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Operator [53]

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Now we would like to move on to the next question, Mr. Yamada from Mizuho Securities, please.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [54]

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I am Yamada from Mizuho Securities speaking. I have several questions. First, on Health Care, on Page 21. Health Care headcount is 9,007 people. And this headcount was reduced by 3,000 from the previous year-end. Is that because of the deconsolidation of Medience? If so, I think it's okay. I can understand that as a cost of discontinued operation. But if not, please explain the background.

And now next question is on Page 10, Tonomachi CPC of LSII marketing approval. I understand that currently, 4 ongoing clinical trials are being conducted. And are you assuming that this production facility has enough capacity to offer CL2020 to cover all the 4 ongoing clinical trials? Or are you expecting more volume than that? Will you please explain about the background, how you see the supply production volume.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [55]

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As for your first question regarding the headcount, this headcount reduction is purely due to the deconsolidation of Medience. Medience is offering blot test service, and they have about 3,500 employees in the entire group. So 3,000 headcount reduction is purely due to Medience deconsolidation.

And then as for Tonomachi CPC, as for the original production capacity for Tonomachi CPC, we are assuming that they can offer enough supply for the currently ongoing clinical trials. So we assume target indication, which are currently investigated into. But if we look beyond that period, we need to further expand the production capacity.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [56]

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So you're applying for the marketing and the manufacturing approval, right? So you're going to manufacture. And as for the first and the second target indication, the current application will be sufficient and can cover. But if you can make further progress on 1/3 and beyond the target indication, and then the current capacity will become insufficient. Is that correct?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [57]

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Yes. Now we assume that production for the currently investigated target indications.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [58]

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Now next question is related to petrochemicals within Chemicals. The second quarter, ethylene center and the major products such as phenol-polycarbonate, will you tell me the utilization for the ethylene center?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [59]

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In the second quarter?

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [60]

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In the second quarter, yes.

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [61]

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The phenol polycarbonate, well, it's fully utilized. And ethylene center for the second quarter, well, again, a full utilization because scheduled maintenance and repair is already done and complete.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [62]

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What about the polyethylene and polypropylene?

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Motohiro Oki, Mitsubishi Chemical Holdings Corporation - Executive Officer & GM of Corporate Management Office [63]

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Polypropylene, again, fully utilized. The polyethylene utilization is high, but not fully utilized.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [64]

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So do you think this situation will continue in the second -- third quarter?

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

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The third quarter -- in October for polycarbonate, well, we are going to have a scheduled maintenance and repair. But other than that, we expect the same situation will continue.

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Mikiya Yamada, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [66]

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So inventory -- due to the inventory valuation, the profit in the second quarter is compromised, and utilization is not really deteriorated. So is it fair for me to assume that Q3 profit will grow from Q2 if -- I mean, even if so, your latter half forecast is only like JPY 3.5 billion to JPY 3.6 billion. Even if I take 50%, is there any negative factor affecting the second half?

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

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Polyethylene will improve, but ethylene glycol market condition is getting tougher. So that part of performance will be a bit minus. Monoethylene glycol utilization is not 100% while we are adjusting the utilization based on the market situation.

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Operator [68]

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Now I would like to make the next question the last. Let me introduce that last person asking a question, Mr. Takeuchi from SMBC Nikko.

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

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I am Takeuchi from Nikko. I have 2 quick questions. First is regarding performance chemicals, especially electric components. What is the growth of the sales volume for electrolyte on full year? U.S. EV manufacturers are not achieving production plan. So will you please tell me your assumption in terms of the sales volume growth?

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

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As for electrode, 20% or so annualized growth is something we are seeing.

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

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So that's the result for the first half, and that's your expectation for the latter half of the year?

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

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That's correct.

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

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So no major difference from the initial forecast?

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

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That's correct.

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

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So it's not necessary to adjust the sales volume [to your] assumption?

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

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No.

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

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And now second question is regarding Page 6 about the cost reduction, chemical subsidiaries, reorganization, what kind of synergy are you expecting? What kind of cost-reduction benefit are you factoring in? So you are consolidating chemical subsidiaries and from top line perspective and from a synergy perspective, cost-reduction perspective, will you comment?

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

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So are you talking about the synergy of consolidating the 3 chemical subsidiaries?

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

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Yes.

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

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So rationalization impact of JPY 5.5 billion, synergy growth effect JPY 6.8 billion, just close to JPY 7 billion benefit.

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

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So based on -- I mean cost is improved further from your midterm business plan, and then the synergy effect is slightly behind. Compared to your initial forecast, there is no major change. Am I understanding correct?

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

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Yes, that's correct.

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Operator [83]

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Thank you very much. That was Mr. Takeuchi. We have received other questions. However, unfortunately, time has come to close the Q&A session.

Finally, from Mitsubishi Chemical Holdings, Mr. Oki is going to give us a few remarks.

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

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Thank you very much for attending our net conference despite your busy schedule today. There are still ongoing uncertainties, but in order to offer profit value, we will do our best. And I would like to ask for your understanding and support.