4005.T4005.TJPX
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Operator: As it is time to start, we will now begin the conference call for the presentation of financial results for fiscal year 2025 third quarter. Thank you very much for your participation. Today, Mr. Yamauchi, Executive Officer and General Manager of Accounting Department, will give a briefing. And later, we will have a Q&A session. We will conclude the call at around 16:50. Now Mr. Yamauchi, over to you.
Toshihiro Yamauchi: Thank you very much. This is Yamauchi speaking. Thank you very much for attending the Sumitomo Chemical conference call despite your busy schedule. I'd like to thank investors and analysts for your deep understanding and support to our management. Thank you very much for that. Now let me start with a briefing of the financial results for fiscal year 2025 third quarter. Before explaining the details of our financial results, I would like to give a brief update on the status of profit and loss for the third quarter. Core operating income and net income attributable to owners of the parent for the third quarter significantly increased compared to the same period of the previous fiscal year. Core operating income was driven by Sumitomo Pharma's strong sales and partial divestiture of the Asian business recorded a gain. Core operating income of Essential & Green Materials increased significantly year-on-year with a gain on the partial sale of shares in Petro Rabigh and better trade terms. Agro & Life Solutions crop protection and chemical business had solid performance. Net income attributable to owners of the parent already exceeded in the third quarter, the forecast announced in November. However, we anticipate that the recording of losses from nonrecurring items will be concentrated in the fourth quarter. Consolidated financial results of the third quarter of FY 2025. Sales revenue was JPY 1.7063 trillion, down JPY 198.5 billion year-on-year. Core operating income expressing recurring earnings power was JPY 186.8 billion, up JPY 126.8 billion year-on-year. Nonrecurring items not included in core operating income was a loss in total of JPY 6.4 billion. In the same period of the previous year, there was the impact of recognizing our interest in Petro Rabigh's debt forgiveness gain of JPY 86 billion as a nonrecurring item, leading to a profit of JPY 85.4 billion. So compared to the previous year, this has worsened by JPY 91.8 billion. As a result, operating income was JPY 180.4 billion, up JPY 35 billion year-on-year. Finance income was a loss of JPY 36 billion, improvement of JPY 69.3 billion compared to the same period of the previous year when loss on debt waiver for Petro Rabigh was recognized. Gain or loss on foreign currency transactions included in finance income or expenses was a loss of JPY 7.7 billion, worsening JPY 22.8 billion year-on-year. Income tax expenses was a loss of JPY 300 million, increase of tax burden of JPY 900 million year-on-year. Net income or loss attributable to noncontrolling interests was a loss of JPY 56.8 billion, worsening by JPY 44.7 billion year-on-year with improvement of Sumitomo Pharma's income. As a result, net income attributable to owners of the parent for the third quarter was a profit of JPY 87.4 billion, up JPY 58.8 billion year-on-year. Exchange rate and naphtha price, which impact our performance average U.S. dollar rate during the term was JPY 148.71 to a dollar and naphtha price was JPY 65,000 per kiloliter. Yen appreciated feedstock price declined compared to the same period of the previous year. Next, sales revenue by reporting segment. Please look at Page 6. Total sales revenue was down JPY 198.5 billion year-on-year. By segment, sales revenue decreased in all segments except Sumitomo Pharma. As for year-on-year changes of sales revenue by sector, sales price decreased by JPY 49.5 billion, volume decreased by JPY 191 billion. Foreign exchange transaction variance of foreign subsidiaries sales revenue decreased by JPY 28 billion. However, the large negative difference in volume is largely due to business restructuring efforts, such as the sale of subsidiaries and business withdrawals and decrease in shipment volume at our sales subsidiary due to a periodic plant maintenance carried out by Petro Rabigh this fiscal year. Next is Page 7. Total core operating income increased by JPY 126.8 billion year-on-year. Analyzing by sector, price was plus JPY 6 billion. Cost, plus JPY 3.5 billion. Volume variance, including changes in equity in earnings of affiliates was plus JPY 117.3 billion. I will explain the details on the following pages. But significant increase in volume of variance gain was largely due to profits from business divestitures. Next is performance by segment. Please turn to Page 8. Agro & Life Solutions. Core operating income was a profit of JPY 28.1 billion, up JPY 8.6 billion year-on-year. Price variance, trade terms improved for overseas crop protection products. Volume variance, there were long -- there were strong shipments in Japan, India and other regions but income declined from exports due to stronger yen and there was a stronger yen effect of sales of subsidiaries outside Japan when converted into yen. Please turn to the next page. ICT & Mobility Solutions. Core operating income was a profit of JPY 46.5 billion, down JPY 13.2 billion year-on-year. Price variance, selling prices of display-related materials declined. Volume variance, though there was a gain on the sale of large LCD polarizing film business, shipments of display-related materials decreased. Shipments of semiconductor process materials such as resist and high priority chemicals increased due to the continued gradual recovery of the semiconductor market. There was lower income from exports due to stronger yen and the stronger yen effect on the sales of subsidiaries outside Japan when converted into yen. Next page. Advanced Medical Solutions segment. Core operating income was a gain of JPY 300 million, down JPY 900 million year-on-year. Sales and affiliated companies decreased. Please turn to the next page. For the Essential & Green Materials segment, core operating income was JPY 19.8 billion, an improvement of JPY 64.1 billion year-on-year. As for the price variance, the profit margin for synthetic resins improved alongside the decline in primary raw material naphtha prices, and the profit margin for alumina also improved. Regarding the volume and other variances, we recorded a gain on the sale of a portion of our equity in Petro Rabigh equity method investee company. In addition, refining margins improved at that company, leading to an improvement in profitability and investments accounted for using the equity method. Please go to the next page. For the Sumitomo Pharma segment, core operating income was JPY 111.2 billion, up by 86.9 billion year-on-year. As for the price difference, due to the impact of NHI drug price revisions within Japan, the selling price fell. Cost differences resulted in a decrease in SG&A due to progress and rationalization and others. Regarding the volume and other variances, in addition to the increased sales of Orgovyx, a treatment for advanced prostate cancer and Gemtesa, a treatment for overactive bladder, gains from the partial transfer of equity in the Asia business are included. This concludes the overview of by segment performance. Next page will be the explanation of the consolidated statement of financial position. Total assets at the end of December 2025 totaled JPY 3.5104 trillion, up by JPY 70.6 billion compared to the previous fiscal year-end. Growth in inventory assets due to periodic plant maintenance at the Chiba plant and increased buildup for sales in the fourth quarter and beyond along with the acquisition of tangible fixed assets for new plant construction and expansions were the primary factors driving the increase. Interest-bearing debt was JPY 1.2215 trillion, down by JPY 64.6 billion compared to the end of the previous fiscal year. As a result, the D/E ratio at the end of December 2025 improved by 0.23x from 1.2x at the end of March 2025, reaching 0.96x. Next, I will explain the cash flows. Please look at Page 14. Operating cash flows from operating activities was positive at JPY 111.6 billion. However, cash inflows decreased by JPY 29.1 billion year-on-year. Quarterly income before taxes improved. However, this was influenced by factors such as the deduction of gains from business divestitures from operating cash flow and the significant improvement in working capital last year end based on immediate term concentrated measures to improve business performance. Cash flow from investing activities was negative JPY 39.8 billion, a decrease of JPY 96.6 billion year-on-year. This period also had the sale of part of Sumitomo Pharma's Asian operations. However, the same quarter last year included significant income from the sales of Sumitomo Pharma shares and Roivant and the sale of Sumitomo Bakelite shares. As a result, free cash flow was positive JPY 71.8 billion, a deterioration of JPY 125.7 billion compared to the positive JPY 197.5 billion recorded last third quarter. Cash flow from financing activities resulted in a negative JPY 100.6 billion due to factors such as loan repayments and dividend payments. This represents a decrease of JPY 41.1 billion in outflows year-on-year. Next, I will explain the outlook for fiscal year 2025. Please go to Page 16. I will explain from the business environment surrounding our company. Regarding the economic conditions, although investments in the field of technology are firmly supporting the global economy, future prospects remain uncertain due to the expansion of protectionism and increased geopolitical risks. In the main business environment, we use weather symbols to indicate our key business areas and our assessment of their respective environments. From the top regarding crop protection chemicals, we expect price competition to continue and inventory congestion in the distribution chain remains uneven across regions. Regarding the methionine market price, although it recovered in the first half of the fiscal year, we anticipate a continued downward trend in the second half. Displays are showing steady growth in mobile-related components. Demand for silicon semiconductors has recovered more than anticipated since our previous forecast and is currently showing steady growth. However, performance continues to vary across different fields. The petrochemical and raw materials market will continue to have low margins. That concludes the business environment overview. Now let me explain the consolidated performance summary. Please turn to Page 17. This is the summary of financial forecast for fiscal year 2025. Core operating income for fiscal year 2025 is forecasted at JPY 200 billion, showing improvement over time with an expected increase of JPY 15 billion compared to the November performance forecast. As shown in the graph in blue, excluding gains on the divestment of business, profit from business activities improved significantly at Sumitomo Pharma and Essential & Green Materials due to the results of fundamental structure reforms, resulting in a significant increase in profits from approximately JPY 80 billion in the previous fiscal year to approximately JPY 120 billion in the current fiscal year. So it has largely increased. Furthermore, and as for the profits attributable to owners of the parent, it has increased by JPY 1.5 billion to JPY 55 billion. Now furthermore, in light of the upward revision due to improved profit and loss, the year-end dividend per share to shareholders will be increased by JPY 1.5 from the JPY 6 announced in the November financial forecast to JPY 7.5 per share. As a result, the annual dividend amount will increase by JPY 4.5 from the previous year's JPY 9 to JPY 13.5. The payout ratio is expected to be approximately 40%. And please go to Page 18. This is showing the details of the business performance forecast. First, sales revenue is forecasted at JPY 2.3 trillion, up by JPY 10 billion from the previous forecast. As for the core operating income, as mentioned before, it is forecasted at JPY 200 billion. Net income attributable to owners of the parent as mentioned before will be JPY 55 billion, an increase of JPY 10 billion year-on-year. The assumptions regarding exchange rates and naphtha price are as stated on this slide. As for the sales revenue, we expect an increase due to higher shipments of semiconductor processing materials within our ICT & Mobility Solutions segment. As for core operating income, I will explain the situation by segment on the next slide. Please go to Page 19. As for the full year business performance by segment, regarding Agro & Life Solutions, Advanced Medical Solutions, Essential & Green Materials and Sumitomo Pharma segments, these 4 segments, as you can see here, the previously announced guidance remains unchanged. As for ICT & Mobility, Semiconductor processing material shipments are expected to increase, leading to a slight increase in profit compared to the previously announced guidance by JPY 2 billion. For others and company-wide expenses, compared to the previous forecast, we are expecting a JPY 13 billion increase. At the time we made an announcement last time, we consider the uncertainties in the business environment, so we have incorporated risks to a certain extent. The business activities are now progressing steadily. Therefore, we are forecasting an increase in profit compared to the previously announced forecast. This concludes the explanation of financial results and forecast. I would now like to take questions from the participants.
Operator: [Operator Instructions] Now we would like to receive the first question. From Morgan Stanley MUFG Securities, Mr. Watabe.
Takato Watabe: I'm Watanabe from Morgan Stanley. For Agro & Life Solutions, I have a question. In the third quarter, your profits and sales was not that large, but why was the profit in the third quarter and there are differences by region. And what is the situation of inventory adjustment and the movement towards fourth quarter? And by main products, what is the trend in the fourth quarter forecast compared to last year's fourth quarter, you expect a reduction in profit. Could you talk about Agro & Life Solutions?
Toshihiro Yamauchi: Thank you for your question. For Agro & Life Solutions sector, first, in the third quarter situation. Compared to last year, it is true that it is better. And by region, India and also in Japan, things were very solid. And Europe as well, the amount is not that large, but Europe was also firm. And in North America, compared to the same period of previous year, it is at a similar level. South America, it is slightly difficult. Last year, there was a drought, which is giving an impact. And credit concerns about the clients exist, so there are difficulties in increasing sales. Customers with high creditworthiness, in this case, competition is becoming strong. And by product, well, in that sense, is the main product [indiscernible], South America is a main market, but growth is a little slow.
Takato Watabe: Sales and profit trend still is not increasing that much, but profit is increasing. What is the reason for that? In the same quarter of the previous year, compared to the previous quarter or previous year, the impact of foreign exchange rate is seen in each region, there will be increase in local currency, but when converted into yen, there are cases which is flat or slightly declining. I think that is the impact. What is the progress of inventory adjustment from crop protection products? What is your prospect for the next fiscal year?
Toshihiro Yamauchi: For inventory, in general, it is moving to an improvement direction. United States and India, we are seeing improvements. But in South America, there is still some inventory remaining. So towards the next fiscal year, South America is the place where we have to resolve. Thank you.
Operator: We would like to take the next question Mizuho Securities, Mr. Yamada.
Mikiya Yamada: This is Yamada from Mizuho Securities. I was told to ask you one question. So I'd like to hear about the third quarter situation outlook regarding the ICT & Mobility Solutions. In the same way as the previous question related to Agro & Life Solutions, I would like to know the details. Specifically, 3 months in third quarter, the -- when you are doing analysis of the variances of core operating income, in 3 months, it was minus JPY 5 billion. And in the 9 months, it was minus JPY 3.7 billion. So year-on-year, it's a plus JPY 1.3 billion is what I think. For display-related products the shipment has declined. And thinking about the foreign exchange being negative, that means that the semiconductor was quite performing strongly. And so in semiconductor, was resist a good performer or in others good or is resist the contributor? And if so, the DRAM and NAND, the high prices are maintaining. So I would like to know the future trend of this.
Toshihiro Yamauchi: Thank you very much for your question. The ICT & Mobility Solutions situation for the third quarter is what you have asked. Looking at the year-on-year basis -- just a moment, please. Regarding semiconductors, from last year, gradually, it is recovering. And by field, memory-related area, the DRAM utilization is increasing and NAND is recovering. However, depending on the customer, it varies. For DRAM, due to the generation change, the South Korean usage is declining. For logic usage, Taiwan and China, new plants are being -- starting their operation and increasing. So our shipment volume is on the trend of increasing. However, on the other hand, South Korea and United States is flat.
Mikiya Yamada: Well, the resist specifically, is there such factors? With memory, it's going to change the generation. However, the U.S. capital part is increasing very well for resist?
Toshihiro Yamauchi: For resist, this is the overall situation compared to last year, the sales is increasing.
Mikiya Yamada: And this time, you have revised upward so that situation from the third quarter to the fourth quarter, it is a quarter that usually declines, but it's not going to be that way. Is that the correct understanding?
Toshihiro Yamauchi: Yes. I have high expectations. Looking forward to it. Thank you.
Operator: Now the next question from SMBC Nikko Securities, Mr. Miyamoto.
Go Miyamoto: I'm Miyamoto from SMBC Nikko Securities. I also had a question about Agro & Life Solutions. This may be like Mr. Watabe's question. In the third quarter, there was an increase of JPY 11.5 billion year-on-year in terms of profit. And fourth quarter, you expect a decline compared to previous year. Same quarter, methionine is showing a declining trend. But there were shipments carried forward. So could you tell me what is the impact? In particular, in Q3, as Watabe-san mentioned, sales trend is showing a difference. Sales in the segment in Q3 year-on-year is a drop of about JPY 4 billion, but profit has increased. So when I see your analysis by sector, looking at the volume variance in the first half, it's minus JPY 3.9 billion. So for 3 months, volume variance is a factor of JPY 12 billion increase in profit. But on Page 23, analysis of sales differences, volume variance and for first half was minus JPY 4 billion, but now it's minus JPY 8.4 billion. So minus JPY 4.4 billion in 3 months. So the sales volume variance is quite negative but profit is positive. Could you explain a little more about it? I think the foreign exchange rate has not changed that much.
Toshihiro Yamauchi: Please give me a minute. Yes. Thank you for waiting. With regards to relationship with sales, methionine volume is declining. So as sales, there's a drop. However, this is not giving a big impact on profit or losses. But for crop protection chemicals, India is doing well, in Japan also. In particular, in Japan, from Q4, sales carried forward. In other words, there's a trend of customers placing orders in advance. So Q3 has improved. That's a factor for the improvement of Q3.
Go Miyamoto: I see. On Page 27, the sales that we have indicated on crop protection, it is flat. And for Q3, 8 months, it has increased about JPY 2 billion. But one variance has increased that much. Why is it so?
Toshihiro Yamauchi: Page 27. I see. This is indicated in yen. But if you look at these figures in dollars, it may look different. First, United States, JPY 2.6 billion negative. But in local currency, it is nearly flat. And India, it is slightly negative. But in local currency, there is an increase. So these are some of the factors. For sales and profit, there is no particular major factors.
Go Miyamoto: I understand. In the fourth quarter, you expect a decline in profit year-on-year. Could you explain that?
Toshihiro Yamauchi: Because shipments were carried forward for crop protection products and methionine sales price is showing a declining trend. So that is taken into consideration.
Operator: Next from Daiwa Securities, Mr. Umebayashi.
Hidemitsu Umebayashi: This is Umebayashi from Daiwa Securities. I would like to ask a question regarding Essential & Green Materials. From the second quarter to the third quarter, the trend, the profit and losses improved by JPY 51 billion, and that is due to the Rabigh share sales. But other than that, if there are any factors I would like to know. First of all, as a confirmation, Rabigh, the profit you made from the equity method is at 37.5% or 15% as of the third quarter, I wanted to confirm that. And also, the third quarters in Essential & Green, the sales revenue has increased as well. So I would like to know the background of that. I think the fact is that the business performance is doing well. Did the margin improve? Or did the petrochemical product sales improve? And also the fourth quarter, I believe that there is going to be a periodic plant maintenance. So was there a buildup of inventory due to that or not is what I would like to know.
Toshihiro Yamauchi: Thank you very much for your question. Regarding the third quarter's Essentials & Green Materials, as you have pointed out correctly, over here, the Petro Rabigh equity sales is included. When we made a timely disclosure in this November, it was JPY 50 billion, and the number that's close to that is incorporated in this. And other than that, there are improvements that were made for Petro Rabigh. Well, over here, up to the third quarter, it was 37.5%. Our interest was that and we have applied the equity method. And from the fourth quarter, it is going to become 15%. And regarding the refining margin improvement also occurred. So this area has improved as well. And in Singapore as well, TPC, they were due to the improvement of the profit margin, the profit and loss situations have also improved.
Hidemitsu Umebayashi: So for the sales part, it was a Singapore that was doing well in terms of the sales improvement?
Toshihiro Yamauchi: Just a moment, please. Well, the products from Rabigh, the sales of those, that compared to the first quarter and the second quarter, the third quarter is showing a larger growth. And from April to June, it has experienced a periodic shutdown for maintenance. And probably to the second quarter, that impact remained. But from the third quarter, it returned to the regular sales and the fourth quarter for the Rabigh manufactured products, we are looking at it the same way, and that is reflected in the changes. And the impact to the profit is minor. So these are the factors is what we think.
Operator: Next, I'd like to receive Mr. Okazaki from Nomura Securities.
Shigeki Okazaki: I'm Okazaki from Nomura Securities. About the dividend, I'd like to ask a question. As you have mentioned, this time, you are going to increase the dividend. The annual dividend payout ratio is now about 40%. I think you mentioned 30% before. The final profit figures may differ. So is that meaning as a background? And JPY 7.5 billion for the interim period? And next year, depending on the farmers' milestone, there will be other factors where basically you will continue or it will be rather positive. We are gradually becoming confident. Is this understanding correct about the dividend payment.
Toshihiro Yamauchi: Thank you for your question. For dividends, as you mentioned, basically, our dividend policy is stable dividend. And with relation to profit, in general, about 30% is the level. At the moment, the profit for this year, we made an upward revision to JPY 55 billion. It is still in the process of recovery. So in terms of dividend payout ratio, a stable minimum dividend payment is going to be made. That is our feeling. So Instead of 30%, it is now 40%. And compared to our initial plan, profit has increased. And about -- we will consider continuing in the future and taking that into consideration, we decided to have this amount of dividend.
Shigeki Okazaki: So this is a minimum level, more than 38.7%. You have not yet to determine what will be the performance next year, but depending upon situation, there may be other factors but among those JPY 7.5 at a moment is amount that you want to keep. Is my understanding correct?
Toshihiro Yamauchi: Yes, you are right.
Operator: Next, from Morgan Stanley MUFG Securities, Mr. Watabe.
Takato Watabe: This is my second time. Regarding Essential & Green Materials, at the flash report, it says that the business transfer gain is JPY 55.8 billion and it was consistent by Rabigh and others. But if you exclude that, it is in the red. And the fourth quarter period of the maintenance shutdown, when we talk about the refining margin right now, I think the Petro Rabigh performance is improving as well, and there is a business integration moving forward. But what is the impact of that? And what are you looking at towards the overall essential and green materials?
Toshihiro Yamauchi: Thank you very much. For the divestment gain and the last report, it said JPY 55.8 billion. Yes. After the third quarter cumulative figure, Petro Rabigh, other than Petro Rabigh, we have divested several companies. Nippon AL, which is already disclosed, including that in total is JPY 55.8 billion. And towards turning around into black ink, regarding Petro Rabigh, it's difficult to share with you what's going to happen in the future. But for the refining margin and probably all of you can assume what the situation is going to be. And I think you can assume in that way. And how it can turn around to profit making, we're in the midst of setting the budget for next fiscal year. So I would like to refrain from commenting.
Takato Watabe: So the fourth quarter non-recorded loss concentrating, it's mainly in Essential & Green Materials. Is that correct, including essential as well.
Toshihiro Yamauchi: To a certain extent, there are planned items for -- from restructuring. But there are some items that we are aware of, such as impairment, but we are looking at it to that extent.
Takato Watabe: So there is -- do you think that is going to work positive in the next fiscal year, such as the decline in depreciation?
Toshihiro Yamauchi: Yes, that's how we are understanding it. However, at this point, it's difficult to give you the full answer.
Operator: Well, it is time to conclude. So the next question will be the last question. Yamada-san from Mizuho Securities.
Mikiya Yamada: I'm Yamada from Mizuho Securities. This is a detailed point. Under others, this time, though there is an upward revision, for Q4, you expect some level of negative figures. So these are corporate expenses. So it is possible that, that will surface on Q4 and things will become more transparent. So JPY 20 billion to JPY 25 billion corporate costs could be expected from next year onwards. What is the trend of that? Could you tell me that?
Toshihiro Yamauchi: Thank you. Under corporate expenses, as you know, the corporate expenses, in particular, R&D expenses are included here. And recently here, regenerative cell research is still under development. So the progress of research expenses is very difficult to make a projection. So these are also included. So we don't expect a large drop next year, but we expect to maintain a certain level in terms of these expenses.
Mikiya Yamada: About more than JPY 10 billion R&D will be spent for regenerative cells. And then that is surfaced in a specific quarter like this?
Toshihiro Yamauchi: Yes, that is what it is.
Operator: Mr. Yamada, thank you very much. With this, I would like to conclude today's conference call. Thank you very much for your participation today. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]