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  • 1. Transcript ofFinancial Results Conference for Fiscal 2010, held on May 11, 2011 Asahi Kasei CorporationNote: The forecasts and estimates mentionedin this document are dependent on a variety ofassumptions and economic conditions. Plansand figures depicting the future do not imply aguarantee of actual outcomes.Reasonable efforts have been made to ensurethe accuracy of the transcription, but norepresentation or guarantee is made withrespect to the presence of any errors oromissions.
  • 2. ParticipantsKoji FujiwaraCFOShigehiro HorimotoGeneral Manager, Corporate StrategyDaichi ArimaGeneral Manager, Corporate Accounting & ControlTakashi YoshidaGeneral Manager, Corporate Planning & Coordination, Asahi Kasei Chemicals Corp.Jiro MoriGeneral Manager, Management & Administration, Asahi Kasei Homes Corp.Masato KashiwagiGeneral Manager, Accounting Dept., Asahi Kasei Pharma Corp.Tsutomu ShioseGeneral Manager, Accounting & Finance Dept., Asahi Kasei Kuraray Medical Corp.Shinsuke KidoGeneral Manager, Corporate Administration & Planning, Asahi Kasei Microdevices Corp.Hiroaki SugiyamaGeneral Manager, Planning & Administration, Asahi Kasei E-materials Corp.Naomitsu FujitaGeneral Manager, Investor RelationsPresentationFujita: Good afternoon, ladies and gentlemen. My name is Naomitsu Fujita, General Manager forInvestor Relations, serving as the emcee. Thank you very much for taking time out of your busy scheduleto attend the briefing on fiscal 2010 financial results. Now I would introduce the participants: KojiFujiwara, CFO; Shigehiro Horimoto, General Manager for Corporate Strategy; Daichi Arima, GeneralManager for Corporate Accounting and Control; from Asahi Kasei Chemicals, Takashi Yoshida; fromAsahi Kasei Homes, Jiro Mori; from Asahi Kasei Pharma, Masato Kashiwagi; Asahi Kasei KurarayMedicals, Tsutomu Shiose; from Asahi Kasei Microdevices, Shinsuke Kido; and from Asahi KaseiE-materials, Hiroaki Sugiyama. First, the presentation by the CFO.Fujiwara: Let me begin the presentation on the fiscal 2010 financial results. I will start with thehighlights of the fiscal 2010 results and the forecast for fiscal 2011. During fiscal 2010, the Japaneseeconomy was moving along the recovery trend in the first half against the backdrop of export expansiondriven by high growth in the emerging markets and government stimulus measures. In the second half,however, the corporate management environment was severely affected by the tapering-off governmenteconomic measures, sharp appreciation of the yen, rising cost of feedstock, and the impact of the GreatEast Japan Earthquake. Among the production facilities of Asahi Kasei Group, four were affected by the earthquake,namely Asahi Kasei Power Devices, Ishinomaki Plant in Miyagi Prefecture; Tomobe plant of Asahi KaseiMetals in Ibaraki Prefecture; and Sakai Plant and Neoma Foam Plant of Asahi Kasei ConstructionMaterials in Ibaraki Prefecture. We extend our deepest sympathy to those affected by the disaster. Theimpact on the consolidated results of the group was relatively minor. First, in terms of impact on our fiscal 2010 earnings, extraordinary loss totaled 800 million yen, 1
  • 3. and impact on operating income was hard to calculate, but as opportunity loss, our estimate was about 1.5billion yen. As a result, operating income was 122.9 billion yen and income after tax was 60.3 billion yen.As for the forecast for fiscal 2011, there are many uncertainties including lingering impact of theearthquake. We put together figures based on our current visibility. First, regarding the restoration of thefour plants affected. Asahi Kasei Power Devices began normal operation in the early part of May. In theconstruction materials operation, operations at Asahi Kasei Construction Materials at Sakai Plant andNeoma Foam Plant have been all but returned to normal. Asahi Kasei Metals resumed part of theoperation in early May; full scale operation is slated for June. Overall, we expect the impact on the fiscal2011 earnings to be minor. Next, I would like to talk about the impact of the earthquake on the Homes business. Actually,the business area of Hebel Haus™ business geographically is only up to the northern part of the Kantoregion, and does not cover Fukushima Prefecture and northward. Still, we were affected in terms ofdisruption in material supplies. Since we are in the business of assembling materials and components tobuild houses, we had to inconvenience our customers due to delay in deliveries. We also had to suspendconstruction of frames for about 20 days. Overall, we are projecting that 2-3 billion yen in operatingincome will have to be pushed back from the first half to the second half of this fiscal year, but we arehoping to make up for the shortfall in the first half in the second half, so that on the full-year basis we canachieve the target operating income of 42.0 billion yen. The third is the possibility of the earthquake resulting in decline in demand, impact on supplychain, as well as mandatory curbs on electricity use during the summer time. We are projecting that thesefactors will have the effect of pushing down the operating income by 2-3 billion yen, notably in theChemicals business. Having said that, there are many other uncertainties and concerns; for instance, the issue ofauto parts procurement lingering or becoming more serious, or consumer and business confidencedrastically worsening. This makes it extremely difficult to make precise projection on the possible impactof the earthquake. So, it is on the caveat that revisions would be made appropriately in due course that weare projecting the operating income of 120 billion yen for this fiscal year.P4: Summary of financial results (i)Let me now move on to the consolidated results for fiscal 2010. Net sales were 1,598.4 billion yen, up11.5% year on year. Operating income was 122.9 billion yen, more than twice as much in the previousyear. Ordinary income was ¥118.2 billion, a little more than double the amount in the previous year. Netincome was 60.3 billion yen, 2.4 times the amount in the previous year. Total assets were ¥1,425.9 billion,equity was ¥663.6 billion, and the interest-bearing debt totaled ¥253.9 billion. Debt-equity ratio was 0.38.P5: Summary of financial results (ii)Looking at major financial items, earnings per share for fiscal 2010 was 43.11 yen. In terms of payoutratio, 55% in fiscal ’09 was kind of unusual. In fiscal 2010, with the dividends per share being 11 yen, thepayout ratio should be 25.5%. For fiscal 2011, should business perform as per our forecast, we hope toincrease the dividends by 2 yen to 13 yen per share. As for ROA and ROE, the target under the five-year Growth Action– 2010, called for 5% orabove and 10% or above respectively. We were approaching the target, but affected by the Lehman crisis,we fell short. Assumptions were, naphtha price of 47,450 yen per kiloliter and the exchange rate of 86 yento the US dollar. Naphtha price increased year on year, while the exchange rate saw yen appreciationduring this period. And these trends are still felt very strongly today.P6: Statements of incomeNext statements of income on page 6. I covered the net sales already. Cost of sales were at 74.7%, animprovement of 2.1% over the previous year. SG&A expenses increased by 6.5 billion yen year on year.This is in relation to increase in bonuses and part of advertisement expenses. Ratio of SG&A expenses tosales was 17.6%. Operating income was 122.9 billion yen. Among the non-operating income andexpenses, the biggest expense item was, not surprisingly, foreign exchange losses totaling 3.9 billion yen,which represents a year-on-year increase of 3.2 billion yen. Equity in earnings of affiliates posted anincome of 2.2 billion yen, which was 1.1 billion yen more than in the previous year. In fiscal 2010, we have a new item called litigation expenses which totaled 1.9 billion yen. Let 2
  • 4. me explain what it is. Back in 2006, we licensed out Rho-kinase inhibitor fasudil to a company calledCoTherix, Inc., which was then acquired by a company called Actelion Ltd. in 2007. And subsequentlyCoTherix terminated the development of fasudil. We took a legal action against CoTherix over this matter.With an arbitration ruling, this matter was settled in 2009. Gain on arbitration award of ¥6.5 billion wasrecorded as an extraordinary income. In the meantime, litigation vis-à-vis other parties including ActelionLimited, which acquired CoTherix, continues. On April 29th and May 3rd, jury verdicts were given butthey are verdicts, and with pending ruling by the judge and possible appeals to higher courts, there is notelling at this juncture on the outcome. As the litigation is ongoing, litigation expenses were recorded infiscal 2010.P7: Financing activityNext, net financing expenses and interest-bearing debt on slide 7. Financing activities evened out in fiscal2010, and interest-bearing debt totaled 253.9 billion yen. At the end of the fiscal year, there was a majorearthquake and to prepare for contingencies arising from the earthquake that hit at the end of the fiscalyear, we increased loans by about ¥30 billion to shore up funds in hand, and these additional loans areincluded in the balance totaling, 253.9 billion yen.P8: Extraordinary income and lossNext, extraordinary income and loss. In fiscal ’09, with the settlement I mentioned earlier, we recordedgain on arbitration award of 6.5 billion yen. For fiscal 2010, there was no particular extraordinary incometo speak of. As for extraordinary loss, as fiscal 2010 was the final year of Growth Action – 2010, we tried todispose of unused or idle noncurrent assets as much as possible to prepare for the start of a newmedium-term management plan in fiscal 2011. And this resulted in loss of disposal of noncurrent assetsamounting to about 5 billion yen. There also was impairment loss mainly in relation to the impairment ofequipment at a fibers subsidiary. Impact of the earthquake was recorded as 800 million yen in loss ondisaster. Business structure improvement expenses of 10 billion yen is mostly in relation to termination ofammonia and benzene production scheduled for 2012.P10: Overseas sales by segmentOn page 10, you can see overseas sales which in fiscal 2010 totaled 449.3 billion yen, accounting for28.1% of the total. Since Homes and Construction Materials have no overseas sales, when you excludesales in these two segments, the percentage of overseas sales was 39.4% of the total. The growth rate yearon year was 21.3%, and by segment, in Electronics overseas sales slightly over 50%, and in Chemicals alittle over 40%. We are showing sales to China in a separate line. Sales to East Asia accounted for abouttwo-thirds of the total, which includes Korea and Taiwan. The largest was to China accounting for about40% of the total overseas sales.P11: Sales increases/decreases by segmentP12: Operating income increases/decreases by segmentP26: HomesNext, sales and operating income by segment. I will start with Chemicals. Sales increased by 120.1 billionyen year on year, of which ¥47.1 billion is attributable to volume increase. The main factor was theincrease in sales volume of synthetic rubber, performance polymers, and other polymer products, drivenby recovery in demand for automobiles and electronics applications. Home-use products such as SaranWrap™ as well as functional additives performed well. Increase due to selling price was very strong,totaling 54.6 billion yen as strong demand for AN—acrylonitrile—and adipic acid pushed up marketprices. If you look at the operating income increases and decreases on page 12, you will find theoperating cost and others being negative ¥25.1 billion. Of this, feedstock and fuel cost accounted for¥33.8 billion. The breakdown was naphtha ¥15.6 billion, benzene ¥5.1 billion, and others 13.1 billion yen,totaling 33.8 billion yen. Terms of trade had a positive impact totaling 20.8 billion yen. The rest of theoperating cost and others, positive ¥8.7 billion, or the difference between ¥25.1 billion and negative ¥33.8billion, is mainly attributable to increase in capacity utilization rate and the consolidation of PS Japan inOctober 2009. 3
  • 5. Moving on to Homes, and if you could please turn to slide 26. As shown in the lower left handside table, total sales for the segment rose from 389.7 billion yen to 409.2 billion yen. Excludinghousing-related operations, sales went up from ¥316.4 billion to 332.4 billion yen. Operating income rosesignificantly from 19.2 billion yen to 30.3 billion yen. Order-built home sales were very strong, anddeliveries increased year on year by 1,025 units from 11,973 units to 12,998 units. Reduced operating costmade a large contribution, too. On the other hand, pre-built homes deliveries, condominiums in particular,were slightly down year on year. For housing-related operations, which includes remodeling and real estate, sales was up butoperating income was flat. Our in-house mortgage securitization business was hit by the mortgage interestrate cut by the government housing finance agency. Nevertheless, the increase in orders for remodelingand in the number of rental units in real estate operations helped offset that impact, resulting inunchanged income level.For order-built homes, the value of new orders in April was up yet again by 15% year on year, whichmarks the 20th consecutive month of year-on-year order growth. The business has been very strong. On afull-year basis, the value of new orders was up 15.5%, and the order backlog at the end of the term washigher by 17.1%. Now let us go back to slides 11 and 12, and move on to Health Care. Sales of the Health Caresegment rose by 3.2 billion yen. Sales volume had a positive impact of 5.8 billion yen. Amongpharmaceuticals, shipments of Flivas™ agent for treatment of benign prostatic hyperplasia andRecomodulin™ recombinant thrombomodulin increased. On the devices side, shipments of artificialkidneys and therapeutic apheresis devices increased. Sales of Planova™ virus removal filters had beenstruggling in the first half, but recovered in the second half. Sales prices had a negative impact of 6 billionyen, including 2.1 billion yen from the foreign exchange rate. For pharmaceuticals, this was mostly due tothe NHI price cuts. For devices, the foreign exchange rate was the major factor. Operating income rose by3 billion yen. For Fibers, most of the sales growth comes from volume growth. The four lines of business -Bemberg™ regenerated cellulose, Roica™ spandex, Leona™ nylon 66 filament, and spunbond - all didwell with Bemberg™ contributing the most to operating income. The Fibers segment was the onlyloss-making segment in FY’09 with the loss of 2.8 billion yen, but this year it was profitable by 4.2billion yen, an improvement by 7 billion yen. Now the Electronics segment. Sales increased by 15.6 billion yen. Volume difference had apositive impact of 34.2 billion yen. Among electronic materials, shipments increased for Hipore™lithium-ion battery separators and dry film photoresists. On the devices side, shipments increased for theelectronic compass and other LSIs for smartphones and other portable devices. Price difference, on theother hand, had a negative impact as sales prices continued to fall and the yen appreciated. But despitethat negative impact, sales of the segment increased by 15.6 billion yen and operating income increasedby 7 billion yen. Last but not least, Construction Materials. The environment has been challenging for thissegment, but nevertheless, sales volume grew and had a positive impact of 1.5 billion yen on sales.Operating income rose by 900 million yen, both sales and operating income grew. By the way, we werevery concerned when the Neoma Foam Plant sustained damage during the March 11th quake at a timewhen insulation materials in general were already in short supply. To our relief, production resumedquickly.P13: Balance sheetsJust briefly on the balance sheet. Total assets at the end of the year was 1,425.9 billion yen. Cash anddeposits increased by 46.4 billion yen over the year, for the reasons explained earlier. Notes and accounts,receivable, increased in line with sales growth. Noncurrent assets decreased mostly due to the 29.1 billionyen decrease in property, plant and equipment. This is related to the scaling down of capex decisionsimmediately after the so-called “Lehman Shock,” which kicked in this year on an incurred basis. Actually,total capex on a decision-adopted basis for the year came to around 150 billion yen.P14: Cash flows and primary investmentsOn slide 14 now, total free cash flow was almost unchanged year-on-year. Cash flow from investmentactivities was slightly down, and cash and cash equivalence at the end of the period was 134.4 billion yen. 4
  • 6. On capex, total tangible and intangible capex incurred was 66 billion yen, while depreciation andamortization totaled 85.2 billion yen.P16: Consolidated operating performanceNow let me discuss the forecast for FY11. The net sales forecast is 1,724 billion yen. The biggest factorhere is the naphtha price, for which we assume an average of 60,000 yen per kiloliter over the year,although current prices are a little higher. The largest impact of this will be on the Chemicals segment.The operating income forecast is 120 billion yen. As already mentioned, for Homes we are anticipatingsome delays in delivery from the first half into the second half. We have also factored in some 2-3 billionyen downside risk, mostly for Chemicals, related to the quake. The forecast is therefore almost flat yearon year. Ordinary income is expected to be higher than operating income, as we do not expect foreignexchange loss and because of equity in earnings of affiliates. For dividend, we are planning an increase by2 yen for the year.P18: Operating income forecast by segmentNow let us look at the breakdown of the forecast by segment. I would like to mostly discuss operatingincome figures here. For Chemicals, the operating income forecast is a fall of 9.9 billion yen year on year.Most of this decline is related to acrylonitrile and adipic acid, as we think that current market prices are alittle too high. Assumptions of acrylonitrile and the spread are as follows: For the first half, acrylonitrile at$2630 per ton, propylene $1,550 per ton and the spread $1,080 per ton. For the second half, acrylonitrileat $2,605 per ton, propylene $1,550 per ton and the spread $1,055 per ton. Actually, the current spread islarger at over $1,200 per ton. In FY10, the spread was quite large and the average over the full year wasabout $1,025 per ton. We are therefore assuming a higher average spread for FY11. Let me now go through the rough breakdown of the year-on-year difference. Sales volume isexpected to have a slightly positive impact. Performance polymers may suffer from production cuts in theautomotive industry, but shipments should increase for chemicals and derivative products such asacrylonitrile. We also expect increased shipments for synthetic rubber and Duranate™ HDI-basedpolyisocyanate. Terms of trade are expected to have a negative impact by about 15 billion yen. According toour assumptions for naphtha price, feedstock will have a negative impact of 54 billion yen, while salesprices will have a positive impact of ¥39 billion, although there are some uncertainties here. The balanceis a negative 15 billion yen. Operating costs and others will have a positive impact of 4 billion yen.For Homes, we are expecting record highs for sales, operating income, and the value of new orders.Operating income is to be a record high for two years in a row. As mentioned earlier, we have a strongorder book and the only concern would be construction capacity, particularly in the second half. We areworking on this aspect now. For Health Care, the operating income forecast is 8 billion yen, up 1 billion yen year on year.For pharmaceuticals, SG&A will increase with more R&D expenses and the increased number of medicalreps. On the other hand, Recomodulin™ recombinant thrombomodulin sales will fully take off, growing4.2 billion yen in FY10 to 8.2 billion yen in FY11. Operating income therefore is expected to grow.Operating income growth is also expected for devices. Depreciation will increase in relation to the newassembly plant for Planova™ virus removal filters and the new R&D facility for medical materials. Butthis should be more than offset by growth in artificial kidneys and the recovery in Planova™ sales.For fibers, the forecast is almost flat year on year. Bemberg™ regenerated cellulose will be down, as theprice of its raw material, cotton linters, has risen together with the sharp rise in cotton prices. Amaintenance turnaround is also expected. The plan is to offset this decline by growth in the three otherlines of fiber business. For Electronics, operating income is expected to grow by 1.2 billion yen. Electronic deviceswill be challenged with the higher yen, but shipments for the electronic compass should be up anddepreciation shall be down. For electronic materials, prices overall will be down while material cost willbe higher and the forecast is a slight fall. For Hipore™ lithium-ion battery separator, with the two newlines in Hyuga, sales volume growth is expected, although depreciation will increase, too. The segment asa whole is expected to deliver operating income growth. For Construction Materials, operating income is forecast to grow by 1.4 billion yen. All 5
  • 7. segments added together, total operating income forecast for the year comes to ¥120 billion. As I havementioned several times, please understand that, although we have made best efforts to anticipate whatwe can, there are many uncertainties. This concludes my presentation. Thank you very much.Question and Answer SessionFujita: We now move on to Q&A. Please state your name and affiliation before you ask your question.Mr. Kanai: Thank you for the presentation. Kanai from Citigroup Securities. My first question is on theforecast on Chemicals for fiscal 2011. You said you expect the propylene/AN spread to increase year onyear. But at the same time, you are projecting terms of trade to be negative 15 billion yen. What are themain factors behind that negative? Could you explain chemicals and derivative products and polymerproducts separately?Fujiwara: As far as East Asian market prices are concerned, we are projecting a relatively larger spread.But when we factor in naphtha-based production in Japan, we see a quite different picture. And that iswhy we are projecting declining profit for AN. And another factor for decrease in profit and chemicalsand derivative products is the following. We feel that spread was too good in the first half of fiscal 2010,and currently, due to disruptions at some AN producers and some maintenance turnarounds and otherfactors, supply and demand is very tight to the extent of setting new record prices. But our Thai operationwould come online in the June-July timeframe, and we expect the AN supply and demand to return tonormal. And with those factors in mind, we are expecting profit in chemicals and derivatives products todecline year on year. As for polymer products, first half of fiscal 2010 proved to be extremely well. Today,while there is some impact of the earthquake being felt, we believe we will maintain the level that we sawin the second half of fiscal 2010. Synthetic rubber continues to perform very well in the meantime.Mr. Kanai: So does it mean that you still project profit for polymer products to decline year on year?Fujiwara: Yes, a slight decline.Mr. Kanai: Thank you. My next question is on Electronics. You said you expect continued growth inelectronic compass in devices, and in materials, volume increased in Hipore™ lithium-ion batteryseparator. Can you tell us the current situation of these two products? Any impact of the earthquake? Andalso could you describe the projection, please?Fujiwara: Looking at the current situation, in terms of sales volume, we see very positive trend,although perhaps there is some temporary demand that we have to keep in mind. But at the same time,Electronics is feeling a very strong impact of the appreciation of the yen, and of course this is also true formedical devices, and that is hurting profitability. So, what’s critical for us is to grow volume so as tosecure overall profit increase. And as far as electronic compass and Hipore™ are concerned, they areperforming very well in terms of sales volume.Kido: This is Kido of Asahi Kasei Microdevices speaking. Sales volume of electronic compass isgrowing steadily along with the smartphone growth, but the thing is greater penetration entails pricedecline. There also is the foreign exchange impact. So, while the volume is growing, we are not seeingcorresponding growth in sales value. Sales are growing, but not at the same rate as the volume growth.Sugiyama: This is Sugiyama of Asahi Kasei E-materials speaking. Hipore™ sales volume grew by over20% between fiscal years 2009 and 2010. We are expecting another year-on-year growth of over 20% forfiscal 2011. So far, we are seeing volume growth at that rate on a monthly basis. And using the usualformula, I would like to explain the situation taking first half of fiscal ’08 as 100. Second half offiscal ’08 was down to 62 due to the Lehman crisis, fiscal ’09 first half was 94, and the second half 98.Fiscal 2010, first half 121. As for the second half, at the last meeting we said we expect a recovery fromthe adjustment phase in the third quarter and projected 123. The actual for the second half was 119, a littleshort of our projection. For the first half of fiscal 2011, we are assuming exceeding 140. 6
  • 8. Mr. Kanai: Thank you. My third question is on Homes. With the impact of earthquake, I wonder whatthe situation is regarding the procurement of insulation materials, which was said to be in shortage tobegin with. What about the impact of temporary homes and demand related to the reconstruction? Iunderstand that Fukushima northward is outside of your territory. Are there any impacts?Mori: This is Mori of Asahi Kasei Homes. As for fiscal 2010, we were afraid of shortage of insulationmaterial supply, but we did not see much impact on the deliveries for fiscal 2010, which was a pleasantsurprise. And for the time being, we have secured the stable supply of insulation materials for now. But aswe move toward summer, we don’t know what the situation is going to be, because it’s going to be adifferent factor involved. And you asked about the impact of the reconstruction-related demand. Actually, we don’t havevery clear vision into this. As for the temporary homes, we do not have the local construction capability.We don’t have the capability to supply basic homes, either. So, for the time being, we will be making onlya human resources contribution through the manufacturers association. So we are not expecting a directsales coming from increased demand related to the reconstruction efforts. But at the same time, we areexpecting growth in the demand for the anti-seismic structures, but we don’t know how this will evolve.And as for the adverse impact, there are talks of labor cost rising related to the construction, but hereagain we don’t have any clear visibility into this.Mr. Kanai: Thank youMr. Takeuchi: Takeuchi from SMBC Nikko Securities. My first question is on Homes. You areexpecting new orders to increase by 1.6% this fiscal year. Could you explain why you think that? Arethere uncertainties towards the year end, but the government is planning to terminate the programs topromote housing acquisitions? So, are you factoring those matters in projecting that increase of 1.6%.Mori: This is Mori speaking. While government budget earmarked for the promotional programs areexpected to decline, we still expect the programs to continue throughout the first half of the fiscal year. So,we are trying to increase orders year on year during the first half of the year. But for the second half, withthe policy expected to run out of steam, we frankly don’t know how it will turn out, although we will betaking our own actions to counter that. So, 1.6% is actually the expression of our desire to equal or go beyond the record order amountset in fiscal 2010. It’s not that we have a precise breakdown for the first half and second half. We arehoping that on the momentum of the government policies, we can see good figures for the first half. Infact, April proved to be good month, but we don’t know about the second half.Mr. Takeuchi: The sales is to increase by 35.8 billion yen, but the operating income is to grow by ¥5.5billion. With the cost reduction efforts, I think, we have been growing over the marginal profit. Though Iunderstand correctly that all those efforts have already exhausted and you are expecting the fixed cost toincrease?Fujiwara: Yes, these are the assumptions. It is very difficult to foresee the future direction of materialcost and labor cost. So, we know that we will be setting a new record in terms of profit, but we cannotforesee what the breakdown is going to be.Mr. Takeuchi: So, you are factoring in these risks to a certain degree.Fujiwara: Yes.Mr. Takeuchi: My second question is on Chemicals. On page 22, you have the quarterly profit changesand in fiscal 2010, between the third and fourth quarters, profit declined by 6.0 billion yen. What were themajor factors behind that quarter-on-quarter decline?Fujiwara: As you can see on page 22, after peaking in the second quarter, the operating profit dipped in 7
  • 9. the fourth quarter. Actually, there were some special factors during the second quarter. I believe the ANspread was the highest in the first quarter, but the first quarter results of Tong Suh Petrochemical in Koreawas actually recorded in our second quarter results, inflating the figures for the second quarter. That isone factor. And as for the fourth quarter, the strong appreciation of the yen was one factor. And there arealso some impacts of the inventory adjustments in some of the businesses. So, there were those specialfactors in the fourth quarter. And I think that accounts for this exceptional dip in the fourth quarter. Interms of spread, we are seeing spread widening again towards the first quarter and we believe that theaverage between the third and the fourth quarters should be the cruising altitude, based on which we haveput together the forecast for this fiscal year.Mr. Takeuchi: My next question is on your Thai AN project. What is the current status? I understandthat you are expecting the start of commercial operation in summer, and since that operation will beclosing in December, maybe you cannot expect much contribution for this fiscal year. But what is theexpected impact in terms of the equity in the earnings of the affiliates?Fujiwara: Our Thai project is doing the test run today. I understand that everything is going as perschedule. But this is going to be the very first propane process-based plant in the world – a dedicatedplant. Although there was the verification operation experience in Tong Suh Petrochemical in Korea, wehave a great expectation of this brand-new plant, and that is reflected in our equity in earnings of affiliatesfigures for this fiscal year, especially during the second half, although our equity holding is 48.5%. That isalready incorporated in our figures.Mr. Takeuchi: In other words, you are expecting the immediate profit contribution of that operation.Fujiwara: Yes, that is the case.Mr. Takeuchi: My third question is on pharmaceuticals. The Recomodulin™ recombinantthrombomodulin sales in fiscal 2010 was ¥4.2 billion. You are expecting to grow this to ¥8 billion for thisfiscal year. I understand that you are thinking of increasing the SG&A expenses, but what is the currentsituation of sales and what are the projections of fixed cost related to this operation?Fujiwara: As you are aware, Recomodulin™ is an entirely new drug and therefore the surveys on allcases were required. And details had to be surveyed and recorded, including how administration wasmade relative to what kind of patients. And they were 4,000 cases that had to be surveyed and recorded,which proved to be a very cumbersome process. But based on this, we are now well poised for fullmarketing and sales. So, we are proceeding as expected. At the same time, we have to keep in mind thatRecomodulin™ is intended for patients suffering from very serious disseminated intravascularcoagulation, and therefore a very precise management by doctors would be needed, including the timingof the administration. And therefore rather than trying to deploy this nationwide to cover all the hospitalsin Japan, we would rather proceed in a very steady manner.Kashiwagi: This is Kashiwagi of Asahi Kasei Pharma speaking. We were operating under constraints infiscal 2010, but with the completion of reporting to the authorities in March, we are now preparingmaterials for the nationwide deployment, that is as of April. And so the medical representatives will beengaged in the marketing and sales activities in the May timeframe. And so, we are keenly interested inhow this will evolve.Mr. Takeuchi: What about the fixed cost for the pharmaceuticals, including cost related to MRs andR&D activities? Would you be increasing this?Kashiwagi: Yes, for the time being we do feel the need to further increase the number of MRs, and alsowe are thinking of enhancing our R&D activities with new drug clinical developments scheduled underthe new medium-term management plan.Mr. Yamada: Thank you. Yamada from Barclays Capital. First on Homes. If you really receive orders in 8
  • 10. the amount as budgeted, you will have added a full year’s worth of order backlog, meaning a turnoverperiod of one year. Are you implementing any measures to fulfill those orders more efficiently, anythingthat we can look forward to, please?Mori: Mori from Asahi Kasei Homes again. As Mr. Fujiwara explained earlier, some deliveries arebeing pushed back into the second half from the first half, and that means construction capacity would bereally stretched in the second half. We are therefore working on measures to increase that capacity byabout 50 units per month by the second half and that is factored in the forecast. But, yes, as you say, oncewe do get as much orders as budgeted, that would surely mean more orders on hand.Mr. Yamada: Thank you. My next question relates to the litigation against Actelion. I understand thatthe verdict was for Actelion to pay you about 45 billion yen. Is it correct to understand that this is notreflected in your forecast only because it is not final yet?Fujiwara: It is only a verdict, and not a court’s decision yet. There could also be an appeals process. So,at this point in time, we do not know when we can really close this case. The timing is very difficult totell.Mr. Yamada: Thank you. My last question is about Chemicals. It was explained that in Q4 things weresqueezed. I do understand that because of the time lag between the movement in feedstock prices andsales prices for polymer products. But then, once sales prices are adjusted, there should be a period thatdeviates to the upside from your normal cruising altitude. Have you not factored that in?Yoshida: Yoshida from Asahi Kasei Chemicals. We have factored in the effect of raising sales prices,assuming that spreads in the first half would be back to cruising altitude. But the reality is that feedstockprice rose in two phases. The first was in January when naphtha prices started to rise again. For this phase,discussions for re-pricing with our customers have been completed. For the second phase, in April, weannounced our intention to raise prices for some products for which negotiations have yet to be completed.There are other items for which the re-pricing process hasn’t even begun. These factors pretty muchcancel out. Therefore, I do not think this would be an upside factor.Mr. Watabe: Thank you very much. Watabe from Deutsche Securities Japan. I have three questions.First can you give us a general description of the petrochemical market, please? It appears that the tide issomewhat changing in Asia. So, if you could tell us your view on what is happening for major products,including but not only acrylonitrile, why that is the case, and whether the change would be a short-termadjustment or not, although I do understand a lot would depend on crude oil prices, interest rates in China,and the cotton market.Fujiwara: I think it is extremely difficult now to forecast the petrochemical market. For example, at onepoint in time, it appeared that naphtha prices would simply continue to rise, but then there was a decline.There are geopolitical risks as well, such as the situation in Libya or in Saudi Arabia. My view is that it isextremely difficult to anticipate the situation for the next several months. My number one concern now isa possible change in the demand side picture, particularly in China in relation to the overall money flowwhen there is a shrink in the money inflow. I would think that demand in China would have a largerimpact over the medium term than the post-quake reconstruction demand here in Japan. For acrylonitrile, the largest consumption sector has been acrylic fiber, followed by ABS resinsand then others. But our forecast for FY11 assumes that ABS will now become the largest, and that theshare of others including acrylamide would approach one-third. The demand breakdown is thus changingsignificantly. For acrylonitrile, our expectation is that while there may be a slowdown, the tightsupply-demand balance would continue for a while. For styrene, we expect rather challenging conditionsto continue, although there would be ups and downs.Yoshida: Yoshida from Asahi Kasei Chemicals again. On acrylonitrile, I would like to simply echo Mr.Fujiwara and say that the spread could be slightly compromised, but the situation overall should be allright. On styrene, it is demand in China that is key. There are a number of uncertainties over there, 9
  • 11. including the restriction on EPS for construction use and the impact of domestic monetary tightening. Thereal question is how those factors translate into demand. On the supply side, while a number of new largeplants came online last year, this is not the case this year, which should mean supply demand balancewould likely not be disturbed in a significant way.Mr. Watabe: Thank you very much. Next, on the electronic compass. We have been hearing that it isdoing great every time, but we do not really get an idea of the scale. If you could provide somequantitative information, perhaps using an index such as you do for Hipore™, we would very appreciateit. We would also like to hear more about competition.Kido: This is Kido speaking. On competition, as I think I mentioned on the previous occasion, in Japanthere are about two competitors, and some more smaller players as well. Outside of Japan, there areanother two or three that have been around for a while. Our market share is large, but not 100%. Andwhile the total market continues to grow, we no longer have an effective monopoly as was the case before.Our share has been eroded gradually, although still large. I am afraid we do not have a quantitative index. Sales kicked-in in full from FY09 andshipments have been growing rapidly each year. And we do not know yet where the saturation pointwould be. If you compare the FY11 forecast with ’09 results, sales volume growth is by a factor of about5, while sales value growth is only about a factor of 2 or 3, as prices fall over time. We believe that themarket for current applications will reach saturation before long, given prices and supply volume.The good news is that there are new applications outside of smartphones. We are also working onmultiple hybrid sensors. But aside from such new fields, the current market for the now commonelectronic compass can be described in the way that I have just done. I hope this answers your questions.Mr. Watabe: Thank you. Lastly, how much extraordinary losses are you budgeting this year?Fujiwara: Roughly speaking, half the amount of the previous year. There are no major items anticipatedso far, except for the usual disposal of property, plant and equipment.Mr. Watabe: Would that be around 10 billion yen?Fujiwara: Well, somewhere around that level.Mr. Watabe: Thank you very much.Fujita: Ladies and gentleman, it appeared that we have exhausted questions now. So, let me close thisbriefing. Once again, thank you very much for joining us. 10