Mitsubishi Chemical Group Corporation Q1 FY2026 earnings call

• **Overall Business Environment & Result Summary
  • While display-related demand outperformed expectations driven by Chinese subsidy policies, and semiconductor and barrier packaging materials performed steadily, overall business was soft due to strong economic uncertainty from US tariff policies. Naphtha price drops created inventory valuation losses, and falling MMA monomer market conditions worsened margin spreads, leading to a 28% YoY drop in Chemicals business core operating profit to 11.6 billion yen. Group net profit attributable to owners dropped 51% YoY due to lower profit from discontinued pharma operations.
  • Overall progress toward the first half guidance is on track, with stronger-than-expected demand for specialty materials offsetting weaker-than-expected MMA market conditions.
• **Structural Reform & Portfolio Transformation
  • The company is executing portfolio reform and profit improvement with speed under the "Mid-term Management Plan 2029", based on three criteria for business selection and three principles for disciplined business management.
  • For carbon fiber: The company has already halted large-tow production at its Hiroshima Otake facility and reduced regular-tow production at its US facility, with impairment losses already recognized in prior period results. It is scaling back low-margin production for wind turbines and pressure vessels, and shifting focus to high-value applications including high-end sports, aerospace & defense, and next-generation mobility via Italy-based CPC.
  • For the Carbon business: The company completed capacity reduction at its Kagawa facility, eliminating unprofitable market-based transactions, and has shifted to a tolling model (coking fee plus raw material cost) to improve profitability. 100 closed coking ovens were completed in April 2025, with full cost rationalization benefits expected in H2 FY2026.
• **Cash Flow & Capital Structure
  • Operating cash flow was +60.2 billion yen, investment cash flow was -35.8 billion yen, resulting in positive free cash flow of 24.4 billion yen. The company continues to strengthen working capital management to improve ROIC.
  • Growth investment for Specialty Materials is progressing on schedule, including capacity expansion for CPC in Italy and capacity expansion for barrier packaging resin "Soarnol" in the UK.
  • Non-core asset sales (including the Dialux real estate business and non-operating assets/policy holdings) generated proceeds, with the Tanabe Mitsubishi Pharma sale proceeds expected to arrive in Q2, which will reduce net debt and improve the net D/E ratio after Q2.

1. Specialty Materials Segment: Sales revenue decreased 6% YoY, down 16.3 billion yen from the prior year period, with core operating profit increasing 23% YoY, up 2.6 billion yen YoY. Demand for display-related, semiconductor-related, and barrier packaging materials was solid, driving performance in Advanced Films & Polymers and Advanced Solutions; the carbon fiber business in Advanced Composites & Shapes remains unprofitable and is undergoing urgent structural improvement. This segment contributed 24.9% of total group core operating profit for the quarter. 2. MMA & Derivatives Segment: Sales revenue decreased 18% YoY, with core operating profit decreasing 65% YoY. The decline was driven by falling MMA monomer market prices since the second half of the prior fiscal year. Core operating profit came in at 3.9 billion yen for the quarter, 6.9% of total group core operating profit. 3. Basic Materials & Polymers Segment: Sales revenue decreased 30% YoY, with core operating loss shrinking by 3.5 billion yen YoY. Within the segment: Materials & Polymers saw a large sales decline due to lower naphtha prices and the prior period divestment of the terephthalic acid business in Indonesia, with core profit falling only 1.8 billion yen YoY; the Carbon business saw sales fall 50.9 billion yen YoY due to lower coking coal prices and the prior period divestment of Kansai Thermochemical, but core loss shrank by 5.3 billion yen YoY thanks to improved inventory valuation and structural reform benefits. This segment recorded an overall core operating loss of 3.6 billion yen for the quarter. 4. Industrial Gases Segment: Sales revenue decreased 4% YoY, with core operating profit decreasing 5% YoY, impacted by unfavorable exchange rates and lower sales volume in the US. Core operating profit came in at 45 billion yen for the quarter, 79.5% of total group core operating profit. 5. Group Total: Consolidated core operating profit for the 1Q was 56.6 billion yen, down 7 billion yen YoY, equal to 47% of the company's full first half core operating profit guidance of 121 billion yen.

• Full FY2026 core operating profit guidance of 265 billion yen is maintained from the initial announcement, and the dividend forecast is also unchanged: full-year dividend of 32 yen per share, with a year-end dividend of 16 yen per share.
• The 1Q core operating profit reached 47% of the first half guidance, and overall the group remains on track to meet the initial first half profit target despite weaker-than-expected MMA market conditions.
• The gain from the Tanabe Mitsubishi Pharma divestment is scheduled to be recorded as planned in Q2.
• For Q2: Display-related demand is expected to soften after the high utilization of panel makers in prior periods, with Specialty Materials profits expected to be lower sequentially from 1Q; MMA & Derivatives is expected to see a sequential profit decline due to continued weak MMA market conditions, though expanded cost-linked pricing will provide some downside support; Basic Materials & Polymers is expected to see profit improvement as scheduled turnaround impacts shrink and further margin improvements materialize in the Carbon business; Industrial Gases is expected to perform steadily.

• Persistently weak MMA monomer market conditions: Chinese petrochemical producers have stopped cutting operating rates even amid oversupply, which prevents market prices from recovering, keeping pressure on segment profitability. Soft demand persists for other C2/C3 derivative products in Basic Materials due to continued Chinese import competition.
• Weak demand pressure: Display-related demand is entering a correction phase after strong prior growth; high-end automotive demand for carbon fiber composites via CPC is currently slower than expected; automotive overall demand is soft due to US trade policy impacts; EV electrolyte demand in Europe and North America has declined.
• Uncertainty around carbon fiber and Carbon business profitability: The Carbon business will not reach break-even in Q2, with full-year break-even still a critical target requiring further action if progress lags; carbon fiber cost cutting will not fully offset the prior large annual loss, and demand recovery for high-value applications is slower than expected.
• General macroeconomic uncertainty: Ongoing US trade policy creates broad uncertainty for global demand, particularly in the automotive sector.

Q: What is the outlook for the Specialty Materials segment after the stronger-than-expected 1Q recovery, particularly with Q2 expected to see a sequential half profit drop? / A: Management confirms that Specialty Materials is on a gradual recovery growth trajectory, with 1Q display demand outperforming the initial budget that already projected a coming market correction. Advanced Films & Polymers and Advanced Solutions are expected to perform in line with initial projections for the full half. For carbon fiber composites, 1Q already delivered some rationalization benefits, but price correction and product mix shift to high-grade products will take more time; the company is aligning upstream production capacity to downstream demand and continuing to shift focus to higher-value product lines.

Q: What is driving the large improvement in the Carbon business, and when will it reach break-even? Are additional restructuring steps planned? / A: The Carbon business saw a 3.6 billion yen sequential improvement from Q4 FY2025, with 4.0 billion yen of core improvement after netting out timing impacts, and 3.3 billion yen YoY improvement after timing impacts. Capacity reduction steps are delivering clear results, with the shift to a tolling pricing model almost delivering the expected full benefits, though large shipment sizes create execution lags from unexpected customer cancellations. Management expects break-even will not be reached in Q2, and is targeting break-even by Q4, ideally Q3 FY2026, with further restructuring steps to be implemented if full-year break-east becomes unlikely.

Q: What is the progress on the planned 56 billion yen full-year profit lift from management initiatives (29 billion yen from pricing policy, 27 billion yen from asset optimization/cost cutting), and is it on track? / A: For the 27 billion yen cost cutting/asset optimization target, 11.5 billion yen of total cost improvement was already achieved in 1Q, with 5 billion yen from Chemicals, putting the initiative well on track for the full year. For the 29 billion yen pricing improvement target, only ~5 billion yen has been achieved in 1Q, which is behind the expected pace, mainly due to negative external impacts including unfavorable yen appreciation and lagged effects from prior year carbon fiber price declines. Adoption of cost-linked pricing for MMA has been slower than expected particularly in China, so management will continue to prioritize expanding this pricing model and pushing for value-based pricing for specialty products. Outside of MMA, performance is in line with expectations, with lower raw material prices that have not been passed through to customers supporting margin improvement for other products.

Q: What is the outlook for semiconductor materials in 1Q and Q2? / A: Year-over-year, semiconductor materials have seen nearly a doubling in profit, as inventory levels in the supply chain have normalized. AI-related demand remains very strong, and automotive/industrial demand has bottomed out. Performance is in line with sequential expectations, and management expects this positive trend to continue in Q2, with some upside potential.