Kaneka : Quarterly Financial Summary for the 1st Quarter, Ended June 30, 2020

Quarterly Financial Summary

1st Quarter, Ended June 30, 2020

August 12, 2020

Kaneka Corporation

Contents

Summary	１
Net Sales , Operating Income by Segments	２
Business Performance by Segments	３
Consolidated Balance Sheet	７
Performance Forecasts	8

The operating results forecasts and certain other statements contained in this document are forward-looking statements, which are rationally determined based on information currently available to the company. For a variety of reasons, actual performance may differ substantially from these projections. They do not constitute a guarantee that the Company will achieve these forecasts or other forward-looking statements.

Summary

(Billions of yen)

	FY2019 1Q	FY2020 1Q		Difference
		Amount		%
Net sales	148.8	126.6		△ 22.2		△14.9%
Operating income	7.0	2.0		△ 5.0		△71.0%
Ordinary income	5.5	0.8		△ 4.7		△85.0%
Net income attributable to owners of parent	3.5	0.4		△ 3.1		△87.5%
Net income per share	¥53.53	¥6.70

• In topics for the quarter under review (April - June 2020), the most prominent is the COVID-19 pandemic. The COVID-19 threat has spread around the world, causing an unprecedented situation in which economic activity across all industries has had to contract sharply, almost to the point of stopping. Unfathomable shocks continue to rock the global economy.
• Crude oil briefly dipped to negative $37.63. U.S. GDP growth dropped to negative 32.9% year on year, the steepest decline on record. GDP in Japan also contracted by 27%, the largest fall since World War II. The scars of an extremely deep, serious depression are spreading across the globe.
• In this business environment, the Kaneka Group's business performance for the first quarter (April 1, 2020 to June 30, 2020) was as follows. Consolidated net sales amounted to ¥126,644 million (down 14.9% year on year), operating income was ¥2,029 million (down 71.0% year on year). Ordinary income was ¥823 million (down 85.0% year on year). Net income attributable to owners of parent was ¥437 million (down 87.5% year on year).

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Net Sales, Operating Income by Segments

(Millions of yen)

		Net sales
	FY2019 1Q	FY2020 1Q		Difference
				Amount	%
Material Solutions Unit	60,176	48,894		△ 11,281	△18.7%
Quality of Life Solutions Unit	38,468	29,738		△ 8,729	△22.7%
Health Care Solutions Unit	10,949	11,698	748	6.8%
Nutrition Solutions Unit	38,908	35,938		△ 2,969	△7.6%
Others	320	373	53	16.8%
Adjustment	-	-	-	-
Total	148,822	126,644		△ 22,178	△14.9%

Operating income

FY2019 1Q	FY2020 1Q		Difference
			Amount	%
5,590	2,855		△ 2,734	△48.9%
3,728	1,236		△ 2,492	△66.8%
1,905	2,298	393	20.6%
1,200	827		△ 373	△31.1%
180	248	67	37.7%
△5,600	△5,436	163	-
7,004	2,029		△ 4,975	△71.0%

• The first featureis that the leading-edgebusinessgroup(E & I ・PV ・Medical・Pharma・Supplement・Agriculturalproductionsupport ) which has beenthe priority forinvestment of R&D resources, has continuedto record year on year growth in sales andprofits,despitethe severe contractionof the global economydue to theCOVID-19crisis.The secondfeatureis that core businessgroup belongingto the Material andQualityof LifeSolutions Units (Vinyls ・MOD・MS・Foam・Fibers ) experienceda decreasein demandwhich causeda decreasein productionas a result of the COVID-19pandemic.This is the largest factorbehindthe sharpdecreasein salesandprofits in the first quarter.
• Accordingto recent announcements by theAmericanChemistry Counciland businesssentiment surveys of the globalmanufacturingindustry, the global chemical sectorhas seena contractionin productionduring the COVID-19crisis in the same way as othermanufacturingindustries, but the productiondecreaseis reportedto have bottomedout in March, with a contractioninApril andMay , beforeproductionbeganto increaseagainin June.
• Incidentally, the Company's core businessgroup belongingto the Material andQualityof LifeSolutions Units, which hadseen productiondecrease, beganto increaseproductionfromJuneafterhittingbottomin May.
• Whileproductionis not likely to returnto pre-COVID-19levelsright away, productionin the core businessgroupis expectedtorecoverat a gradual pacein the third and fourthquarters,with earningsincreasing throughthe year due to productionincreases.
• Furthermore, the Company has takenthe paradigmchangeduringthe COVID-19crisis as an opportunityto implement measuresto boost productivity by strengtheningback officefunctions. Theseincludeapplying
  "selectionand concentration"of R&B initiativesand introducinga new work culture,exemplifiedby remoteworking. (Cost cuts: ¥500millionin the first quarter)

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Business Performance by Segments

Material	Net Sales	¥ 48.9 billion	【year-on-year△18.7％】
Solutions Unit	Operating Income	¥ 2.9 billion	【year-on-year△48.9％】

Composition ratio of sales

Net Sales

(Billions of yen)

Operating Income

(Billions of yen)

Vinyls and Chlor-Alkali

• PVC resins and caustic soda: Sales and profits decreased due to a lockdown in India.

Performance Polymers（MOD）		Performance Polymers（MS）

• MOD and MS: Sales and profits decreased due to a drop in demand in Europe and the U.S.
• Epoxy masterbatch: Application development continued and facilities for boosting capacity operated as planned.

New Business

• Kaneka Biodegradable Polymer PHBH: Joint development continued steadily with a large number of brand holders in Japan and overseas. Final discussions of productivity increases and cost reductions are proceeding toward a decision on constructing a plant with a 20,000 t production capacity.

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Business Performance by Segments

Quality of Life	Net Sales	¥ 29.7 billion	【year-on-year△22.7％】
Solutions Unit	Operating Income	¥ 1.2 billion	【year-on-year△66.8％】

Composition ratio of sales

Net Sales

(Billions of yen)

Performance Fibers

• Performance Fibers: Demand for hair accessories fell sharply due to lockdowns in Africa. Demand for pile and flame retardance materials is also sluggish due to the COVID-19 crisis.
  The newly established Product Development Center in Ghana will be used to achieve an early recovery in sales.

Foam & Residential Techs

• Foam & Residential Techs: Expandable polystyrene resin and extruded polystyrene foam boards slumped due to a decrease in fishing coolers and construction and civil engineering activity. Polyolefin foam demand was heavily impacted by the global decrease in automobile production.

Operating Income

(Billions of yen)

PV & Energy management

• PV & Energy management: High-efficiency photovoltaic module products for residential use saw firm sales.
  Proceeded with joint development of wall surface and see-through photovoltaic modules for buildings and automobiles.

E & I Technology

• E & I Technology: Polyimide films and graphite sheets saw a gradual recovery in the smartphone market. The Group bolstered development of original products for OLEDs and 5G applications.

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Business Performance by Segments

Health Care	Net Sales	¥ 11.7 billion	【year-on-year 6.8％】
Solutions Unit	Operating Income	¥ 2.3 billion	【year-on-year 20.6％】

Composition ratio of sales

Net Sales

(Billions of yen)

Medical

• Medical: Sales of catheters are recovering after a temporary halt due to the COVID-19 crisis. Embolism coils performed well, and the Group plans to sell them in the U.S.
  The Group decided to triple the current production capacity at its Vietnam plant.
  The Group is proactively advancing technology and capital alliances in new therapeutic fields.
  The Group started breast reconstruction treatment that uses culture adipose derived from stem cells.

Operating Income

(Billions of yen)

Pharma

• Pharma: Capacity expansion at Osaka Synthetic Chemical Laboratories, Inc. and Kaneka Eurogentec S.A. contributed to sales. The Group started supplying active pharmaceutical ingredients for Avigan® Tablet and reagents, both for COVID-19.
  The Group is engaged in contracted production of vaccine intermediates for AnGes, Inc. using leading-edge advanced technology such as plasmid DNA.
• The Group started an infection research team to focus on the infectious diseases domain.

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Business Performance by Segments

Nutrition	Net Sales	¥ 35.9billion	【year-on-year△7.6％】
Solutions Unit	Operating Income	¥ 0.8 billion	【year-on-year△31.1％】

Composition ratio of sales

Net Sales

(Billions of yen)

Foods & Agris

• Foods & Agris: Demand for bread and confectionery slumped due to a downturn in restaurant dining and inbound tourism. An increase in people eating meals at home drove favorable performance at Kaneka Sun Spice Corporation. Dairy product sales were firm, and the Group commenced organic dairy farming. The Group established a dairy farming agricultural production company in Betsukai, Hokkaido Prefecture.

Operating Income

(Billions of yen)

Supplemental Nutrition

• Supplemental Nutrition: Reduced form of coenzyme Q10 performed strongly in the U.S. due to increased awareness of preventative care.
  Sales of probiotics were favorable in Europe and the Group started sales in the U.S.
  The Group will strengthen dissemination of scientific information and develop its brand strategy through diverse supplements.

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Consolidated Balance Sheet

(Billions of yen)

		March 31,		June 30,		Difference
		2020		2020
Assets	306.9		299.3
	Current Assets			△ 7.6
	Noncurrent Asssets	346.4		351.3	4.9
	Total assets	653.3		650.6		△ 2.6
Liabilities	130.8		138.5
	Interest bearing debt		7.6
	Others	168.3		158.0		△ 10.3
	Total liabilities	299.2		296.5		△ 2.7
Net assets	331.5		331.3
	Shareholders' equity			△ 0.2
	Others	22.6		22.9	0.2
	Total net assets	354.1		354.2	0.1
Total liabilities and net assets	653.3		650.6		△ 2.6
Shareholders' equity ratio	50.7%		50.9%
Net assets per share	¥5,082.08		¥5,079.53

• • Shareholders' equity ： Net assets deducting Noncontrolling interests and Subscription rights to shares
• Total assets decreased due to a decrease in notes and accounts receivable-trade.
• Liabilities decreased due to a decrease in notes and accounts payable-trade.
• Net assets increased due to an increase in valuation difference on available-for-sale securities.

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Performance Forecasts

① World Economic Outlook

The impact of COVID-19 is expected to have peaked during the first quarter, with

business performance to begin gradually recovering from the second quarter, making a

full recovery from the second half of the fiscal year ending March 31, 2022.

②Forecast for Consolidated Business Performance for the Fiscal Year Ending March 31, 2021

(Billions of yen)

	FY2019 result		FY2020 forecast		Change
		Amount		％
Net sales	601.5		560.0		△ 41.5		△6.9%
Operating income	26.0		21.0		△ 5.0		△19.3%
Ordinary income	20.2		16.4		△ 3.8		△18.7%
Net income attributable to owners of parent	14.0		10.0		△ 4.0		△28.6%

* The forecasts are based on exchange rates of ¥108 to the U.S. dollar, ¥120 to the euro and a domestic naphtha price of ¥28,000 per kiloliter.

The operating results forecasts and certain other statements contained in this document are forward-looking statements, which are rationally determined based on information currently available to the company. For a variety of reasons, actual performance may differ substantially from these projections. They do not constitute a guarantee that the Company will achieve these forecasts or other forward-looking statements.

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Forecast for Consolidated Business Performance by segments for the Fiscal Year Ending March 31, 2021

		Net Sales
	FY2019	FY2020		Change
	result	forecast
Material Solutions Unit	241.8	215.5		△ 26.3
Quality of Life Solutions Unit	154.8	136.6		△ 18.2
Health Care Solutions Unit	46.4	52.5		6.1
Nutrition Solutions Unit	157.4	154.4		△ 3.0
Others	1.1	1.0		△ 0.1
Adjustment	-	-		-
Total	601.5	560.0		△ 41.5

(Billions of yen)

Operating Income

FY2019	FY2020		Change
result	forecast
20.6	15.5		△ 5.1
14.2	9.4		△ 4.8
8.9	11.5		2.6
5.6	5.3		△ 0.3
0.5	0.6		0.1
△ 23.9	△ 21.3		2.6
26.0	21.0		△ 5.0

• The core business group (Vinyls ・MOD・MS・Foam・Fibers) stopped production in the COVID-19 crisis, but production is now expected to recover gradually in the third and fourth quarters, with production increases to drive an improvement in earnings for the year.
• The leading-edge business group (E & I ・PV・Medical・ Pharma・Supplement・Agricultural production support), a driving force for growth is expected to continue a strong earnings growth trend.
• Furthermore, the Company will engage in high productivity business management, such as strengthening back office functions. These include applying "selection and concentration" of R&B initiatives and introducing a new work culture, exemplified by remote working. (Cost cuts: ¥3,000 million)

③Dividends forecasts for the Fiscal Year Ending March 31, 2021

• Based on the above performance forecasts for the fiscal year ending March 31, 2021 and a basic policy of continuing to make stable profit returns, the Company has maintained its annual dividend of ¥100 (interim ¥50, year-end ¥50).

The operating results forecasts and certain other statements contained in this document are forward-looking statements, which are rationally determined based on information currently available to the company. For a variety of reasons, actual performance may differ substantially from these projections. They do not constitute a guarantee that the Company will achieve these forecasts or other forward-looking statements.

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④Growth toward the fiscal year ending March 31, 2023

• From the second half of the fiscal year ending March 31, 2022, the Company expects to see production activities recover to pre-COVID-19 levels. The performance recovery is expected to be delayed by 1 year.

Net sales ¥700 billion

Operating income ¥53 billion

• Amid a rapid paradigm shift in society sparked by the COVID-19 crisis, the Company will bolster the competitiveness of the leading-edge business group (E & I ・Medical・Pharma・PV ・Supplement, etc.).
  The Company will invest resources intensively in its focal new large-scale business group, such as Kaneka Biodegradable Polymer PHBH, and accelerate reaping the fruits of its R&B initiatives.

• The Company will hone the unique business characteristics of its core business group (Vinyls ・MOD・MS・Foam・Fibers・Foods & Agris), and build them into a strong platform supporting management as a business base.
• New large-scale business Kaneka Biodegradable Polymer PHBH:
  This is the Group's first large-scale business in a long time. Amid a multitude of new business groups, this one will receive a concentrated investment of management resources.
  The Company will expedite the development of technology for uniquely combining its two technology sources (yeast fermentation technology and high molecule polymer technology) to realize large scale commercial operations at an early stage.
• Expedite management digital transformation
  The Company will convert to a robust corporate structure by making efficient investments of management resources.

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KANEKA CORPORATION

https://www.kaneka.co.jp/en/