Mitsubishi Materials : Explanation and Q&A on Conference Call (FY March 2024 Q2 Financial Results)

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1.Mitsubishi Materials' operating profit for the Q2 increased by ¥4.4 billion from the Q1, mainly due to a recording of profit by improving metal recoveries in the Metals business

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This is a transcript of Mitsubishi Materials Corporation's second quarter financial results for the fiscal year ending March 2024 announced on November 9, 2023.

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Naoki Ono (hereafter "Ono"), Chief Executive Officer, Mitsubishi Materials Corporation

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Presentation

Ono: I am Naoki Ono, CEO of Mitsubishi Materials. Thank you very much for attending today's briefing.

Let's quickly go over the Q2 earnings overview and the full-year performance outlook.

Please turn to page three of the material, the executive summary, for an explanation of the Q2 business environment and future outlook.

For Q2, the business environment in the automotive market saw a continuation of demand recovery trends as the semiconductor shortage began to resolve. However, our recovery in demand has not materialized due to existing inventory in distribution. The semiconductor market's device manufacturer sales have bottomed out, but demand remains in a trough phase. Exchange rates have shown a trend toward a weaker yen, while metal prices for copper and palladium are on a declining trend, and the high cost of domestic electricity and raw materials continues.

In this context, H1's performance was below the previous year's due to lower demand in the automotive and semiconductor markets, but progress was largely as expected due to foreign exchange gains and an increase in equity method investment earnings.

Net sales decreased due to a shift to contract smelting under the P.T. Smelting's scheme and a decline in sales. Operating profit saw some benefits from the weakening of the yen and price increases; however, a significant drop in sales led to a decrease in profit. Ordinary profit included an increase in equity earnings from Mitsubishi UBE Cement, but overall decreased due to factors such as a shift in the timing of mine dividends that were expected in H1.

Our full-year performance forecast has been slightly revised downward, taking into account the current business environment. We anticipate operating profit at ¥40 billion, ordinary profit at ¥56 billion, and profit attributable to owners of parent for the current period at ¥38 billion. These figures represent a decrease from our previous forecast by ¥10 billion, ¥2 billion, and ¥3 billion, respectively. Our dividend forecast remains unchanged from the previous announcement, standing at ¥94.

Looking ahead to H2 of the fiscal year, the yen is expected to continue its weak trend, and while there are no signs of recovery in metal prices, domestic electricity rates are forecasted to settle below our expectations.

The semiconductor market is still experiencing low demand, and recovery is not expected until H1 of FY March 2025. This year, the Copper & Copper Alloy and Electronic Materials & Components businesses will see a significant decrease in profit. However, as the automotive business for Copper

• Copper Alloy business is showing signs of recovery, we expect to return to the growth trajectory outlined in the Medium-term Management Strategy FY2031, driven by the recovery in the automotive market and enhanced cost competitiveness.

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Please refer to page four for the quarterly trends.

For Q2 of the fiscal year ending March 2024, due to a decrease in sales in the Metals business, sales were ¥353.5 billion, down ¥9.1 billion from the previous quarter. Operating profit increased by ¥4.4 billion from the previous quarter to ¥8.1 billion, due to an improvement in metal recoveries in the Metals business.

Ordinary profit was ¥11.4 billion, up ¥4.5 billion from the previous quarter, thanks to the increased equity in earnings of Mitsubishi UBE Cement. Net profit was ¥6.2 billion, up ¥1.2 billion from the previous quarter, reflecting the increase in ordinary profit.

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Moving on to page five, here we compare the performance of H1 of the last fiscal year with that of the current fiscal year.

For the current fiscal year's H1, we experienced a decrease in sales and profit compared to the same period last year. Although there was an increase in sales of about ¥35 billion due to the weakening of the yen, this was offset by a decrease in sales in the Metals business due to changes in the P.T. Smelting's scheme, the transfer of the polysilicon business, a fall in copper prices, and decreases in sales of Advanced Products and Metalworking Solutions businesses, leading to a total decrease in sales of ¥115.7 billion.

Details regarding the increase or decrease in operating profit and ordinary profit will be explained on the next page.

Profit attributable to owners of parent decreased by ¥12.5 billion, due to the decrease in ordinary profit and a reduction in special profit.

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Continuing to page six, please look at the waterfall chart. This is an analysis of the increase or decrease in ordinary profit for H1 of the current fiscal year compared to H1 of the previous year.

Operating profit decreased by ¥17.6 billion, while non-operating profit improved by ¥13 billion, resulting in an ordinary profit of ¥18.4 billion. Operating profit saw the benefits of a weaker yen and price increases in the Copper & Copper Alloy and Metalworking Solutions businesses. However, there was a significant decrease due to rising energy costs, sluggish demand for automobiles, and a decline in sales of Advanced Products and Metalworking Solutions businesses due to the deterioration of semiconductor market conditions.

Ordinary profit was positively impacted by an improvement in the equity method earnings of Mitsubishi UBE Cement, but this was offset by a decrease in operating profit and the deferral of dividend income from the Los Pelambres copper mine from H1 to H2 of the fiscal year, leading to a decrease in profit by ¥4.6 billion YoY, resulting in ¥18.4 billion.

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Moving on to page seven, this page presents the consolidated balance sheet as of the end of September 2023.

The balance amounted to ¥1,985 billion, which is an increase of ¥93.2 billion from the end of March 2023. Inventory assets had decreased at the end of March 2023 due to the impact of the furnace maintenance at the Naoshima Smelter & Refinery implemented in Q4 of the previous fiscal year, but they have increased now as that impact has ceased.

Furthermore, the balance increased due to the addition of fixed assets resulting from the expansion construction of the P.T. Smelting and an increase in loans for operating capital to the Mantoverde copper mine, an equity method affiliate.

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Please turn to page eight, where we present the full-year forecast for the fiscal year ending March 2024.

The full-year performance forecast incorporates the current business environment and has been slightly revised downward. I would like to explain the details on the following page.

Please note that the dividend forecast remains unchanged from the previously announced figures.

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Let's move on to page nine, which presents a variance analysis of the current fiscal year's ordinary profit forecast compared with the previous forecast.

Operating profit is expected to decrease by ¥10 billion, while non-operating profit and loss are expected to improve by ¥8 billion, resulting in an ordinary profit forecast of ¥56 billion, a decrease of ¥2 billion.

Operating profit is expected to fall short of the previous forecast by ¥10 billion, despite the beneficial effects of a weaker yen and lower-than-expected energy costs, such as electricity. This is largely due to the impact of reduced sales in the Copper & Copper Alloy and Electronic Materials & Components businesses.

For ordinary profit, we expect an increase from foreign exchange gains on foreign currency- denominated receivables and payables, and higher equity method investment earnings from Mitsubishi UBE Cement. However, these are not sufficient to offset the decrease in operating profit, and we have revised the forecast down to ¥56 billion.

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Let's turn to page 10, where we have the segment-specific details.

Starting with the metals business, for H1 of the fiscal year, we saw a decrease in ordinary profit by ¥12.7 billion YoY. The main factors contributing to this decline were the falling prices of sulfuric acid and palladium, increased energy costs, the absence of dividend income from the Los Pelambres copper mine, and a decrease in equity method investment earnings.

Regarding the full-year forecast, we anticipate ordinary profit to be about ¥35 billion, consistent with our previous forecast. This takes into account the expected offset of the negative impact from the decreased ore grades, etc. at the Copper Mountain mine by the favorable foreign exchange gains.

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Moving on to page 11, let's focus on the Copper & Copper Alloy business within the Advanced Products Company.

For H1, ordinary profit decreased by ¥1.4 billion YoY. The decline was primarily due to reduced sales, especially of products for the automotive sector, and an increase in hedge costs.

For the full-year forecast, ordinary profit has been revised down by ¥5 billion from our previous forecast to ¥1.8 billion. Currently, orders for automotive terminal materials are showing signs of recovery, and we expect an improvement in H2 of the fiscal year. However, this recovery is not projected to fully offset the downturn experienced in H1, leading us to revise our forecast downward.

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