Investors’ Meeting for Current Priority Management Issues and Business Strategy
Q&A Summary
Date and time:
Presenter:

Tuesday, November 27, 2018, 15:00 to 16:30
Masakazu Tokura, President

Specialty Chemicals
Q. Regarding the separators business in the Energy & Functional Materials
Sector, can you tell me about the status of new customer leads, increases to
production capacity, and strategies for your investment plans?
A. Production at an electric vehicle manufacturer, which adopts batteries using
our products, has achieved steady improvements, and it looks like thatcompany is finally ready to take the next step. As such, we are exploring thefeasibility of expanding the production capacity of separators. We think that
we need to start work without taking much time. Because we are dependent
on a major customer, we do need to develop new customers. We are currently
focusing on shipping the quantities that have been requested, however.
Therefore, while we have made some progress in developing new customers,
we have yet to achieve major successes on this front. We understand that, inthe future, we will have to sell separators for various battery types.
Q. You earlier spoke about the profitability of separators, but, as it seems likethere is a lot of cost pressure, what are your thoughts on doing the production
in-house and on cost improvements?
A. The first thing is raising productivity, and we make daily improvements on
this front. At the Ohe Works we have achieved substantial improvements to
productivity, while at the plant in Daegu, South Korea, we are carrying out
initiatives to raise productivity further. We produce our substrate internally,
and cover any shortfalls through purchases from third parties. When possible,
it is better to produce everything from substrate to coating all together on ourown, but since we have limited resources, we are conducting studies on the
expansion of our own substrate production while continuing to acquire thirdparty substrates.

Q. I would like to hear more details about the Liquid Crystal Polymer (LCP)
from the Energy & Functional Materials Sector, which you newly introduced.
With the arrival of the 5G (next-generation mobile telecommunications)society, it is predicted there will be a move to replace polyimide, which iscurrently in use as the high-frequency material, with LCP. What are the costadvantages, and how does the competitive environment look?
Also, am I correct in understanding that Sumitomo Chemical has acompetitive advantage in the market for LCP because you have a solution
type and because it can be expanded for rigid applications?
A. Our Super Engineering Plastic business is focused on LCP and PES. While
our competitors have a full line of products, we have concentrated ontechnology just for these two materials, and we are confident that we havesuperior competitiveness. Especially in the case of LCP, we are one of the top
suppliers in the world, and our application technology is also very advanced.
Our solution type of LCP has the feature that it is optimal for thin-film
applications, which no other company has, and we also have LCP with otherunique features.
Q. Am I correct in understanding that Sumitomo Chemical possesses baseresins?
A. Yes, of course we have those.
Q. Regarding the IT-related Chemicals Sector, you previously were chasing the
top manufacturers from behind, but I think it looks like you have now caught
up to or are overpassing them. Please tell us the reasons for this. Is it
because the OLED era has arrived in the last year or two, or because
products using your own technologies are contributing?
A. Since establishing the IT-related Chemicals Sector we have done businessbased on our proprietary technologies. We have assiduously carried out
research and development, and are finally starting to see business blossom in
the field of liquid crystal displays. Currently, sales of polarizing films for fullscreen smartphones, which is a special processing polarizing film, are steady,and sales of products using the Company’s materials, such as acrylic
protection films for polarizing films, which we have long been developing, areprogressing. Furthermore, in the OLED display field, in addition totouchscreen panels, we have been selling circular polarizing films using areverse wavelength dispersion and liquid crystal-coated retardation film,
which is our own material. Certainly, we do need to consider such factors as
the cost of processes, but products using our proprietary materials provide
high marginal income ratios, and fundamentally we think of them as being
high in added value. Moreover, if sales of OLED light-emitting materials, on
which we have carried out R&D, increase, I think we can grow further.

Q. I would like to ask you about the thinking of the IT-related Chemicals Sector
on page 26, especially about sustainability and growth. Considering thatgrowth is topping out in the high-end smartphone market, I think that thepenetration ratio of OLED displays for smartphones somewhat lags
projections. Meanwhile, new-entrant display manufacturers have begun
shipping OLED displays. With such a market environment, can you tell me
your forecast for the Company’s touchscreen panels? Also, what sorts ofproducts are you thinking about selling for foldable smartphones, which are
rumored to be released in the next period? Finally, I think that regarding
circular polarizing film, you are currently using films bought from third
parties to ship liquid-crystal-coated polarizers. Can you provide acomprehensive answer that addresses points such as the progress of yourCompany’s development of its own materials?
A. Regarding touchscreen panels, we have both a glass type for rigid applications
and a film type for foldable applications. It is not as if foldable OLED displays
are suddenly going to be adopted for all smartphones, so we have both types
so that we can support both types of display—rigid and foldable. We expect tosee demand for film-type touchscreens rise as our new customer’s operations
increase in the future, so we will be devoting energies to support that.
Also, as I have been saying for a while, in regard to components for foldable
smartphones, development of a window film is progressing steadily.
Regarding circular polarizing film for OLED displays, we ship products using
liquid crystal-coated retardation film.
Regarding sales to North American smartphone manufacturers, there has
been news about the slumping sales of smartphones using liquid-crystal
displays, but, fortunately, we ship polarizing films for OLED displays, so arein good shape.

Q. Regarding the new methionine plant, I would like to hear more about the status of its
launch, including about the commencement of commercial production in November.
I would also like to know the basis for your earlier statement that methionine is now
at its market bottom. And, with Evonik currently experiencing trouble, the price ofmethionine appears to be rising sharply. Do you think this is a situation that willcontinue?
A. Although I do not have any definitive evidence that the methionine market is currently atits bottom, keeping in mind that global demand for 1.3 million tons of methionine isincreasing at 6 to 7 percent annually, I think that supply and demand will always comeinto equilibrium. Put simply, manufacturers’ plans for increased methionine production
capacity, which were announced simultaneously when the market took off, work out toabout 800,000 tons in total, but we are actually seeing a number of around 300,000 tons,
100,000 tons of which is from our new plant. With the growth rate in demand formethionine, this amount can be absorbed in about four years’ time. Demand for chicken
meat remains strong, so I think we will see the market turn in the near future.
We opened the new plant at the beginning of November with a vertical startup of 100,000
tons, and we expect it to achieve full operations within this year. We have received
extensive support from Niihama city and Ehime prefecture.
Q. The re-evaluation system for crop protection products will be implemented in 2021.
How will this affect costs? Will costs related to re-evaluation arise bundled as large
fixed costs at a specific point, such as 2021, or will they appear annually in small
increments?
A. The crop protection products re-evaluation system is part of a global trend that I want us
to manage, leveraging our strengths. Because we will evaluate many existing products
over 15 years, costs will arise not at a specific point, but over time.

Q. Regarding the pharmaceuticals sector, including nucleic acid medicine, there are theareas that your company handles and there are the areas handled by Sumitomo
Dainippon Pharma. On the point that Sumitomo Dainippon Pharma, as a listedcompany within your Group, plays an important role in the pharmaceuticals sector,
I would like to know if there are any disadvantageous aspects related to the pursuitof synergies and whether the current organization is optimal, including from theperspective of governance.
A. I think that I should not generalize here, but, in the life sciences field, we have both crop
protection and pharmaceuticals businesses. Especially in the case of the pharmaceuticals
business, while there was a time in the past when it was Sumitomo Chemical’s
pharmaceuticals division, we implemented the current organization in order to give thesubsidiary as much autonomy as possible, because the patterns of behavior in thatbusiness are so different from our other businesses,. At the same time, while it iscommonly said that scale is the issue in the pharma business, I have consistently said thatsize is not everything. In fact, the world’s major pharmaceutical manufacturers are
partnering with startups, and innovative drugs are more apt to be acquired from outside.
What lies at the source of those types of technologies is gene editing technology—
engineering that fuses digital with bio, which is referred to as “digital bio,” itis also very
useful for agriculture. For example, if you are looking at toxicity tests on human cells
created through gene editing or iPS cells, the technologies are identical to those forpharmaceuticals. The underlying basic research and technologies for regenerative andcellular medicine and gene editing are all common, so I think there are large synergies.
Therefore, while I do not know if it will be forever, my thinking is that, in the life
sciences field, I want us to keep both the crop protection and pharmaceuticals businesses.
With the fusion of the two and our desire to newly pick up the areas in regenerative andcellular medicine that Sumitomo Dainippon Pharma is unable to handle, we recently
established the Bioscience Research Laboratory. Bio and gene editing technologies will
also contribute to increased added value and increased production of foodstuffs. While
we are not growing foods through gene editing, and are only doing biomarkers, there are
already organizations in the world beginning to produce cows with plentiful meat, tunawith lots of fat, and tomatoes high in nutrients using gene editing, though it is not yet
approved. For us to contribute to higher production of foodstuffs, I think that in the future
we will need to consider such things. As the technologies for agriculture andpharmaceuticals are the same in those types of fields, I want to carefully develop both.

Bulk Chemicals
Q. I would like to know about the background of how Rabigh Refining & Petrochemical
Co. - Petro Rabigh (PRC) achieved stable operations.
A. PRC overcame 6 or 7 years of adversity with dogged perseverance, experiencing culturaldifferences, differences in skill levels, and differences of opinion with top management.
By steadily resolving all the issues one at a time, stable operations were achieved. The
biggest contributing factor is that the local employees of PRC have raised their own
abilities. I previously said that PRC has achieved full operations, but it encountersproblems at times. Even when it gets in trouble, though, it recovers at almost the same
speed as a plant in Japan. I think this can only mean that the company has raised its
capabilities. Of course, there is also the fact that the current CEO has become
comfortable working with people of an Asian background, that he is receptive to our
opinions, that maintenance skills have risen, and that spare parts for problems have been
secured. I think the accumulation of all these small factors has contributed to stable
operations. Therefore, I do not think business will easily break down, and I expect it tocontinue for the time being. I want PRC’s Phase II Project to adopt this system and reachstable operations.
Q. It seems that the market conditions behind petrochemical products, especially
ethylene, are fluctuating greatly. What is your outlook?
A. I have not heard any specific stories about US-produced ethane or polyethylene being
shipped to Asia in large quantities. In China, however, with the effects of the US-China
trade war, we could see, for example, a slowdown in the production of home electronics,
and demand become slightly bearish. With that, it seems plausible that we will see
ethane-based ethylene and polyethylene from the US flow our way. As such, I think thatmarket conditions for petrochemical products, especially centered on polyethylene, haveclearly peaked. I think we were lucky that conditions remained favorable as long as theydid.

Others
Q. I think that the content of the section “Direction of Future Business Strategy” fromyour presentation is a good fit for the present day. Currently, with the economic
environment experiencing great changes, including the issues between the US andChina, what approach will you take in carrying out business over the next three
years? Also, returns to shareholder and capital allocation were not explained in
depth. Could you share your thoughts on how you will allocate funds, or any otherrelevant information, from a medium- to long-term perspective going forward?
A. Regarding the world’s economic environment, you often hear talk of a trade war between
the US and China, but this tension needs to be looked at from a broader perspective. I see
the situation as a battle for hegemony between China and the United States. Ian
Bremmer, the president of the Eurasia Group, used the term “geopolitical depression” inthe report “TOP RISKS 2018” at the beginning of the year and “China Loves a Vacuum”
came first within their list of risks. Here, “vacuum” refers to the spaces unoccupied by
the US, and it neither signifies that Pax Americana has come to an end nor implicates Pax
Sinica, rather that the battle for hegemony between the two countries has begun. As thecurrent US-China trade war is one aspect of this, I think it would be wise to prepare forthe tension to not easily be relieved. There are experts who claim that the decades
following World War II were an unusually blessed period, and now we are entering very
uncertain times, especially geopolitically, which will likely continue for a good while.
That aside, everyone is cognizant of the tasks, such as those symbolized by the SDGs,
that must be done, and there is no change to the essential proposition of maximizing thecontribution we can make with our company. That is what we will continue to do, and I
think that we will need to periodically review various issues, including capital allocation,
as necessary.
Q. Even in such an environment, do you think growth will be possible?
A. If we were only out to increase results during the three years of the next Corporate
Business Plan, yes, I think we could achieve it, by slightly lowering the amount ofinvestments and putting off difficult initiatives, such as digital transformation. Whentaking the 2020s and 2030s into consideration, however, we may see a time when successor failure is decided very quickly, so I would like to proceed now by carrying out
initiatives with determination, while we have the resources.

Q. Regarding your thoughts on investments in the next Corporate Business Plan, I
would like to know the scale of the three-year total. Approximately how much of anincrease (or decrease) will there be from the investment amount during the current
Corporate Business Plan, or are you envisioning a similar amount? Also, about theratio of the investment amounts by sector, what sort of image do you haveconsidering the current situation?
Also, you have made a large amount of upfront investments into the Rabigh Project,
but there is not much to be heard about any cash-base recovery. Please tell us thepace at which you intend to collect your investments from the next Corporate
Business Plan onward?
A. We currently are in the midst of formulating our investment plan for the next Corporate
Business Plan. Basically, the 690 billion yen (on a decision-making basis) in projected
investments for the current Corporate Business Plan is above our primary balance, which
we find acceptable in light of the increase of our financial strength. By “primarybalance,” I mean free cash flow minus dividends paid. For the next Corporate Business
Plan, I would like to restore the primary balance, but, amidst calls for innovation, there
are various investments in infrastructure that we must make, so we think that it cannot be
helped if we exceed the primary balance. Accordingly, we expect the level of investmentsin the next Corporate Business Plan to be as much as the 2016-2018 level. Because wehave to maintain a good financial condition while making any investments, however, ourposition is to keep an eye on that balance while formulating our profit plans. As for the
proportion of investment spending for each business sector, we expect it will not changemuch from the current Corporate Business Plan. The reason why is because weconcentrate our investments in areas where we can win with superior technology. That
does not necessarily mean that we will not make investments in the Petrochemicals &Plastics Sector. Our position is that we will, of course, make investments in the
Petrochemicals & Plastics Sector if there are value-added business opportunities.
Petro Rabigh made a profit last year of $400 million, but the dividends we have received
so far have been insignificant, and, as you point out, we have not been able to achievemuch in terms of a cash return on our investment. Because we started Phase 2 in the
midst of this situation, we think it will take a long time before we can recover theinvestments made in Phase 1 and Phase 2 combined. Still, we want to work to maintainstable operations so that we can earn a steady return every year.

Q. Your explanation regarding the SDGs is in line with the “Sumitomo Spirit” and isvery positive. On the other hand, I get the impression that there is a huge amount ofemotional news coverage of problems related to crop protection products and waste
plastics. This issue is not limited to your company, and relates, rather, to thechemicals industry at large, and I think that, over the next five years or so, we areentering a period in which the industry will have to give more presentations to avoid
negative impressions forming and Sumitomo Chemical will have to do more to makeits initiatives known amongst the public. Are you aware of these issues, and what are
your thoughts on them? From the perspectives of costs and risks and business
opportunities, please paint a picture of how you will grow in SDG-related businesses
over the next five years.
A. As you say, doing nothing to address the different issues, including environmental
problems, is a risk. I would like to see us convert these issues into opportunities, byproviding, with our own technologies, solutions that solve problems. That is something I
want to pursue.
Uncertain debates about chemicals and plastics do often arise, so I think we need toprovide better explanations, which are more scientific, logical, and quantitative, toJapanese governmental agencies and to the world. The initiatives of the Chairman of theJapan Chemical Industry Association at the International Congress and Convention
Association (ICCA) the other day can be viewed as one such effort. I often meet with the
major chemical companies, and we completely agree that, while there may be steps thateach company can take regarding problems related to the recycling of plastics, industrywide action is the way to maintain the reputation of the chemical industry.
There is a wide-range of information about the disposal of plastics. For example, there
are reports that 8 million tons of plastic waste enters the oceans annually, and at this rate,
there will be an amount that will exceed the mass of the world’s fish by 2050—. You also
hear about how much plastic waste is extracted from the stomachs of whales that havebeen necropsied, and that microplastics are being found in human bodies upon dissection.
The streaming video, “Plastic Pollution: How Humans are Turning the World into
Plastic,” created by Kurzgesagt – In a Nutshell, through collaboration with the United
Nations Environment Programme (UNEP), is a 9-minute video that looks at the problemsof plastic. The video, which has garnered much attention, introduces both the merits anddemerits of plastics. Please do take a look. My thoughts are that it is our job to explain
the contents of this video, and similar reports, by providing statistics that are a little morescientifically grounded. Take, for example, single-use food packaging, which offers thehighest level of thermal recycling among the types of plastic. Without this packaging,food freshness would decline, causing waste to increase, which would lead to an increase
in CO2. Similarly, consider the use of a cotton bag instead of a plastic grocery bag. Only
when a cotton bag would be used 7,100 times, its impact on the environment would beequivalent to that of a plastic grocery bag, because the energy cost and CO2 emissions to
produce plastic bags is low. In this way, plastic comes with many different good and bad
points. This all means that leaving and discarding plastics into the environment is bad,and that it is important to intelligently recycle them for further use. In this vein, theJapanese government, especially the Ministry of the Environment is now formulating aplastics circulation strategy. I see it as our responsibility to put out information that is as
scientifically, logically, and quantitively accurate as possible, and I also think this is anissue we share with the other major chemical companies. Finally, as I earlier mentioned, I
think it is important for us to actively participate in international alliances and otherorganizations, in order to promote this type of thinking we have in Japan.
Q. I look forward to seeing what you can do, for example, by contributing with aproduct that can be made thin with a material like your Easy Processing
Polyethylene.
A. Thank you. We will do our best.

(END)

Cautionary Statement
Statements made in this document with respect to Sumitomo Chemical’s current plans, estimates,
strategies, and beliefs that are not historical facts are forward-looking statements about the future
performance of Sumitomo Chemical. These statements are based on management’s assumptions andbeliefs in light of the information currently available to it, and involve risks and uncertainties. The
important factors that could cause actual results to differ materially from those discussed in theforward-looking statements include, but are not limited to, general economic conditions in Sumitomo
Chemical’s markets; demand for, and competitive pricing pressure on, Sumitomo Chemical’s
products in the marketplace; Sumitomo Chemical’s ability to continue to win acceptance for its
products in these highly competitive markets; and movements of currency exchange rates.