FY2019-FY2021 Corporate Business Plan Presentation Meeting
Q&A Summary
Date and time: Tuesday, March 12, 2019, 15:30 to 17:30
Presenter:
Masakazu Tokura, President
Q&A:
Masakazu Tokura, President,
Toshihisa Deguchi, Executive Vice President,
Kunio Nozaki, Senior Managing Executive Officer,
Ray Nishimoto, Senior Managing Executive Officer,
Hiroshi Ueda, Senior Managing Executive Officer,
Noriaki Takeshita, Senior Managing Executive Officer,
Hiroshi Niinuma, Senior Managing Executive Officer,
Keiichi Iwata, Senior Managing Executive Officer
Specialty Chemicals
Q. The core operating income variance analysis for the Energy & Functional
Materials Sector (fiscal 2018 vs. fiscal 2021), on slide 54, shows volume as
being quite large. You spoke earlier about expanding sales for battery
materials and super engineering plastics and I guess that most of theincrease in volume in battery materials will be separators, but for superengineering plastics, which will have the larger impact on volume, LCP or
PES? Also, the negative impact of fixed costs and others is quite large, butshould we understand the background behind this as being due to the
expansion in separator production?
A. (Keiichi Iwata, Senior Managing Executive Officer): First, with regard tovolume, this will primarily come in increased volume for separators, but in
addition volume will also significantly increase for cathode materials(precursor) from Tanaka Chemical, our subsidiary. To be thorough, there will
also be an increase in alumina, an inorganic material, because this is used asa material in coating separators, so that will account for about three-fourthsof the increase in volume of alumina. On the other hand, in super-engineering
plastics, volume will grow for both LCP and PES: we have high expectations
for LCP, due to expanded sales for new applications such as in 5G
technologies, and for PES, we expect sales expansion for automotive
applications. With regard to fixed costs, as you point out, the biggest impact
results from depreciation expenses and the increase of labor costs, as the
production capacity of separators will be expanded at SSLM.

Q. With regard to the expansion of separator production capacity, you have
explained about the coating component, but today you said that you would
also expand production of the substrate. Doing the math, I guess you might
expand production by a little over 100 million m2/year. You have spoken
previously about wanting to expand production of the substrate as well if you
had a prospect of a new manufacturing method, so should we understand thisto mean that you have at last found a prospective new manufacturingmethod? Also, I would like to ask about the location.
A. (Keiichi Iwata, Senior Managing Executive Officer): At the current moment,
substrate from a new production method is under development. We areconfident that we have solidified the technology to some degree, but the final
stages still remain. With regard to the location of the expansion, that is not
yet determined, but the major factor will be the length of the construction
period. From the start of construction on the building, that process alone willtake about a year and a half and there is a possibility of missing a business
opportunity; therefore it will come down to a place with a building we caneffectively utilize, and which can be set up with a short construction period.
Q. Recently, there have been expansions in production lines in China, so are you
considering purchasing substrate from a Chinese separator manufacturer?
A. (Keiichi Iwata, Senior Managing Executive Officer): That is one of our options,but at the current time we are not having concrete discussions.
Q. The profit margin for the IT-related Chemicals Sector for fiscal 2018 still may
be on the upswing, but what will you do to improve profit margins to a levelsuitable for specialty chemicals? Also, could you please explain the state ofyour in-house developing technologies and your pipeline, including polymer
coated-type OLED materials?
A. (Masakazu Tokura, President): The IT-related Chemicals businesses Sector
has a high asset turnover ratio, so even if the core operating income to sales
revenue appears low, the ROI is not low. In FY2021, its ROIs is likely to
exceed our 7% target largely because the percentage of higher-value-added
products based on our in-house developed technology increases. This is abusiness that cannot avoid a drop in prices of products, but we want tofurther strengthen our OLED display-related business through sellinghigher-value-added products using the materials developed in-houseproprietary. In addition, we will focus on new efforts toward creating abusiness for OLED materials in the field of smart mobility.

(Toshihisa Deguchi, Executive Vice President): We have invested about 120
billion yen over the three years of the Corporate Business Plan that runs
through fiscal 2018. Because those businesses will begin operation from fiscal
2019, we think that we can improve both sales revenue and core operating
income.
As for our materials developed in-house, acrylic protective films have alreadybeen commercialized. This film offers outstanding permeability andresistance to humidity and is becoming the standard main protective film forlarge TVs. In addition, we are working to extend our liquid crystal coatedretardation film, used with OLEDs, to small and medium-sized displays.
While there is a need to change its characteristics somewhat, we hope todevelop a film based on similar principles for the smartphone use. Outside ofthat, we are considering making display cover materials for the outermost
surfaces of foldable displays. There are three products we can supply forfoldable displays, which are polarizing film, touch screen panels, and display
cover material.
With regard to the OLED materials, production has begun on JOLED
products using our OLED materials, though the volume is quite small at the
moment. We believe our materials will be shipped steadily as the production
volume on the company's new line increases step by step. Our significant
expectations are for TV applications; our products have been well received bypanel manufacturer. Currently for TV applications, vapor-deposition white
OLEDs (white OLEDs with color filters) are major, but we think we can
extend coated-type OLEDs into this space, we think the coated-type exceeds
the current vacuum deposition type in both cost and performance overall. We
expect to have progress during the Corporate Business Plan running throughfiscal 2021.
Q. On slide 57, you show a variance analysis for core operating income for the
IT-related Chemicals Sector (fiscal 2018 vs. fiscal 2021), and the downward
impact due to margins is about 100 billion yen, larger than the positive
impact from volume, the assumed lowering of the margins during the coming
three years is larger than over the last three years. While businesses such aspolarizing film have matured, why do you need to lower your prices so much?
Also, I would also like to ask about effects of display’s shift from liquid crystal
to OLED.
A. (Masakazu Tokura, President): In the world of IT-related chemicals, newproducts are demanded one after another, and when new products enter themarket, if they are well received, they spread across the market all at onceand massive increases in sales volume while lowering prices. For this reason,
price differences are always large. However, we have focused on streamlining
in order to cope with such market trends, In the past, there was a time when
we were able to cover the losses from dropping the sales price with suchstreamlining, but the difficulty has been increasing gradually.

(Toshihisa Deguchi, Executive Vice President): While liquid crystal display
market has matured, sizes of the displays are increasing. In liquid crystal
displays, we think that the field where we can generate profits from now on isin the large size and high end field, we foresee the possibility price decreases
there. Regarding 65-inch TVs, which are growing in demand, its price must
be expected to fall considerably after two to three years.
As displays shift from liquid crystal to OLED, certainly unit prices willdefinitely increase. But it will also be necessary to cope with its price as
OLED spreads across the market. Even in this business environment, we
intend to shift to high-end fields with high profit margins as much as possible,
by increasing added value through differentiation and manufacturing
materials in-house.
Q. In the core operating income variance analysis for the Health & Crop
Sciences Sector in FY 2021, volume accounts for more than 30.0 billion yen.
You have said that this would be a combination of a number of small things,
but we would like a few comments on at least the ones that will have thelargest contribution to this difference in volume.
A. (Masakazu Tokura, President): A number of projects are lined up in excess ofa few billion yen. For example, we expect that the 250,000 tons of methionine
will fully contribute to sales. Moreover, we did not include very much of thisin the presentation, but it is said that the products we are developing forpharmaceutical use with Bonac Nucleic Acid will generate ten billion yen inbusiness in the near future in use as guide RNA for genome editing, so wehave high expectations. Beyond this, there are five or six factors, such asbiorationals.
(Ray Nishimoto, Senior Managing Executive Officer): We expect biorationals
to continue to grow. We are seeing the growth of the products we have now,and we are factoring into that our intention to also consider small andmedium-scale acquisitions during this Corporate Business Plan.
(Masakazu Tokura, President): Beyond that, in crop protection chemicals, ourfungicide against soybean rust, INDIFLIN ™, will be launched andcontribute to sales in Japan and Brazil, though the scale will just be a few
billion yen. The increase of the volume also includes items such as shipments
for seed treatment applications to Corteva Agriscience™.

Q. Compared with the level in Oct-Dec of 2018, or its present level, how much doyou expect the methionine market to recover, in percentage terms, by fiscal
2021? I would also like to hear the basis for your thoughts. I think demandcertainly will grow, but if we consider that the capacity expansion plans ofcompanies like Evonik, Bluestar, and Novus are likely to come up again, theneven if demand grows 5-6%, I think it is feasible that utilization rates could
fall, but what do you think?
A. (Masakazu Tokura, President): It is true that the price of methionine iscurrently crawling on the bottom, and even when it climbs a bit it has notclimb again right away. For the next Corporate Business Plan, we expect thatprices will rise by a few dozen cents.
The expansion plans set forth across all methionine supply companies
amount to about 1.2 million tons of production capacity, but as far as weknow, only about 400,000 tons of capacity have actually started construction.
So, if demand grows at an annual rate of 6-7%, or in other words, demand
increases by a little under 100,000 tons per year, then it will catch up the
expanded capacity in 4-5 years, more or less.
In addition, looking at the circumstances of other companies, the current
price is definitely not something they are satisfied with, either. Rather, I
think they are struggling for profitability, though we have some costcompetitiveness. So, we think that prices will definitely turn the corner andstart rising.
(Ray Nishimoto, Senior Managing Executive Officer): We are aware that
there are still uncertain factors in the future of the price; though we say that
we are expecting an increase in the next Corporate Business Plan, we aretaking a comparatively conservative view.
With regard to the balance of supply and demand, demand has continued to
be vigorous; we do not expect any change at all in the trend that the volume
will be completely absorbed over a relatively short timeframe, while there are
expansion plans of capacity. We have no concerns about either the sales orthe volume during the next Corporate Business Plan period.

Q. I would like to ask about how you will use the 220 billion yen in M&A. On
Slide 41, “Major M&As” is listed under Pharmaceuticals, but what otherfields and businesses do you think M&As are needed for? I understand that if
it is similar to what you did under your Corporate Business Plan throughfiscal 2018, then it will mainly be focused on Health & Crop Sciences, but isthat the case? Regarding your global footprint, you spoke about letting things
rest once in India and investing in South America for Health & Crop
Sciences-related businesses, are you next considering someplace like Brazil,
as candidate for M&A?
A. (Masakazu Tokura, President): As you remark, life sciences will be our focus.
With regard to acquisitions in the Pharmaceutical Sector, I cannot say
anything at the current stage. You would have to ask Sumitomo Dainippon
Pharmaceuticals, but I think they are looking at post-Latuda. We havesecured this level of funding in consideration that it may be necessary.
Outside the Pharmaceutical Sector, our major focus is probably the field ofbiorationals. Through acquisitions we will buy both time and technology,
strengthening our biorational field to another level. Also, if we can build agood new project regarding global footprint, we will invest in it.
Even in the IT-related Chemicals Sector and the Energy & Functional
Materials sector, we occasionally have opportunities to buy technology at thesingle digit billions of yen level, though not at the double digit level. We havenot disclosed them because the scale was somewhat small, but we haveconducted some small purchases in the IT-related Chemicals Sector. In short,the true nature of acquisitions is to buy time, and we will continue to makeuse of them going forward.
Q. Should we understand that, in the Health & Crop Sciences Sector, you areinterested in investment opportunities in Brazil similar to Excel Crop Care in
India?
A. (Masakazu Tokura, President): We are not at the stage where we can give out
any specific project names, but we have made a number of efforts. They have
not reached any definite plans, however.

Bulk Chemicals
Q. You are forecasting a fall in profits for the Petrochemicals & Plastics Sector in
fiscal 2021 of 8 billion yen compared to fiscal 2018. You spoke about reduced
margins for MMA, but I would like you to tell us as much as you can about
your way of thinking about Rabigh’s contributions to profits in fiscal 2018
and fiscal 2021.
A. (Masakazu Tokura, President): It is essential to think of Rabigh Phase I andPhase II separately.
I think that Phase I can maintain a high level of stable operations. But
refinery margins have an extremely significant impact on Phase I, as Rabighis an integrated complex; the lower refinery margins in fiscal 2018, whichwere comparatively high in fiscal 2017, was also a major factor in the declineof Rabigh’s profit for fiscal 2018. At the moment they are once again slightly
up, but it is extremely difficult to foresee fiscal 2019. However, we think that
Phase I will produce a certain level of profits, regardless of refinery margins.
With regard to Phase II, it will soon be undergoing CRT tests for threemonths, and if everything goes well, it will begin amortization and begin
producing and selling products. But we do not think it will contribute toprofits in fiscal 2019, as this is a startup period and initial expenses will besignificant. Rather, it may have a negative impact; we expect it begin tocontribute around fiscal 2021. This is not a pessimistic view, but just the view
you need to take with this sort of major project.
(Noriaki Takeshita, Senior Managing Executive Officer): We hope that Phase
II will move to commercial operations within the year, and if that is the caseamortization can begin. In addition, there is the question of whether we canenter full operations immediately in the first year, and it also seems thatmarket conditions are softening somewhat at the moment, so at the current
stage, it may be somewhat difficult to make a profit overall. We expect thatprofitability will improve in fiscal 2021, but at the same time, because we will
also have scheduled periodical maintenance shutdown (the full stop after theplant is started), the utilization rate for fiscal 2021 is still unclear in someplaces. This is something we are always saying, but because Petro Rabigh is alisted company, we cannot give too many details, so we will leave it there.
Q. Should we understand that you are taking a conservative view of refinery
margins?
A. (Noriaki Takeshita, Senior Managing Executive Officer): They were extremely
high until about the midpoint of last year, but gasoline has fallen drastically,
and currently it is quite bad. We expect it to improve from there, but we do
not expect the sort of high levels we saw until 2018.

Q. Outside of the Phase II investments that are being shifted from the current
Corporate Business Plan to the next Corporate Business Plan, will there be
any significant outlays? I think that you also have things like plans forinvestments to do with the refinery, but how do you envision this under thisnew capital expenditure and investments plan, and could you give us a senseof timeframe with your explanation?
A. (Masakazu Tokura, President): Since we began the Rabigh project,sophistication and lightning of the refinery has been raised as a topic.
However, we prioritized to expand the fractions to aromatics, to organize thecomplex, and to set it up in Phase II. While we would like to consider
positively investments for streamlining the refinery if those investments
would generate significant benefits from a long-term perspective, we will
have to make that decision in view of the profitability and financial status ofPetro Rabigh as a whole.
We are often asked if Petro Rabigh will have a Phase III, but we will not.
Phase I does business in ethane-derived ethylene and polypropylene, and ifthat were the end of it, that would have the highest profitability. However, weembarked on Phase II, as it is the petrochemical complex that uses all
fractions effectively, and we felt that, in order to build long-term friendly
relations with Saudi Arabia in a win-win way, it was necessary to set up a
petrochemical complex.
We have not had a thoroughgoing discussion with the Saudi side, but weconsider that the question of when we will next invest in streamlining must
be discussed while taking into consideration factors such as the possibility
that difficult times may continue, including both the setup of Phase II andmarket conditions.
Q. Should I understand that to mean that there have not been substantive
discussions?
A. (Masakazu Tokura, President): Yes.

Others
Q. With regard to the major action item of your next Corporate Business Plan of“Improving Productivity through Digital Innovation,” I think it is the casethat this field is one where the scale of investment is to some degree directlyreflected in results, or in other words, that it is easy for this field to become awinner-takes-all competition that favors major players. As your company is
not in the top class in terms of business scale in your various businesses, howwill you focus on the digital investment of 60.0 billion yen, and in what sortof timeframe do you envision achieving results from this investment? If amajor player like Dow DuPont or BASF were to invest a few hundred billion
yen, is there not a danger that you will be at a competitive disadvantage?
A. (Masakazu Tokura, President): As you point out, we are a diversified chemicalcompany, and we are aiming for a conglomerate premium, rather than aconglomerate discount, even with regard to, for example, our researchdatabases. In other words, even if the amount invested is the same, we will
be able to optimize our various research efforts by utilizing interoperability tolink our databases.
Materials informatics (MI) is not something that we can set up in the three
years of the next Corporate Business Plan, however. We have already begun
initiatives such as deploying electronic notebooks for experiments andcapturing failure data, in order to first make steady progress in databaselinking. Some people misunderstand MI, thinking that if they use MI, anyone
can easily develop products if data is sold, but that is not the case. Domain
knowledge is essential to look at the data and analyze what it means, and by
repeatedly feeding research back into domain knowledge, research becomes
more polished. In crop protection chemicals, for example, the difference in theamount of domain knowledge between an ordinary person and major
agrochemical companies like BASF and Bayer is vast. Though our sales ofcrop protection chemicals may be relatively small, we are confident that inresearch and development, particularly in organic synthesis, we have a levelof technology, including domain-specific technology, that is not far behind, oris even keeping pace with the majors, and is to be highly valued, if we do say
so ourselves.
Next is improving productivity through digital innovation in plant operations.
Detecting signs of abnormalities, which we often hear in contexts such as
nuclear power, is something that can foresee unusual trends in extremely
stable operations. On the other hand, it is extremely difficult to apply this tochemical plants, due not only to stopping operations for required periodical
maintenance shutdown, but also to factors such as switching products likefine chemicals. We feel, however, that we must develop a system to makegood use of the process data collected with plant information systems.
We think that where we can deploy the particular strengths of Japan, though
they are not limited to Japan, is in increasing productivity by combining thereal world data and domain-specific technology we have with both public dataavailable on the market and our own private data. I think we will continue toface challenging times, but we would like to work with a longer-term view.
(Hiroshi Ueda, Senior Managing Executive Officer): We have both data andsamples of about 300,000 agrichemical compounds at our laboratory in
Takarazuka, and between 300,000 and 400,000 pharmaceutically-related
compounds at our Bioscience Research Laboratory in the Osaka area. Thus
we have been collecting real data all the time; by applying statisticalprocessing and current digital technology to this stored data, I think there ispossibilities something will come of that.
When it comes to plants, as well, we have already been collecting data for all
tags and meters for all plants on a minute-by-minute basis for over a decade.
The time has now come to utilize that data, and we have created Digital
Innovation Department to take the next few steps; aiming to further strengthen
capability at every R&D facility and at every plant through introducing digital technology
and training data engineers.
(Masakazu Tokura, President): Being Sumitomo means being a company thattakes advantage of on-site capabilities and is always taking this sort of organic andorganizational approach to growth, and we would like to take this approachto improve productivity through digital innovation as well. We would be
grateful if you would evaluate this for the unique efforts of Sumitomo.
(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.