Earnings Call: Q4 2025

May 14, 2025

Summary

FY2024 delivered record sales and profit, with growth across the chemical businesses. FY2025 guidance anticipates further consolidated growth, while tariffs, input costs, and higher R&D and depreciation costs weigh on select segments.

Good morning, everyone. Thank you for taking the time off your busy schedules to participate in today's briefing. Allow me to start today's briefing on financial results for the Adeka Corporation for the fiscal year ended March 31, 2025, and on the progress of ADX 2026. Today's briefing will cover the following agenda items. First are the consolidated results for fiscal year 2024. We registered JPY 407.1 billion in net sales, up JPY 7.3 billion on a Y-O-Y basis, JPY 41 billion in operating profit, up JPY 5.5 billion, JPY 39.3 billion in ordinary profit, up JPY 3.5 billion, JPY 25 billion in profit attributable to owners of parent, up JPY 2 billion. All of these represent a new record high for each sales and profit line item. Lastly, we registered JPY 245.6 in net profit per share, up JPY 20.7 per share. Next is an analysis of operating profit. While an increase in fixed costs represented a significant headwind for operating profit, this was offset by higher sales volume, benefits from net pricing, and a favorable exchange rate. Ultimately, these factors translated into a Y-O-Y operating profit growth of JPY 5.5 billion. Next are the trends in consolidated performance by segment. Net sales were down in the food products and life science segments on a Y-O-Y basis. Operating profit was up across all three businesses that make up the chemicals segment, and also in the food products and life science segments. I would now like to give you a more in-depth review of the results for each segment, starting with polymer additives in the chemicals segment. Here are the main factor highlights for sales on a Y-O-Y basis. Polymer production in the market continued to trend toward a recovery. Sales of flame retardants for home appliance enclosures were strong, and sales of one-pack granule additives were steady. Sales of antioxidants for automotive engineering plastics were also strong. We delivered strong or steady sales performances in the categories of home appliances, plastic products in general, and engineering plastics, excluding for use in automotive interior and exterior materials. Net pricing, an increase in sales volume, and a favorable exchange rate made significant contributions to operating profit, which broke the JPY 10 billion threshold for the first time in a while. Next are the results for electronic materials in the chemicals segment. Here are the main factor highlights for sales on a Y-O-Y basis. Amid growing demand related to generative AI, sales of high K materials for advanced memory were strong, and sales of semiconductor lithography materials for advanced photoresists were steady. For products for displays, sales of black matrix resists expanded in China and Taiwan. Within materials for semiconductors, sales of high K materials for advanced DRAM were strong, while sales of semiconductor lithography materials for advanced photoresists were steady. In the category of materials for displays, while sales of black matrix resists for color filters were strong, sales were weak in terms of etching materials for LCD panels. An increase in fixed costs of JPY 900 million weighed down on operating profit, but this negative impact was offset by higher sales volume and a favorable exchange rate environment. Next are the results for environmental materials in the chemicals segment. Here are the main factor highlights for sales on a Y-O-Y basis. Sales of lubricant additives for engine oil for hybrid vehicles and motorcycles in Southeast Asia were strong. Additionally, reactive emulsifiers for architectural coatings sold well in India and China. Within materials for automobiles, sales were strong for lubricant additives for engine oil and epoxy resins for structural bonding. Regarding building materials and food labels, sales of reactive emulsifiers were particularly strong. Lastly, materials for electronics saw strong sales of epoxy resins for electronic devices. An increase in fixed costs and the negative impact of net pricing weighed down on operating profit, but these were offset by a significant increase from sales volume and a favorable exchange rate. Consequently, we saw a significant operating profit increase in environmental materials. Next is the food products segment. Here are the main factor highlights for sales on a Y-O-Y basis. Net sales dropped due to the reorganization of subsidiaries and weak sales in China. Conversely, sales of functional margarine were strong in Southeast Asia, as were sales of our Marvelous Series of functional margarines and our Deli-PLANTS Series of plant-based foods, mainly in Japan. In the category of breads and confectioneries, kneading oils and fats, and our Marvelous Series of functional margarines delivered strong results. Lastly, sales were also strong for our Deli-PLANTS Series of plant-based foods for use in breads and cafe menus. Higher fixed costs weighed down on this segment's operating profit results by JPY 600 million on a Y-O-Y basis. But the positive effects of net pricing and higher sales volume were enough to offset this, and ultimately translated into a small increase in operating profit. Next is the Life Science segment, which consists primarily of our operations at Nihon Nohyaku. Here are the main factor highlights for sales on a Y-O-Y basis. Sales of agricultural chemicals in general were weak in India due to poor weather conditions. In pharmaceuticals, sales of topical antifungal agents struggled amid the decline in demand in Japan for these agents for the treatment of athlete's foot. As I just stated, sales of agrochemicals were weak in India, but strong in North America and Europe, and steady in Brazil. Within pharmaceuticals and others, sales of our topical antifungal agent, luliconazole, for the treatment of athlete's foot were weak. Lastly, while an increase in fixed costs weighed down on operating profit, this was offset by positive net pricing effects, higher sales volume, and a favorable exchange rate. These factors translated into a significant increase in operating profit. Allow me to use this opportunity to announce a segment change due to organizational revision. Effective April 2025, Electronic Materials was reorganized into Semiconductor Materials. Starting with the financial statements for the first quarter of fiscal year 2025, information will be disclosed using the new segment classification. The two tables contain a numerical comparison between the new and old segment classification schemes. Under the old classification, Electronic Materials covered materials for semiconductors, as well as other materials for use in electronics. We now classify electronic materials used for purposes other than semiconductors under Environmental Materials. As such, while the net sales and operating profit totals remain the same, as per the new segment classification, the newly created Semiconductor Materials category delivered JPY 34 billion in net sales and JPY 9 billion in operating profit. Next are the consolidated forecasts for fiscal year 2025. Allow me to start with the outlook of the market environment in fiscal year 2025. Despite low growth, we still expect the global economy to remain resilient. On the other hand, the impact of the U.S. tariff policy on the market and on global supply chains remains uncertain. You can see here our outlook for the various markets within the three segments of Chemicals, Food Products, and Life Science. I would now like to share with you our assessment of the impact of the U.S. tariff policy. Our four U.S.-based subsidiaries generate approximately JPY 40 billion in net sales every year from operations in the Chemicals and Life Science segments. In terms of U.S.-bound export items from Japan, we export ALD materials for use in semiconductors, environmental materials such as lubricant additives and adhesion and bonding materials, and some ingredients for use in agrochemicals in the domain of life science. Within polymer additives, we export to the U.S. flame retardants manufactured in China, as well as some raw materials for our group companies. The impact of the 10% tariff currently in effect is expected to remain limited, but the application of additional tariffs would require negotiations with customers. Next are the consolidated forecasts for FY 2025. For the full fiscal year, we are guiding for JPY 441 billion in net sales, JPY 43 billion in operating profit, JPY 43 billion in ordinary profit, and JPY 26.4 billion in profit attributable to owners of parent. In other words, we are guiding for a Y-O-Y increase across the board. Please refer to the table at the bottom for the exchange rate and naphtha assumptions underlying the results forecast. Next are the consolidated forecasts by segment. We expect a Y-O-Y sales increase for all segments. Operating profit is expected to decrease slightly in Semiconductor Materials and the Life Science segment. Let us now look at each business individually in greater detail, starting with Polymer Additives in the Chemicals segment. In FY 2025, and compared to a FY 2024 baseline, both net sales and operating profit are expected to increase as demand for products as a whole will continue to recover. We expect the following factors to boost sales in this business. The first driver here is the full-scale sales of our new TRANSPAREX™ clarifier with uses in food packaging and automobiles. The second driver is the expansion of sales in the U.S. and South Korea of intumescent flame retardants with applications in home appliances and automobiles, and our efforts to tap into demand for antimony alternatives. Similarly, we are also expecting an increase in operating profit. While we expect a sharp increase in the price of raw materials, we expect the effects of the growth of sales and of uncompromising cost reduction efforts and the application of appropriate sales prices to make up for this and ultimately allow us to grow operating profit results. Next is the forecast for semiconductor materials within the segment of chemicals. In FY 2025, and compared to a FY 2024 baseline, demand is expected to be strong, mainly for products for advanced semiconductors. We expect a slight decrease in profit, partly reflecting the depreciation of equipment for products for next-generation semiconductors and other factors. We expect the following factors to boost sales. First, we expect strong sales growth for semiconductor lithography materials for use in advanced photoresists and EUV exposure. Second, we expect strong growth from high K materials, especially ALD materials, for use in advanced logic ICs and wiring, et cetera. Third, we expect to firmly maintain our market share leadership position in the advanced semiconductor market as it pertains to film formation materials for advanced memory. While there was indeed some weakness related to prices, we expect steady adoption of our new products, and we are quite confident in this assessment. The outlook is an increase in sales. We also expect higher profits derived from this product series. We expect a slight decrease in operating profit on account of a decline in sales prices for some materials for use in memory products, and this is a factor we cannot overlook. Another factor weighing down on operating profit is an increase in fixed costs as we enhance the size of our research staff to increase our focus on front-end process materials. Additionally, while it will take time for us to derive a meaningful profit contribution from this, we will also enhance our research personnel allocation to materials for the back-end process. These efforts lead to an increase in fixed costs. We also expect an increase in depreciation expenses associated with infrastructure for the manufacturing of materials for use in memory and logic ICs. All in all, we expect higher sales coupled with a slight decrease in profits. Next is the forecast for environmental materials within the segment of chemicals. Sales and profit are expected to increase with the acceleration of global expansion driving sales of strategic products. We expect the following factors to boost sales. Looking at strategic products, we expect to be able to grow sales in the U.S., Europe, and Asia, as well as in China and Taiwan, of lubricant additives for use in automotive engine oil, reactive emulsifiers for use in building materials and food labels, and photo curing materials and special epoxy resins for use in electronics. We also expect an increase in operating profit driven by the effects of the growth of sales. We do expect an increase in fixed costs, but overall, we expect operating profit to grow on a Y-O-Y basis. Next is the forecast for the food products segment. We are guiding for higher sales and a slight increase in profit due to the expansion of sales of fats and oils for kneading, other high-performance products, and plant-based foods. The market is experiencing raw material shortages and price increases, so Adeka will offer viable alternatives that meet client needs. For example, we offer fats and oils for kneading as a functional alternative to butter, as well as high-performance fats and oils as an alternative to eggs presented within our Deli-PLANTS Series. We are also working to address demand from inbound tourists and expanding overseas sales. Within this, we plan to bring to market fillings for use in bread, Western confectioneries, souvenirs, and freezer-stable whipped cream. We seek to expand our assortment of high-performance products, carry out uncompromising cost reductions, and set appropriate sales prices, thus offsetting a sharp increase in the price of raw materials and putting operating profit back on an upward trajectory. Next is the forecast for the life science segment. Sales will increase due to the expansion of self-developed items and efforts to recover sales in India. Conversely, profit is expected to decrease, partly reflecting an increase in fixed costs resulting from the strengthening of research and development. We expect a sales expansion in Japan and North America with a focus on self-developed items. Specifically, we will be focusing on accelerating expansion into the fruits and vegetables markets. In India, we will work to rebuild our operations at Nichino India Private Limited. Specifically, we will rebuild our marketing strategy and revise purchasing and manufacturing processes. Circling back to what I said earlier, we will be front-loading the new active ingredient registration process, so we expect this to translate into a slight increase in fixed costs. Because of this, while we do expect an increase in profit from overseas agrochemical sales, we are guiding for an operating profit decrease for this segment as a whole. Page 23 contains the annual dividend forecast for FY 2025. We distributed an annual dividend of JPY 100 per share in FY 2024 and are now targeting second quarter end and year-end dividends of JPY 52 per share each, for a total annual dividend of JPY 104 per share in FY 2025. We therefore expect a dividend increase for the third consecutive term and the 17th consecutive term without a dividend reduction. As of the end of FY 2024, the overseas sales ratio stood at just under 55%, as overseas markets continue making up more and more of our business. Next is a progress update as it pertains to the execution of the ADX 2026 MTMP. We position ADX 2026 as the second stage toward the attainment of ADEKA VISION 2030 as a three-year period for increasing earnings strength with a focus on profit and efficiency. During this period, we will pursue a growth strategy of promoting sustainability initiatives and carry out continued transformation. As we have stated on previous occasions, Adeka's fundamental policy is promoting sustainability initiatives for greater social value and continuous growth driven by our earnings power, sustainability, and a resilient management foundation. Our key strategies are as follows: Transition to a high profitability structure, increase eco-friendly products, and reduce GHG emissions through business structure transformation, and establish a resilient management foundation. Allow me to go over our business goals and Adeka's first-year performance. As I mentioned at the beginning, the operative theme this year is to bridge the gap between FY 2024 realized results and our target for FY 2026. Next are the operating profit targets for each segment. According to the new category classification, electronics and IT materials and functional chemicals are now divided into semiconductor materials and environmental materials. The table on page 29 shows our net sales and operating profit goal for each business, although the totals remain the same despite the changes in classification. Next is a progress evaluation against the operating profit targets. As you can see, we made very good progress in the first year vis-a-vis the targets we set for ourselves for all businesses and segments. Allow me to give you some color on our strategic products. For FY 2024, net sales of strategic products were more or less in line with the plan. A number of products actually outperformed the plan. Some examples include light stabilizers for use in automobiles within the category of polymer additives, ALD materials like high K materials, et cetera, for use in semiconductor memory within the category of semiconductor materials, and adhesive materials for use in electronics within the category of environmental materials. I would now like to go over the results for new products. While sales of new products did grow on a Y-O-Y basis in fiscal year 2024, realized results fell short of company expectations. For example, sales of photo curing materials for use in displays, which under the current segment classification are categorized in environmental materials, fell significantly short of the plan on account of a delay in adoption of these materials in the Chinese market. That said, material assessment and line tests progressed well, so a recovery is possible in fiscal year 2025. Next are the ROIC results. We are targeting a ROIC of 10.5% by fiscal year 2026. The overall ROIC for fiscal year 2024 was 9.1%, and the table shows the individual ROIC figures for each segment and business. Fiscal year 2024 saw improved ROIC results thanks to operating profit growth, the sale and disposal of idle assets, the reduction of interest-bearing debt, and enhanced ROIC management in each business. This next slide covers our efforts to expand and create eco-friendly products. We are focusing on commercializing and promoting these types of eco-friendly products and consider this a critical mission for the Adeka Corporation. While net sales of eco-friendly products in fiscal year 2024 were in line with the plan, we will continue working to grow sales for these products so that we can reach our fiscal year 2026 and fiscal year 2030 targets. A number of these products outperformed the plan. For example, in the category of environmental materials, sales of lubricants for the reduction of friction and which contribute to fuel efficiency improvements and the reduction of CO2 emissions exceeded company expectations. In the category of food products, sales of products with RSPO and other certifications outperformed, and these products contribute to environmental protection and the conservation of ecosystems. Lastly, in the category of polymer additives, nucleating agents for automobile components outperformed, and these products contribute to improvements in fuel efficiency and the reduction of CO2 emissions. Next is our capital investment plan. We are targeting a total of JPY 75 billion in capital investment over the three-year period corresponding to ADX 2026, and realized investment in fiscal year 2024 stood at JPY 18.6 billion. The table on the left contains a breakdown of the various planned investment amounts by business and segment over the relevant three-year period. We will also be carrying out research investment and common investment and others. In terms of investment capital deployed in fiscal year 2024, we focused primarily on maintenance and replacement investments in the businesses and segments of polymer additives, food products, environmental materials, and life science. Within Semiconductor Materials and Environmental Materials, while some new investments in these businesses were delayed, we completed projects started within the scope of the previous MTMP, and these have begun operating. We have included here examples of these plants and infrastructure. This concludes today's briefing on financial results. Thank you for your time today.