Earnings Call: Q3 2025

Feb 12, 2025

Summary

Q3 sales and operating profit increased YoY, with profit growth across core businesses despite declines in Food Products and Life Science sales. FY2024 guidance was maintained, while semiconductor materials investment and organizational focus continue.

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 Adeka Corporation for the third quarter of the fiscal year ending March 2025. First are the consolidated results for the third quarter. We registered JPY 296.3 billion in net sales, up JPY 9.8 billion on a YOY basis, JPY 30 billion in operating profit, up JPY 6 billion, JPY 29.6 billion in ordinary profit, up JPY 5 billion, JPY 19.2 billion in profit attributable to owners of parent, up JPY 2.7 billion, and lastly, JPY 188.4 in net profit per share, up JPY 27.4 per share. Next is an analysis of operating profit. While an increase in fixed costs represented a headwind of JPY 4.7 billion for operating profit, this was offset by higher sales volume, benefits from net pricing, and a more favorable exchange rate. Ultimately, these factors translated into a YOY operating profit growth of JPY 6 billion. Next are the trends in consolidated performance. As of the end of the third quarter, realized net sales results corresponded to 70% of the full-year forecast target and 73% for operating profit. Next are the consolidated results for the third quarter on a per segment basis. While net sales were down in the food products and life science segments on a YOY basis, we nevertheless recorded growth across the board for all the other segments and businesses. We also saw YOY operating profit growth across all of our core businesses. 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. Net sales in this segment were up 6.6%. Here are the main factor highlights for sales on a YOY basis. The third quarter was marked by the continued reduction of surplus inventories in the supply chain. Customers' resin production increased, and one-pack granule additives and flame retardants delivered brisk sales. Additionally, sales of PVC stabilizers were strong for housing interior applications in North America. Materials for use in all plastic products posted strong sales results, especially one-pack granule additives. Sales were also strong for materials for use in home appliances, especially flame retardants for home appliance enclosures and for building materials, especially PVC stabilizers for home interior materials. Lastly, we saw a steady sales performance from antioxidants for use in engineering plastics. Polymer additives saw a YOY operating profit growth of 40.5%. Within this, while higher fixed costs weigh down on operating profit significantly on a YOY basis, these were offset by improvements in net pricing, higher sales volume, and a favorable exchange rate, which drove overall profit. Next are the results for electronic materials in the chemicals segment. Net sales in this segment were up 12.4%, primarily on account of the following factors. Sales of high-K materials and photoacid generators for advanced semiconductors for different applications, including generative AI, were buoyant. Additionally, sales of black matrix resins were strong as a result of new adoptions and expansion in China. Within materials for use in semiconductors, sales of high-K materials for advanced DRAM were strong, while photoacid generators used for semiconductor lithography and semiconductor peripheral materials posted steady sales results. In terms of materials for displays, sales were strong for black matrix resins and photo initiators for color filters. Photo curing materials for optical film also delivered a steady performance. Conversely, sales of etching materials for LCD panels were weak. Electronic materials saw a YOY operating profit growth of 12.2%. Within this, while higher fixed costs and net pricing weigh down on operating profit on a YOY basis, these were offset by higher sales volume and a favorable exchange rate, driving overall profit. Next are the results for environmental materials in the chemicals segment. Net sales in this segment were up 11.2% YOY, primarily on account of the following factors. Reactive emulsifiers for architectural coatings sold well in India and China. Sales of lubricant additives for engine oil were also bullish following growth in demand for this product for use in hybrid vehicles and increased adoption for motorcycles. Within building materials, sales were strong for reactive emulsifiers for paints and adhesives, as well as for waterborne resins. In terms of materials for use in automobiles, lubricant additives for engine oil delivered steady sales, while sales were strong for special epoxy resins for structural bonding. Lastly, within materials for use in electronics, sales of peroxygen chemicals for printed circuit boards were strong. Environmental materials saw a YOY operating profit growth of 28.1%. Within this, while higher fixed costs weigh down on operating profit on a YOY basis, these were offset by higher sales volume and a favorable exchange rate driving overall profit. Next are the results for the Food Products segment. Net sales in this segment were down 1% YOY, primarily on account of the following factors. Net sales dropped after weak sales in China, the reorganization of subsidiaries, and product model integration. Additionally, sales of functional fats and oils were strong in Southeast Asia. In Japan, kneading oils and fats for bread making delivered brisk sales, as did the Marvelous series of functional margarines that help reduce food losses. While we recorded lower sales on a YOY basis, our product mix now has a distinct focus on high-value-added products, and this shift is ongoing. Within breads and confectioneries, sales of fillings were weak, while conversely, sales were strong for kneading oils and fats and for our Marvelous series of functional margarines. Lastly, sales were also strong for our Deli-PLANTS series of plant-based foods for use in breads and cafe menus. The Food Products segment saw a YOY operating profit growth of 30.2%. While an increase in fixed costs weigh down on operating profit, net pricing and higher sales volume had a positive impact and allowed us to drive operating profit growth overall. Next are the results for the Life Science segment. Net sales in this segment were down 3%, primarily on account of the following factors. Sales of agricultural chemicals were bearish in India due to poor weather conditions and channel inventories from past fiscal years. In pharmaceuticals, sales of topical antifungal agents struggled amid the decline in demand in Japan for these agents to address nail fungus infections. In terms of agrochemicals, sales of agrochemicals, in general, were weak in India, while conversely, sales of insecticides for rice crops were strong in Japan, as were sales of products we sell through our partnership with Corteva. Additionally, sales of herbicides were strong in North America and Europe, and sales of fungicides in Brazil were steady. Lastly, within pharmaceuticals and others, sales were weak for topical antifungal agents to treat athlete's foot. The Life Science segment saw a YOY operating profit growth of 65.1%. While an increase in fixed costs weighed down on operating profit, net pricing, a favorable exchange rate, and higher sales volume had a positive impact and allowed us to drive operating profit growth overall. I would now like to go over the consolidated financial forecasts for fiscal year 2024. The consolidated financial forecast remains unchanged from the targets announced in November 2024. For the full fiscal year, we are guiding for JPY 426 billion in net sales, JPY 41.1 billion in operating profit, JPY 39.2 billion in ordinary profit, and JPY 24.5 billion in profit attributable to owners of parent. Adeka Corporation has already distributed an interim dividend of JPY 48 per share, and we expect to distribute a year-end dividend of JPY 49 per share, bringing the total annual dividend to JPY 97 per share. I would now like to go over the consolidated forecast for fiscal year 2024. The cells shaded in light blue show an increase compared to a November 2024 forecast baseline, while the cells shaded in pink show a decrease. As you can see, while we now expect second half and full fiscal year sales from polymer additives and electronic materials to fall short of the forecasts announced back in November 2024, we expect an over-performance from environmental materials and the Food Products segment. Consequently, and circling back to what I said earlier, the overall net sales forecast for fiscal year 2024 remains the same at JPY 426 billion. In terms of operating profit, we now expect second half and full fiscal year results from polymer additives, environmental materials, and food products to exceed the forecasts announced back in November 2024. While we expect operating profit to fall short of the November 2024 forecasts for electronic materials, the overall forecast amount across all segments and businesses remains the same. Allow me to discuss the businesses that saw the most significant changes, starting with electronic materials in the Chemicals segment. As announced in November 2024, Adeka was guiding for JPY 11.9 billion in operating profit for fiscal year 2024. However, we have since lowered this forecast to JPY 11 billion on account of two main factors. Number 1, adoption of photo curing materials used in optical films for displays was lower in China than we had originally anticipated. In other words, delays in the adoption of these materials in the Chinese market significantly impacted operating profit results. That said, material assessment and line tests progressed well, so we believe that a recovery is possible in fiscal year 2025. Number 2, high-K materials for advanced memory within the domain of semiconductors posted results close to the initial target. While we experienced headwinds in the form of price slides and the depreciation of the South Korean won, strong shipment volumes for our flagship products allowed us to offset these. In other words, while we were indeed able to offset these headwinds, we couldn't generate enough momentum to stage a successful results over performance. Next is the Food Products segment. Price revisions led to a deterioration in price balance in this segment, and this continues to be the case, with the positive effects from higher prices being overshadowed by the negative impact of a worsening price balance. The two line graphs on page 17 show the trend in palm oil prices and price balance. We are limited in our ability to pass on higher input costs to the consumer, so we are shifting our strategy to the sales expansion of high margin, high value-added products. These product lineups include, for example, our Deli-PLANTS series, matching an ongoing diversification in eating habits, and our Marvelous series of functional margarines offering food manufacturers and restaurants convenience and the ability to reduce food waste. This shift has allowed us to offset these headwinds and maintain our results. Last is the reference section. Page 19 shows the expected progress versus Adeka's ADX 2026 midterm management plan. We are targeting JPY 53 billion in operating profit by FY 2026 on JPY 500 billion in net sales, and an ROE and overall ROIC of 11% and 10.5% respectively. We also continue making progress toward a number of sustainability indicator targets we have set for ourselves. Next is an overview of ADEKA CORPORATION's capital investments. In Japan, a new research building is under construction at the Kuki R&D Center within the combined scope of electronic and environmental materials. Completion is scheduled for January 2026. Additionally, in the second half of 2024, we began the commercial production of high purity hydrogen peroxide for semiconductors at our Fuji plant. We have also built a production line for epoxy resin adhesives at our Mie plant. This line is expected to come online in FY 2025. In South Korea, we are planning and implementing a series of capacity and facility improvements for the production of high-K materials for advanced semiconductor memory. Construction for a new building for the manufacturing of new semiconductor materials was completed in October 2024 as an initiative with an eye toward the future. In Taiwan, mass production at a new plant for the manufacturer of cutting edge logic semiconductor materials is expected to start within FY 2024. Allow me to use this opportunity here today to go over the transfer of equity and shares in two subsidiaries as part of our reorganization efforts, with the objective of seeking more efficient group management. Specifically, we have carried out the transfer of equity in Adeka Fine Chemical Shanghai. We sold the company after consolidating production into Adeka Fine Chemical Zhejiang. Additionally, in the food products segment, we will be executing the transfer of shares in Uehara Foods Industry as part of our reorganization efforts in Japan to strengthen the earnings base of the food products business. Shown here is the overseas sales ratio, which currently stands at 55.5%. While this has been an incremental process, we continue shifting our focus to overseas markets. This concludes the financial results presentation. I would now like to go over ADEKA CORPORATION's business strategy for semiconductor materials. My presentation will proceed in the order outlined in the agenda. First are our reorganization efforts. July 1, 2024, marked the creation of the Electronic Materials Division for the purpose of integrating sales, research, and planning functions to more accurately and swiftly respond to the needs of our customers. This marked a transformation into a structure consisting of four divisions: foods, polymer additives, and now also electronic materials and environmental materials. Then, effective April 1, 2025, we have reorganized the Electronic Materials Division into the Semiconductor Materials Division, and the purpose behind this change is to create an organizational structure specializing in semiconductors and further focused on expanding sales. We seek to synergize growth domains together with a strategy consisting of selection and concentration, so that we can swiftly execute initiatives to maximize benefits in terms of human capital, products and technology, and equipment. In summary, we executed these reorganization efforts in order to increase the capital efficiency and earnings power of the business with an eye toward the future after achieving net sales of JPY 500 billion. Our vision of the Semiconductor Materials Division is as follows: underpin the development of an ICT-based society in the world that is changing significantly due to paradigm shifts, create new value with advanced materials, and contribute to people's affluent lives. Within this scope, we are targeting a very significant increase in both net sales and operating profit. As was the case during ADX 2023, we plan to execute active capital and R&D investment over the course of ADX 2026. As such, while this gives the impression of a lower operating profit margin, we will continue growing the actual operating profit amounts, aim for depreciation over a shorter time period as a sign of higher quality earnings, and deliver profits in each operating division. This structure remains the same, and we will be accelerating this trend through the changes we will now be implementing. This dynamic is at the core of this reorganization. I would now like to discuss our focus products and the projected growth of sales. We expect that sales of high-K materials for advanced semiconductor memory will continue to grow. At the same time, we also expect sales growth for advanced materials for logic ICs, photoresists, and advanced materials used during the back-end process. Within this scope and toward 2030, we have plans to offer materials for use by domestic package manufacturers, carry out market development in Taiwan, expand sales of materials for use in EUV lithography, invest in Taiwan, restructure our plants in Kashima, invest in South Korea, and accelerate installations. I would now like to discuss our efforts for the continued growth of semiconductor materials. Here, we will be paying attention to the semiconductor market and focusing management resources. As I mentioned earlier, we will be specifically dedicating manpower, goods, and capital to the domain of semiconductor materials. Within this scope, we will seek and train human resources that are capable of truly understanding the needs of the market and of cultivating new businesses. Concurrently, we will seek to further improve our level of technological expertise and sophistication across the entire semiconductor manufacturing process and continue carrying out growth investments while reviewing fixed costs. The Adeka Corporation will continue working to achieve business growth by expanding our expertise and activity to the back-end process, in addition to further growth from the front-end process. Next is a semiconductor market forecast. While the front-end process is the larger market of the two, we expect both markets to continue growing through 2030. The semiconductor market itself is expected to reach a scale of around $1 trillion by 2030. So we believe the market for materials for use in semiconductors will follow suit in the manner outlined in the graphs. This slide describes the semiconductor manufacturing process and Adeka's strengths. Adeka's offerings in the field of materials for semiconductors started with etching gases, shown here in the middle section of the front-end process. We then started offering photoacid generators, entered the cleaning process through our hydrogen peroxide offerings, and started offering high-K materials, building up our product lineup in the front-end process. Our strengths are our ability to quickly develop products with an eye toward the next generation and beyond, and excellent quality management technologies to satisfy strict semiconductor standards. I would now like to discuss technology trends for memory semiconductors and our development policy. The trend in DRAM and 3D NAND has been toward miniaturization and higher capacity. Another key point is the significant structural changes to these memory products. Our development policy is to achieve miniaturization, higher capacity, and lower power consumption using leading-edge ALD materials. Additionally, our policy is to establish a structure for developing and supplying products that will be needed 2 to 3 generations in the future. I would now like to go over the DRAM technology roadmap and material development. As you can see from the diagram, memory technology has evolved over time, starting with a stack structure, then progressing to cylinder and pillar structures, and eventually reaching the structure associated with 3D DRAM over the coming years. Adeka started supplying high-K materials for capacitors, and this was followed by new materials around capacitors. We are now in the process of developing materials to help with bonding technologies for ASD/ALE technologies. In summary, our key strategy in this area is to work hard to develop new materials and continue to supply new products as we keep up with changes in the element structure of DRAM. Next are technology trends for logic ICs and our development policy. As you can see from the diagram, device and wiring standards too have changed and evolved considerably over time. Along with the continued progress in miniaturization, we expect the structures of transistors and multilayer wiring to continue changing. In terms of our development policy, we aim to be a main supplier with materials that are ready for structural change and will be accelerating joint development with leading companies in the industry and with semiconductor equipment manufacturers. This diagram shows the technology roadmap for logic ICs according to imec. It's a very information-dense diagram, so allow me to overlay Adeka's own development policy on top of this roadmap so as to better convey these trends to you. The die shrink will progress from the nanometer scale to measurements in angstrom, with changes at the device and wiring level. Within this process, the Adeka Corporation currently offers high-K gate dielectrics and materials for use in threshold voltage tuning film. To this, we will be adding new low-K materials and new channel materials for 2-dimensional semiconductors and are working toward this end. Within wiring, we have plans to offer materials for new low-K films, metal wiring materials, and eventually graphene materials. Next is the topic of the expansion of sales of photoacid generators, which we position as key materials for semiconductor photoresists. As wiring miniaturization progresses, we will position photoacid generators used with EUV and immersion ArF photoresists as our main target markets. In other words, our goal is to manufacture photoacid generators that ensure the expansion of the advanced photoresist market. I would now like to discuss technology trends for semiconductor lithography and our development policy in this area. Here, you can see the expected progression and technology trends, and also how EUV patterning technologies are expected to continue evolving over time. Against this backdrop, Adeka Corporation will specialize in the development of advanced photoresist materials and work to shift seamlessly from research and development to mass production. I would now like to briefly touch upon our efforts in the expansion of the business area to the semiconductor back-end process. We believe we can expand applications for our fundamental technologies and existing products to the area of the semiconductor back-end process. Adeka already boasts expertise with hydrogen peroxide materials, etching technologies, surfactant materials, dispersion technology, UV initiators, and latent curing agents, as we currently supply these to companies that use several of these products in the back-end process. We want to leverage all these to create a product capable of applying ultra-fine treatment to metal selective etchants. Other additions to our lineup we are working on are stress relaxation applied to low-temperature sintering copper paste and higher reliability, high thermal conductivity resin sheets. We are also working to make an entry into the market for sealing agents through under-fill and side-fill materials in the form of high-performance epoxy resin adhesives. Next is the technology roadmap and material development plan for the semiconductor back-end process. The diagram on page 17 shows the various materials we intend to integrate at each stage of the roadmap. We expect to see game changers for materials across the board in the packaging step within the back-end process in semiconductor manufacturing. So Adeka, too, is accelerating its R&D efforts on this front. The next topic is area-specific business expansion. In Japan, we will strengthen leading-edge research and development of production technologies. Circling back to what I said earlier, construction is underway for a new research building at the Kuki R&D Center, with completion scheduled for early 2026, at which point it will become operational. We will also establish a new Chiba research lab. In South Korea, we increased local production operations for semiconductor materials, completing a third plant and extending and relocating our R&D center. In Taiwan, we fully entered the market of materials for advanced logic ICs with the completed construction of a semiconductor materials plant. Going forward, we will expand the range of products we manufacture in our facilities in Taiwan. In the U.S., we are accelerating adoption of new semiconductor materials as we seek to reach full operational usage at our West Coast office. Concurrently, we will also work to develop markets for next-generation semiconductor materials. Lastly, in China, we will work to expand sales of legacy materials. In summary, going forward, we will work to expand into Taiwan and the U.S. by leveraging the business expertise acquired in Japan and South Korea. I would now like to discuss the capital investment plan. Allow me to direct your attention to the right-hand side of the page, which shows capital investment directed towards semiconductor materials carried out during ADX 2023 and totaling over JPY 10 billion. Within the scope of these efforts, we work toward the construction of a foundation for the expansion of our semiconductor materials business in South Korea, Taiwan, and Japan. Construction is also underway for the new Kuki R&D Center to be used within the scope of creating innovative new products. Moving on to the table on the left, within the scope of ADX 2026, we will continue directing considerable investment resources to electronic materials related to semiconductors and also carrying out additional investment not listed here whenever necessary. In summary, we will continue dedicating our efforts to further enhancing our business of materials for use in semiconductors. We will also work to expand the semiconductor business in Taiwan, where we have a new plant coming online. We invested JPY 2.5 billion in the construction of this plant, located in Tainan City, for the manufacture of materials for cutting-edge logic ICs. Construction was completed in October 2023, and we are currently in the process of obtaining user certification in the progression toward mass production. We have constructed a plant in Taiwan that will play a part in technological innovation for logic ICs, marking our full entry into the semiconductor business in Taiwan. This concludes my presentation. Thank you for your time today.