Earnings Call: Q2 2025

Nov 12, 2024

Summary

H1 sales and profit increased, led by polymer additives and environmental materials. FY2024 profit guidance and dividends were raised, with semiconductor demand and new product launches supporting growth plans.

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 first half of the fiscal year ending March 2025. Today's briefing will proceed in the order outlined in the agenda. First are the consolidated results for the first half. We registered JPY 195 billion in net sales, up JPY 7.4 billion on a Y-o-Y basis, JPY 18.2 billion in operating profit, up JPY 3.4 billion, JPY 16.8 billion in ordinary profit, up JPY 1.3 billion, JPY 11.4 billion in profit attributable to owners of parent, up JPY 900 million, and lastly, JPY 112.5 in net profit per share, up JPY 9.3 per share. Next is an analysis of operating profit. While an increase in fixed costs represented a headwind of JPY 3.3 billion for operating profit, this was offset by higher sales volume, a more favorable exchange rate, and benefits from net pricing. Ultimately, these factors translated into a Y-o-Y operating profit growth of JPY 3.4 billion. Next are the trends in consolidated performance. As of the end of the first half, we recorded JPY 195 billion in net sales, corresponding to 46% of the full-year forecast target, and JPY 18.2 billion in operating profit, corresponding to 44%. Next are the consolidated results for the first half on a per segment basis. Polymer additives, electronic materials, and environmental materials all posted strong net sales results. Conversely, net sales were down in the life science segment and also slightly down in the food products segment. In terms of operating profit, polymer additives and environmental materials both posted significant Y-o-Y increases. While net sales were down on a Y-o-Y basis in the food products segment, operating profit was up during the same period. In August of 2024, we disclosed a first-half results forecast for fiscal year 2024. Within this, while net sales came in slightly below the forecast, we were able to grow operating profit as planned. 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 6.8%, while operating profit was up 39.7%. Here are the main factor highlights for sales on a Y-o-Y basis. Sales of PVC stabilizers were strong following the expansion of sales and new customers adopting the use of these products in North America. Sales of clarifiers and antioxidants were buoyant due mainly to rallying demand and orders brought forward by customers amid the disruption of marine transport. Results were strong for agents for use in building materials, which is the main market for polymer additives. More specifically, materials like PVC stabilizers for home interior materials. Within food packaging and containers, results were strong for clarifiers for use in food packaging materials. In the domain of automobiles, including EVs, sales were strong for nucleating agents and antioxidants. Lastly, flame retardants for home appliance enclosures were strong. While higher fixed costs weigh down on operating profit by JPY 900 million on a Y-o-Y basis, these were offset by improvements in net pricing, a favorable exchange rate, and higher sales volume, which drove overall profit. Next are the results for electronic materials in the chemicals segment. Net sales in this segment were up 13.3%, while operating profit was up 1.5%. Here are the main factor highlights for sales. Sales of high-k materials and photoacid generators for advanced semiconductors for different applications, such as generative AI, were buoyant. Sales of black matrix resins thrived, reflecting the expansion of sales and new customer adoption in China. In terms of semiconductors, sales were strong for high-k materials for advanced DRAM, photoacid generators used for semiconductor lithography, and semiconductor peripheral materials. Within displays, sales were strong for black matrix resins and photoinitiators for color filters and photo curing materials for optical film. On the other hand, sales were weak for etching materials for LCD panels. While fixed costs and net pricing weigh down on operating profit, higher sales volume and a favorable exchange rate allowed us to deliver an operating profit performance in line with last fiscal year. Next is environmental chemicals in the chemicals segment. Net sales in this segment were up 12.9%, while operating profit was up 47.1%. Here are the main factor highlights for sales. Customers' adoption of lubricant additives for engine oil increased in Asia amid the growth of sales of hybrid vehicles. Additionally, sales of reactive emulsifiers for architectural coatings remained solid following the continued expansion of adoption in Asia. Within materials for use in automobiles, sales were strong for lubricant additives for engine oil, lubricants for use in rubber tire wire drawing machines, and special epoxy resins for structural bonding. Sales were also steady for epoxy resin adhesives for automotive electronic components. Within building materials, sales were strong for reactive emulsifiers for paint and adhesives, and waterborne resins. Lastly, within electronics, sales were steady for peroxygen chemicals for cleaning. While fixed costs were up, this was offset by an increase in sales volume and a favorable exchange rate, which drove an overall increase in operating profit. Next is the Food Products segment. Net sales in this segment were down 0.8%, while operating profit was up 72.8%. Here are the main factor highlights for sales. In addition to weak sales in China, the revision of unprofitable items and a subsidiary changing their revenue recognition standard contributed to the decrease in sales. Additionally, sales of functional fats and oils were strong in Southeast Asia. In Japan, sales were healthy, chiefly for the Marvelous series of functional margarines for baking, which are helpful in food loss reduction. Within breads and confectionery, sales were strong in Southeast Asia and Japan for our Marvelous series of functional margarines for kneading. Lastly, sales were also strong for our Deli-PLANTS series of plant-based foods for use in breads and cafe menus. While an increase in fixed costs weighed down on operating profit, net pricing and higher sales volume had a positive impact and allowed us to drive operating profit. Next is the Life Science segment, which primarily corresponds to the results for Nihon Noyaku. Net sales in this segment were down 3.8%, while operating profit was down 9.9%. Here are the main factor highlights for sales. Sales of agricultural chemicals were bearish in India and Brazil, mainly due to the circulation of inventories in the past fiscal year. In pharmaceuticals, sales of topical antifungal agents struggled amid the decline in demand in Japan for these agents to address nail fungus. Within agrochemicals, sales were weak in India and Brazil for agrochemicals in general, including generics. Additionally, sales of raw ingredients for Bayer, including insecticides, were also weak in Europe. Conversely, sales of insecticides for rice and Corteva products were steady in Japan, while the sale of herbicides was also steady in North America and Europe. Lastly, circling back to what I said earlier, within pharmaceuticals, sales were weak for our topical antifungal agent, luliconazole. In terms of the operating profit results in the first half, higher fixed costs were offset by a favorable exchange rate. I would now like to discuss the revision to the consolidated financial forecasts for FY 2024. The slide on page 14 shows our market environment outlook in the second half of FY 2024. Within the Chemicals segment, we expect continued growth in the category of materials for use in semiconductors. Conversely, we expect a decrease in materials for use in displays following the intensification of competition in the market as the shift to China is expected to continue. We expect the remaining product categories in this segment to remain at around first-half levels. More specifically, we expect that performance will remain firm in the category of automobile, despite the uncertainty of the future. In the Food Products segment, we expect products for use by mass merchants and convenience stores and in the tourism and restaurant industry to continue delivering a strong performance in the second half. Lastly, in the Life Science segment, planted area is on an expansion trend, so we expect an uptrend for agrochemicals starting in the second half. I would now like to discuss the revision to the FY 2024 financial forecasts. The area within the red border shows the revised financial forecasts for the second half and on a full-year basis. The Adeka Corporation is targeting 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. We have therefore raised guidance for the line items of operating and ordinary profit and profit attributable to owners of parent compared to the previous forecast as announced back in August 2024. Next are the revisions to the consolidated forecast by segment. We raised the net sales forecast for polymer additives and electronic materials and slightly lowered the forecast for environmental materials, the Food Products segment, and the Life Science segment. That said, all in all, we are forecasting an overall net sales increase. We raised the operating profit forecast for polymer additives and electronic materials and slightly lowered the forecast for environmental materials and the Food Products segment. Lastly, we slightly raised the operating profit forecast for the Life Science segment. All in all, we are forecasting an overall operating profit increase exceeding the forecast as initially disclosed back in August. Next is a Y-o-Y comparison of the outlook for the second half for each of our businesses. Regarding polymer additives, demand is expected to rally for products as a whole, although there will be a temporary adjustment phase. In terms of all plastic products, we expect the elimination of slow-moving inventory in the supply chain and for polymer production in the Middle East to rally. We therefore expect improvements in the expansion of general-purpose antioxidants and one-pack granular additives. In terms of products for use in automobiles, there is a plurality of viewpoints on this front, but on a Y-o-Y basis, we expect growth in intumescent flame retardants in the markets Adeka operates in. Allow me to introduce to you a new polymer additive product the Adeka Corporation has recently brought to market. We have named this new clarifier product TRANSPAREX, which is a product that confers unparalleled transparency properties to polypropylene articles. This product was released in the U.S. and in Asia in November 2024. TRANSPAREX confers unparalleled transparency properties to polypropylene articles and makes it very easy to recycle existing polymers, allowing for a reduction in carbon footprints. Going forward, we expect to see a shift in the market of transparent resins toward these polypropylene products. The polypropylene market as a market for clarifiers is expected to grow from JPY 30 billion to JPY 50 billion and over by 2030. Together with growth in the global clarifier market, we seek to grow its share in the global market for clarifiers to 60% or more, primarily by leveraging our new TRANSPAREX product. As such, we aim to earn consolidated net sales of JPY 30 billion from clarifiers and to have the largest share of the global market by 2030. Page 19 contains two key outlines of our new TRANSPAREX product. More specifically, as outlined in point one, we have achieved a world record in transparency with TRANSPAREX and, as outlined in point two, have created an unprecedented type of polypropylene. Next are electronic materials in the chemicals segment. Here, performance is expected to remain strong, mainly in the area of products for advanced semiconductors. Furthermore, this forecast already takes into account an increase in fixed costs following capital investment. We expect to grow sales of high-k materials for advanced semiconductor memory, photoacid generators for advanced photoresists, and multipurpose ALD materials for advanced logic ICs. The markets of memory and logic ICs for AI are expected to continue to expand, while the recovery of the legacy semiconductor market continues to be delayed, a trend we expect will drag on for the foreseeable future. Next are environmental materials in the chemicals segment. Here, we will work intensively to increase sales in the field of materials for automobiles, architectural coatings, and adhesives. While we expect an increase in fixed costs in the second half due to the incorporation of the category of battery materials into environmental materials and the start of operations of our high-purity hydrogen peroxide facilities, the forecasts already take these factors into account. Regarding materials for automobiles, we expect continued sales growth for our ADEKA SAKURA-LUBE series of lubricant additives for engine oils, primarily for use in hybrid vehicles. Additionally, in the field of architectural coatings and adhesives, we expect an increase in sales, primarily overseas, of our ADEKA REASOAP series of reactive emulsifiers for use in high-performance products and architectural exteriors and in products for use in food labels. I would now like to discuss efforts for commercialization. This product was previously known as SPAN, but it has been renamed to ADEKA AMELANSA series. In July 2024, we moved the scope of this product series to a newly established battery materials department laboratory under the Environmental Materials Division. We proactively disclose the prototyping and demonstration of various test cells using SPAN and carry out efforts in the form of industry-government-academia collaborations. In fact, Adeka carried out the world's first successful prototyping and demonstration of test cells, more specifically, a lithium sulfur rechargeable battery using SPAN and resin film. This is the world's first trial production of a lightweight LiS rechargeable battery using resin film as an alternative to the aluminum foil used in standard batteries. Our new battery is about half the weight of lithium-ion batteries and is also safe, as it was demonstrated that no fires occurred, even under intentionally extreme conditions. As it stands, we believe an ideal use case for these to be aerial vehicles. Next is the food products segment. We have benefited from improved profitability and will continue working on this front and also to expand sales of high-performance products overseas. Regarding market conditions in Japan and abroad, we expect the Chinese economy to remain stagnant and for consumers in Japan to continue being budget-minded. Lastly, we expect the continued depreciation of the yen and a high cost of living. The price of inputs has gone up, so Adeka will be passing on costs as appropriate. Simultaneously, we will accelerate overseas expansion, and within this scope, Adeka will take the initiative in offering high-concentrated versions of highly functional products like Marvelous. Additionally, we will heavily promote our Deli-PLANTS series of plant-based foods and accelerate expansion not only in East Asia, but also in India, Oceania, and the Middle East. Next is the life science segment. Here, we seek to improve profitability in Brazil and to receive more orders, mainly for independently developed products in the fruit and vegetables markets in Europe and in the U.S. Amid the population growth and economic development in emerging countries, we believe that food demand and the global demand for agrochemicals will continue trending upward. Within the full-year forecast, we expect growth in Latin and North America and for the current stagnating trend in Nihon Noyaku to turn into a slight downward trend in Asia and Europe. That said, we believe we will be able to maintain results in line with last fiscal year. I would now like to go over the dividend policy and the annual dividend forecast for fiscal year 2024. As we have stated on previous occasions, we are committed to returning profits to shareholders in an appropriate manner, in accordance and proportion to the company's financial standing and business results, while simultaneously strengthening and expanding the financial structure and management foundation. We will carry out proactive investment in markets and areas with growth potential and achieve a medium and long-term improvement in business results as we are committed to maintaining the stable distribution of dividends in line with a dividend payout ratio of 40% or more. For fiscal year 2024, the interim dividend was JPY 48 per share, up JPY 3 per share from the previous forecast, while the year-end dividend is now forecast to be JPY 49 per share, up JPY 4 per share from the previous forecast. All in all, we expect the annual dividend to come to JPY 97 per share, corresponding to a dividend payout ratio of 40%. Last is the reference section. Page 27 shows the expected progress versus the ADX 2026 midterm management plan. We are targeting JPY 53 billion in operating profit by fiscal year 2026 on JPY 500 billion in net sales. For fiscal year 2024, which corresponds to the first year of ADX 2026, we are targeting JPY 41.1 billion in operating profit on JPY 426 billion in net sales. Next is an overview of the Adeka Corporation's capital investments. 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 is also underway as an initiative with an eye toward the future and is now nearing completion. In Taiwan, we are in the process of launching a new plant for the manufacture of cutting-edge logic semiconductor materials, as well as new products. In Japan, a new research building is under construction at the Kuki R&D Center in Saitama Prefecture within the combined scope of electronic and environmental materials. Completion is scheduled for January 2026. Additionally, within the scope of environmental materials, we expect to be able to begin commercial operation shortly 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 fiscal year 2025, marking the start of commercial operations. Shown here is the overseas sales ratio. Over the years, we have worked to raise the overseas sales ratio, and we have been making good progress on this front. As of the end of the first half, the overseas sales ratio stood at 55.6%. This concludes today's presentation. Thank you for your time.