Earnings Call: Q4 2024

May 14, 2024

Summary

FY2023 operating and current profit reached records despite slightly lower sales. FY2024 guidance anticipates growth, while ADX 2026 targets JPY 500 billion in sales and JPY 53 billion in operating profit, backed by substantial investment.

Good morning, everyone. Thank you for taking the time off your busy schedules to participate in today's briefing. First is an overview of the consolidated results for FY 2023. In summary, while sales were down slightly, we registered a YoY increase in profit, reaching new record highs for the line items of operating and current profit. We registered JPY 399.7 billion in net sales, down JPY 3.5 billion on a YoY basis, JPY 35.4 billion in operating profit, up JPY 3 billion, JPY 35.7 billion in current profit, up JPY 3.1 billion, JPY 22.9 billion in profit attributable to owner to parent, up JPY 6.1 billion, and lastly, JPY 224.9 in net profit per share, up JPY 61.6 per share. Next is an analysis of operating profit. Noteworthy here is a significant improvement of JPY 7.2 billion in net pricing and JPY 2.7 billion from a favorable exchange rate environment. Conversely, an increase in fixed costs and manufacturing costs weighed down on results by JPY 4.2 billion, as did a decrease in sales volume by JPY 2.6 billion. Next are the trends in consolidated results. Sales had been on a steady upward trajectory through to the end of FY 2022, but this trend was interrupted by a slight decrease in sales in FY 2023. Conversely, while the upward trajectory in operating profit was broken in FY 2022, it nevertheless resumed in FY 2023. Next are the consolidated results for FY 2023 on a per segment basis. Here, polymer additives, in particular, registered a significant decrease in sales, accompanied by a comparable decrease in operating profit. Operating profit was also down in electronics and IT materials, and the life science segment registered a large decrease in operating profit. Conversely, the food products segment delivered a pronounced V-shaped recovery. 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. Polymer production in the Middle East and Europe was sluggish, and sales of one-pack granule additives and antioxidants struggled. Challenges in these two areas had a significant negative impact on sales. Additionally, sales of flame retardants for engineering plastics used in home appliance frames and other products were also sluggish. All plastic products struggled in terms of sales, while flame retardants for engineering plastics used in home appliance frames posted a weak performance, as did materials for use in building materials and food packaging. Conversely, materials for automobiles, especially light stabilizers, posted strong results, and nucleating agents and plasticizers for rubber posted a steady performance. In terms of operating profit, while exchange rates and net pricing worked in our favor, these were offset by lower sales volume and increases in fixed costs, et cetera, resulting in a YoY decrease in operating profit. Next are the results for electronics and IT materials in the chemicals segment. Here are the main factor highlights for sales. Sales increased YoY due to brisk sales of products for advanced semiconductors and a pickup in sales of display-related materials toward the midpoint of the fiscal year, despite the negative impact of generation change and production cutbacks by customers of products for older generation semiconductors. High K materials for advanced DRAM and photoacid generators used for advanced semiconductor lithography posted a strong performance. On the other hand, production cuts led to weak sales of High K materials for previous generation memory products. Regarding materials for use in displays and other electronics, sales of photo initiators for color filters were strong, and black matrix resists and etching gas materials for LCD panels posted steady results. Conversely, sales were weak for photo curing resins for optical film and etching materials for printed circuit boards for use in electronic components. While the exchange rate worked in our favor in terms of operating profit, we started incurring costs for several of our CapEx investment projects, meaning fixed costs were up. Lower sales volume and the impact of net pricing also worked against us in terms of operating profit, which was down on a YoY basis. Next is functional chemicals in the chemicals segment. Here are the main factor highlights for sales. Sales were buoyant as the adoption of lubricant additives for engine oils expanded, mainly in the U.S. Conversely, sales of propylene glycol and peroxide products for general industrial use were poor amid lingering market weakness. Regarding materials for use in automobiles, sales were strong for lubricant additives for engine oil and steady for special epoxy resins for structural bonding and epoxy resin adhesives for automotive electronic components. Sales of reactive emulsifiers for architectural coatings and others, too, were strong, while on the other hand, sales were weak for chemicals for general industrial use, such as polypropylene glycol and peroxide products. Sales of surfactants for use in cosmetics were also weak. While net pricing and the exchange rate worked in our favor in terms of operating profit, these tailwinds were offset by higher fixed costs and lower sales volume, culminating in a slight YoY decrease in operating profit. Next is the food products segment. Here are the main factor highlights for sales. Sales of products for souvenir confections were buoyant, backed by inbound demand, while sales of new Marvelous products, which contribute to maintaining the deliciousness of bread and other foods with only a small amount of formula, were also strong. Sales of margarines and fillings for use in souvenir confections were strong, as were sales of our Marvelous series of functional margarine products for kneading. Conversely, sales of general-purpose fats and oils were weak. Lastly, we saw growth in adoption of our Deli-PLANTS series of plant-based foods. We observed operating profit tailwinds across the board in the form of net pricing improvements, higher sales volume, and lower manufacturing costs. Of these, improvements in net pricing were particularly significant. We raised prices and also succeeded in unlocking value in products that previously had been unprofitable, including in terms of product delivery. We saw rapid profitability improvements, particularly in the category of general-purpose fats and oils. This was coupled with very significant sales growth of functional products, and these various factors translated into a V-shaped recovery in the food products business. Next is the life science segment, which corresponds primarily to the results for Nihon Nohyaku. Here are the main factor highlights for sales. In Japan, sales were solid due to price revisions implemented last fiscal year and the widespread expansion of sales of items developed in-house. Prices of generic agrochemicals fell due to intensified competition, and sales of agrochemicals struggled in Brazil. Sales of agrochemicals were steady in Japan, North America, and India, but we struggled in the Brazilian market. Sales were also weak for our topical antifungal agent, luliconazole. The exchange rate worked in our favor, but this benefit was offset by the negative impacts of higher fixed costs and lower sales volume, leading to a significant YoY decrease in operating profit. I would now like to go over the FY 2024 consolidated forecasts. Regarding our outlook, amid concerns over China's economic slowdown, the world economy is expected to grow moderately, aided by interest rate cuts in Europe and the United States. Against this backdrop, we expect strong growth across the majority of the markets in which Adeka's products and materials are used. The consolidated forecasts for FY 2024 are as follows. We expect to deliver JPY 425 billion in sales, up JPY 25.2 billion YoY, JPY 37.3 billion in operating profit, up JPY 1.8 billion, JPY 36.4 billion in current profit, up JPY 600 million, and JPY 23 billion in profit attributable to owners of parent, virtually unchanged from FY 2023. Net profit is expected to come to JPY 225.2 per share, and we expect to distribute JPY 90 per share in dividends. The exchange rate assumptions are as detailed on the table at the bottom of page 15. Next are the consolidated forecasts by segment. We expect YoY sales and operating profit growth virtually across all segments, the exception being food products. Circling back to what I said earlier, we made extensive progress in the execution of price revisions in FY 2023. Going forward, and especially toward the latter half of the fiscal year, we expect our customers to try to negotiate price reductions. So all in all, we expect slightly lower sales and a decrease in operating profit. I would now like to go over the various positive and risk factors by segment. An important litmus test is how the market for electronics and IT materials evolves over time. As it stands, we expect continued demand for advanced semiconductors and have carried out a number of CapEx investments based on this assumption. Whether this investment pays off or not depends on whether demand for these materials outweighs the capital outlay within the scope of these CapEx efforts. Last is the overseas sales ratio, which stood at 54.2% in FY 2023. We expect this ratio to rise even further as we accelerate overseas expansion of our food products and work to secure a strong position overseas for our other segments and products. This concludes our briefing on the FY 2023 financial results. Thank you for your time. I would now like to go over the Adeka Group's new midterm management plan, titled ADX 2026. Allow me to start with a review of the previous midterm management plan, ADX 2023. ADX 2023 was off to a good start as the Adeka Group delivered a rather strong performance in FY 2021. It was at this point, and in light of strong results, that we raised the guidance targets within the scope of ADX 2023. Unfortunately, we were met with challenging conditions in the form of a worldwide pandemic in the form of COVID-19, a crisis in Ukraine, and an interest rate differential between Japan and other countries' central banks. We stood up to these challenges, executing various initiatives, which we believe ultimately paid off, as evidenced by the results. Next is a summary of various management indicators. The Adeka Group had targeted JPY 35 billion in operating profit by the end of FY 2023 within the scope of the initial version of ADX 2023. However, as I touched upon earlier, we achieved JPY 34 billion right from the start in the first year of ADX 2023. This prompted us to raise guidance in August of 2022 to JPY 42 billion as the operating profit target for fiscal year 2023, the final year of ADX 2023, while keeping the other targets unchanged. Ultimately, we failed to achieve this revised operating profit target in fiscal year 2023 and within the broader scope of ADX 2023, as well as our ROE target. On the other hand, we achieved and slightly exceeded our capital investment target, as well as the dividend payout ratio at 40%, above our dividend policy target of at least 30%. I would now like to discuss the progress and results of key strategies. We invite you to go over the details later at your convenience, but in broad strokes, we were successful in the sales expansion of strategic and eco-friendly products within the scope of our key strategy of transforming the earnings structure. Another success was our key strategy of achieving sustainable growth with new domains. More specifically, we carried out the development of SPAN, an active material for next-generation batteries, and made a successful demonstration of the world's lightest cell using an original Adeka test cell. We therefore believe we have been able to develop a material possessing tremendous potential going forward. Lastly, within the scope of our key strategy of reinforcing group management, we implemented measures under the slogan of transformation to adapt to the new social environment. I would now like to go over an overview of the new midterm management plan, ADX 2026. Allow me to start with the positioning of ADX 2026. Our group ultimately seeks to achieve ADEKA VISION 2030, which represents our goal of becoming an innovative company contributing to a sustainable future and affluent lifestyles. Within this framework, we position ADX 2026 as a three-year period for carrying out continued transformation through to fiscal year 2026. A core aspect of ADX 2026 is the pursuit of a growth strategy of promoting sustainability initiatives. Here, our fundamental policy consists of promoting sustainability initiatives for greater social value and continuous growth. Within this, we will seek to further improve our earnings power, sustainability, and build a resilient management foundation. As you can see from the diagram, our operations sit on top of a resilient management foundation, and we intend to link up and synergize sustainability and earnings power in order to co-create social value and profit. Through these efforts, we ultimately seek to improve corporate value. Next are the targets for ADX 2026. For the final year of ADX 2026, that is fiscal year 2026, we are targeting JPY 53 billion in operating profit on net sales of JPY 500 billion. This represents an ROE of 11% and 10.5% in ROIC. We are targeting JPY 75 billion in CapEx investment and will be maintaining the dividend payout ratio at 40% or more. Here is the outlook for the external market environment for the period covering fiscal years 2024 and 2026. We expect both opportunities as well as risks when it comes to the social environment and our outlook for our target markets. Additionally, our forecasts for the price of raw materials and exchange rates are as shown here. In terms of changes in our target markets, please refer to our outlook assumptions on the bottom right-hand corner. Next are our key strategies. As we did with ADX 2023, we will be executing initiatives within the scope of three key strategies. Key strategy number one is transition to a high profitability structure. Key strategy number two is increase eco-friendly products and reduce GHG emissions through business structure transformation. Lastly, key strategy number three is establish a resilient management foundation. Please refer to the bullet points for more information on the various initiatives to be executed within each key strategy. Next are the performance targets by segment. For the Adeka Group as a whole, we are targeting JPY 53 billion in operating profit and JPY 500 billion in net sales. In terms of the breakdown by segment, we expect to be able to achieve just over JPY 130 billion in sales in polymer additives and stage a recovery back to the operating profit highs we achieved in ADX 2023. We position electronics and IT materials as a profit center, and we intend to continue growing our operating profit results in this business. Within functional chemicals, we are targeting steady operating profit growth through disciplined efforts to grow the sale of functional materials. The food products segment is expected to grow further in terms of net sales and operating profit, and we will work to secure net sales and operating profit growth in the life science segment. I would now like to delve into the details of our key strategy of transition to a high profitability structure. Within this key strategy, we will be expanding the scope of our operations, especially within electronics and IT materials. We plan to continue focusing on semiconductor materials and aggressively invest in facilities, including construction of a new research building in the Kuki R&D center. Over the course of ADX 2023, we executed approximately JPY 12 billion in CapEx investment in this segment, and we now have plans to carry out a further JPY 15.8 billion in CapEx and approximately JPY 10 billion corresponding to the construction of a new research building at the Kuki R&D center. Previously, we offered materials for use in memory products, but we will be expanding into the domain of logic IC and also into the back-end process, whereas previously our efforts had centered on the front-end process. For the most part, our target areas remain the same, but we have plans to focus more heavily on Taiwan going forward. As I mentioned earlier, we will be expanding the scope of our operations within electronics and IT materials over the next three years, including by offering comprehensive coverage featuring both the front-end and back-end processes. Previously, we had specialized to a significant degree in High K materials for DRAM, but we will now also be focusing on materials for use in logic IC and back-end process packages, while aggressively promoting growth in the sale of materials for use in photoresists. For the most part, our area strategy and measures remain unchanged from ADX 2023, the main key differences being our new plant in Taiwan coming online and continued investment for the next generation. Up until now, we had specialized to a significant degree in High K materials for DRAM, but we also plan to dedicate considerable efforts to investment in infrastructure for materials for use in logic IC semiconductor devices. This does not mean we will become complacent when it comes to High K materials for DRAM, as we will be working to achieve the full-scale operation of the advanced materials infrastructure we built over the course of ADX 2023. We will also fully utilize our newly built R&D center to further add to company results. I would now like to go over the strategies and targets for polymer additives within our key strategy of transition to a high profitability structure. Our target areas remain the same, but we have plans to expand the scope of our polymer additives business to include the markets for recycled resins, agriculture, and the environment. Next, our focus products and measures within polymer additives. Within our aforementioned goal of expanding sales of eco-friendly products, we will be expanding to the electric vehicle industry and to other applications the use of our ADK STAB FP series of products, giving plastics flame retardant properties. Additionally, we will also be further enhancing our efforts to present our ADK CYCLOAID series, supporting the development of the polymer industry by contributing to realizing a recycling-oriented society as an environmentally friendly, recyclable polymer additive and a bio-based polymeric plasticizer. Furthermore, up until now, our efforts within the CapEx investment plan had been within the scope of growing sales of existing products. But for ADX 2026, we now have plans for the maintenance and renewal of equipment in preparation for the commercialization of new products. Next are the strategies and targets for functional chemicals within our key strategy of transition to a high profitability structure. As with polymer additives, we will be keeping existing markets and target areas, while also expanding the sale of our materials into the markets for mobility, electronics related to mobility, and green transformation, referred to as GX. In terms of focus products and measures, we believe there is further room for growth for our ADEKA SAKURA-LUBE series of products, offering improvement in automobile fuel efficiency and reduction in CO2 equivalent emissions, and we will further focus on carrying out sustained efforts toward this end over this three-year period. We will also carry out the maintenance and renewal of carbon neutral related infrastructure, not just within the scope of the Adeka Group's own carbon neutrality targets, but also in a more general sense, by exploring opportunities and sales growth in materials making a contribution in the domain of sustainability and carbon neutrality. Next are our strategies and targets for the food products segment within the scope of our key strategy of transition to a high profitability structure. In terms of the target markets, we are looking to achieve sales growth in the restaurant industry, which is an area we cultivated over the course of ADX 2023. Amidst our efforts to build up a strong position and achieve sales growth in the market for plant-based foods, we will be further specializing in this market and deliver growth. We will also accelerate our overseas expansion, including to the European and North American markets, and aim to generate sales opportunities in India, Oceania, and the Middle East. Next are the focus products and measures. Here, we will work to further grow sales of our Marvelous series of functional oils that help maintain the deliciousness of bread, et cetera, and reduce food waste, and of the aforementioned Deli-PLANTS series of plant-based foods that take into consideration food diversity and the environment. Additionally, the Adeka Group currently has bases in China, Malaysia, and Singapore, which we will be utilizing while simultaneously focusing on developing sales channels in Europe, the U.S., India, and the Middle East. Next are the strategies and targets in the life science segment. Here, we will be utilizing existing bases to expand sales in Asia and Latin America, where markets are experiencing rapid growth. We will be keeping our target markets and areas and adding new revenue sources from pharmaceuticals and animal healthcare products as we seek to achieve market penetration for these. We will also simultaneously carry out initiatives in smart agriculture and sanitary pest control. Next are the focus products and measures. Here, we will focus on the expansion of key items while growing new businesses and carry out market expansion based on area strategy. Our main target for expansion is insecticides for paddy rice in the Asia-Pacific area, as well as sales expansion in Latin America, in line with demand for agrochemical products. We view these types of initiatives as being of vital importance. We built a multipurpose plant for the manufacturing of active ingredients in India over the course of ADX 2023, which we will operate to its fullest extent in ADX 2026 in the execution of the aforementioned initiatives. Next are our efforts to expand strategic products and new products. Within new products, we have plans to expand sales, especially electronics and IT materials, and functional fats and oils within food products. We also have plans to increase capital efficiency, raising the Adeka Group's total ROIC from its current level of 8.3% to 10.5% by fiscal year 2026. Toward this end, we will be reducing interest-bearing liabilities, improve management of non-current assets, and further trim down and optimize our cross-shareholdings portfolio. I would now like to discuss our key strategy of increase eco-friendly products and reduce GHG emissions through business structure transformation. Toward realizing our ADEKA VISION 2030 targets, we reviewed and made some slight revisions to our 2030 KPIs in sustainability priorities, dedicating the three-year period through to fiscal year 2026 as a time to execute these initiatives. We invite you to review the various key points in the areas of the environment, social, and governance. Next are our efforts to expand and create eco-friendly products. The Adeka Group positions a multitude of its products across various product domains as eco-friendly products, and these accounted for JPY 76.8 billion in sales in fiscal year 2023. By fiscal year 2026, we expect to have grown this figure to JPY 115 billion, ultimately reaching JPY 201.4 billion in fiscal year 2030. Next is our roadmap to reduce GHG emissions with a view toward carbon neutrality. The Adeka Group is ultimately aiming for carbon neutrality by 2050, with an interim target in 2030 corresponding to a 46% reduction in CO2-equivalent emissions compared to fiscal year 2013 levels. Next is the promotion strategy as it pertains to our efforts to reduce GHG emissions with a view toward carbon neutrality. The Adeka Group's GHG emission target for fiscal year 2026 is as shown on the waterfall chart on the left. More specifically, we expect to offset increased GHG emissions from business growth through energy-saving measures and the adoption of renewable energy, allowing us to achieve our FY 2026 target. I would now like to go over our commitment to respect for human rights within the Adeka Group's priority sustainability issues. We will work to reduce human rights risks across the group and respect human rights in the supply chain. Within ADX 2026, Adeka upholds five commitments to human rights, which we will be putting into action. Next is our commitment to promote DE&I within the Adeka Group's priority sustainability issues. Adeka will be promoting diversity, equity, and inclusion to embrace diversity and ensure fairness in the exercise of talent, thereby contributing to the growth of the company. Please refer to Slide 32 for more information on our DE&I plan. Next is the topic of corporate governance within the Adeka Group's priority sustainability issues. Adeka will establish effective corporate governance and make swift and decisive decisions based on a strong management foundation. We reformed our management structure over the course of ADX 2023 through the execution of the initiatives listed on page 33, but we have plans to execute further initiatives within the scope of ADX 2026, strengthening the functions of the board of directors and increasing its effectiveness, promoting dialogue with shareholders, and strengthening functions of outside directors. Our third key strategy consists of establish a resilient management foundation. More specifically, we will be executing the three initiatives listed on page 34 with a view toward increasing the resilience of the management foundation to take swift actions in a highly uncertain environment. These initiatives are strengthening supply chains, initiatives to enhance human capital, and the promotion of DX. We will be carrying out efforts to strengthen supply chains. Within this scope, we will ensure business continuity even in the face of drastic changes in the external environment and create a resilient supply chain. In terms of initiatives to enhance human capital, we will be promoting the allocation and development of human resources, our greatest management resource, leading to the sustainable growth of the group. For more details on the various initiatives, we invite you to peruse the bullet points on page 36. Next is the introduction of an incentive plan. We introduced two incentive plans utilizing the stock system, consisting of Adeka Corporation shares for employees of the company and some of the group companies. The two incentive plans consist of an employee stock benefit trust and a special incentive scheme for the Employee Stock Ownership Association. Through their execution, we strive to further enhance corporate value by raising employees' sense of participation in management and motivation and morale to improve the share price and business performance. Next is the promotion of DX. Our new core system became operational during ADX 2023, and we seek to leverage this system to accelerate our company-wide digital strategy and promote continuous business transformation. We expect to carry out JPY 75 billion in CapEx investment over the course of the three-year plan corresponding to ADX 2026. Of this, the vast majority of investment will take place in Japan, although it should be noted that this includes expenses for the construction of a new research building at Kuki R&D Center. It also includes expenses for maintaining and replacing equipment. And circling back to what I said earlier, we will be reviewing and rationalizing these expenses. This plan is weighed toward electronics and IT materials, as we intend to proactively allocate management resources to this domain. More specifically, we intend to allocate investment toward new materials for DRAM and logic semiconductor materials. Our dividend policy within ADX 2026 calls for a dividend payout ratio of over 40%. As you can see from the graph, and even extending to periods preceding FY 2015, another basic premise behind our dividend policy is that once we raise dividends, the higher amount becomes the baseline level going forward. As such, our basic policy involves maintaining both the dividend payout ratio at 40% and the dividend baseline. This concludes my presentation. Thank you for your time.