TOAGOSEI CO.,LTD. Q2 FY2025 earnings call

• Core Growth Driver: Mobility

  • Lithium-ion battery binders: A new product that extends battery life by suppressing negative electrode expansion, this product has seen expanded adoption in consumer applications including data center energy storage, drones, and high-performance smartphones after initial adoption by a leading global EV manufacturer. A second production facility is scheduled for completion by the end of 2025, with the company set to receive government subsidies covering one-third of investment for this globally competitive product.
  • Automotive battery adhesives: Sales have grown steadily alongside expanding adoption across vehicle models since 2021, with development for next-generation batteries currently ongoing.

• Core Growth Driver: Semiconductor Manufacturing Chemicals

  • High-purity products including liquefied hydrogen chloride (world No.1 market share), high-purity potassium hydroxide, and high-performance CMP acrylic polymers are positioned as core offerings. Demand from cutting-edge AI semiconductors is driving a recovery in shipment volumes starting in H2 2025, with the company expanding supply capacity and advancing purity improvements to meet growing demand.

• Profitability Improvement: U.S. Instant Adhesive Business Restructuring

  • After the previous joint venture with Newell Brands saw significant share decline due to rising competition, Toagosei has dissolved the joint venture and shifted to independent operation to pursue share expansion. Four key strategies will be implemented: 1) develop customer-aligned products leveraging the company's technical strengths; 2) expand product lines beyond instant adhesives; 3) expand distribution to home centers and large supermarkets to increase store count and shelf space; 4) boost brand awareness via mass advertising. The company has partnered with an experienced strategy consulting firm and appointed new sales agents to support this push.

• Profitability Improvement: Aging Sewerage Infrastructure Products

  • Aron Kasei's sewerage repair products for aging pipes are seeing strong sales growth, with the company currently developing non-excavation pipeline inspection technology with mapping functionality to address the high frequency of road cave-ins caused by pipe damage.

• New High-Priority Products

  • Aronix Sheet, a glass replacement resin for LiDAR covers, combines glass-like optical and heat resistance with improved lightness and shatter resistance. It has already begun adoption in stationary sensors, cleaning robots, and autonomous lawnmowers, with automotive LiDAR identified as the key high-growth target segment.

• New Growth Area: Medical R&D

  • The company has launched joint research on siRNA pharmaceuticals with the iCONM, combining the company's siRNA design technology with the center's nucleic acid delivery technology to develop treatments for intractable diseases. Clinical trials are planned within 5 years, with this area identified as the leading candidate for the company's next core growth driver.

• Financial Strategy

  • Toagosei issued 10 billion yen in corporate bonds (its first in 24 years) at a low 1.384% interest rate, to fund growth investment, diversify funding sources, improve financial stability, and boost ROE via financial leverage. The company is targeting a PBR of 1x, and plans to acquire 7 billion yen in treasury shares in 2025, with a planned full-year dividend of 65 yen per share (a 5 yen increase YoY) for an expected total shareholder return payout ratio of 115%.

1. Basic Chemicals: Despite an overall sales volume decrease, reduced fixed costs for acrylic monomers drove a 0.5 billion yen increase in operating profit year-over-year (YoY). Full-year 2025 expects operating profit to remain up YoY, with weakening acrylic monomer performance in H2 offset by strong performance from electrolytic products.
2. Polymer & Oligomer: Rising prices for specialty raw materials and weak sales of mobility specialty polymers led to a 0.9 billion yen operating profit decrease YoY in H1 2025. Full-year 2025 expects a 9 billion yen sales increase YoY but a 0.6 billion yen operating profit decrease YoY, with H2 recovery from the H1 bottom in automotive and electronic material demand not enough to offset H1 losses.
3. High-performance Materials: Delayed recovery in semiconductor demand led to a 0.1 billion yen operating profit decrease YoY in H1 2025. Full-year 2025 expects a 1 billion yen sales increase YoY (driven by H2 semiconductor market recovery) but a 0.3 billion yen operating profit decrease YoY, pressured by competition from low-cost Chinese goods for amenity products and increased R&D expenses for medical care.
4. Resin Processed Products: Increased sales of aging infrastructure countermeasure products and price adjustments across segments (including life support products) drove a 0.5 billion yen operating profit increase YoY in H1 2025. Full-year 2025 expects a 9 billion yen sales increase YoY and an 0.8 billion yen operating profit increase YoY, supported by cost reduction for overseas-sourced nursing care products and expanded sales of high-performance elastomer products.
5. Other: Increased R&D expenses for the Kawasaki Frontierence R&D Center and Nagoya Creation R&D Center led to a 0.4 billion yen operating profit decrease YoY in H1 2025.

• Full-year 2025 consolidated guidance: Net sales of 162.5 billion yen and operating profit of 14 billion yen, representing a slight 3% and 2% decrease YoY respectively. This represents a downward revision from the previous target of 15 billion yen in operating profit, as the company continues ongoing growth investment.
• The guidance incorporates a modest level of U.S. tariff impact in H2 2025, and accounts for H2 recovery in semiconductor and mobility product demand. Net income attributable to parent shareholders is expected to be 12.2 billion yen, a 3 billion yen increase YoY, driven by higher special profits from reduced impairment losses and continued policy share sales.
• After a 1.2 percentage point increase in H1 2025 to 77.7%, the company expects the equity ratio to decline to around 75% after accounting for treasury share purchases, dividends, and new corporate debt, consistent with the goal of improving ROE and PBR by reducing equity and expanding profits.
• Full-year 2025 ending cash and cash equivalents are expected to be around 40 billion yen, roughly unchanged from the start of the year.

• Slowing global economic growth driven by U.S. tariff policy, the Ukraine conflict, and the Middle East conflict, with low growth observed in China, Europe, and Japan during H1 2025.
• Persistently weak offshore market conditions for acrylic esters due to inflows of low-cost Chinese products into Asian markets.
• Delayed recovery across the overall semiconductor market, despite strong demand for cutting-edge AI semiconductors, which drove lower sales of high-purity inorganic products in H1 2025.
• Quality and equipment issues at Toagosei Thailand and Toa Techno Gas led to a 0.1 billion yen operating profit decrease YoY for each entity in H1 2025.
• Towa Gosei America saw expanded net losses in H1 2025 due to structural reform costs related to the joint venture dissolution.
• Towa Gosei Singapore remains unprofitable, with ongoing reviews of fundamental measures to eliminate losses.
• Higher fixed costs driven by wage increases, depreciation from new capital investment, and increased R&D expenses pressured H1 2025 profitability, and will continue to impact full-year results.

Q: What magnitude of impact is U.S. tariffs expected to have on H2 operating profit, and which segments will be affected?

A: Direct exports to the U.S. account for only 2% of total sales, and high-value specialty products are not subject to the 10% tariff, with no expected near-term impact on direct shipments. It is very difficult to quantify indirect impact, where tariffs may reduce end-demand for automotive and electronics products that use Toagosei materials. Management has only incorporated a very small, immaterial impact into current guidance, and will continue monitoring and adjust plans flexibly.

Q: What is the current adoption status of Aronix Sheet, and what are the key barriers to sales expansion?

A: Aronix Sheet has already been adopted for LiDAR used in stationary motion sensors, cleaning robots, and autonomous lawnmowers, with automotive LiDAR identified as the highest-priority target market. It has won initial adoption for automotive due to its advantages over traditional glass in thinness, light weight, and wide viewing angle. The key challenge is high manufacturing costs driven by complex, multi-step production (including specialized formulation and processing techniques). Management will work to consolidate processes and reduce production costs going forward.

Q: What is the minimum target level of cash and cash equivalents the company holds?

A: Management estimates the minimum required cash balance is approximately 20 billion yen, equal to roughly two months of sales. This level is sufficient to cover operating costs including labor expenses for an extended period if needed, so the planned full-year ending balance of 40 billion yen is above this minimum requirement.

Q: What is the company's target equity ratio, and how does it plan to reach this target?

A: The current H1 equity ratio is 77.7%, which is very high, and the company expects it to decline to around 75% after accounting for treasury share purchases, dividends, and new corporate bond issuance. Management notes that ROE cannot increase if equity does not decrease, and will continue pursuing strategies to reduce equity while expanding profits to drive improvement in ROE and PBR.