DAIICHI KIGENSO KAGAKU-KOGYO CO.,LTD Q4 FY2025 earnings call

Vietnam Business Update

• Additional construction for the Vietnam project was almost complete in May 2025, and the company plans to increase capacity utilization starting from June 2025, progressing in line with the revised plan
• The project will have its largest negative impact on earnings in the 2026 March fiscal year; reaching full operation as quickly as possible to meet customer demand paired with aggressive cost reduction is the company's top priority this fiscal year
• The project is positioned to reduce geopolitical risk: Daiichi Kigenso is the only commercial-scale supplier of zirconium intermediate (zirconium oxychloride) outside of China, with this unique position branded as the "VREC Premium", and customer interest has increased sharply following the start of the second Trump administration

Updated Mid-Term Management Plan (DK-One Next)

• The plan is updated to extend to the 2032 March fiscal year (the company's 100th anniversary), with the core target of increasing the revenue contribution of strategic segments to 50% by 2032
• ROE and DOE have been added as formal performance targets; a 1.8% DOE minimum is set as a lower bound to guarantee stable dividends. From the 2029 March fiscal year (73rd term) onward, the company targets a 30% dividend payout ratio, with stable dividends in the early period and increasing dividends aligned with growth in the later period
• Cash allocation will prioritize active capital expenditure and R&D for strategic segments; financial discipline will maintain net debt-to-equity between 40% and 60% to balance growth and stability
• The portfolio transformation strategy reaffirms: stable earnings from the base business and automotive catalyst segment will fund R&D and investment for strategic segments, with the goal of growing strategic segments to half of total revenue by 2032

Growth Strategies

• The company continues to prioritize three core strategic growth areas: secondary batteries, biomaterials, and semiconductor abrasives, all expected to grow long-term, and the company aims to outpace market growth leveraging its competitive advantages (stable supply from Vietnam, 70 years of specialized technical expertise)
• The company is accelerating new business creation by leveraging its existing technical know-how in partnership with external stakeholders; three new projects are currently under rapid feasibility assessment, with progress to be disclosed via press release once competitive positioning (including patents) is secured
• For the automotive catalyst segment: the company will strengthen efforts to re-enter Chinese PHEV supply chains with competitive cost-quality products, and expand market access in high-growth Global South markets (centered on India) to maintain scale amid declining internal combustion engine vehicle sales
• For the secondary battery market: the company expects NCM batteries (which use zirconia) to outgrow LFP batteries (which do not) in terms of total battery capacity starting in 2026, and will capture this growth with enhanced cost-competitive high-performance products
• The six core strategic pillars of the original DK-One Next plan remain unchanged, with regular monitoring and adjustment at the board and management levels to ensure progress toward targets

Financial Performance Overview

• Overall revenue saw stagnant growth; operating margin remained flat year-over-year due to cost cutting despite the Vietnam project headwind, but a 1.3 billion yen foreign exchange loss pushed operating profit and net profit significantly below prior year levels
• Free cash flow was positive 3 billion yen, supported by operating cash flow and subsidy income
• The company will strengthen inventory and fixed asset management to improve low ROIC levels, while managing net assets appropriately

Overall company total revenue fell 4.5% year-over-year, with a 3.4% year-over-year decrease in sales volume; the larger revenue decline was driven by falling raw material prices.

1. Strategic Segment (Semiconductor & Electronics): Revenue slightly increased year-over-year. Polishing abrasive products for semiconductors (a core product, primarily used in electric vehicles) saw slower growth but still delivered full-year results above the prior year. Demand for MLCC (multi-layer ceramic capacitor) products recovered, supporting the segment's overall performance.
2. Strategic Segment (Energy): Revenue decreased 9% year-over-year overall. After rapid growth driven by secondary battery demand in 2023, the segment saw a sharp slowdown in electric vehicle demand starting in late 2024, leading to prolonged industry-wide inventory adjustment. SOFC/SOEC products (the segment's other core line) saw steady final product sales and are expected to recover soon. The company's high-performance functional materials for batteries are well-regarded by global customers, and the segment expects growth after inventory adjustments conclude.
3. Strategic Segment (Healthcare): The biomaterials sub-segment is steadily growing share in Western markets driven by strong quality-cost balance, but growth slowed in the second half of the fiscal year due to overlapping product launch lulls at several key customers. A recovery is expected in late 2025.
4. Automotive Exhaust Gas Purification Catalyst Segment (current core revenue base for the company): Revenue declined year-over-year due to production adjustments from certification non-compliance issues, the industry shift to electric vehicles, and changing sourcing trends at Chinese automakers. Chinese PHEV growth, the main driver of internal combustion engine vehicle growth in 2024, has not benefited the company as it has not yet gained access to this new supply chain. Operating income for the full fiscal year decreased by 140 million yen year-over-year. The main drag was a more than 800 million yen cost increase from the Vietnam subsidiary, driven by delayed launch and low operating rates. Successful cost pass-through for rising energy, logistics, and labor costs partially offset this negative impact.

• The 2026 March fiscal year is expected to be the earnings bottom, with the largest negative impact from the Vietnam project, combined with industry inventory adjustments across all strategic segments and expected sales declines in automotive catalysts, leading to significantly lower earnings than historical levels
• The company forecasts 1 billion yen operating profit and 200 million yen ordinary profit for 2026 March fiscal year, and has factored in a 5% negative impact on automotive-related revenue (equal to ~1 billion yen in revenue and ~500 million yen in operating profit) from expected second Trump administration trade policies
• Strategic segment revenue is expected to increase ~15% year-over-year once inventory adjustments conclude
• A 700 million yen foreign exchange loss is already factored into guidance due to expected stronger yen vs the 2025 March fiscal year
• Through the mid-term plan: operating margin will remain below 10% through the 2029 March fiscal year (73rd term) as Vietnam project headwinds linger and new high-margin projects have not yet scaled, but profitability and capital efficiency are expected to improve significantly from the 2030 March fiscal year (74th term) onward as cost reduction progress and the share of high-margin strategic businesses increases
• If there are material changes to the business environment or cost reduction progress, the company will update guidance accordingly

• Foreign exchange volatility: The company's Vietnam project involves over 15 billion yen in foreign currency-denominated lending. While the company uses hedging instruments such as derivatives and forward contracts, hedging effectiveness is limited. A mere 2 JPY appreciation of the yen vs the USD reduces annual profit by ~150 million yen, and the company is also exposed to USD-VND exchange rate volatility. Recent opposite movement of JPY/USD and VND/USD exchange rates increases consolidated earnings volatility. The company is exploring increasing VND-denominated debt at the subsidiary to mitigate this risk.
• Automotive industry structural shifts: Emission regulation tightening, which the company expected to drive catalyst demand growth, has been delayed. Many automakers have increased precious metal content to meet performance requirements instead of increasing demand for the company's specialty products, limiting demand growth. The company has not yet gained access to the fast-growing Chinese PHEV supply chain, pressuring automotive segment revenue.
• Energy segment cyclicality: Electric vehicle demand growth has slowed sharply, leading to prolonged industry inventory adjustment that has suppressed near-term segment revenue. The growing market share of LFP batteries (which do not use the company's zirconia products) could pressure long-term demand growth.
• Vietnam project execution risk: Delayed launch and low utilization have already increased costs by more than 800 million yen, and the project will create an additional 430 million yen negative impact in the 2026 March fiscal year. Full profitability will require additional raw material cost reduction and expanded sales.
• Rare earth raw material supply risk: Rare earth prices have seen recent volatility driven by US trade policy, creating uncertainty for raw material supply and costs.
• The original mid-term plan assumption that automotive catalyst and secondary battery demand would offset each other has broken down, leading to a material downside miss relative to original targets.

The provided earning call transcript does not include a question and answer section.