SHIKOKU KASEI HOLDINGS CORPORATION Q4 FY2024 earnings call

• Overall 2024 Financial Performance

  • All key metrics (revenue, operating profit, ordinary profit, net profit) hit all-time records: consolidated revenue 69.493 billion yen (+10.1% YoY), operating profit 9.741 billion yen (+21.5% YoY), ordinary profit 10.779 billion yen (+16.2% YoY), net profit attributable to parent shareholders 8.813 billion yen (+12.2% YoY). A 11-yen weaker yen versus the prior year added 2.0 billion yen to revenue and 1.2 billion yen to operating profit.
  • Overall operating margin reached 14%, up 1.3 percentage points YoY.

• Long-Term Vision: Challenge 1000

  • This is a 10-year backcast plan to become a "one-step-ahead proposal-driven company based on originality", with 2029 (final STAGE3) targets of 100.0 billion yen revenue, 15.0 billion yen operating profit, and 10% ROE. 2025 is the final year of STAGE2, and current results are 20% below original STAGE2 targets for both revenue and profit. Management completed a full review of the plan over the past year.
  • Inorganic Chemicals: New insoluble sulfur plant completed in January 2025; depreciation will create near-term cost pressure, but high-quality products only producible at this plant will contribute to profit starting 2026 after customer product approval, and the segment is near its STAGE2 target. New sulfur-based environmental projects are in progress.
  • Organic Chemicals: On track to meet STAGE2 targets, driven by a strong customer base for core product Neochlor in the North American pool market. The company holds high domestic market share for chlorinated products for water applications, and is expanding its BtoC WASHMANIA product line.
  • Fine Chemicals: Semiconductor process materials are outperforming expansion plans, R&D is being strengthened, and low-cure resin modifiers won the 2024 Shikoku Regional Invention Award Minister of Education, Culture, Sports, Science and Technology Award. GliCAP has secured adoption in AI server boards and mass production for semiconductor package substrates, and 2025 sales are already exceeding STAGE3 targets. Management prioritizes aggressive investment to capture this growth opportunity.
  • Building Materials: Sales are underperforming STAGE2 targets due to domestic market contraction. The company is refocusing resources on its core strength of non-residential landscape exteriors, pursuing partnerships to leverage its unique product portfolio and custom design capabilities, and has launched an overseas sales department to expand into international markets, exiting overreliance on the domestic market.

• Capital Strategy and Shareholder Returns

  • Management recognizes the company's stock price is still undervalued relative to its potential, with current full-firm ROIC of 6.6% below the weighted average cost of capital due to large excess capital, while ROIC is 19.6% for chemicals and 7.7% for building materials. The company aims to stably maintain ROE above 10% and improve capital allocation.
  • Shareholder return policy: Target 30% payout ratio and 50% total return ratio during Challenge 1000, with a new 3% DOE target for dividend setting. 2024 full-year dividend is 50 yen per share (payout ratio 26.1%), with over 10.2 billion yen in share buybacks bringing total return to 141.4%, 2024 DOE reached 2.8%. The 2025 dividend is maintained at 50 yen per share, with progressive dividend policy committing to maintain dividends even during temporary profit declines from large investment. The company will continue share buybacks as part of ongoing cross-holding unwinding as a core governance reform.

• Post-Review Strategic Adjustment

  • The full review confirmed existing strategies are insufficient to meet final 2029 targets, and large investment depreciation will peak in 2028-2029, creating a gap to profit targets. STAGE3 will be reframed as a period of capacity building for post-2030 growth, prioritizing growth investment over hitting 2029 profit targets. The company will pursue existing organic growth plus new business development and M&A in areas that leverage its core strengths, to secure the 100 billion yen revenue target. Human capital investment and workplace improvement will be intensified to drive value creation.

1. Chemicals Business (total):

   • Full-year 2024 sales: 49.93 billion yen, +6.6 billion yen year-over-year. It accounts for 71.8% of total consolidated revenue. Operating profit: 8.61 billion yen, +2.23 billion yen year-over-year.
   • Inorganic Chemicals Sub-segment: YoY +0.21 billion yen revenue, QoQ +0.28 billion yen revenue. Growth driven by expanded sales of core product insoluble sulfur to North America and other markets.
   • Organic Chemicals Sub-segment: YoY -0.37 billion yen revenue, QoQ -1.96 billion yen revenue. Decline caused by customer facility maintenance and inventory adjustment.
   • Fine Chemicals Sub-segment: YoY +0.37 billion yen revenue, QoQ -0.13 billion yen revenue. YoY growth driven by recovery of the electronics market; QoQ decline is a pullback from forward deliveries to the third quarter. New product GliCAP is seeing strong adoption led by server board applications, and semiconductor process materials have secured full production adoption with expanding demand. Overall Chemicals: YoY +0.33 billion yen operating profit, QoQ -0.69 billion yen operating profit. YoY growth driven by higher sales share of high-margin fine chemicals.

2. Building Materials Business (total):

   • Full-year 2024 sales: 18.48 billion yen, -0.23 billion yen year-over-year. It accounts for 26.6% of total consolidated revenue. Operating profit: 0.95 billion yen, -0.55 billion yen year-over-year.
   • Q4 performance: YoY -0.03 billion yen revenue, QoQ +0.51 billion yen revenue. YoY decline from weak sales of wall materials and residential exteriors due to sluggish new single-family housing starts; operating profit declined YoY by 0.12 billion yen because high aluminum prices offset the benefit of a higher sales share of high-margin landscape exteriors. QoQ operating profit increased from higher landscape exterior sales.

• 2025 consolidated guidance:

  • Revenue: 70.0 billion yen, +0.7% upward from 2024 actual. Revenue growth is expected from fine chemical expansion in chemicals, and from price hikes and landscape exterior expansion in building materials.
  • Operating profit: 9.4 billion yen, -3.5% downward from 2024 actual. The decline reflects expected lower selling prices and higher fixed costs from new insoluble sulfur plant depreciation in chemicals, offset partially by expected profit growth in building materials from improved profitability after price hikes.
  • Ordinary profit: 9.8 billion yen, -9.1% YoY, reflecting the lap of prior year foreign exchange gains. Net profit: 6.5 billion yen, -26.2% YoY, reflecting the lap of prior year investment securities sale gains.
  • Assumed exchange rates: 150 JPY/USD, 160 JPY/EUR, 21 JPY/CNY.

• Capital expenditure and depreciation:

  • 2025 planned capex: 9.25 billion yen, including 1.851 billion yen in delayed projects from 2024. Major spending: 1.76 billion yen for a new R&D center building, 1.3 billion yen for on-site cogeneration systems, 0.78 billion yen for remaining payments on the completed insoluble sulfur plant. Depreciation will increase by 1.028 billion yen full-year, with 0.5 billion yen of that increase coming from the new insoluble sulfur plant starting depreciation in July 2025.

• Intense global oversupply and competition for insoluble sulfur, with the company operating at tight margins even with current yen benefit against Chinese competitors.
  • For Neochlor in the North American market: demand is sensitive to weather, and market share is vulnerable to changes in anti-dumping tariffs on Chinese products and new entry of Spanish competitors, plus uncertainty from US trade policy changes.
  • Domestic residential construction and residential exteriors market is in long-term decline due to demographics, with no bottom in sight and intense competition keeping profitability low.
  • Building materials international expansion faces uncertainty from differing local building specifications and cultural preferences, requiring product adaptation with uncertain outcomes.
  • Large planned capital expenditure over the next several years will increase depreciation costs, with profit contribution from new capacity not expected until after 2030 for most projects, creating near-term profit pressure.
  • Current growth in fine chemicals relies on rapidly expanding semiconductor and electronics demand, which is cyclical and could see slower growth than expected.

Q: What specific investments is the company planning for fast-growing fine chemical products, particularly for GliCAP? / A: After 5x sales growth for GliCAP, the existing production line at Marugame Factory (shared with Tuface) no longer has sufficient spare capacity, so new capacity investment for GliCAP is now under active review. For semiconductor process materials currently produced at the TAP-4 plant in Tokushima Factory, mass production shipments have started, so planning for a next new production line is also underway. Management notes the company's existing production footprint is insufficient for this projected growth, and site selection for new capacity is now being evaluated.

Q: Building materials is the main source of missed STAGE2 targets; what countermeasures are planned for STAGE3? / A: Over the past year, the company has completed major internal organizational reform for building materials, launching new internal business units and a new dedicated overseas sales department, with overseas sales staff already assigned to target markets and preliminary activities underway. The company is carefully evaluating whether to export standard Japanese products or adapt designs for local market preferences, given differing building standards and cultural norms across countries, to address the long-term stagnation of domestic residential demand. For the declining JULUX plaster interior product line, the company will retain the business out of a mission to preserve traditional Japanese building culture, and is implementing a large price increase to restore profitability, which has so far been accepted by customers.

Q: What is the breakdown of GliCAP's 5x 2024 sales growth, and what is the growth outlook for 2025? / A: 2024 sales growth is led primarily by server board applications, which drive most of the revenue due to higher material usage per board. Semiconductor package substrate adoption is progressing, and while it contributes less to 2024 sales, it will start contributing growing revenue in 2025. The expected 1.5x 2025 sales increase (50% YoY growth) is confirmed, with growth driven by demand for GliCAP's high-frequency flat interface performance that meets server industry requirements.

Q: What is the current market status of residential and landscape exteriors, and what initiatives is the company pursuing? / A: Long-term, residential exteriors are declining with new housing starts already down 50% from peak, and further decline is expected due to demographics. Q4 2024 saw a slight recovery in single-family housing starts, but competition remains intense and profitability is low. For landscape exteriors, the company is expanding beyond large public projects into new areas: it is launching new solar carport products targeting environmental demand, and has developed new parklet products for Japan's walkable city initiatives promoted by the Ministry of Land, Infrastructure, Transport and Tourism, with commercial sales of parklets now starting after development, to drive new growth in the segment.