NIPPON SHOKUBAI CO.,LTD. Q4 FY2025 earnings call

• Overall 2024 Fiscal Year Result: The company achieved year-over-year revenue and profit growth, with both ROE and ROA rising to the 4% range. Growth was driven by higher sales volumes of solutions products, AA, and AES, plus improved equity method investment returns.
• Business Segment Restructuring: Starting FY2025, the company updated its business segment reporting structure. The Materials Segment remains split into AA/SAP and EO Other; the Solutions Segment is now split into three sub-segments: Specialty, Electronics, and Other. The Other sub-segment includes construction, energy, and new business lines, which will be split into independent segments if they grow large enough. Going forward, the company will disclose revenue and profit for all five business segments separately.
• New Mid-Term Management Plan (FY2025-FY2027): The core strategic goal is to transform the company's business portfolio by aggressively allocating resources to the Solutions Segment. Total planned investment in the mid-term period is double the level of the prior mid-term plan. The target is for Solutions to generate over half of total company profit by FY2027.
• Solutions Segment Growth Strategy:
  • Specialty: Expand sales of amine products for water treatment and CO2 absorbents, and strengthen production capacity for core product lines.
  • Electronics: Expand sales of high-definition LCD products including Acryvure optical film resin and fine particles, increase market share in China, and expand fine particle production capacity.
  • Other sub-segment: Expand the product lineup via the E-Tech acquisition and pursue growth in emerging regions; grow equity method returns for lithium-ion battery electrolyte Ionel in China; target profitability for the health/medical business by FY2027 via expanded supply capacity and increased contracted projects.
• Materials Segment Strengthening:
  • AA/SAP: Establish an optimal 5-location global production and shipping system, improve productivity via scrap-and-build, and strengthen sales to high-growth emerging markets. The company is building a new 50,000 ton-per-year SAP plant in Indonesia, scheduled to start commercial operation in July 2027, and will decommission inefficient older plants in Japan as needed.
  • EO: Expand derivative product lines and contracted production, improve profitability via better shipping operations and advanced productivity controls.
• Global Supply and Demand Outlook: AA global demand is projected to grow 3% annually, reaching ~7.8 million tons in FY2025; the supply-demand balance is expected to bottom out around 2027. SAP global demand is also projected to grow 3% annually, reaching ~3 million tons, and its supply-demand balance is expected to bottom out in FY2025 and improve earlier than AA due to fewer planned capacity increases industry-wide.
• Shareholder Return Policy: Through FY2027, the company targets a 60% equity ratio, and will pay dividends equal to the higher of 100% payout ratio or 2% DOE. The company also plans to repurchase 20.0 billion yen of own shares over the 4-year period.

FY2024 (fiscal year ending March 2025) actual results:

1. Materials Segment: Revenue of 294.1 billion yen (71.8% of total company revenue), operating profit of 12.9 billion yen. This represents a 10.3 billion yen year-over-year revenue increase and a 0.2 billion yen year-over-year profit increase, driven by higher sales volumes of Acrylic Acid (AA) and Super Absorbent Polymer (SAP) and higher basic materials unit prices, partially offset by spread contraction from the expiration of prior year raw material price timing benefits.
2. Solutions Segment: Revenue of 115.3 billion yen (28.2% of total company revenue), operating profit of 5.1 billion yen. This represents a 7.1 billion yen year-over-year revenue increase and a 2.4 billion yen year-over-year profit increase, driven by higher volumes and wider spreads from specialty chemical price increases and yen depreciation, with strong demand growth for polyethyleneimine and recovering display-related material demand. Total company FY2024 actual revenue is 409.3 billion yen, with total operating profit of 19.1 billion yen.

FY2025 (fiscal year ending March 2026) forecast:

1. Materials Segment: Revenue of 279.0 billion yen, operating profit plus equity method investment gain/loss of 12.4 billion yen. This represents a 15.1 billion yen year-over-year revenue decrease and a 3.5 billion yen year-over-year profit decrease, with higher sales volumes of SAP in emerging markets offset by yen appreciation, weak global market conditions, higher SG&A, and lower equity method investment gains.
2. Solutions Segment: Revenue of 126.0 billion yen, operating profit plus equity method investment gain/loss of 6.2 billion yen. This represents a 10.7 billion yen year-over-year revenue increase and a 0.1 billion yen year-over-year profit increase, with higher sales volumes and wider spreads from expanded display material sales and the E-Tech acquisition offset by higher R&D SG&A and lower inventory valuation gains.

• FY2025 full-year company guidance: Revenue of 405.0 billion yen (down 4.3 billion yen year-over-year), operating profit of 17.0 billion yen (down 2.1 billion yen year-over-year), operating profit plus equity method investment gain/loss of 19.3 billion yen (down 3.8 billion yen year-over-year). The forecast incorporates expected higher inflation-driven SG&A, yen appreciation-driven spread contraction, and negative demand impacts from US tariffs, even as it projects higher sales volumes across all segments.
• FY2025 profitability outlook: ROE is forecast at 4%, with ROA and ROIC both forecast in the 3% range.
• Mid-term FY2027 target: Total company operating profit plus equity method investment gain/loss is targeted at 35.0 billion yen. The Materials Segment target is 16.0 billion yen (flat against FY2024 actual results), and the Solutions Segment target is 18.5 billion yen (triple FY2024 actual results).
• 2024 full-year dividend: A year-end dividend of 60 yen per share is planned, bringing full-year dividend to 114 yen per share, a large increase from prior year and a 6 yen increase from the November 2024 forecast. For FY2025, full-year dividend is planned at 100 yen per share, in line with the 100% payout ratio policy. A 5.0 billion yen share repurchase is being planned for FY2025, which would bring total payout ratio to 130%.

• Yen appreciation reduces profit for the Solutions Segment, which generates a large share of revenue from overseas sales, and also compresses spreads for the Materials Segment.
• Inflation drives higher SG&A, logistics costs, and raw material processing costs, which pressure profit margins even as sales volumes grow.
• US import tariffs are expected to reduce demand for the company's AA and SAP products, and the overall macro impact of tariffs remains highly uncertain.
• Weak global market conditions for AA, SAP, and EO derivatives are expected to continue through FY2025, keeping spread pressure high.
• New capacity additions for AA are scheduled to come online in 2025 and 2026, which will keep the global AA supply-demand balance soft through the mid-2020s.
• MMA joint venture profitability is highly cyclical; after a strong first half of 2024, the business has slowed, which reduces equity method investment gains and directly impacts net income available for dividends.
• Intense price competition for commodity SAP in emerging markets could pressure margins if the company is pulled into competitive pricing.

Q: The Solutions Segment saw strong profit growth in Q4 FY2024, but the FY2025 forecast calls for flat profit year-over-year. Is this due to upfront investment costs, and what is driving the growth trend? / A: The main driver of Q4 growth was the Electronics segment, led by strong growth in Acryvure and fine particles, and this growth momentum continues into FY2025. While volumes are growing steadily in both Electronics and Specialty, the overall flat profit is due to higher R&D spending for new health, medical, and battery-related new businesses, plus negative currency impacts from yen appreciation for large overseas sales volumes. Sales growth remains on track regardless of the flat profit outlook.

Q: For 2025, Electronics segment sales are projected to rise 23 billion yen from H1 to H2, but total Solutions segment profit is only projected to rise 5 billion yen. What explains this disconnect, and what is driving H2 growth? / A: H2 growth reflects the expected adoption of higher-margin high-function display materials starting in the second half of FY2025, with Acryvure and fine particles expected to accelerate from H2 through FY2026 and FY2027. The limited overall profit growth is again due to higher SG&A from increased R&D investment across the Solutions Segment; underlying growth in high-margin product lines remains strong.

Q: What is behind the projected improvement in SAP profit in FY2025, given weak expected capacity utilization and price pressure? Is the high growth in emerging market diapers a challenge to product mix? / A: The 2025 improvement is relative to the very weak H2 FY2024 result, driven by higher overall sales volumes and a shift to higher-margin product mix. The company is intentionally focusing on higher-function SAP for premium diaper, feminine care, and industrial applications rather than chasing low-margin commodity SAP volume in competitive emerging markets, so it avoids direct price competition. Most annual contracts are priced on a raw material formula basis, so higher input costs are passed through to customers.

Q: How do US tariffs impact AA and SAP demand projections, and what is your outlook for SAP market growth? / A: The 3% annual global demand growth projection for AA has not been adjusted for reciprocal tariffs, but the company has already incorporated negative tariff impacts to its own profit forecast. For SAP, the company projects 2025 growth in the mid-to-high 2% range, and the company has consistently outgrown the global market, justifying its planned 50,000 ton capacity increase in Indonesia.