NIPPON SHOKUBAI CO.,LTD. Q3 FY2026 earnings call

• Previous Mid-Term Plan (FY2022-FY2024) Review
  • Targeted three transformations: expand Solutions business, strengthen Materials business, advance sustainability and organizational changes. Environmental and organizational transformations progressed mostly on plan, but business transformation failed to deliver profit growth.
  • Major underperformance was caused by slowing global demand, customer development delays, and delayed construction of new supply chains, leading to a 39% miss on the overall operating profit target.
• New Mid-Term Plan (FY2025-FY2027) Strategic Direction
  • Positioned as a 'Transformation Acceleration' stage, maintaining core strategic direction while deepening selection and concentration to accelerate portfolio shift toward the Solutions business.
  • Narrowed the Solutions business from 10 prior focus areas to 4 high-potential growth segments: Specialty, Electronics, Construction, and Energy (Batteries), allocating 75% of total Solutions business investment (total 90 billion yen planned for Solutions) to these 4 areas.
• Key Segment Operational Strategies
  • Specialty: Grow short-term in water treatment agents, medium/long-term in CO2 absorbents, leveraging the segment's low competition and diverse application profile to address social challenges.
  • Electronics: Grow niche-top products centered on optical control technology and fine particle materials, expand Acryvia sales for large displays in China, and develop new products for next-generation displays and semiconductors.
  • Construction: Expand product lineups including through the acquisition of I-Tec Co., Ltd., expand downstream products, and grow in high-growth regions while supporting carbon neutrality goals.
  • Energy (Batteries): Expand Ionel lithium-ion battery electrolyte production capacity across China, Japan (new Kitakyushu plant starting commercial operation in 2028), and North America, implementing a local-for-local production strategy and low-cost manufacturing to drive profit growth.
  • Healthcare/Medical: Expand capacity for the middle-molecular API CDMO business, strengthen supply chains, and grow both exploratory and GMP-grade contracted orders.
  • Core Materials (AA and SAP): Strengthen sales in growth markets, optimize production via plant consolidation/scrap-and-build, expand sales in Global South, and develop bio-based AA and sustainable SAP to compete with low-cost Chinese suppliers.
• Enabling Strategies
  • Sustainability: Maintain the 2030 target of 30% GHG emission reduction, target 55 billion yen in environmental contribution product sales by FY2027.
  • Human Capital Strategy: Shift from general employee engagement building to targeted development of personnel aligned with strategic priorities, implementing data-driven talent matching and new talent management systems.
  • Digital Transformation: Advance smart factory initiatives at the Himeji plant to cut labor and maintenance costs, and accelerate product development via AI-driven smart labs.
• Capital Allocation & Balance Sheet Management
  • Planned total investment of 155 billion yen over the 3-year plan, 60% allocated to growth investments including capacity expansion and M&A.
  • Investment and shareholder returns are funded by operating cash flow, new borrowing, and proceeds from selling policy-held stocks.
  • Target a shareholders' equity ratio of close to 60% to reduce weighted average cost of capital (WACC), and monitor ROIC by business segment to optimize assets.

For fiscal 2024 (FY2024), the company reported an estimated operating profit of 20 billion yen, significantly missing the target of 33 billion yen, driven primarily by underperformance of the Solutions business. For the new mid-term plan covering FY2025-FY2027 ending FY2027:

• Materials (Mateerials) business: Target profit is 16 billion yen, which is approximately the same level as the elevated yen-influenced FY2024 result. It accounts for ~45.7% of total planned profit.
• Solutions business: Target profit is 18.5 billion yen, representing a 13 billion yen increase from FY2024. It accounts for ~52.9% of total planned profit, making it the majority contributor to group profit.

• Long-term (FY2030) guidance targets total profit (operating profit + equity method investment gain/loss) of 60 billion yen and ROE of 9% or higher.
• FY2027 (end of new mid-term plan) guidance targets total profit (operating profit + equity method investment gain/loss) of 35 billion yen, with 18.5 billion yen from the Solutions business and 16 billion yen from the Materials business. Additional targets include ROE of 7% or higher and ROIC of 6% or higher, newly added as a performance metric.
• The new plan expects over 50% of group profit to come from the Solutions business by FY2027, completing a major shift in the company's business portfolio.
• Environmental contribution product sales are guided to 55 billion yen by FY2027.
• Shareholder return guidance maintains the existing policy through FY2027: 100% payout ratio for net income or 2% or higher DOE, whichever is higher, with continued treasury stock purchases. A total of 70 billion yen in shareholder returns is planned over the 3-year period.

• Commoditization of battery materials and intensifying competition from Chinese manufacturers, including potential below-cost pricing from competitors.
• Uncertainty over global economic conditions, particularly the impact of US-China reciprocal tariffs on Materials business product demand, especially acrylic esters for automotive and construction applications.
• Potential slowdown in EV demand that could push out capacity utilization timelines for new battery material production facilities.
• Persistent oversupply and pricing pressure in core commodity material markets (acrylic acid, ethylene oxide) driven by capacity expansion from Chinese manufacturers.
• Slowdown in large display panel capacity expansion that could limit growth for the company's electronics material products.

Q: The new plan narrows the Solutions business to 4 growth areas from 10. How is the outlook different from the previous plan, and why is growth more certain this time? / A: In the last mid-term plan, the company spread resources across 10 areas and tried to grow within existing capacity, which proved difficult. Now the company has narrowed to 4 areas with clear growth potential and is committing dedicated additional resources to these segments. Product development has progressed over the past 3 years, and the company now has clear visibility that customers will adopt its products, giving higher confidence in growth targets.

Q: With commoditization progressing in battery materials, what risks do you face with large battery investments, and is profitability secure? / A: The company already faces unmet demand for its battery electrolyte in China, so capacity expansion is needed to meet existing customer inquiries. The company has a differentiated low-cost manufacturing process that allows it to maintain profitability even if commoditization drives down market prices. Management has fully factored in coming competition and price declines into the plan, and expects to generate consistent profits while competitors may operate at a loss.

Q: Could the 100% payout ratio policy lead to a dividend cut if profits decline temporarily, and will the policy change after FY2027? / A: A temporary dividend cut cannot be completely ruled out if profits drop, as payout is tied to annual net income. However, the company's core strategy is to grow profits through the mid-term plan, and expects to deliver a higher total dividend by the end of FY2027 regardless of short-term fluctuations. The current policy of 100% payout or 2% DOE (whichever is higher) will remain in place through FY2027 as previously announced.

Q: The Materials business profit target is flat between FY2024 and FY2027. Is this business really stabilizing and improving profitability? / A: The flat headline number masks underlying improvement: FY2024 profit was inflated by temporary yen weakness, and FY2027 includes new depreciation costs from the upcoming Indonesia SAP plant that will not run at full capacity in its first year of operation. The company is restructuring production by closing high-cost old plants and shifting output to more competitive new facilities, while shifting the product portfolio toward higher-value SAP grades, so underlying profitability is actually increasing.