SANWAYUKA INDUSTRY CORPORATION Q4 FY2025 earnings call

Overall Business Performance

• Despite the weak operating environment: sluggish demand for high-purity chemicals from delayed semiconductor recovery and slowing EV growth, plus rising costs from inflation-driven raw material, energy, and labor price hikes, the company offset weakness in the chemicals business by focusing on its competitive Reuse and Recycling businesses, achieving higher revenue with lower profit for the full year.
• Planned investments for future demand growth, including capital expenditures and talent recruitment, were implemented on schedule. Excluding one-time 127 million yen in retirement benefit costs from accounting standard changes, core operating profit was 963 million yen, and profitability improved sequentially in Q3 and Q4, indicating recovering earning power.

Industry-Specific Growth Strategies

• Semiconductor Industry Strategy: Target medium-term growth by offering end-to-end services from fine chemical manufacturing/sales to post-use chemical recycling. Key strengths include being Japan's only chemical recycling manufacturer, ability to propose optimal waste regeneration methods, and strict quality control that meets the industry's high standards. The company is currently discussing horizontal recycling with semiconductor manufacturers (a high-barrier opportunity) and is preparing capacity to meet expected demand growth as automotive sector recovery increases waste solvent generation.
• Battery Industry Strategy: Target long-term growth by offering comprehensive services to lithium-ion battery makers, with strengths in high-quality product delivery, stable global procurement routes, and strong partnerships built via joint development with automakers. The company is currently expanding beyond China to serve new Japanese and North American battery clients, and is working to diversify supply sources to enable stable domestic battery production in Japan from pricing, supply security, and sustainability perspectives.
• Electronic Components Industry Strategy: Address medium-term growth demand for automotive-focused electronic components by leveraging alliances with local recycling firms to meet regional recycling needs and reduce transportation-related emissions. The company already has operational capacity in place and is waiting for demand to recover for automotive MLCC and aluminum electrolytic capacitor products.
• Fine Chemical Procurement & Supply Strategy: Respond to reduced domestic fine chemical supply from ongoing Japanese ethylene plant consolidation by partnering with major manufacturers to source chemicals from multiple global routes (including China and non-China markets). The company holds existing storage tank infrastructure in coastal regions, and expects growing demand for its quality management and purification services, since imported fine chemicals require domestic quality adjustment before use.
• Engineering Business Strategy: Capture growing demand for chemical plant decommissioning driven by ethylene plant consolidation and aging infrastructure. Key strengths include ability to act as prime contractor for full projects (with specific construction business licensing), existing relationships with chemical clients, and in-house qualified staff. The company will partner with external demolition firms as needed, and project decommissioning will also generate additional raw material feedstock for its Reuse and Recycling businesses.

Mid-Term Management Plan (FY2026 - FY2028 March Term)

• The 3-year plan is a foundation-building phase toward the Grand Vision 2030 target of becoming an environmental leading company. The plan targets 21 billion yen in total revenue and 3.8 billion yen in EBITDA by FY2028.
• The company plans approximately 8 billion yen in total capital expenditure to build a new plant in Kitakyushu, with a maximum 2 billion yen in government subsidies, and 4 billion yen (65% of the net 6 billion yen project cost) contributed by Sanwa. Construction will break ground in July 2025, and the new plant will enable local regional recycling for Kyushu-area semiconductor waste solvents, support BCP for resource supply, reduce production costs, and cut CO2 emissions.
• The new subsidiary Sanwa Material Solutions will operate the Kitakyushu plant, focusing on recycling for semiconductor, chemical, and electronic component clients, with non-recyclable material used as fuel for local cement production.
• Cash allocation during the mid-term plan will prioritize capital investment for Kyushu plant phases, human capital and intellectual capital development, with M&A and capital alliance opportunities also under consideration.

Total company revenue for FY2025 March Term was 16.04 billion yen, a 2.6% increase year-over-year. The three core segments (Reuse, Recycling, Chemicals) account for 80% of total revenue.

1. Reuse Business: Grew strongly in FY2025, with both sales volume and unit prices of solvent-based recycled products increasing year-over-year. The circular economy model of collecting used organic solvents, refining, and reselling performed well, delivering revenue growth.
2. Recycling Business: Demand for waste-derived fuel remained strong, and recycled fuel sales volume increased. However, collection volumes of high-fee hard-to-treat waste decreased due to low client operating rates, leading to a slight revenue decline.
3. Chemicals Business: Revenue decreased amid continued demand slowdown. High-purity fine chemical demand remained sluggish due to delayed recovery in the semiconductor industry and slowing growth in the EV battery industry, with Chinese-bound binder sales continuing to underperform.
4. Automotive Business: Sales volume decreased slightly due to raw material price-driven price increases and production cuts from automotive industry scandals, but overall sales remained steady.
5. Engineering Business: Small revenue base, with 4.03 billion yen in revenue for FY2025 March Term.

• FY2026 March Term Guidance: The company projects 6.0% year-over-year revenue growth to 17 billion yen, and 19.6% operating profit growth to 1 billion yen, with a conservative forecast amid high uncertainty from factors like US tariff policy. Net income attributable to the parent company is forecast at 740 million yen.
• Segment-level forecasts: Reuse business growth is expected from increasing automotive battery solvent regeneration as new auto plants come online; Recycling business will strengthen sales efforts to increase waste collection for fuel supply; Chemicals business is expected to return to year-over-year growth as new automotive battery binder supply ramps up; Engineering business expects 25.9% year-over-year revenue growth to 4.52 billion yen, driven by a large already secured mid-sized chemical plant demolition project.
• Mid-term plan targets are maintained, with a 2031 March Term target of 35 billion yen in revenue and 4.2 billion yen in operating profit, and a target ROE of 8%. The full-year dividend was raised from the original 40 yen per share to 43 yen, with a 31.4% payout ratio.
• The start of construction spending for the Kitakyushu new plant was pushed back from FY2025 March Term to FY2026 March Term.

• Near-term demand weakness: Near-term demand for semiconductor, electric battery, and automotive electronic components remains sluggish, with continued uncertainty over industry recovery timing.
• Supply chain risk: Reduced domestic chemical output from Japanese ethylene plant consolidation increases reliance on imported raw materials, which creates exposure to foreign exchange volatility and geopolitical risks.
• Investment lag impact: Current large-scale investments for future growth are expected to pressure ROIC through the early 2030s, as capacity will come online ahead of projected demand growth.
• Horizontal recycling barriers: Horizontal recycling of chemicals back into semiconductor and battery manufacturing faces high quality hurdles that may delay commercialization.

Q: What drove the shift from a downward earnings revision to an upward revision for the full fiscal year? / A: Weak demand in early 2025 (Jan-Feb) caused a sequential sales decline from the prior quarter, but successful margin protection and cost compression allowed the company to maintain solid profitability. Stronger-than-expected performance from Reuse and Recycling businesses offset the continued weakness in chemicals, leading to the upward revision from earlier lower guidance.

Q: What is the growth outlook for the Engineering business over the medium term? / A: Growing industry consolidation and aging infrastructure will drive increasing demand for chemical plant decommissioning in Japan through 2050. The company already secured a large demolition project in Kansai for FY2026, and has built out competitive advantages including prime contractor licensing, existing client relationships, and in-house expertise to capture growing demand, which will also feed additional raw material to the company's Reuse business.

Q: What is the total construction budget for the new Kitakyushu plant, and what is the company's funding plan? / A: The total project cost is approximately 8 billion yen, with up to 2 billion yen in Japanese government environmental subsidies bringing the net cost to 6 billion yen. Sanwa will contribute 4 billion yen (65% of the net cost), with land and funding already fully prepared. The project will break ground in July 2025, with construction taking approximately two years.

Q: When does management expect industry and earnings recovery to occur? / A: Medium-term growth for semiconductor, battery, and electronic components is certain, but near-term demand remains soft. The company expects gradual recovery as new automotive and EV plants ramp up production, but is maintaining a conservative forecast and will adjust investment and capacity expansion in line with actual demand growth, with preparation done in advance to capture demand when it rebounds.