SANWAYUKA INDUSTRY CORPORATION Q2 FY2026 earnings call

• Core Business Model and Strategic Positioning

  • The company is a specialty chemical recycling manufacturer that separates and refines valuable materials from industrial waste, producing high-quality, high-value-added recycled products to build a circular domestic supply chain. Its unique differentiator is the ability to re-recycle post-consumption waste from its own sales, creating a closed-loop cycle that reduces currency exchange and geopolitical sourcing risks for customers by recycling imported materials multiple times domestically.
  • The company expects accelerating consolidation of domestic ethylene centers through the 2030s, which will reduce availability of domestically sourced chemical inputs that currently rely on Chinese imports, creating growing demand for domestic recycled chemical products. The firm is actively investing to improve its domestic recycling capabilities to address this market need.

• Recent Operational and Strategic Moves

  • Completed full acquisition of A&H Japan, a Osaka-based precious/rare metal recycling firm, on October 1. A&H Japan has annual sales of ~3.97 billion yen, operating profit of 200 million yen, and holds sustainable laser peeling and wet recovery technologies for precious metals that complements Sanwa Yuka's existing organic chemical recycling expertise, filling the gap in the company's inorganic/strategic metal recycling capabilities. The 700 million yen acquisition enables the company to offer a full suite of recycling services for organic chemicals, inorganic chemicals, and strategically critical precious/rare metals to customers in the growing semiconductor and battery industries.
  • Construction of the new Sanwa Material Solutions plant in Kitakyushu is on schedule for a April 2027 launch, focused on material recycling of industrial waste from semiconductor and battery manufacturers in the Kyushu region, with expansion planned into Yamaguchi and Hiroshima prefectures. The project aligns with the timeline of JASM's Phase 2 construction and Toyota Motor's hybrid battery production resumption in the region.
  • A medium-scale test plant is under construction at the company's headquarters factory to accelerate development of new separation technologies and low-CO2 refining processes. An 1.1 billion yen expansion of mixed emulsion fuel production capacity is underway in Aichi prefecture to increase production of coal/heavily oil alternative fuel made from industrial waste for cement and lime producers.
  • The company drove gross margin improvement to 29.6% (+2.1 ppts YoY) via in-sourcing of previously outsourced processing and transportation, plus continuous process improvement initiatives.

• Capital Allocation and Shareholder Return

  • The company maintains a no-dividend-cut basic policy, prioritizing medium/long-term growth investment as a recently listed firm, while balancing returns to shareholders, capital investment, and employee compensation to drive sustainable growth. The company plans to begin disclosing EBITDA alongside results going forward.

1. Reuse Business: Cumulative 2Q sales were lifted by the acquisition of A&H Japan to a full-year forecast of 6.0 billion yen, with 33% full-year progress. The segment grew over 5% year-over-year and over 5% quarter-over-quarter. Solvent-based recycled products saw higher volume and selling price than the prior year, with steady utilization driving margin improvements. Recycled phosphoric acid collection volume decreased slightly year-over-year due to lower semiconductor plant utilization. Revenue contribution share for the combined Reuse/Recycling/Chemicals segments is ~80% of total consolidated revenue. 2. Recycling Business: Grew over 5% year-over-year and over 5% quarter-over-quarter. Demand for waste-derived fuel remains strong, so the company increased waste collection and recycled fuel sales volume. Collection of high-margin difficult-to-process waste returned to growth in the quarter. 3. Chemicals Business: Full-year progress is ~50%, with performance slightly above forecast despite 8.7% QoQ sales decline. Battery industry-bound product selling prices rose, but overall recovery remains slow due to delayed semiconductor and battery industry growth; AI-related semiconductor segments are strong, but automotive/commodity segments remain weak. Binder manufacturing orders came in higher than expected in the first half. 4. Automotive Business: Selling prices rose with raw material costs, but sales volume decreased year-over-year, though overall sales were relatively stable. 5. Engineering Business: Achieved strong double-digit growth both year-over-year and quarter-over-quarter. Large demolition project start was delayed, but the business recovered via securing PCB processing projects. A large confirmed factory decommissioning order from a major chemical manufacturer is expected to be received between Q4 2026 and the next fiscal year. Total 2Q cumulative consolidated sales: 8.287 billion yen (+6.6% YoY), operating profit: 492 million yen (+45.8% YoY).

• Full-year 2026 March Fiscal Year guidance was upwardly revised, driven by the stronger-than-expected first half performance and the addition of A&H Japan. The revised full-year forecast is: 18.7 billion yen in total sales, 1.1 billion yen in operating profit, 1.2 billion yen in ordinary profit, and 830 million yen in net profit. The upward sales revision is almost entirely from the 1.763 billion yen contribution from A&H Japan; one-time M&A costs offset most near-term profit gains from the acquisition, with meaningful profit expansion expected starting in 2027. Reuse segment full-year sales guidance was revised from 2.2 billion yen to 4.021 billion yen, with other segments seeing minor adjustments.
• The 2026-2028 mid-term management plan targets are unchanged: 25 billion yen in full-year sales by 2028 March fiscal year, 1.2 billion yen in operating profit, 4.8%+ operating margin, and 3.2 billion yen in EBITDA. The forecast growth trajectory is 18.7 billion yen (2026), 22.0 billion yen (2027), 25.0 billion yen (2028). The planned 12 billion yen operating profit for 2028 reflects a temporary dip from the step-up in depreciation expenses for the new Kyushu plant starting full operations in 2027, with EBITDA still targeted to grow to 3.2 billion yen from ~2.5 billion yen currently.
• The company plans ~8.0 billion yen in total large-scale investments to deliver Grand Vision 2030, with up to 1.8 billion yen in expected government subsidies to support the investments, which is critical amid rising interest rates. The four core investment projects (Kyushu new plant, A&H Japan acquisition, R&D test facility, Aichi fuel capacity expansion) are on track to drive mid-term growth.

• Unstable U.S. trade policy creates ongoing macro uncertainty, and inflation has pushed up raw material, energy, and labor costs, keeping corporate cost burdens elevated.
• Overall manufacturing sector recovery is weaker than expected, including for the battery and electronics components sectors that the company prioritizes, though these sectors have bottomed and are beginning a gradual recovery. Growth in the battery sector has slowed more than initially forecast, creating near-term uncertainty for the company's battery-related chemical product sales.
• Domestic chemical supply is expected to tighten as ethylene center consolidation accelerates, and reliance on Chinese chemical imports creates business vulnerability from geopolitical and political pressure that could restrict access to imported inputs.
• Geopolitical and currency fluctuations increase sourcing risk for imported precious and rare metals, which are critical inputs for semiconductor and battery manufacturers, increasing demand for domestic recycled supplies.
• Large engineering projects can experience delayed timelines that push revenue recognition into future periods.

Q: What are the specific synergies between A&H Japan and Sanwa Yuka's existing business, and will we see immediate profit impact? / A: The combination pairs A&H Japan's precious/rare metal recycling technology with Sanwa Yuka's existing customer base and trading relationships with large industrial firms. This will allow the company to capture unmet demand for metal recycling services. Additionally, waste from the engineering segment's factory demolition projects contains precious and rare metals that A&H Japan can now recycle sustainably to create new value. The company is accelerating customer development to deliver near-term profit growth.

Q: Why is 2028 March fiscal year operating profit forecast lower than 2027, and is this a temporary decline? / A: The main reason is the new Kyushu plant starting operations in April 2027, which will lead to a large step-up in depreciation expenses starting in 2028. Revenue will ramp up gradually as the plant scales, so initial depreciation costs will outpace early operating profit. The decline is temporary, and investors should focus on the EBITDA target of 3.2 billion yen for 2028, which represents continued strong growth from current levels.

Q: Will the company continue pursuing M&A like the A&H Japan acquisition to support growth? / A: The company is actively exploring growth opportunities aligned with its Grand Vision 2030 strategy, and will continue to pursue attractive M&A deals when the right target and timing align to accelerate growth. It is actively gathering information on potential targets to support this strategy.

Q: How much sales growth do you expect from the new Kyushu subsidiary long-term? / A: The company does not provide a specific long-term target at this stage. Kyushu is seeing growing investment in semiconductor and automotive battery manufacturing, and customers are requesting sustainably sourced recycled materials to support their global competitiveness. The company will continue investing in the new subsidiary as needed to meet customer demand for recycled materials and horizontal recycling services, and expects the operation to become a core growth driver for Grand Vision 2030.