NIPPON KAYAKU CO.,LTD. Q3 FY2025 earnings call

• Overall 3rd Quarter Results

  • Total cumulative revenue: 168.0 billion yen, 76% progress against November's full-year forecast. Total operating profit: 18.1 billion yen, 94% progress against forecast. All three segments achieved YoY operating profit growth.
  • Non-operating and special items: 2.0 billion yen extraordinary loss for special retirement allowances for Polatechno business restructuring, 1.1 billion yen gain from selling policy-held shares, 2.0 billion yen foreign exchange gain in Q3 leading to a cumulative 1.2 billion yen gain YTD.

• Business Segment Operations

  • Mobility & Imaging: Strong performance in China driven by new energy vehicle subsidies, with strong growth for local Chinese OEM demand offsetting declines from Japanese OEM demand. Domestic Japanese operations are recovering gradually from the OEM certification issue, while ASEAN demand remains weak due to stricter auto loan underwriting. Polatechno saw profit growth from price increases for some products, though it faces weakness in passive polarizer components for older instrument clusters, which are being replaced by TFT displays.
  • Fine Chemicals: Solid growth across segments. Epoxy resin for semiconductor substrates is recovering, with strong demand for AI/high-end server applications. Color materials for both consumer and industrial inkjet are solid; non-phenol thermal developers are growing driven by regulatory shifts away from bisphenol A. Catalyst grew on large customer catalyst replacement cycles.
  • Life Science: Operating profit grew 578% YoY due to the absence of last year's 6.0 billion yen new product launch cost. Biosimilars and the newly launched sunitinib tablet are achieving steady market penetration. API and international business saw temporary shipment delays, which are covered by solid domestic demand.

• Pipeline, Capital and ESG

  • Pharmaceutical development: Phase III enrollment for Buparlisib is complete, with topline data expected in H1 2025. Taletrectinib data has been presented at oncology conferences.
  • Capital allocation and shareholder returns: Full-year dividend planned at 60 yen per share, a 15 yen increase from prior year. 10.0 billion yen in share repurchases have been completed, leading to a 54% payout ratio and 110% total return ratio. The company maintains its strategy of growing ROE toward 8% by limiting net asset growth. Nippon Kayaku was added to the FTSE Blossom Japan Index this term.

1. Mobility & Imaging: Revenue of 69.3 billion yen, accounting for 41.25% of total 3rd quarter cumulative revenue. Segment operating profit is 10.8 billion yen. Of its subsegments, Safety Systems domestic business saw a revenue decline due to slow recovery from the automaker type certification issue, while KSH (China) grew 35.2% YoY. Polatechno achieved revenue growth driven by expanding head-up display (HUD) business, with X-ray components remaining solid. Full-year forecast revenue is 92.0 billion yen (Safety Systems 71.5 billion yen, Polatechno 205 billion yen), with 5 billion yen upward revision for each subsegment. 2. Fine Chemicals: Revenue of 50.5 billion yen, accounting for 30.06% of total 3rd quarter cumulative revenue. Segment operating profit is 8.0 billion yen. All its subsegments grew over 20% YoY: Functional Materials, Color Materials achieved over 20% YoY revenue growth, while Catalyst grew 41.7% YoY to 5.1 billion yen. Full-year forecast revenue is 673 billion yen, with 3 billion yen upward revision for Functional Materials, 11 billion yen for Color Materials, and 5 billion yen for Catalyst. 3. Life Science: Revenue of 48.1 billion yen, accounting for 28.63% of total 3rd quarter cumulative revenue. Segment operating profit is 6.0 billion yen. Pharmaceutical business saw a total 0.6 billion yen revenue decline, with domestic formulation achieving 0.7 billion yen YoY growth while API/CDMO business declined 1.4 billion yen YoY due to cyclical demand fluctuations. Full-year forecast revenue is 643 billion yen, with 0.6 billion yen upward revision for the pharmaceutical subsegment.

• Full-year FY2025 guidance was revised upward across all metrics: total revenue raised by 3.4 billion yen to 223.7 billion yen (+1.5% from prior forecast); operating profit raised by 1.8 billion yen to 21.1 billion yen; ordinary profit raised by 4.0 billion yen to 24.1 billion yen; net income raised by 2.6 billion yen to 17.9 billion yen. An average exchange rate of 1 USD = 153.94 yen is used for the full-year forecast.
• Q4 FY2025 forecasts by segment: Mobility & Imaging expects 22.8 billion yen revenue and 2.4 billion yen operating profit (a decline from Q3 due to the Chinese New Year holiday and front-loaded customer orders in Q3); Fine Chemicals expects 16.8 billion yen revenue and 2.5 billion yen operating profit (a decline from Q3 due to post-restocking demand normalization for consumer inkjet and customer inventory adjustment for epoxy resin); Life Science expects 16.2 billion yen revenue and 0.6 billion yen operating profit (a YoY decline due to delayed R&D expenses shifting to Q4 and pre-price revision purchasing slowdown ahead of the mid-year Japanese drug price revision).
• Long-term guidance: The company is targeting the mid-term management plan operating profit target of 26.5 billion yen in the final year of the plan, and will continue to progress to get as close to this target as possible in the coming fiscal year. HUD business targets annual revenue of several billion yen within the next few years.

• Weak demand outlook: ASEAN auto demand is expected to remain depressed for the foreseeable future due to stricter auto loan underwriting in Thailand; domestic Japanese auto demand is recovering only gradually from the prior OEM certification issue, with lingering effects still pressuring results. Passive polarizer components for older vehicle instrument clusters face ongoing secular decline as they are replaced by TFT displays.
• Trade and tariff risks: For Mexican exports to the US, while short-term impact is limited as most contracts pass tariff costs to customers, long-term there is risk that customers will switch to US-based suppliers due to higher procurement costs. US tariff policies could also create headwinds for sales of American-made MEMS resist into Asian markets, though the impact remains unpriced and is still under review.
• Demand uncertainty: Automotive epoxy resin encapsulant demand recovery depends heavily on overall auto market conditions, with ASEAN recovery expected to take additional time. Growth of maleimide resin for 5G applications has been slower than initially expected, with clearer volume growth not expected for some time. Industrial inkjet for textiles faces a challenging pricing and market environment currently.

Q: What are the key drivers of the full-year operating profit upward revision for Mobility & Imaging and Fine Chemicals? / A: For Mobility & Imaging, the largest driver is stronger-than-expected performance in China, contributing ~0.5 billion yen in increased profit. Polatechno adds another ~0.5 billion yen from sustained price increase effects for projector components and stronger-than-expected growth in HUD business. For Fine Chemicals, the profit increase comes from broad revenue growth driven by strong consumer inkjet demand, strong epoxy resin demand for AI/high-end server substrates, and growing demand for non-phenol thermal developers amid regulatory shifts.

Q: What is the 2025 outlook for Safety Systems across regions, and what is the expected impact of US tariffs on Mexican production? / A: Nippon Kayaku has already achieved significant penetration with Chinese local OEMs, including both new energy vehicle segments like plug-in hybrids. Japanese domestic demand is recovering gradually from the earlier type certification issue, while ASEAN demand is expected to remain slow for the foreseeable future due to tighter lending standards. Short-term tariff impact on Mexican exports to the US is limited, as most contracts pass tariff costs to customers. Long-term, there is risk of customer switching to US-based suppliers, but any transition would take significant time.

Q: Is the view that epoxy resin will hit a plateau in Q4 and grow strongly next year on AI server demand correct? / A: Epoxy resin has recovered from last year's lows, with clear divergence across end markets: demand for AI/high-end server substrates has been growing strongly in volume terms. The Q4 slowdown is only due to customer inventory adjustment, not weakening underlying demand. For next year, substrate demand is expected to remain solid, though the outlook for automotive semiconductor encapsulant epoxy resin remains somewhat uncertain.

Q: When will maleimide resin for 5G markets start growing meaningfully, and what is the outlook for non-phenol thermal developers? / A: Maleimide resin for 5G is growing gradually, but growth has been slower than the company initially expected, and additional time is needed to scale customer adoption. For thermal developers, non-phenol products are growing steadily driven by regulatory trends. Amid pending regulation of BPS, both Nippon Kayaku's non-phenol TG-MD and intermediate phenol-based TG-SH are seeing strong order growth as customers transition away from regulated products.