NIPPON KAYAKU CO.,LTD. Q1 FY2026 earnings call

• Leadership & Mid-term Planning

  • Newly appointed President Shigeyuki Kawarma confirmed this fiscal year is the final year of the mid-term business plan KAYAKU Vision 2025 (KV25). Management will focus on completing KV25 while developing a new long-term vision for 2026 and beyond that delivers value to employees and stakeholders.

• Operational Updates

  • Mobility & Imaging: The impact of Japan's prior type certification irregularity has been fully resolved, with domestic operations returning to growth. China continues to gain new vehicle model contracts and deliver volume growth, while North American operations remain weak. Head-up display light shields are steadily increasing adoption, targeting 15% annual growth.
  • Fine Chemicals: Non-phenolic thermal developers are outperforming phenolic variants, with both categories seeing strong demand in Q1. Some U.S. customers pulled forward purchases in Q1 to avoid upcoming tariffs, creating a temporary headwind for Q2.
  • Life Science: Biosimilar Bevacizumab BS grew market share from 28% to 32% (taking top share in the Japanese biosimilar market), and Adalimumab BS grew share from 11% to 13%. Generic cancer drug Lenalidomide launched in June. Flometoquin insecticide is making progress on overseas regulatory approvals.
  • Pharmaceutical Pipeline: New drug candidate Taletrectinib for ROS1 fusion-positive non-small cell lung cancer has received Japanese manufacturing approval application, designated as an orphan drug and eligible for priority review, targeting approval and launch by end of calendar 2025. Portrazza initiated clinical trials for expanded indication in EGFR-amplified unresectable advanced/recurrent esophageal and gastric cancer, with first patient enrollment completed for the esophageal cohort. Alaglio is conducting a pilot study with SBI Pharma for ovarian cancer tumor visualization during surgery.

• Capital & Shareholder Return

  • Full-year capital expenditure is planned at 31.6 billion yen, 5.0 billion yen higher YoY, with the majority of the increase allocated to Mobility & Imaging manufacturing capacity expansion in China and Malaysia. Depreciation expense is projected at 16.9 billion yen, 3.0 billion yen higher YoY from completed priority investments under KV25. Nippon Kayaku maintains a target payout ratio of 40%+ and a 100%+ total payout ratio until ROE reaches 8%. This fiscal year plans 17 billion yen in share repurchases (15 billion yen planned next fiscal year for a two-year total of 32 billion yen), with repurchased shares to be cancelled. Full-year dividend is planned at 60 yen per share, resulting in a projected 155% total payout ratio and 52.8% payout ratio. Nippon Kayaku was recently added to the Nikkei Progressive High Dividend Stock Index's 30 constituents.

• Sustainability

  • Nippon Kayaku was re-selected as a constituent for all 6 investment indices adopted by GPIF (Japan's Government Pension Investment Fund). The company's sustainability website was updated in July 2025 to improve transparency of ESG disclosures.

1. Mobility & Imaging Segment: Revenue of 22.4 billion yen, 0.5 billion yen decrease year-over-year (YoY), accounting for 40.9% of total company revenue. Segment operating profit of 2.4 billion yen, 1.4 billion yen decrease YoY. Progress against full-year profit forecast is 44%. Sub-segment performance: - Safety Systems: Revenue 17.9 billion yen, 0.3 billion yen increase YoY. KSH (China) revenue 4.5 billion yen, 0.7 billion yen increase YoY on sustained volume growth; KSM (Mexico) revenue 2.6 billion yen, 0.4 billion yen decrease YoY due to US import tariffs and new inflator project launch delays. - Polatechno: Revenue 4.5 billion yen, 0.8 billion yen decrease YoY due to liquid crystal projector component product discontinuation and market downturn.

2. Fine Chemicals Segment: Revenue of 16.7 billion yen, 0.5 billion yen increase YoY, accounting for 30.5% of total company revenue. Segment operating profit of 2.5 billion yen, 0.1 billion yen increase YoY. Progress against full-year profit forecast is 52%. Sub-segment performance: - Functional Materials: Revenue 9.0 billion yen, 0.6 billion yen increase YoY supported by growing semiconductor demand for AI and high-end servers. - Pigment Materials: Revenue 7.5 billion yen, 0.9 billion yen increase YoY on strong performance of industrial/consumer inkjet pigments and thermal developers. - Catalysts: Revenue 0.2 billion yen, 1.0 billion yen decrease YoY due to timing of customer catalyst replacement cycles.

3. Life Science Segment: Revenue of 15.7 billion yen, 1.1 billion yen increase YoY, accounting for 28.6% of total company revenue. Segment operating profit of 1.9 billion yen, 0.2 billion yen increase YoY. Progress against full-year profit forecast is 43%. Sub-segment performance: - Pharmaceutical: Revenue 13.3 billion yen, 0.8 billion yen increase YoY, with volume growth offsetting the impact of annual Japanese drug price revisions. - Agro: Revenue 1.9 billion yen, 0.3 billion yen increase YoY on expanding overseas registration for new products.

• Half-year full company performance is projected to remain on track with original plan.
• Q2 2026 fiscal guidance: Mobility & Imaging segment projected revenue 22.9 billion yen, segment operating profit 3.0 billion yen (600 million yen increase QoQ), with full price pass-through for raw material cost inflation planned to be completed in Q2. Fine Chemicals segment projected Q2 revenue 16.3 billion yen flat YoY, segment operating profit 2.3 billion yen; the impact of U.S. customer forward buying will not resolve until Q3 2026, and catalyst business revenue will recover in the second half of the fiscal year. Life Science segment projected Q2 segment operating profit 2.5 billion yen, supported by sales growth and licensing revenue.
• Catalyst business full-year revenue is projected to meet original plan, exceeding 10 billion yen, with quarterly volatility considered normal for the industry.
• Consumer inkjet pigment full-year demand is projected to meet original plan, with no larger-than-expected decline from paperless trends; temporary Q2 demand adjustment from forward buying is expected, with demand returning to projected levels by the second half of the year.
• The new mid-term business plan for 2026 and beyond will be disclosed between the end of this fiscal year and the start of next fiscal year.

• Raw material cost inflation: Prices for gold and explosive raw materials used in safety systems remain elevated, with price pass-through still ongoing as of Q1, partially pressuring near-term margins.
• Foreign exchange: Adverse foreign exchange movements reduced Q1 operating profit by 300 million yen, with total Q1 revenue impact of 1.6 billion yen.
• Higher fixed costs: Capacity expansion investments in China and Malaysia have increased labor and other fixed costs, pressuring near-term profitability in the Mobility & Imaging segment.
• U.S. import tariff impacts: Reduced production volumes at KSM (Mexico) and customer forward buying of pigment materials in Q1 created temporary adverse impacts on Q1 and projected Q2 performance.

Q: What explains the nearly doubling of capital expenditure in the Mobility & Imaging segment this year, and what is the breakdown of this investment? / A: The increase is almost entirely from investment in the Safety Systems sub-segment. Key projects include expansion of cylinder inflator and GTMS squib lines at KMY (Malaysia), and a new cylinder inflator line at KSH (China) scheduled to enter operation within this fiscal year. Investment in Malaysia represents the largest portion of this year's segment capital expenditure. The 2.1 billion yen investment in a new squib line at KSH (China) also includes supporting infrastructure (new building, explosive processing equipment), which explains the large total outlay. Investment is focused on enabling local production for local demand, completing the manufacturing supply chain within China.

Q: What are the primary drivers of the 1.4 billion yen YoY decline in Mobility & Imaging segment operating profit? / A: Sales volumes increased overall, and the marginal profit from volume growth offset the 700 million yen impact of raw material cost inflation exactly. The largest drag is 700 million yen in total higher fixed costs from recent capacity expansion, of which 400 million yen is higher labor costs for new lines in China and Malaysia. Additional factors include a 200 million yen negative comparison from unusually high Polatechno X-ray business demand in last year's Q1, plus discontinuation of projector-related products. Management is continuing to advance price pass-through for raw material cost increases, which will be reflected in earnings starting in Q2.

Q: What is the expected change in inter-site cross-shipment after KSH (China) and KMY (Malaysia) complete their local squib production capacity? / A: Cross-shipment between sites will not fall to zero, but it will decline materially as both locations gain complete local manufacturing capability, reducing logistics and exposure to cross-border supply chain disruptions.

Q: What areas will Nippon Kayaku prioritize for capital investment after 2026, when the KV25 mid-term plan concludes? / A: Future investment will focus on new product development that leverages Nippon Kayaku's existing core technologies across business segments, particularly products that support ESG goals and improve employee engagement. Specific plans will be formally announced after finalization, which is expected between the end of this fiscal year and early next fiscal year. Development investment and corporate reform will be the main focus areas for future spending.