NIPPON KAYAKU CO.,LTD. Q2 FY2026 earnings call

• Overall H1 Financial Performance: Total H1 revenue was 113.6 billion yen (4.1% YoY increase, 4.5 billion yen growth). Operating profit was 10.6 billion yen (500 million yen YoY decrease), while parent net profit hit 11.7 billion yen (5.7 billion yen YoY increase) driven by a 6.2 billion yen gain from investment securities sales. Gross margin declined to 29.8% from 31.9% YoY due to higher raw material costs and negative pricing impacts from annual drug price revisions.

All three business segments achieved year-over-year revenue growth in the first half:

1. Mobility & Imaging: Revenue of 46.3 billion yen (0.3 billion yen increase YoY), accounting for 40.8% of total H1 revenue. Segment operating profit of 5.2 billion yen (1.8 billion yen decrease YoY). Within the segment: Safety Systems revenue was 37.4 billion yen (2.1 billion yen increase YoY), with Chinese subsidiary KSH growing 1.9 billion yen YoY to 10.2 billion yen while Mexican subsidiary KSM declined 0.6 billion yen YoY to 5.0 billion yen due to US auto production cuts; Polatechno revenue was 8.8 billion yen (1.8 billion yen decrease YoY). Full-year forecast: Mobility & Imaging expects Safety Systems revenue of 77.6 billion yen (6.4 billion yen increase YoY) and Polatechno revenue of 18.6 billion yen (1.6 billion yen decrease YoY).
2. Fine Chemicals: Revenue of 34.2 billion yen (1.6 billion yen increase YoY), accounting for 30.1% of total H1 revenue. Segment operating profit of 5.0 billion yen (0.1 billion yen increase YoY). Within the segment: Functional Materials revenue was 18.5 billion yen (1.3 billion yen increase YoY), Dye Materials revenue was flat at 13.0 billion yen, and Catalyst revenue was 2.8 billion yen (0.3 billion yen increase YoY). Full-year forecast: Fine Chemicals expects Functional Materials revenue of 36.3 billion yen (3.1 billion yen increase YoY), Dye Materials revenue of 24.1 billion yen (1.2 billion yen decrease YoY), and Catalyst revenue of 12.0 billion yen (4.3 billion yen increase YoY, with almost all growth concentrated in H2).
3. Life Sciences: Revenue of 33.1 billion yen (2.6 billion yen increase YoY), accounting for 29.1% of total H1 revenue. Segment operating profit of 5.3 billion yen (1.7 billion yen increase YoY). Within the segment: Pharmaceutical revenue was 28.2 billion yen (2.6 billion yen increase YoY), with biosimilars driving strong growth. Full-year forecast: Life Sciences expects Pharmaceutical revenue of 59.7 billion yen (6.2 billion yen increase YoY) and Agro revenue of 9.6 billion yen (0.1 billion yen increase YoY).

• Full-year 2025 guidance has been upward revised from initial estimates: total revenue is now projected at 239.8 billion yen (17.2 billion yen YoY increase), operating profit at 21.3 billion yen (0.9 billion yen YoY increase), and parent net profit at 20.4 billion yen (2.9 billion yen YoY increase). All segments are expected to achieve full-year revenue growth.
• R&D expenditure guidance was revised down to 13.7 billion yen from 16.4 billion yen due to changed cost burdens from pharmaceutical license agreement renegotiations. Capital expenditure guidance was revised down to 24.0 billion yen (7.6 billion yen lower than initial plan) due to project scope adjustments and carry-overs for automotive safety component investments, primarily in the Safety Systems business.
• The new 10-year long-term strategic plan Evolution 2035 (2026-2035) is structured into three 3-year phases. Phase I (2026-2028) targets achieving ROE of 8% as early as possible, then reaching double-digit ROE, with a target of 10%+ ROE by Phase II ahead of 2035.
• The plan organizes business around three focus themes: 1) Safety: Maintain and grow automotive safety device share, expand into aerial mobility (drones, eVTOL) safety and new high-efficacy pharmaceuticals; 2) Prosperity: Develop new semiconductor materials, carbon-neutral catalysts, and hydrogen society technologies; 3) Inspiration: Grow digital printing inks, functional dyes and X-ray related businesses.

• Raw material price inflation (notably gold and gunpowder for Safety Systems) has compressed segment margins, and full pass-through of higher costs to customers has not yet been achieved, particularly in China and South Korea for the Safety Systems business.
• Unfavorable exchange rate movements created a 600 million yen negative impact on H1 operating profit.
• The outgoing KAYAKU Vision 2025 plan is expected to miss its 8% ROE target, with projected full-year ROE of ~7.7%. Key factors for the miss include: raw material cost inflation in Mobility & Imaging, secular decline of legacy LCD-related markets, delayed automotive semiconductor market recovery, delayed new product launches in dyes, slower-than-expected new drug penetration, and larger-than-expected drug price cuts for biosimilars.
• Biosimilar market competition is expected to intensify amid ongoing policy discussions, creating uncertainty for long-term margin trajectories.
• Growth of cylinder-type inflator sales depends on gaining market share beyond underlying market volume growth, and timing of capacity utilization increases relies on faster-than-projected share gains.

Q: When does management expect to hit 10% ROE under the new long-term plan? / A: Management confirms the plan is still being finalized, but targets reaching 10%+ ROE during Phase II (2029-2031) of Evolution 2035, and will aim for further improvements in Phase III. No specific fixed date is provided at this stage.

Q: What is the company's stance on continuing share buybacks to lift ROE? / A: The company has already committed to 320 billion yen in total share buybacks across FY2025 and FY2026. Management confirms the existing policy: share buybacks will continue until ROE sustainably exceeds 8%, but no commitment has been made to continue buybacks until ROE hits 10% at this stage.

Q: What drove the strong H1 growth in Functional Materials, and what is the capacity expansion at the Atsuta plant for epoxy resin? / A: Epoxy resin for semiconductor encapsulation was the main driver of growth, with a strong recovery starting in Q2. The new Atsuta plant capacity is primarily for power semiconductor epoxy resin, and increases total capacity by ~30% (1.3x existing capacity). Low-dielectric materials for high-speed communication will be produced using existing Atsuta plant capacity for maleimide resin, so the expansion already supports both product lines.

Q: What is the status of Adlai's licensed candidate AN2025, which was removed from Adlai's pipeline? / A: Adlai discontinued development of AN2025 after failing to meet its Phase III primary endpoint, so Nippon Kayaku has removed the candidate from its pipeline. The company retains its stake in Adlai, and will consider licensing other promising pipeline assets from Adlai in the future.

Q: What is the peak sales outlook for newly launched Ibrtrogine? / A: Ibrtrogine targets a rare indication (ROS1-positive non-small cell lung cancer) with only hundreds of annual cases in Japan, so growth will be gradual. Management targets reaching double-digit billion yen in sales as soon as possible, with peak sales currently projected at ~2.0 billion yen.