TAIYO HOLDINGS CO.,LTD. Q4 FY2025 earnings call

• Overall Financial and Balance Sheet Performance

  • Consolidated operating profit and ordinary profit came in slightly below the original full-year guidance due to weaker-than-expected results in March 2025. Reported net income attributable to parent shareholders was 10.7 billion yen after a 7 billion yen special loss for impairment. The full-year average USD/JPY exchange rate was 152 yen.
  • ROE reached 10.6% for the period, which was pulled down by the impairment charge; adjusted for the impairment, ROE would have been around 15%. ROIC continued to rise steadily.
  • Cash and deposits decreased by 13 billion yen, which offset a 25.9 billion yen reduction in short-term borrowings completed at what management views as an opportune timing.

• Updated Shareholder Return Policy

  • Management changed the group's profit return policy to target a 100% consolidated total payout ratio through at least the March 2028 fiscal year, to support ROE improvement aligned with the company's long-term management vision.
  • The policy signals that the company will not grow additional equity capital beyond current levels. The expected dividend on equity (DOE) for the March 2026 fiscal year is 17.3%.
  • Management confirms that even with this enhanced shareholder return, planned capital investment for the electronics and pharmaceutical businesses can be fully funded internally, and additional debt capacity is available for M&A and growth investments over the next three years.

• Operational Milestones

  • Taiyo Pharma Asia completed construction of a new factory in Thailand, with commercial operation targeted for the second half of the March 2027 fiscal year, launched on an experimental pilot basis initially.
  • Taiyo Green Energy opened a new floating solar power plant as part of an off-site PPA scheme to supply self-consumption power to Taiyo Pharmatech, aiming for stable power prices and supply security.
  • The company's 10 million USD CVC fund has deployed 9 million USD cumulatively, with an expected 1-2 million USD return (2-3x return on the exited investment) in the March 2026 fiscal year. The fund is focused on electronics, space and AI sectors, for technology scouting purposes.
  • The company has gained multiple ESG index inclusions and recognitions, including first-time certification as a 2025 Excellent Health Management Corporation, continued inclusion in the JPX Nikkei Index 400 and Nikkei Semiconductor Stock Index, inclusion in the MSCI Japan Women Empowerment Index, and a second consecutive B score from CDP for climate change.

• Segment Operational Updates

  • In the Electronics segment, dry film for package substrates remains the core top-selling product, with dry film for high-function rigid products emerging as a new growth focus. China accounts for a very large share of sales, and high-function rigid dry film sales to China have remained resilient despite broader concerns over Chinese economic slowdown, while domestic Japanese sales continue a gradual decline. Q1 2025 sales were pulled forward due to an internal system replacement, leading to a sequential sales decline through the year, which management expects to return to normal seasonal patterns in the 2026 fiscal year.
  • In the Medical and Pharmaceutical segment, management recorded a 7 billion yen impairment loss on seven Taiyo Pharma product sales rights, driven by unexpected negative impact from the October 2024 introduction of the selected medical care system, which management acknowledges it did not fully anticipate. The impairment reduces annual future sales right amortization by 1.1 billion yen, which will benefit future operating profit.

For the 2025 March fiscal year, total consolidated revenue was 119 billion yen. The three business segments had the following performance: 1. Electronics Business: Revenue was 81.7 billion yen (68.65% of total consolidated revenue), operating profit was 21.4 billion yen, with EBITDA of 25.1 billion yen. Revenue increased 14% year-over-year driven by higher sales volumes for both rigid and package products and an average 8 yen year-over-year yen depreciation against the US dollar. 2. Medical and Pharmaceutical Business: Revenue was 31.5 billion yen (26.47% of total consolidated revenue), operating profit was 2 billion yen. Revenue increased 8% year-over-year due to the consolidation of My Stars (formerly Rik), increased demand for Taiyo Pharma products from competitor supply shortages, and higher contract manufacturing volumes at Taiyo Pharmatech. Operating profit declined year-over-year due to the impact of the newly implemented selected medical care system. 3. ICT&S Business: Revenue was 5.7 billion yen (4.79% of total consolidated revenue), operating profit was 26 million yen. This segment finally reached a profitable operating level in the 2025 fiscal year, with growth driven by three core sub-businesses.

• For the full March 2026 fiscal year, management guides consolidated revenue of 123.4 billion yen, operating profit of 23.3 billion yen, ordinary profit of 22.5 billion yen, and net income attributable to parent shareholders of 16 billion yen.
  • Electronics Business guidance: 81 billion yen revenue, 20 billion yen operating profit, representing a 6% operating profit decline year-over-year. Guidance assumes a 145 yen USD/JPY rate, and expects gradual demand recovery driven by high-function rigid and package products with higher sales volumes. Profit declines reflect the impact of assumed yen appreciation, higher personnel and R&D expenses.
  • Medical and Pharmaceutical Business guidance: 35.4 billion yen revenue (12% year-over-year increase), 4.6 billion yen operating profit (124% year-over-year increase, more than doubling). Growth is driven by a large existing contract manufacturing contribution that will hit full volume in this fiscal year, plus the 1.1 billion yen annual amortization reduction from the 2025 impairment.
  • ICT&S Business guidance calls for both revenue and operating profit growth compared to 2025 fiscal year results.
  • Capital expenditure guidance for 2026 fiscal year is 9.9 billion yen, with total planned capex of ~30 billion yen over the next three years. Steady-state annual capex is expected to be 5-6 billion yen, with no large incremental projects currently planned, and pharmaceutical investments largely completed for the near term. Depreciation expense is guided at 7.1 billion yen for 2026, up from 6.6 billion yen in 2025.
  • Management reaffirms that the long-term target of 9 billion yen operating profit for the Medical and Pharmaceutical Business by the March 2031 fiscal year is still achievable with only minor incremental additions to existing facilities; large new factory investment would not occur until after the March 2028 fiscal year, and would take four years from planning to completion. Sales for the 2031 target are expected to come in slightly below the original 60 billion yen target due to higher profit margins in the contract manufacturing business, but could still reach 60 billion yen with contributions from My Stars.

• The selected medical care system implemented in October 2024 caused larger-than-anticipated sales damage to Taiyo Pharma's long-listed products, leading to a 7 billion yen impairment charge in 2025. The system will have a full-year impact in 2026 equivalent to double the 2025 impact.
  • Further yen depreciation against the euro could increase raw material costs for the pharmaceutical business, which could lead to additional impairment charges, though management assesses this risk as low at present.
  • No large new growth investments for the Electronics business are currently planned, and the segment's growth remains dependent on incremental volume gains rather than meaningful expansion, creating pressure to find new expansion opportunities over time.
  • The food and agriculture R&D business within ICT&S is not expected to generate meaningful profit for the foreseeable future, and relies on surplus profits from the energy business to fund its work addressing long-term food security risks.

Q: The 2026 pharmaceutical operating profit guidance of 4.6 billion yen matches the long-stated target, but the future profit growth trajectory is unclear to external observers. What is the strategic direction for the pharmaceutical business going forward? / A: Management acknowledges the 7 billion yen impairment reflects a management misstep, and announces the business will no longer acquire new long-listed products going forward. Existing products that have already reached the lowest drug price will drive gradual profit improvement, so 2025 was the bottom for Taiyo Pharma profitability. Contract manufacturing is seeing increasing inbound inquiries, as major pharma companies have spun off their manufacturing facilities and prefer to work with CMOs that do not compete with them in generic drugs, leading to concentrated inflow of contracts. Management confirms the 9 billion yen 2031 operating profit target is still achievable with gradual organic growth.

Q: Is the 9 billion yen 2031 pharmaceutical operating profit target achievable with existing facilities, and when will major new investment be required? What is the expected sales level for 2031? / A: The 9 billion yen target can be achieved with only minor upgrades to existing facilities, so no major new capital expenditure is needed before the March 2028 fiscal year. A new factory would take four years from planning to completion, so any new plant would not come online until the late 2020s at the earliest. Sales are expected to come in slightly below the original 60 billion yen 2031 target, because the contract manufacturing business that is driving growth has higher profit margins than the original business mix, so the profit target can be achieved with lower sales. My Stars consolidation could still push sales to 60 billion yen, however.

Q: What is the current status of the new rigid PCB dry film product for electronics, and what is its growth potential? / A: The product is still at the prototype sampling stage, accounting for less than 1% of current Electronics segment revenue. The primary target application is rigid substrates for smartphones, where the product's combination of planarization and thin-film capabilities provides unique value, which would create very large volume demand if adopted. Mass commercial adoption is not expected for quite some time, and production location has not yet been finalized, with trial production ongoing at both Kanto and Kyushu facilities. There are no other major high-volume applications currently targeted.

Q: What has driven the recent profitability improvement in ICT&S, and what is the medium-term outlook for the segment? / A: ICT&S has three core sub-businesses, two of which are currently growing strongly: fine chemical contract manufacturing (70% of revenue from external clients) and DX services firm Fanlead (70-80% of revenue from external clients), both of which have grown volume and profitability. The third is Taiyo Green Energy, which operates profitable floating solar power generation, but uses its surplus profits to fund long-term food security R&D that is not expected to generate near-term profits. Total ICT&S remains slightly profitable overall, but large-scale growth is not expected in the next 3-5 years. Management's near-term focus is on growing the pharmaceutical business, with longer-term expansion plans to be developed gradually.