MUROMACHI CHEMICALS INC. Q2 FY2025 earnings call

Core Company Purpose & Mission

• The company's core purpose is to contribute to society focusing on "health" and "environment": the pharmaceutical and health food segments support public health, while the chemicals segment contributes to environmental solutions.
• The company aims to grow continuously by addressing social challenges in the health and environmental fields, improving both its economic and social value.

Aggregate Financial Performance

• For the first half (2Q cumulative) of the 2025 May term, total revenue reached 2.965 billion yen, a 1.8% year-over-year increase, which is broadly in line with the initial plan.
• Gross profit increased due to improved cost ratio driven by higher factory utilization, adjusted selling prices reflecting yen depreciation and raw material inflation, and temporary inventory increases from customer production schedule changes. Operating profit reached 154 million yen, a 34% year-over-year increase; net profit reached 120 million yen, a 29.5% year-over-year increase.
• Selling, general and administrative expenses increased 3.1% year-over-year, primarily due to higher development-related costs amid growing development demand.

Key Operational Updates

• PFAS solution development (Chemicals segment): Starting April 2026, PFAS limits will be upgraded from interim targets to formal water quality standards with mandatory testing for water utilities. The company has already launched PFAS-removal ion exchange resin, is co-developing a simple PFAS analysis method with Tokyo Gakugei University for monitoring, and has established basic technology for resin regeneration for sustainability, with commercialization underway. Ion exchange resin outperforms activated carbon in PFAS adsorption capacity and can adsorb a wider range of PFAS variants.
• Pharmaceutical segment updates: Multiple new imported API products started deliveries in the current term, including one gastrointestinal API for a major generic drug manufacturer expected to hit 100 million yen in annual peak sales. The company is working to reduce reliance on a small number of core products by steadily adding new imported and in-house manufactured API products.
• Health Food segment updates: The company has built capacity to support multiple product formats (tablets, capsules) in addition to its core stick jelly products via collaboration with partner companies, to meet broader customer demand and drive revenue growth.
• Chemicals segment market expansion: The company gained adoption of its high cross-linking ion exchange resin at two additional power plants in the current term, following its initial entry into the power industry last term. It will leverage these adoption wins to expand into more power plants and new application use cases.

Shareholder Return

• The company plans a 3 yen per share dividend increase this term (following a 3 yen increase last term), which is expected to bring payout ratio above 30%. The company will announce a new long-term dividend policy alongside the new mid-term management plan in six months, with a core principle of maintaining stable dividends.

1. Pharmaceutical segment: Revenue of 1.352 billion yen, accounting for 51% of total revenue; reported a year-over-year decrease in revenue and operating profit, with 41% progress against the full-year revenue forecast. The decline in revenue is driven by intensified market competition for the company's core imported antiepileptic drug API. 2. Health Food segment: Revenue of 523 million yen, accounting for 13% of total revenue; operating profit of 5 million yen, with 52.3% progress against the full-year revenue forecast. Revenue increased year-over-year, driven by strong sales of new OEM products launched in Q3 of the prior fiscal period. 3. Chemicals segment: Revenue of 1.089 billion yen, accounting for 36% of total revenue; reported an operating loss of 17 million yen, with 45.4% progress against the full-year revenue forecast. Revenue increased sharply year-over-year, driven by growth in ion exchange resin sales, and water treatment equipment sales hit the initial planned target.

• Full-year 2025 May term earnings guidance is maintained despite 2Q operating profit and ordinary profit coming in above the initial forecast, after accounting for planned future sales and expected expenses.
• No changes to the FY2025 mid-term management plan numerical targets and growth strategies. Muromachi Chemical expects full-year 2025 results (the final year of the current mid-term plan) to come in below the original plan, but will continue efforts to close the gap to the target.
• The new mid-term management plan is currently under development and will be announced in July 2025; management aims to set plans that meet or exceed existing long-term targets, driven by ongoing development progress across all business segments.

• The pharmaceutical segment faces declining revenue from its core antiepileptic API product due to intensified market competition, creating concentration risk from reliance on a small number of core products, which the company is working to address by expanding its product portfolio.
• High raw material price inflation and supply chain tightness from generic drug supply shortages creates input cost and supply risk for the pharmaceutical business.
• While PFAS removal solutions represent a major growth opportunity, there are still significant market adoption barriers to widespread uptake by water utilities, and revenue contribution is too uncertain to set formal financial targets at this stage.
• The chemicals segment is currently in an investment phase, with elevated development and sales expansion costs leading to operating losses in the first half, with profitability dependent on future market adoption of new products and solutions.

Q: How does management expect PFAS-related business to contribute to earnings, and what is the current planning timeline?

A: PFAS regulation has only just been formalized, so management is still monitoring market and regulatory developments across private and public sector stakeholders before setting formal sales targets. Management expects regulation will eventually expand to wastewater in addition to tap water, and is already receiving customer inquiries; it will aggregate this information before updating formal plans.

Q: Why is the chemicals segment currently unprofitable, and what is the path to profitability?

A: The chemicals segment is in an active investment phase, with high development costs for PFAS and other new solutions, plus increased sales and marketing expenses from trade show and academic outreach to promote the company's technology. It is also incurring upfront costs to enter the export business, which adds travel and operational expenses. Management views this as a necessary investment for long-term growth and asks for investor understanding of the current unprofitable phase.

Q: What are the advantages of Muromachi's ion exchange resin over activated carbon for PFAS removal, given claims activated carbon has lower cost and better sustainability?

A: Ion exchange resin has a higher upfront price than activated carbon, but has superior adsorption performance and lower replacement frequency, leading to a similar total long-term running cost. Management expects most customers will ultimately combine both technologies to leverage their respective advantages. Since Muromachi also sells activated carbon, it views activated carbon producers as partners rather than competitors, and will focus on providing customers with optimal combined solutions matched to their specific needs.

Q: What impact does the ongoing generic drug supply shortage have on Muromachi's pharmaceutical business?

A: The downside impact is higher raw material prices and difficulty sourcing certain raw material inputs, which is an industry-wide challenge. The upside is that generic drug manufacturers are increasingly seeking new supply partners to resolve shortages, leading to a higher volume of development inquiries for Muromachi. The company is actively advancing these development projects to meet new customer demand.