ARAKAWA CHEMICAL INDUSTRIES,LTD. Q2 FY2026 earnings call

Consolidated H1 2025 Performance

• Consolidated net sales: 40.367 billion yen (+2.6% YoY)
• Operating profit: 0.929 billion yen (+196.0% YoY)
• Ordinary profit: 0.639 billion yen (+103.8% YoY)
• Net income: 0.724 billion yen (YoY decrease due to 1 billion yen fixed asset sale gain in prior year), in line with initial forecast; EBITDA hit record high
• Investments for production capacity expansion in growth segments are complete, the company is now entering the investment recovery phase

Core Growth Strategy

• Target further expansion in advanced semiconductors and data center markets, driven by strong demand growth tied to generative AI expansion
• Pursue product differentiation via high functionalization, expand sales globally and improve profitability across all segments
• Focus on accelerating existing business renewal, recovering profitability, recovering investments in growth segments, and scaling up the life science business to improve overall profitability via portfolio reform

Key Operational Updates

• New Business Initiatives: 1. Water-based fluorine-free oil-resistant paper coating agent compliant with PFAS regulations, gaining market traction amid the shift from plastic to paper packaging. 2. Microalgae business: Pilot cultivation plant completed at Osaka factory in July 2025, initial B2C products (functional supplements, miso cubes) already launched, targeting future B2B commercialization. 3. Pine leaf extract joint research: Mechanism for depression symptom improvement identified and published, moving toward future development, planned to be detailed in the next mid-term management plan.
• Capacity & Production Updates: 1. Fuji factory new Beamset facility: Customer certification ongoing (slightly behind original plan), gradual mass production to start in Q4. 2. Chiba Alcon facility: Utilization rate improved from 30% to 60% (operating days basis), targeted to reach 70-80% next fiscal year and full capacity by FY2027 after scheduled January 2026 maintenance. 3. Mizushima factory new fine chemical plant: Entered trial production and certification in May 2025, mass production to start in H2 of next fiscal year.
• Sustainability: Achieved 50%+ CO2 emission reduction by FY2023, beating the original 30% 2025 target; targets to maintain 50%+ reduction through 2030 on the path to net zero by 2050.
• **Shareholder Return: Maintains full year dividend forecast of 50 yen per share (25 yen interim, 25 yen year-end), targets 40% payout ratio through the 5th mid-term management plan.

1. Functional Coating Business: H1 2025 net sales = 8.977 billion yen (9.3% YoY increase), segment profit = 1.008 billion yen (68.4% YoY increase). Revenue contribution to total consolidated sales = 22.2%. Key product performance: Beamset (UV-curable resin) H1 sales = 3.4 billion yen, Arakote (thermosetting resin) sales up 40% YoY.
2. Paper & Environment Business: H1 2025 net sales = 10.094 billion yen (8.2% YoY decrease), segment profit = 0.534 billion yen (47.2% YoY decrease). Revenue contribution to total consolidated sales = 25%. Key product performance: Polystron (paper strength agent) H1 sales = 7.2 billion yen.
3. Adhesion & Biomass Business: H1 2025 net sales = 13.89 billion yen (5% YoY increase), segment loss = 0.603 billion yen (loss narrowed from 1.292 billion yen YoY). Revenue contribution to total consolidated sales = 34.4%. Key product performance: Alcon (hydrogenated petroleum resin) H1 sales = 3.5 billion yen, rosin-based adhesion resin sales remained solid across Asia.
4. Fine Electronics Business: H1 2025 net sales = 7.366 billion yen (7.6% YoY increase), segment profit = 0.274 billion yen (25.4% YoY decrease). Revenue contribution to total consolidated sales = 18.3%. Key product performance: Fine chemical products H1 sales = 1.9 billion yen, Neopolish (precision polishing agent) H1 sales = 1.8 billion yen.

• Overall full year 2025 consolidated forecast remains unchanged from the May 2025 release, with full year net income and profit growth projected YoY. Segment-level forecasts are revised to reflect H1 performance and current market conditions:
• Functional Coating Business: Full year sales revised upward from 18.5 billion yen to 19.5 billion yen; segment profit revised upward from 1.6 billion yen to 2.15 billion yen. Beamset full year sales forecast at 7.1 billion yen (record high).
• Paper & Environment Business: Full year sales revised downward from 22.4 billion yen to 21 billion yen; segment profit revised downward from 1.6 billion yen to 1.15 billion yen. Polystron full year sales forecast at 15 billion yen.
• Adhesion & Biomass Business: Full year sales forecast unchanged at 29 billion yen; segment loss widened from 0.7 billion yen to 0.9 billion yen. Alcon full year sales forecast at 7.9 billion yen.
• Fine Electronics Business: Full year sales revised upward from 15 billion yen to 15.4 billion yen; segment profit revised downward from 1 billion yen to 0.9 billion yen. Fine chemical full year sales forecast at 4 billion yen, Neopolish full year sales forecast at 3.9 billion yen (record high).
• Overseas full year sales forecast at 35.8 billion yen (+1.2 billion yen YoY), accounting for 42.1% of total sales.
• Full year capital expenditure forecast at ~4 billion yen, depreciation forecast unchanged at 5.5 billion yen.

• Domestic demand for paper products is declining, and intensified price competition from overseas competitors for paper strength agents is pressuring profitability in the Paper & Environment Business.
• General-purpose Alcon products from China face oversupply, leading to intense price competition that pressures margins.
• Chiba Alcon facility is still operating below full capacity, with improvement in utilization and operating speed progressing slower than originally planned.
• Cost increases for electronics materials have outpaced price adjustments, pressuring profits in the Fine Electronics Business.
• Customer certification for new production facilities takes longer than originally scheduled, delaying mass production ramp-up.
• China's economic slowdown creates downward pressure for segments with high China exposure, particularly the Paper & Environment Business.
• Life science new businesses are still in early development, with uncertain timelines for reaching profitability.

Q: The Q2 profit dropped sharply from Q1 (700 million yen to 200 million yen). Is this due to seasonality or planned maintenance? / A: Q2 annually has concentrated scheduled plant maintenance across the company, which creates a recurring seasonal profit decline. Despite this, Q2 operating profit still remained positive this year, compared to a deficit in the prior year, so the result is actually improved from last year.

Q: How should we interpret the unlabeled generative AI market growth graph? Is the scale implied higher than current sales? / A: The graph illustrates long-term growth potential, not current sales. The company already invested to expand production capacity 1.3x-1.4x for semiconductor and data center-related products to meet 2030 demand, and the graph reflects this possible future capacity level. Both fine chemicals and precision polishing agents can handle 1.4x demand growth from their current full year forecast levels.

Q: What is driving growth in semiconductor-related advanced materials, and when will the new Mizushima plant ramp up? / A: Semiconductor advanced materials fall under the fine chemical product segment, and are ODM-style co-developed contract manufacturing products for advanced semiconductor miniaturization. Growth is driven by ongoing semiconductor miniaturization trends. The new plant will start mass production gradually in H2 next fiscal year, as customer certification needs to progress sequentially rather than launching all at once, so ramp-up will be gradual.

Q: What are the priorities and targets for the next mid-term management plan? / A: Final targets are still being finalized, but the plan will prioritize profit over sales growth, with a goal to exceed the all-time high operating profit of 5 billion yen achieved in 2016-2017 within the 5-year plan period. Growth drivers will be: 1) UV/thermosetting resins in Functional Coating; 2) overseas paper strength agent in Paper & Environment; 3) global expansion of PineCrystal super pale rosin and Chiba Alcon profit turnaround in Adhesion & Biomass; 4) fine chemicals, polishing agents, and new high-growth electronics materials in Fine Electronics. The company will pursue selective focus to avoid resource dispersion, and aims to build life science into a new core business pillar by the end of the plan period.