Sumitomo Osaka Cement Co.,Ltd. Q4 FY2025 earnings call

• Long-term Vision and Mid-term Plan Status

  • The company's long-term vision is SOC Vision2035, unchanged from initial adoption. The 2023-2025 mid-term management plan is in its final year. While full mid-term plan overall targets will not be met, preparations for the next mid-term plan are progressing.
  • Key progress: The cement business achieved profitability through price hikes, and preparation for growth in the new materials ESC business is on track via capacity expansion.

• Capital Allocation

  • Total 3-year cash inflow from operating cash flow and asset sales is projected to reach 121.6 billion yen. 6 billion yen in asset sales (mostly policy-held shares) was completed in 2024, and sales will continue in 2025.
  • Total investment is projected to be lower than the original plan, following adjustments to carbon neutrality investment timelines and delayed mass production for optoelectronics CDM. Growth-focused investment, including new ESC production building construction, continues.
  • Shareholder return: The 3-year average total payout ratio is on track to reach 57%, exceeding the 50% target. A new share buyback has already been announced. Policy-held share reduction is progressing: the ratio of policy holding market value to net assets fell to 16.9% at end-2024, with a target of below 10% by 2026.

• Strategic Progress

  • Existing business profit improvement: The cement business is on track to meet its mid-term plan profit target via securing appropriate pricing.
  • Growth foundation building: ESC production capacity expansion for new materials is progressing to support future sales growth. Human resources and digital transformation (DX) strategies are being advanced to strengthen the management base.
  • Key outstanding challenge: Early commercial launch and mass production setup for the optoelectronics next-generation LN modulator (CDM).

2024 Fiscal Year (Fiscal 2024) actual results:

1. Cement Business: Reported 0.9 billion yen in operating profit (a 2.3 billion yen improvement year-over-year), turned back to net profit. Positive factors included 4.2 billion yen gain from price hikes and 6.1 billion yen gain from lower coal and oil prices, offset by 2.3 billion yen negative impact from lower sales/production volume, 1.2 billion yen negative impact from yen depreciation, and higher fixed manufacturing/transportation costs. Domestic sales volume was 7.2 million tons (-7.4% YoY), export volume was 1.27 million tons (+34.6% YoY).
2. Mineral Products Business: Increased revenue on higher overseas limestone sales volume, but operating profit remained flat YoY due to higher mining costs.
3. Building Materials Business: Increased revenue and profit, driven by higher ground improvement construction volume and increased sales of precast concrete products.
4. Optoelectronics Business: Increased revenue from higher optoelectronics equipment sales. Cost cutting reduced the segment's net loss, narrowing the deficit. New generation LN modulator (CDM) sales launch was delayed, dragging performance.
5. New Materials Business: Decreased revenue and profit, driven by lower sales of electrostatic chucks (ESC), a key semiconductor manufacturing equipment component.

Total company full-year 2024 results: Net sales of 219.5 billion yen (-3 billion yen YoY), operating profit of 9.35 billion yen (+2.1 billion yen YoY), net income of 9.01 billion yen (-6.33 billion yen YoY, impacted by larger foreign exchange losses and the absence of prior year policy holdings share sale gains).

Fiscal 2025 (Year Ended March 2026) guidance:

• Company-wide: Projected net sales of 235 billion yen (+15.5 billion yen YoY), operating profit of 19 billion yen (+9.65 billion yen YoY), net income of 14 billion yen (+4.99 billion yen YoY). Guidance assumes an exchange rate of 145 JPY/USD and CIF coal price of 135 USD/ton.
• Segment guidance:
  1. Cement Business: Projected operating profit of 10 billion yen (+9.1 billion yen YoY), driven by 8.1 billion yen gain from new price hikes and 2.9 billion yen gain from lower coal and oil prices. Domestic sales volume projected at 7.14 million tons, export volume projected at 1.4 million tons (+10.4% YoY). Domestic cement demand is projected at 32 million tons (-2% YoY).
  2. Mineral Products Business: Projected higher revenue from limestone price hikes, but lower profit due to higher mining costs.
  3. Building Materials Business: Projected higher revenue from increased precast concrete sales, but lower profit due to higher raw material costs.
  4. Optoelectronics Business: Projected higher revenue from increased optoelectronics equipment sales, with further deficit reduction from continued cost cutting. CDM commercial launch is planned for H2 FY2025.
  5. New Materials Business: Projected higher revenue and profit from recovering ESC sales, with a projected 30% YoY sales increase. The 2023-2025 mid-term plan overall profit target will not be met, but the foundation for the next mid-term plan has been solidified.

• Domestic cement demand has declined for 6 consecutive years, driven by labor shortages, 2024 industry regulatory changes that delayed construction, and high materials/labor costs that have reduced or delayed construction projects.
• The full impact of the latest 2000 yen/ton cement price hike will not be fully realized until Q2 FY2025, with negotiations still ongoing for roughly half of customers, creating near-term revenue uncertainty.
• ESC demand recovery is gradual: customer inventory adjustment will not complete until the first half of FY2025, with no dramatic sales increase expected even in H2 2025.
• The delayed commercial launch of the optoelectronics CDM product continues to pressure segment profitability, with no clear timeline for full profit improvement.
• Coal prices remain volatile, and around 30-40% of FY2025 coal procurement has not yet been locked in, creating cost uncertainty.

Q: Why is the projected 8.1 billion yen price hike impact for FY2025 lower than implied by current market prices, and what is the timeline for full price hike penetration and future price action? / A: Over 50% of customers (by count) have already accepted the full 2000 yen/ton hike, and the effect will gradually increase starting from April 2025. Project-based contracts will only see the price hike for new projects, so the full impact will not appear until Q2 FY2025. Management aims to complete all negotiations by the first half of FY2025, with full price impact reflected by October 2025. The company will continue to negotiate appropriate pricing if future costs increase further.

Q: Why is your 2025 domestic cement demand projection slightly higher than peers' 31 million tons, and what is your long-term demand outlook? / A: Demand has declined 6 years straight due to two key factors: high labor and material costs have reduced or delayed project volume, and labor shortages plus 2024 regulatory changes have delayed construction. The 2024 regulatory impact will be smaller in 2025, and long-term there is solid underlying demand from infrastructure resilience projects, defense construction, the Linear Chuo Shinkansen, semiconductor facility construction, urban redevelopments, and aging infrastructure repairs after recent high-profile sinkhole incidents. Management expects demand to stabilize around the 31-32 million ton level, rather than declining indefinitely.

Q: What is the current status of ESC inventory adjustment and demand recovery, and why are you expanding capacity when current facility utilization is only 50%? / A: Actual ESC demand has gradually recovered since H2 FY2024, and customer inventory adjustment is progressing as expected. Inventory adjustment is expected to be largely completed by the end of H1 FY2025, with full sales recovery starting in H2 FY2025. Growth will be gradual rather than dramatic. Customers have indicated long-term demand will grow, so the company is expanding capacity to over 2x current levels to enable stable supply for future growth. Current utilization is 50% on existing facilities.