TAIHEIYO CEMENT CORPORATION Q4 FY2025 earnings call

U.S. Cement Market Attractiveness

• U.S. cement demand has an extremely high 0.98 correlation coefficient with GDP growth (2009-2022 data), a rare relationship among developed economies that means economic growth directly translates to cement demand growth.
• The U.S. market has a structural supply deficit: approximately 25% of national cement supply is imported, and 40% of supply in CPC's 5 core states is imported. Imports act as a demand buffer, allowing domestic production facilities to maintain stable utilization rates during demand downturns.
• Clinker production capacity has declined 10% nationwide and 15-25% in CPC's operating regions since 2010, driven by environmental regulations. New clinker plant construction is effectively blocked in California, making existing facilities increasingly valuable.

Core Strategic Synergies Between CPC and Taiheiyo Cement

• Operational synergy: Taiheiyo Cement's production and facility management expertise has raised utilization rates at acquired CPC plants from ~80% to over 95%, adding ~500,000 tons of annual production equivalent with no new capital investment.
• R&D synergy: Combined R&D efforts between Taiheiyo Cement Japan and CPC developed Type IT blended cement, a proprietary product tailored to the Southwest U.S. market that is not currently offered by any competitor.
• Global supply network synergy: Taiheiyo Cement's global network supplies CPC with cement and supplementary cementitious materials (SCMs: slag, fly ash, pozzolans) from group facilities in Vietnam, Indonesia, Japan, and other Asian markets, stabilizing supply and reducing costs. After the exit of China's Jiangnan Onoda, group supply recovered to over 60% of CPC's import needs, with additional supply from Indonesia launching next year.

Key Operational Milestones & New Product Development

• Blended cement adoption has grown rapidly nationwide, reaching 60% of total U.S. cement demand in 2024, up from near zero in 2021. Blended cement reduces clinker use, cutting CO2 emissions and increasing effective production capacity: a 20% clinker reduction increases effective cement output by 25% for the same clinker production.
• Type IT blended cement is CPC's proprietary solution for the Southwest market's acidic sulfate soil challenge, which had blocked adoption of standard Type IL blended cement. Type IT is a ternary blend of clinker, limestone, and pozzolan (or fly ash) with a 20% blending rate (higher than Type IL's 10%), delivering greater CO2 reductions while resisting sulfate degradation and inhibiting alkali-silica reaction in aggregate. It is already approved for public projects and has been selected for the Arizona Mexico border wall project.
• CPC opened the Gem Hill pozzolan mine near its Mojave plant in 2024 to secure domestic feedstock for Type IT production. Two 50,000-ton silos are under construction at the Stockton import terminal to allow imported slag and fly ash to support expanded SCM and blended cement production, launching in H2 2026.

Vulcan Acquisition Benefits

• The acquisition adds ready-mix facilities across Northern California (including the Bay Area), San Diego, and the new Riverside market, doubling the number of top 30 California cities covered by CPC to nearly 100%. The acquisition is expected to increase CPC's EBITDA by approximately 30%, with additional unquantified synergies from expanded blended cement and SCM sales.

Taiheiyo Cement operates its U.S. business through its subsidiary CalPortland Company (CPC), which operates three core product segments: Cement, Ready-Mix Concrete, and Aggregates, primarily across 5 key U.S. states (Washington, Oregon, California, Arizona, Nevada) plus smaller operations in Alaska and Canada.

• Cement Segment: 2023 sales volume was ~2.5x 2009 levels, outpacing overall market demand growth of 1.5x over the same period. In 2023, CPC achieved a 14% operating profit margin and 20% EBITDA margin; 2025 guidance expects these margins to hold at ~10% and ~17% respectively, despite broader high-interest-rate driven demand declines. CPC currently supplies ~90% of all Type IL/IT blended cement shipments in the Southwestern U.S. (California focused) market.
• Ready-Mix Concrete Segment: 2023 sales volume was also ~2.5x 2009 levels. The acquisition of Vulcan Materials' California ready-mix business adds 2.8 million cubic yards (≈2.1 million cubic meters) of annual production capacity, bringing CPC's total ready-mix scale to over 8 million cubic yards annually. Post-acquisition, CPC's cement internal consumption ratio (in-house use by CPC's own ready-mix operations) in the Southwest will rise from 19% to 25%, moving closer to the 30% industry target.
• Aggregates Segment: Following the acquisition of the high-margin Grimes Quarry near Los Angeles, 2025 sales volume is expected to grow even amid broader industry demand declines. High-margin urban aggregates quarries are a strategic priority for CPC, with existing capacity expansions ongoing at acquired assets.

• Demand recovery: Current high interest rates have driven a gradual decline in cement demand since 2023, but management expects demand will recover once interest rates fall, with the American Cement Association projecting a return to trend growth by 2028, matching the 5-year recovery timeline seen after the 2008 Lehman Shock.
• Blended cement penetration: Management expects California blended cement penetration to reach 50-60% by 2030, assuming current regulatory decarbonization schedules stay on track. CPC will exclusively supply Type IT cement for this market growth, with iterative product development to increase blending ratios over time.
• EBITDA margins: 2025 expected margins are 10% operating margin and 17% EBITDA margin, down from 14% and 20% in 2023-2024, but still stable amid industry-wide demand declines.
• Growth strategy: Management will prioritize maximizing synergies from the Vulcan acquisition, expanding high-margin SCM and blended cement sales, and pursuing additional strategic acquisitions of high-value urban aggregate quarries if attractive opportunities arise.

• Regulatory risk: While current California regulations require increasing embodied carbon reductions for construction, any delay or rollback of decarbonization rules would slow the adoption of blended cement and reduce demand growth for CPC's Type IT product.
• Supply risk: Domestic U.S. supply of slag and fly ash (key SCMs) is declining: most coal-fired power plants in the West are scheduled to close by 2035, and steel production is shifting from blast furnaces to electric arc furnaces which produce less usable slag. Domestic SCM supply will become increasingly constrained and expensive over time.
• Competitive risk: While CPC currently holds exclusive rights to Type IT in its operating regions, competitors could develop competing products over time, though regulatory product approval timelines create at a 1+ year barrier to entry.
• Macroeconomic risk: A severe recession matching the 2008 Lehman Shock, which would cut demand by 30-40% over 2-3 years, would pressure profitability even with import buffer mechanisms, as fixed cost reduction would not be able to offset such a large decline quickly.
• Carbon pricing risk: California's ETS carbon price has fallen recently under the current Trump administration, but long-term political pressure is expected to push prices back up, increasing operating costs if CPC cannot pass through costs to customers.

Q: What is Taiheiyo Cement's 2030 blended cement penetration outlook for California, and what product will CPC supply? / A: Management expects California's blended cement penetration will reach 50-60% by 2030 if regulatory decarbonization proceeds as scheduled, up from the current 6%. This rapid growth will be driven by increasingly strict low-carbon requirements from the CALGreen Code and California Department of Transportation. Management confirms CPC will exclusively supply Type IT cement to meet this demand, with future iterations expected to increase blending ratios by swapping pozzolan for fly ash or slag to deliver even greater carbon reductions. This is a first-mover advantage that positions CPC to capture most of this growth.

Q: How long will CPC's exclusive advantage for Type IT last, and can competitors catch up quickly? / A: Regulatory product approval (such as QPL listing in Washington and Oregon) requires close to a year to complete for new products, and competitors have not yet started the process for Type IT in California. Currently, only Amrize has Type IL approval in Washington/Oregon, and only CPC and Vicat's National supply Type IL in California, with CPC holding 90% of Southwestern Type IL shipments. Competitors that do not currently produce blended cement face a very high barrier to launching Type IT quickly, so CPC's advantage will last at least 1-2 years, and likely longer.

Q: Can CPC secure sufficient SCM (slag, fly ash) supply as domestic supply declines, and will this hurt profitability? / A: Management is planning to import slag and fly ash from Japan, Indonesia, and potentially China through the new Stockton terminal silos, which will come online in H2 2026. The company already owns the Gem Hill pozzolan mine, secured in 2018 to reduce reliance on third-party SCM supply. While management acknowledges the long-term trend of declining domestic supply, imported SCM is economical and profitable, so rapid price doubling that would hurt margins is not expected at this time. The limited domestic supply also means CPC's import terminal gives it a long-term competitive advantage.

Q: What is the current adoption outlook and profitability for Type IT? / A: Type IT is still new, so full-scale adoption has not happened yet, but starting Q1 next year all of CPC's bagged cement will switch to Type IT, driven by bag supplier demand for low-carbon product labeling. This switch is expected to add approximately 200,000 tons of annual Type IT sales, with particular appeal to environmentally conscious private customers and tech firms like Google. Currently, Type IT has similar cost to traditional Type II/V cement, so it sells for the same price, but scaling and process improvements are expected to deliver cost reductions over time. Management will look for opportunities to price it at a premium as demand for low-carbon cement grows.