Nippon Denko Co.,Ltd. Q4 FY2024 earnings call

Overall Financial Performance

• Consolidated accounting-based ordinary profit doubled year-over-year to 4.9 billion yen (a 2.5 billion yen increase), while actual-based ordinary profit (excluding inventory impacts) remained flat year-over-year at ~5.5 billion yen, matching 2023 levels.
• Parent net profit was 3.1 billion yen in 2024; excluding one-time gains in 2023 from securities sales and deferred tax asset reversals, net profit increased year-over-year.
• Inventory increased by more than 3 billion yen to 34 billion yen, driven by higher-priced manganese ore inventory after the cyclone-driven price spike. Cash holdings were reduced by 2 billion yen to 5.9 billion yen via tighter inventory management, and leverage metrics remained stable year-over-year.
• Free cash flow fell from 4.1 billion yen to 1.1 billion yen due to higher working capital needs from elevated manganese ore prices.

9th Mid-Term Management Plan Progress

• The plan launched in 2024. While overall actual-based profit was flat year-over-year, non-alloy iron businesses increased profit by 1 billion yen, advancing the company's goal of building a balanced multi-business portfolio. The 2027 target of 10 billion yen in actual-based profit remains, though management will adapt to a greatly changed operating environment from plan initiation.

Shareholder Return

• A new shareholder return policy launched in August 2024 sets a 40% payout ratio based on actual-based net income (calculated as 70% of actual-based ordinary profit to account for taxes), with a 10 yen per share annual dividend floor.
• 2024 full year dividend is 11 yen per share, a 2 yen increase, which aligns with the new policy; the payout ratio is 41% under the new policy framework and 48% based on accounting net income.

Research & Development and Capital Expenditure

• The mid-term plan targets average annual R&D spending of 800 million yen, with 800 million yen budgeted for 2025. Recent new product developments include a 6G radio wave absorption film to prevent equipment malfunction, and an additive for 3D metal printing that increases SUS316L stainless steel hardness by 2.5x for automotive and aerospace applications.
• Total planned investment between 2024 and 2030 is 45 billion to 50 billion yen. 2024 investment was 7 billion yen (2 billion for strategic projects, 5 billion for maintenance). 2025 planned investment is at least 10 billion yen, with 5 billion allocated to GX and DX initiatives, and 5 billion for maintenance. A fifth incineration ash melting furnace for the recycling business is under active consideration, with details to be released when finalized.

Sustainability Initiatives

• GX (Green Transformation): Working toward a target of 45%+ CO2 emission reduction by 2030 (vs 2015 levels). Current priorities include expanded wood coke use and energy conservation, with long-term work to develop innovative low-carbon manganese alloy iron production technology.
• DX (Digital Transformation): A full DX roadmap with clear timelines has been established. Production data visualization tools have already been deployed at the Tokushima (functional materials) and Koriyama (aqua solution) factories, with deployment planned for Kashima (incineration recycling) and Tokushima (alloy iron) factories in 2025 to drive productivity and efficiency gains.
• Human Capital Management: New initiatives include a region-based general employee track, radio advertising to improve brand recognition for recruitment, and 2025 additions of student loan repayment support and employee referral hiring programs to strengthen talent acquisition and engagement.

All figures below are in 100 million yen for actual-based ordinary profit, the company's preferred metric that excludes inventory valuation impacts:

1. Alloy Iron Business: 1.1 billion yen in 2024, down from 2.3 billion yen in 2023 (a 1.2 billion yen decrease). Domestic operations saw a 900 million yen decline in actual-based profit, while overseas operations limited the decrease to a small single-digit drop after 800 million yen in revenue improvement gains offset 1.1 billion yen in margin deterioration. Accounting-based ordinary profit for the segment was 2.2 billion yen in 2024.
2. Functional Materials Business: 2.0 billion yen in 2024, up from 1.8 billion yen in 2023 (a 200 million yen increase). Price hikes offset rising costs, and expanded cathode material capacity at the Myoko factory added 100 million yen in profit. One-time construction residual soil disposal costs pressured accounting-based profit, but actual-based profit still grew 200 million yen year-over-year.
3. Incineration Ash Recycling Business: 1.4 billion yen in 2024, up from 800 million yen in 2023 (a 600 million yen increase). 400 million yen of the gain came from higher precious metal (gold/silver) prices for molten metal recovered from incineration ash, and 200 million additional yen came from productivity improvements and price adjustments to offset persistently high electricity costs.
4. Aqua Solution Business and Power Business: No explicit full year actual-based profit figures were disclosed in the available transcript.

• Management has not issued a full year 2025 consolidated earnings guidance at this time, as high external uncertainty makes a reasonable forecast impossible. Key uncertain factors include the impact of US trade policy, the pace of Chinese economic slowdown, the duration of steel market supply-demand easing, alloy iron market trends, and the impact of sluggish EV adoption in Europe and China on functional material demand.
• Full year 2025 guidance is scheduled to be published alongside Q1 2025 results in mid-May.
• For 2025 operational priorities:
  • Alloy Iron Business: Pursue minimum cost structures and normalize elevated inventory levels to further improve the business's fundamental resilience amid expected weak steel demand and low alloy iron prices.
  • Functional Materials Business: Continue value-aligned price negotiations and develop new sales channels, as early signs of customer inventory adjustment completion have emerged despite sluggish EV demand.
  • Aqua Solution Business: Continue to explore new business areas amid challenging market conditions.
  • Incineration Ash Recycling Business (high-priority growth segment): Strengthen sales efforts to local governments, partner with engineering firms to participate in DBO contracts for new municipal incineration projects to secure long-term stable incineration ash supply, and advance planning for a fifth melting furnace to expand capacity.

• Geopolitical and macroeconomic risks: Ongoing conflicts in the Middle East and Ukraine, slowing Chinese economic growth, and persistent yen-driven inflation in Japan have created broad macro instability.
• Commodity market and supply chain risks: Global steel and alloy iron supply-demand is weakened, depressing market prices. The March 2024 Australian cyclone caused large manganese ore price volatility and supply chain disruption, though existing risk mitigation limited production impacts.
• Demand growth risks: EV adoption growth in China and Europe has slowed below earlier expectations, pressuring demand for EV-related functional materials.
• Operational and cost risks: Persistent high energy costs and rising personnel costs have pressured segment margins across the business.

Q: What specific initiatives is the company pursuing to compress elevated inventory levels? / A: The majority of the company's 6-month inventory rotation period comes from alloy iron inventory, which was historically held at elevated levels to ensure reliable customer delivery and cover output during frequent scheduled maintenance outages. The company has already successfully extended maintenance cycles as part of broader productivity improvement efforts. Management will explore how much inventory can be safely reduced while maintaining reliable delivery, with the goal of cutting overall inventory to appropriate levels. This will also free up cash for other strategic priorities.