Nippon Denko Co.,Ltd. Q2 FY2025 earnings call

• Core Business Overview

  • Shin Nihon Electro works operates across two core sectors: Materials (Alloy Iron, Functional Materials) and Environment (Incineration Ash Recycling, Aqua Solution, Power Business).
  • H1 2025 results were flat year-over-year: weak Alloy Iron performance from negative inventory impacts was fully offset by a recovery in the Functional Materials segment.

• Mid-Term and Long-Term Strategic Planning

  • The 9th Mid-Term Management Plan is a roadmap to the 2030 target: consolidated revenue of 110 billion yen, actual-based ordinary profit of 13 billion yen, and ROE of 10% or higher. Total strategic growth investment of 45 billion to 50 billion yen is planned through 2030.
  • 17 billion yen in total growth investment is planned across 2024-2025: 2 billion yen for GX/DX in 2024, and 15 billion yen in 2025 focused on growth sectors including 10 billion yen for a new incineration ash melting furnace (final decision by end of 2025, targeted launch in 2027).

• Growth Investment Progress

  • Incineration Ash Recycling: Contract volume with local governments is growing steadily to address national landfill shortages. The planned new 5th melting furnace will expand capacity from the current 130,000 ton annual limit.
  • Aqua Solution: The firm invested 0.2 billion yen directly in Gardaria, a startup that uses algae to selectively adsorb precious metals from low-concentration plating waste. The company will leverage its existing water treatment infrastructure to commercialize this precious metal recovery business.
  • DX/GX: DX systems for real-time production visibility have launched at 3 factories, with a target of 80 skilled DX leaders by 2030 (12 trained as of 2024). For GX, the firm is expanding use of renewable woody coke to replace coal-based coke for CO2 reduction, and is evaluating a high-efficiency power generation facility to recover byproduct gas at Tokushima plant (decision by end of 2025), targeting 45%+ CO2 reduction by 2030 and carbon neutrality by 2050.

• Financial Strategy for ROE Improvement

  • The firm targets expanding total assets to 150 billion yen by 2030 (from ~100 billion yen in 2023), with growth concentrated in income-generating fixed assets from strategic investment, while actively reducing inventory to generate cash from current assets.
  • Net D/E ratio will be raised from the current 0.11 (end of H1 2025) to 0.30-0.45 to add leverage for investment funding. High-level shareholder returns will be prioritized, with cash from inventory reduction and growth profits allocated to returns rather than retained accumulation.
  • Inventory reduction progress: Inventory fell to 30.7 billion yen (end of H1 2025) from 34 billion yen prior year, generating ~3.7 billion yen in free cash flow in 2025. Full-year 2025 FCF is projected at 4 billion yen, with ~7 billion yen total FCF across 2024-2025.

• Shareholder Return Policy

  • Updated policy from 2024: Changed from 30% payout ratio on accounting-based net income to 40% payout ratio on actual-based net income (excluding inventory and transitory impacts), with a 10 yen per share minimum dividend.
  • 2025 full year return: 12 yen per share dividend (11 yen ordinary, 1 yen 100th anniversary special dividend), plus a 4 billion yen share repurchase program. 2.3 billion yen of repurchases were already completed via ToSTNet-3, with 1.7 billion yen remaining via market purchases. Most repurchased shares will be cancelled, with a small portion allocated to executive and employee restricted stock plans.

For the 2025 full year (actual-based, excluding inventory and transitory impacts):

1. Alloy Iron Segment: Actual-based ordinary profit is projected at 1.3 billion yen, a 0.6 billion yen decrease from the prior year. Domestic operations face a mild decline, while overseas operations (centered on ferrosilicon) face severe market weakness. A planned 1+ month-long periodic maintenance in August will create a 0.3 billion yen negative impact, and overseas ferrosilicon market downturns add another 0.3 billion yen negative impact.
2. Functional Materials Segment: Actual-based ordinary profit is projected at 2.2 billion yen, a 0.2 billion yen increase from the prior year. Customer inventory adjustments have resolved, boosting sales volume, and value-aligned pricing improvements have offset rising costs.
3. Incineration Ash Recycling Segment: Actual-based ordinary profit is projected at 1.7 billion yen, a 0.3 billion yen increase from the prior year. Strong, stable high precious metal market prices (for gold and other metals recovered from molten ash) drive the gain, offsetting overall cost increases.

For H1 2025: Consolidated revenue rose 0.16 billion yen year-over-year, while accounting-based ordinary profit was flat at 0.12 billion yen yen. Excluding inventory impacts, actual-based ordinary profit rose 0.02 billion yen year-over-year.

• Full-year 2025 consolidated guidance: Accounting-based ordinary profit is projected at 3 billion yen, down from 4.9 billion yen in the prior year, driven by large negative inventory impacts from 2024's high manganese ore prices. Excluding inventory impacts, actual-based ordinary profit is projected at 5 billion yen, nearly flat with the prior year's 5.2 billion yen.
• Non-alloy iron segments are expected to offset the 0.6 billion yen decline in the Alloy Iron segment, delivering 0.5 billion yen in total growth to keep full-year actual-based profit flat.
• The 9th Mid-Term Management Plan progress remains on track, with all strategic initiatives advancing as scheduled. Inventory is expected to continue declining through the end of 2025, further improving balance sheet strength.

• Geopolitical instability in Ukraine and the Middle East, plus global trade disruptions from Trump tariffs and slowing Chinese economic growth have created a very challenging operating environment.
• Global steel demand easing has pushed international alloy iron market prices into a prolonged downturn, pressuring alloy iron segment margins. Manganese ore and ferrosilicon prices have fallen to levels matching the worst of the COVID-19 pandemic.
• Broad cost inflation for labor, depreciation, energy, and other inputs has added ~2 billion yen in total annual cost pressures, offset only by active productivity and pricing improvements.
• EV-related material demand growth has slowed in 2025, creating near-term pressure on the Functional Materials segment.
• The Alloy Iron segment's planned August 2025 periodic maintenance will shut down production for more than a month, creating a 0.3 billion yen one-time negative profit impact.

Q: How does competitive landscape look across all segments, and what are Shin Nihon Electro's unique competitive advantages? / A: No other company operates the full mix of businesses Shin Nihon Electro holds, making the company's portfolio unique. In alloy iron, the sector is largely organized around affiliations with blast furnace steelmakers, so open competition is limited, and the company holds strong global competitiveness. In functional materials, the company is the only domestic producer of ferroboron, and holds very high market share in niche products like zirconium oxide, boron oxide, and hydrogen storage alloys, with strong demand from customers seeking to avoid China supply risk. In incineration ash recycling, few firms offer the same full-service solution, and the business has strong geographic localization barriers, with limited direct competition as clients choose between landfilling, cement raw material use, or outsourcing to Shin Nihon Electro.