NIPPON FILCON CO.,LTD. Q4 FY2024 earnings call

Overall Company Background

• Founded in 1916 as Japan's only manufacturer of papermaking wires, the company operates four core business segments after expanding its product scope over 109 years.
• The company's PBR has traded between 0.4x and 0.6x over the past 5 years, which management attributes to unstable ROE and insufficient equity spread relative to the 4%-6% cost of equity capital. While the 2024 update to capital and dividend policy delivered minor stock price improvement, delayed earnings recovery has not yet moved PBR higher.

Long-Term Strategic Direction

• Management identifies restoring earnings power as the top priority to improve PBR, aligned with the 2023-2025 medium-term management plan. The company has shifted to a long-term planning framework because near-term-only measures cannot address structural challenges, and has set a 2034 target of 2.3 billion yen in operating profit and ROE of 8% or higher.
• The 2025 November term will be used to organize long-term priorities and develop the 2026-2028 medium-term management plan, the first step toward achieving the 2034 vision.

Core Initiatives for Earnings Power Restoration

• Industrial Functional Filter & Conveyor Business: The papermaking product sub-segment is positioned as a core stable earnings business despite low long-term growth. Management will shift primary production to the Thai subsidiary for cost reduction, prioritize expansion of non-woven fabric products (a longstanding R&D focus) in growing overseas markets, and accelerate development of customer-aligned products (such as power reduction drive load reducing wires) to grow domestic market share. The other industrial filter/conveyor sub-segment is positioned for stable long-term growth across diverse industries.
• Electronic Materials & Photomask Business: Positioned to grow to a top-tier player in a persistently high-growth market. The etching processed sub-segment has invested in capacity for years to meet customer requirements for fast prototype turnaround and timely mass production, and will continue building out capabilities to win orders from previously unserviced customers. The photomask sub-segment will expand sales of high-demand photomasks for high-frequency devices, sensors, and power semiconductors, while building out production capacity for new products like optical components. Near-term depreciation pressure from recent capacity expansion will fade as growth accelerates.
• Environment & Water Treatment Related Business: Positioned to grow as the top pool market share player alongside filtration equipment. The prior market leader plans to exit the business by 2027 after completing final projects, creating a large opportunity for Nippon Filcon to expand share and earnings from 2027 onward. The company is currently expanding headcount, strengthening production systems including partner suppliers, and rebuilding its sales network to capture this opportunity.
• Real Estate Leasing Business: Management will continue maintaining earnings through planned large-scale repairs to address property aging and preserve rental rates.

Capital Policy & IR

• The 2024 November term updated dividend policy to require a minimum 30% consolidated payout ratio and minimum 2.4% DOE. Management will continue evaluating additional capital efficiency measures including share buybacks. The company will conduct a share buyback program of up to 560,000 shares for a maximum of 285.6 million yen via the Tokyo Stock Exchange ToSTNeT-3 off-auction trading platform on January 14, 2025. Total shareholder payout including buybacks is estimated at 141.0% for 2024 and 163.8% for 2025.
• Management will expand IR activity through developing an integrated report and updating sustainability content on the corporate website.

1. 産業用機能フィルター・コンベア事業 (Industrial Functional Filter & Conveyor Business): Even though domestic paper demand stagnated and European overseas demand declined due to recession, yen depreciation drove year-over-year sales growth for both the papermaking product segment and the other industrial filter/conveyor segment (driven by increased food industry conveyor belt demand). This segment was the primary driver of the company's overall revenue growth in the period.
2. 電子部材・フォトマスク事業 (Electronic Materials & Photomask Business): Positive growth continued across automotive, smartphone, PC, tablet, and communication device end markets, and the segment captured increased demand for customer prototype and development products. Both etching processed products and photomask product sub-segments achieved year-over-year sales growth. Price increase effects reduced the segment's cost of sales ratio, improving margin performance.
3. 環境・水処理関連事業 (Environment & Water Treatment Related Business): Due to COVID-19-related delays that pushed multiple large pool project construction schedules to concentrate in the prior and current fiscal year, sales declined year-over-year but remained at a high absolute level. Sharp increases in imported material costs (driven by yen depreciation) and overall construction industry cost inflation led to a significant year-over-year drop in operating profit for the segment. Nearly all large concentrated projects were completed in the 2024 November term.
4. 不動産賃貸事業 (Real Estate Leasing Business): All existing properties operated stably with no major performance issues.

• For the 2025 November term, management forecasts total net sales of 28.0 billion yen, a 639 million yen decrease year-over-year, driven by the absence of large concentrated pool project revenue that was recognized in 2024.
• Management forecasts 2025 November term operating profit of 600 million yen, a 324 million yen decrease year-over-year. The decline is driven by higher depreciation expense from large recent capacity investments in the photomask product sub-segment. Photomask investments use a 6-year declining balance depreciation method, so heavier depreciation in the first few years post-investment will be followed by expected earnings recovery in later years.
• The full-year 2025 dividend forecast is maintained at 28 yen per share (consistent with 2024's full-year dividend), representing an expected payout ratio of 100.1%.

• The domestic papermaking product market is shrinking faster than management initially projected, making short-term earnings recovery difficult.
• While the Electronic Materials & Photomask and Environment & Water Treatment segments have favorable long-term business outlooks, ongoing capacity expansion and sales capability building have created temporary downward pressure on earnings.
• Yen depreciation increased import costs for large pool projects in the 2024 term, driving significant margin deterioration in the Environment & Water Treatment segment, though this impact is not expected to repeat in future periods as the concentrated projects are completed.
• The company has failed to generate a sufficient equity spread relative to its cost of equity, which has kept PBR depressed at 0.4x-0.6x over the past 5 years, with no meaningful improvement to date despite policy adjustments.

No question and answer section is included in the provided transcript.