KNC Laboratories Co.,Ltd. Q4 FY2025 earnings call

• Overall 2025 March Fiscal Year Financial Results: Kobe Natural Products Chemistry reported a year-over-year decline in both revenue and profit. Full-year revenue reached 8.17 billion yen, 10.7% lower YoY; ordinary profit was 0.92 billion yen, 55.6% lower YoY; adjusted EBITDA was 1.76 billion yen, 38.6% lower YoY. The revenue came in 320 million yen above initial guidance, primarily from earlier-than-planned revenue recognition in the Bio segment. Net income was 98 million yen above guidance due to lower R&D-related net costs after government subsidies.
• New Orders and Backlog: Q4 2025 achieved 3.22 billion yen in new orders, bringing total backlog to 5.29 billion yen. The weighted average remaining lead time for the backlog is 12.6 months, with roughly half of the backlog expected to be recognized as revenue in fiscal 2026. Pharmaceutical segment make-to-order products have significantly longer lead times than other segments, and account for the majority of the backlog.
• Balance Sheet and Cash Flow: As of fiscal year-end, total assets were 20.15 billion yen, net assets were 13.52 billion yen, and the equity ratio was 67.1%, down slightly as the company directed borrowed funds to growth investments. Operating cash flow was 1.48 billion yen, investing cash flow was -3.32 billion yen, resulting in a free cash flow of -1.83 billion yen, with a closing cash balance of 2.38 billion yen.
• Mid-Term Strategic Framework: The company has outlined a 9-year, three-stage growth plan (HOP, STEP, JUMP) to become a high-growth, high-value-added contract chemical manufacturing firm. The current 3-year HOP stage (through 2028 March fiscal year) targets 12 billion yen in total revenue, 13% average annual revenue growth, 30% adjusted EBITDA margin, 14% net income margin, and 10% ROE. Five core strategic priorities have been identified for the HOP stage:
  1. Strengthen specialized, technical sales: The company will double the size of the sales team by deploying technical talent to sales, regularly monitor order acquisition, and target 12.5 billion yen in annual new orders by 2028.
  2. Expand production capacity and improve productivity: 5.5 billion yen in ongoing capital expenditures will be completed, including the new Izumo Second Factory FP-4 building and Bio Research Center Building D. These investments will increase total production capacity by 50% and raise output per employee by 20% by 2028, supported by process optimization, automation, and AI/IT tool adoption.
  3. Adapt to evolving customer needs: The company will strengthen high potency API capabilities, expand low-metal material production for semiconductor materials at the new FP-4 facility, and implement global GMP compliance for pharmaceutical and bio products. It will also actively pursue partnerships with complementary firms to expand capacity.
  4. Accelerate commercialization from R&D: The company will continue to actively partner with academia and venture biotechs, participate in government research projects, and expand the product pipeline to commercialize new projects in the next mid-term planning period, while exploring new niche businesses.
  5. Reduce Q4 revenue concentration: The company will cut Q4 revenue share from 40-45% to ~33% after the new facilities come online, increase quarterly IR disclosures to improve forecast accuracy, and lower the cost of capital.
• Capital Allocation: The company targets a 2% return on equity (DOE) and plans to maintain stable dividends, with a 33 yen full-year dividend for fiscal 2025 (up 3 yen YoY) and a planned maintained 33 yen dividend for fiscal 2026 despite projected profit declines.

For the full 2025 March fiscal year, total company revenue was 8.17 billion yen, a 10.7% year-over-year decrease. The three operating segments performed as follows: 1. Functional Materials segment: Revenue increased 280 million yen year-over-year, driven by recovering demand for display-related products, reaching 280 million yen in absolute terms, accounting for approximately 34.3% of total fiscal 2025 revenue. 2. Pharmaceutical segment: Revenue decreased 1.1 billion yen year-over-year, as the segment entered a transition (off) period, accounting for approximately 41.1% of total fiscal 2025 revenue. 3. Bio segment: Revenue exceeded initial guidance by 260 million yen, driven by the early recognition of revenue originally planned for fiscal 2026, with equipment sales hitting an all-time high, accounting for approximately 24.6% of total fiscal 2025 revenue. In Q4 2025, total segment revenue was 2.92 billion yen, down approximately 1 billion yen year-over-year, almost entirely driven by a 1 billion yen year-over-year decrease in pharmaceutical segment Q4 revenue.

• Fiscal 2026 (ending March 2026): Management guides total revenue of 8.6 billion yen, a 5.1% increase year-over-year, with segment breakdown: 2.95 billion yen for Functional Materials, 3.7 billion yen for Pharmaceuticals, and 1.95 billion yen for Bio. The Bio segment is projected to grow 280 million yen year-over-year following the completion of new R&D and production facilities. Management guides ordinary profit of 0.8 billion yen, a 13.9% year-over-year decrease, as higher depreciation, personnel, and other upfront investment costs offset revenue growth. Adjusted EBITDA is projected to grow 0.9% year-over-year to 1.77 billion yen.
• Capital expenditure guidance for fiscal 2026 is 3.5 billion yen, with 800 million yen in annual growth capex planned for fiscal 2027 and 2028. Depreciation expense is projected to reach 0.97 billion yen in fiscal 2026, rising to 1.28 billion yen in 2027 and 1.31 billion yen in 2028 as new assets come online.
• Mid-term (through March 2028 fiscal year): Management maintains its target of 12 billion yen in total revenue with 13% average annual growth, alongside the targeted profitability and return metrics outlined in the mid-term plan.
• Dividend guidance: Management maintains a stable dividend policy, guiding a 33 yen full-year dividend for fiscal 2026, unchanged from fiscal 2025.

• The pharmaceutical segment has inherently long lead times and large project-to-project revenue volatility, which caused a large year-over-year revenue decline in fiscal 2025 as the segment entered a transition off-period between major projects.
• The 4Q-heavy revenue concentration (40-45% of full-year revenue currently occurs in Q4) reduces the accuracy of full-year earnings forecasts, which can increase the company's cost of capital. While management targets reducing this concentration to ~33%, pharmaceutical project timing is driven by customer factors outside of the company's control, so heavy Q4 concentration will persist to some degree.
• Ramping up capacity and expanding into new high-value product areas requires large upfront capital expenditures, increasing fixed costs (depreciation and personnel costs) and putting near-term downward pressure on profitability.
• Pursuing multiple opportunities across different pharmaceutical sub-sectors may stretch the company's human and capital resources if not managed properly.

Q: Given your current human and capital constraints, should you narrow your strategic focus in the pharmaceutical segment rather than pursuing multiple different opportunities? What early traction have you seen for your current pharma strategy?

A: Management notes that the concern over constrained resources is reasonable, but the company's strategy aligns with customer expectations to pursue all viable opportunities. All the priority areas the company is targeting — including globalization, high potency APIs, medium molecules, nucleic acids, and peptides — rely on the company's core organic synthesis capabilities and shared GMP management systems, so separate dedicated teams are not required for each area. The company is also open to forming strategic partnerships to access additional capacity and resources when needed, and management believes the current mid-term plan is fully achievable with existing resources.