KNC Laboratories Co.,Ltd. Q1 FY2026 earnings call

• Company Overview & Core Capabilities:
  • Founded in 1985, Kobe Natural Products Chemistry is a contract R&D and manufacturing firm combining organic synthesis and bio-technology, serving clients from basic research through mass production across pharmaceuticals, functional materials and bio sectors.
  • It holds a unique competitive position in Japan as an independent listed firm capable of handling both organic synthesis and bio projects from small to large volume, including medium-molecule pharmaceuticals like peptides and nucleic acids, with strict confidentiality maintained to preserve client trust.
  • The 9-year (2026-2034) growth strategy is split into three 3-year phases: HOP (2026-2028, focus on building growth foundation), STEP (2028-2031, focus on profit margin improvement), and JUMP (2031-2034, focus on sustained high-value high growth).
• HOP Phase (2026-2028) Key Strategic Priorities:
  1. Strengthen technically skilled sales capability: Hire technical talent from inside and outside the company to expand and strengthen the sales team to capture new contracting opportunities and maximize added value. A temporary decline in orders per employee is expected during this investment period, with recovery targeted in the subsequent STEP phase. The 2028/03 target for annual order value is 12.5 billion yen.
  2. Increase production capacity and productivity: Target a 50% increase in total production capacity and a 20% increase in per-employee productivity through completion and launch of two new facilities (KNC Bio Research Center Building D and Izumo Second Factory FP-4 Building), process re-engineering, better utilization of existing equipment, automation, and adoption of AI/IT. Building D is already assigned to a specific client for dedicated repeat production with immediate ramp-up of utilization, while FP-4 has begun active sales outreach for new large-volume projects.
  3. Respond to evolving client needs: Commercialize high pharmacological activity APIs, achieve compliance with global GMP standards to support Japanese pharmaceutical clients' overseas clinical trials, and expand low-metal material capacity for semiconductor-related products via the new FP-4 building. Targets include securing high pharmacological activity API projects, adding new mass-production semiconductor material projects, and establishing commercial manufacturing under global GMP.
  4. Accelerate commercialization from R&D: Expand partnerships with venture companies and academia, secure investment opportunities via venture capital, and participate in joint projects as a specialist in bio, organic synthesis and manufacturing. Targets include expanding the pipeline with academia and drug discovery ventures, achieving commercialization in the STEP phase, exploring new businesses, and becoming a leader in niche segments.
  5. Improve forecast visibility from 4Q-heavy seasonality: Address the historical concentration of revenue in the fourth calendar quarter caused by client delivery timing demands for large pharmaceutical and bio projects. The new facilities will add products with monthly revenue recognition to lift all quarterly revenue levels, and the company will increase IR disclosures to show order backlog and lead time each quarter to improve forecast transparency and reduce cost of capital.
• 1Q 2026/03 Operational Performance:
  • 1Q delivered year-over-year revenue growth (up 20% driven by concentrated pharmaceutical shipments) but lower operating profit, due to one-time cost increases from production plan adjustments, increased work for new client project alignment, utilization volatility from project scheduling, and one-time higher outsourcing costs. All one-time negative factors are expected to be eliminated from 2Q onward.

Kobe Natural Products Chemistry operates across three business segments, with revenue contribution evolving over time:

1. Functional Materials Segment: At IPO 7 years ago, it contributed ~50% of total revenue. It manufactures photoresists for semiconductor manufacturing and special materials for displays, with ongoing expansion into new material categories driven by customer demand. It is investing 2.7 billion yen in the new FP-4 building at Izumo Second Factory to expand low-metal management capacity for high-end semiconductor materials.
2. Pharmaceutical Segment: At IPO 7 years ago, it also contributed ~50% of total revenue. It provides contract manufacturing of APIs, intermediates for pharmaceutical R&D, clinical trials and commercial products, and has supported the launch of numerous new drugs for Japanese pharmaceutical clients.
3. Bio Segment: Grew from less than 10% revenue contribution at IPO to 20% after the COVID-19 pandemic, improving the company's sector risk diversification. It supports from basic research to mass production for bio-manufacturing leveraging microbial production technology, and is investing 2.8 billion yen in the new KNC Bio Research Center Building D for pharmaceutical API production.

• 2026/03 Full-Year Guidance: Maintained at the original forecast level. The company expects a return to profit in 2Q, with full-year 2026/03 showing revenue growth but reduced profit, as it absorbs upfront investment for capacity expansion and capability building. 2Q 2026/03 is projected to reach 1.7 billion yen in revenue and 55 million yen in operating profit, exiting the profit bottom of 1Q.
• HOP Phase (2026-2028) Financial Targets: Maintained targets of 13% CAGR for revenue, reaching 12 billion yen in revenue by 2028/03, 30% adjusted EBITDA margin, 14% net profit margin, and 10% ROE. The company expects 2026/03 and 2027/03 to be the profit bottom, with margins recovering from 2028/03 onward, and targets all-time high EBITDA margin and ROE in the subsequent STEP phase.
• New Facility Contribution: The two new facilities will be completed in the current 2026/03 fiscal year. KNC Bio Research Center Building D will achieve immediate ramp-up, while Izumo Second Factory FP-4 Building will begin full revenue and profit contribution from the 2027/03 fiscal year onward.
• Order Outlook: New orders in 1Q 2026/03 reached 3.13 billion yen, the highest level for a first quarter since 2023/03, driven by accumulation of long-lead-time projects primarily in the pharmaceutical segment. The company has strong confidence in achieving the 2027/03 and 2028/03 revenue growth targets, as large projects that will contribute to future revenue have been secured.
• Dividend Guidance: Maintained a full-year dividend of 33 yen per share, aligned with the prior year, in line with the company's policy of targeting a 2% DOE for stable shareholder returns even while pursuing active growth investment.
• Market Cap Target: Hitting the 12 billion yen revenue target for 2028/03 is expected to allow the company to exceed the 10 billion yen market cap threshold required by the Tokyo Stock Exchange's new listing standards.

• Revenue seasonality: Large pharmaceutical and bio projects are concentrated in the fourth quarter per client request, leading to lower forecast visibility and higher perceived uncertainty that can increase the company's cost of capital. This is being addressed via new facility additions and improved IR disclosure, but cannot be fully eliminated.
• Tariff and raw material price volatility: Changes in trade policy (such as the Trump tariffs) can lead to higher raw material prices. The company mitigates this by passing price increases through to clients, so no material impact is expected, but future unforeseen price shifts cannot be fully ruled out.
• Foreign exchange volatility for raw material procurement: The company mitigates this risk via forward exchange contracts for overseas-sourced materials, and passes through any remaining raw material price increases to clients in contract pricing, limiting the company's residual exposure.
• Project scheduling volatility: Unexpected client delays or production issues can cause utilization volatility and temporary operating losses, as seen in the 1Q 2026/03 result, though such events are expected to be one-time and limited to the quarter of occurrence.

Q: What are the key growth drivers for each of the three business segments under the mid-term plan? / A: For functional materials, the 2.7 billion yen investment in the FP-4 building will enable low-metal management for high-end ArF and EUV semiconductor photoresist products, which will act as the core growth driver. For the bio segment, the 2.8 billion yen investment in Building D is expected to drive future revenue growth. For the pharmaceutical segment, the company will focus on building out global GMP quality assurance to support Japanese pharma clients' overseas clinical trials, with high pharmacological compounds and the company's focused mid-molecule areas (peptides and nucleic acids) expected to drive future sales growth. This confirms that functional materials and bio have visible new capacity from investment, while pharma will focus on filling existing expanded capacity.

Q: What is the ROE outlook beyond the 10% 2028/03 target? / A: The 10% ROE target for the HOP phase is intentionally set at a moderate level. In the subsequent STEP phase, the company aims to achieve an all-time high ROE by growing its high value-added existing business, and the company is already actively pursuing new orders to achieve this target.

Q: When will the new factories be completed and start contributing to earnings? / A: Both the KNC Bio Research Center D Building and the Izumo Second Factory FP-4 Building are scheduled for completion in the current 2026/03 fiscal year. D Building is planned for a vertical immediate ramp-up, while FP-4 is currently receiving client inquiries, and full revenue and profit contribution from FP-4 is not expected until the 2027/03 fiscal year.

Q: How does the company plan to achieve the 10 billion yen market cap target under the TSE's new listing rules? / A: The company is in the first year of its mid-term plan, and targets 12 billion yen in revenue by the third (final) year of the plan. Management believes hitting this revenue target will allow the company to cross the 10 billion yen market cap threshold. To achieve this, the company will proactively engage with individual investors and shareholders to improve understanding of the business, and will continue holding IR events like this seminar to build market expectation for the company's performance.

Q: What impact will the Trump tariffs have on the company, and how is raw material price volatility managed? / A: There is no material impact from the Trump tariffs at present. If tariffs cause raw material prices to rise, the company passes the price increase through to clients, so no major issues are expected. For raw material price and foreign exchange volatility from overseas procurement, the company uses forward exchange contracts to hedge prices, and passes any raw material price increases through to client contract prices after client agreement, limiting the company's risk exposure.