SUMITOMO CHEMICAL COMPANY,LIMITED Q4 FY2026 earnings call

Business Portfolio Transformation

• The company has shifted from a profit structure dominated by petroleum and plastics (PNP) business to one where growth drivers AGL and ICTM account for almost 60% of total forecasted FY2026 core operating income.
• The company will continue concentrating investments in its identified growth drivers to further advance the portfolio shift.

Agro and Life Solutions Strategies

• For crop protection chemicals, 5 new active ingredients have launched between 2020-2024, 3 of which are expected to become blockbusters. The blockbuster candidate Indifilin, a soybean rust fungicide, targets a market expected to grow to 600 billion yen by 2029; the company has expanded into neighboring markets like Paraguay and is expanding Indifilin's approved uses across additional crops and regions.
• The company consolidated its two U.S. biorational businesses (VBS and MGK) into a single new entity to capture synergies and reduce redundant overhead. Current biorational sales are 70-80 billion yen, with a target to double sales by the early 2030s. The company prioritizes growth in South America (fast-growing regional demand), North America (growing interest in biostimulants), and Europe (difficult chemical registration creates major opportunities for biorationals). It has 40 biorational products in its development pipeline, with plans to expand into animal nutrition.

ICT and Mobility Solutions Strategies

• To respond to rapidly growing demand for AI semiconductors, the company is building a new Next Generation EUV Technology Center in Osaka, Japan, with integrated R&D, mass production, and analysis functions, and has started operations of an advanced ARF lithography tool to accelerate product development.
• The company has established customer-aligned production footprints across Japan, South Korea, China, Taiwan, and the U.S. (Texas and Arizona). The recent acquisition of AUECC expands the company's geographic footprint to key semiconductor manufacturing hubs in Taiwan and the U.S. West Coast, and adds hydrofluoric acid specialty products to the company's existing volume product portfolio, creating synergies. The company targets doubling or more AUECC-inclusive semiconductor materials sales by 2030.
• The company holds a strong position in immersion ArF photoresist, and is targeting 20% share in next-generation high NA EUV photoresist with its organic molecular resist technology. It has already started mass production of multiple backend process materials for advanced large-size AI chips, and is expanding this new business area.

Advanced Medical Solutions Strategies

• The Parkinson's disease drug M-Shepery obtained conditional approval in Japan, with clinical trials ongoing. It is on track to become a 100 billion yen annual sales blockbuster by the early 2030s if approved in the U.S.
• For the CDMO business, the company prioritizes advanced small molecule CDMO with minimal capital investment. It recently acquired full ownership of Koei Chemical to expand production capacity, and opened a U.S. sample and research outreach office that is already nearly fully utilized. The regenerative medicine CDMO business has been profitable for five consecutive years, and will start construction of a fourth production plant that will add over 10 billion yen in production capacity.

PNP Business Restructuring

• The company is shifting the legacy PNP business from a capital-intensive manufacturing model to an IP licensing model, where proven environmental and process technologies are licensed to third parties to generate profit without large capital expenditures. Recent examples include licensing hydrochloric acid oxidation technology to BASF, and the company is accelerating licensing for GX-related technologies like PMMA chemical recycling.

Management Foundation Strengthening

• The company has implemented rigorous investment discipline with multifaceted risk quantification, external objective input, and agile decision-making, as demonstrated by the AUECC acquisition. 80% of all mid-term plan strategic capital expenditures are allocated to AGL and ICTM, and 75% of this planned investment has already been deployed as scheduled.
• The company reorganized R&D functions to align corporate and business unit R&D roadmaps through a cross-functional center, focusing resources on high-potential areas where the company holds competitive advantages.
• The company updated its DX strategy to prioritize internal AI utilization, including integrating internal data and planning to introduce AI agents to improve decision-making. It is also developing the Tsunagu digital platform for the domestic Japanese agricultural sector.
• The executive compensation system was updated to increase the variable performance-aligned portion from 50% to 60% of total compensation, and adds an ROIC achievement coefficient to better align pay with capital efficiency goals.

FY2025 overall sales revenue was 2,328 billion yen, a decrease of approximately 278 billion yen year-over-year. Core operating income was 208.4 billion yen, an increase of 67.9 billion yen year-over-year, and net income was 60.9 billion yen, up 22.4 billion yen. ROE hit 6.4% and ROIC hit 5.6%, both showing improvement from 2024.

• Agro and Life Solutions (AGL): Core operating income saw a slight year-over-year increase, exceeding the February 2025 forecast. It contributes approximately 30% of total core operating income as of the current portfolio shift. AGL's FY2026 core operating income is forecast to increase by 8.7 billion yen year-over-year.
• ICT and Mobility Solutions (ICTM): Core operating income saw a large year-over-year decrease. The decline was driven by 10 billion yen of pre-shifted 2025 sales pulled into 2024 due to Trump tariffs, and reduced display material shipments amid general-purpose semiconductor shortage and falling smartphone demand. It contributes approximately 30% of total forecasted FY2026 core operating income. ICTM's FY2026 core operating income is forecast to increase despite prior upfront investments, driven by growing semiconductor material shipments.
• Essential Green Materials (EGM): Core operating income saw a large year-over-year increase, primarily driven by the sale of PetroRabic shares. EGM's FY2026 core operating income is forecast to increase by 5.6 billion yen, including the benefit of improved PetroRabic refinery margins.
• Specialty Pharma: Core operating income saw a large year-over-year increase, driven by 49 billion yen in gains from the disposition of its Asian business and expanded sales of three key products. Excluding the 2025 one-time disposition gain, FY2026 core operating income is on track to increase year-over-year, even though the headline forecast shows a 14.4 billion yen decline on a nominal basis.

• FY2026 overall sales revenue is guided to increase 31.5 billion yen to 2,360 billion yen. Core operating income is guided to increase 6.6 billion yen to 215 billion yen, and net income is guided to increase 9.1 billion yen. On an underlying performance basis (excluding one-time capital gains from business dispositions), FY2026 core operating income is forecast to increase 80 billion yen from FY2025's underlying result, marking significant growth.
• ROE is guided at 6.8% for FY2026, while ROIC is guided 0.1 percentage points lower year-over-year due to a larger capital base from strategic growth investments.
• The company forecasts an annual dividend of 16 yen per share for FY2026, an increase from prior levels. Management has stated a target to reach an annual dividend of 24 yen per share at the earliest possible opportunity.
• The FY2026 guidance already incorporates a 10 billion yen negative risk related to the ongoing Middle East situation, and notes that no further upside or downside from current PetroRabic margins is incorporated beyond the 9.2 billion yen Q1 gain.

• The ongoing Middle East conflict has driven sharp increases in raw material prices. While the company has secured raw material requirements for all current production plans through June, and there is no major disruption to operations at present, there is a risk that prolonged conflict through summer or autumn 2026 could lead to larger than expected negative impacts on earnings. There is also risk that the company may not be able to fully pass through higher raw material costs to customers, even after internal efficiency and rationalization efforts.
• For AGL, fertilizer shortages tied to the Middle East situation could delay plantings in major markets like Brazil, leading to lower crop protection chemical sales. Slowing Chinese exports to Brazil and growing generic market share also create potential headwinds, though no material impact has been observed to date.
• Registration of new chemical crop protection products in Europe has become extremely difficult, creating uncertainty around the timing of Pavecto registration, even though the product has a strong safety profile.
• PNP business in Singapore faces persistent oversupply from Chinese producers that suppresses margins, and joint venture agreements limit disclosure of operational details related to production optimization efforts. Extreme raw material price volatility also creates inventory valuation risk for the EGM segment.
• Intensifying competition in the large and growing Indifilin soybean fungicide market could limit the company's sales growth despite Indifilin's superior performance.

Q: One year into President Mito's tenure, how has Sumitomo Chemical changed, how is Middle East risk incorporated into guidance, and why is net income lower relative to operating income growth?

A: Management has focused on building a bottom-up, autonomous organizational culture where employees are empowered to contribute ideas, and the strong FY2025 results reflect cumulative progress on this cultural shift. A 10 billion yen negative risk from prolonged Middle East conflict is already incorporated into the FY2026 core operating income guidance, with fertilizer supply risks for AGL and cost pass-through risks for ICTM and EGM accounted for. Lower net income reflects conservative accounting for impairment and advance recognition of ongoing structural reform costs in the EGM segment.

Q: Is there any missing capability in the current portfolio strategy, how will the iPS cell business be funded given its R&D requirements, and how much progress has been made on EGM restructuring?

A: There are no missing core capabilities; the company will continue to leverage its core strength in organic synthesis across its targeted growth areas rather than pursuing unaligned new acquisitions. The iPS cell regenerative medicine business builds on the company's long-standing internal safety assessment expertise, generates synergies with the company's small molecule and nucleic acid CDMO business, and requires R&D investment an order of magnitude smaller than traditional small molecule drug discovery, which is fully within the company's capacity. EGM restructuring is progressing, and management remains confident in achieving the 20 billion yen core operating income target for FY2026 after accounting for current Middle East-related disruptions.

Q: Why will biorational growth accelerate starting in 2027, and what is the company's Europe biorational strategy and M&A plan?

A: Biorational growth acceleration in 2027 is primarily driven by biostimulants, which require multi-year customer testing and awareness building to drive adoption; by 2027, enough testing will be complete to drive rapid sales growth, particularly in North America. Europe is a strategic priority for biorationals given the difficulty of registering new chemical crop protection products, but current investment will be focused on the higher-priority semiconductor sector first. Additional investment in European biorational production, R&D, and logistics will be pursued as the company's financial position further improves. Pavecto's main target market has shifted from Europe to South America, where registration is expected to come earlier and it addresses a growing unmet need for target spot disease control.

Q: What is the current progress on Singapore PCS restructuring, and what is the probability of hitting the 20 billion yen FY2026 EGM operating income target amid Middle East volatility?

A: Singapore PCS is a well-regarded, trusted regional cracker facility that serves as critical regional infrastructure, but faces ongoing pressure from Chinese oversupply. Management is in discussions with joint venture partners and other stakeholders about the future structure of the business, with discussions delayed slightly by the current Middle East situation, so no details can be shared publicly due to agreements. The 9.2 billion yen Q1 FY2026 gain from strong PetroRabic refinery margins is already incorporated into guidance, and no further upside or downside is assumed after Q1. After accounting for current low utilization in Singapore and domestic PNP operations and Middle East risks, management still expects to achieve the full-year 20 billion yen target.