TOPPAN Holdings Inc. (7911.T) Earnings Call Transcript & Summary

I am Noguchi, Head of the Living & Industry Division. Let me start with an overview of the Living & Industry business and our Packaging business strategy. First, the overview of the business. In fiscal '24, the business recorded sales of JPY 548 billion and non-GAAP operating profit of JPY 39 billion. It accounted for 32% of consolidated net sales of Toppan Holdings. At the subsegment level, we have packaging centered around flexible packaging with sales of JPY 406.1 billion and Decor materials, mainly Decor sheets used for walls, floors and fixtures with sales of JPY 141.9 billion. Next is the fiscal '25 plan for the Living & Industry segment. As the content is the same as presented in the financial results briefing, I will omit the details, but allow me to highlight one point as shown in the center of the table on the right, in fiscal '25, about 80% of the sales will come from packaging and about 20% from Decor materials, meaning that the Packaging business will be the core driver of the Living & Industry business for both scale and profitability. Next is the trend in non-GAAP operating profit by segment. As shown in the chart on the far right, the Living & Industry segment profit has steadily increased from fiscal '22 to fiscal '24, demonstrating solid earning capacity growth. In fiscal '25, with Sonoco's TFP or thermal formed and flexible packaging business joining, profit growth will be accelerated with expected non-GAAP operating profit of JPY 59.7 billion and an operating profit margin of 8.1%. With this, leading an industry will grow to have the highest non-GAAP operating profit amount of the 3 segments. As a pillar of Toppan's corporate value creation, we will work to grow it further. Now I will explain the Packaging business, which is the main theme of today's presentation. The top left graph shows the sales trend of the Packaging business broken down by domestic and overseas market. Share of Overseas business has expanded to 56% due to Sonoco TFP and other overseas M&A. The lower left graph shows the trend in non-GAAP operating profit for the Packaging business. The bar chart is the amount of profit and the line graphs are operating margins for Japan and overseas. In Japan, profitability has improved considerably due to SX growth in addition to structural reforms, including withdrawal from underperforming businesses and acceptance of appropriate pricing. Overseas, the highly profitable Sonoco TFP business with its 11% margin is driving profitability, which will improve further with synergies. Next is our positioning in the global flexible packaging market. Having aggressively expanded our footprint and acquired Sonoco's TFP business, we are now at #3 among flexible packaging converters globally by revenue. In ASEAN, the fastest-growing region for flexible packaging, we are the #1 flexible packaging converter and also have the world's top market share in transparent vapor depositive high-barrier films, securing a strong position in the global flexible packaging market. Next is the medium-to-long-term outlook for the Packaging business. We will accelerate solutions that anticipate market changes and establish a robust competitive advantage and promote de facto standardization of SX packaging and maximize synergies to transition into the next stage of growth. As shown in the slide, since fiscal '22, we have focused on domestic structural reforms and footprint expansion through overseas M&A. As a result, in fiscal '25, we project sales CAGR of 4.5% and a 3-point improvement in non-GAAP operating margin to 9.3%, achieving a significant profitability enhancement and establishing a foundation for growth. Towards fiscal '30, we aim for further leap, targeting a sales CAGR of over 5% and non-GAAP operating margin of over 12% to solidify our position as a global top runner in SX packaging. Finally, the strategic direction for the Packaging business will be led by two growth drivers. The first is the global application of European regulations mandating the use of recycled materials, which will drive global demand for SX packaging. The second is the acquisition of Sonoco TFP business and the strengthening of our European film business, leading to the establishment of the global platform for accelerated growth. The details of these two growth drivers will be explained next by Suzuki and Tatewaki.

I will now discuss the outlook for the global packaging market, focusing on changes in the market environment, including regulatory trends and explain why SX packaging is expected to grow. Let me begin with point one, changes in the packaging market environment. In the context of preventing global climate change, we are shifting from the traditional linear economy on the left based on mass production and mass consumption toward a circular economy, which aims to circulate resources for as long as possible. It is a model where what was based is turned into valuable recycled resources. Amid this transition, demand for sustainable packaging or SX packaging is increasing. Moving on to point 2. To realize the circular economy, it is essential to incorporate life cycle design into packaging, that is to go beyond the manufacturing and usage and include recovery and recycling in the design process. We refer to the flow of manufacturing and product distribution indicated in blue as the manufacturing side and the return flow of collection, regeneration and recycling in green as the recycling side. On the manufacturing side, to enable recyclability after use, packaging must be designed using monomaterial plastics and adopt aluminum-free barrier structures for oxygen and moisture. On the recycling side, with regulatory mandates to incorporate recycled materials, the challenge is how to design packaging that maintains quality even when using such materials. A truly circular economy can only be achieved when these two flows are seamlessly connected. Now point 3. To accelerate this transformation, Europe has taken the lead in enacting legislation. In January of this year, rules focusing on packaging and packaging waste called PPWR were enacted. Provisions like restrictions on certain substances will be enforced across the EU starting in August 2026. On the manufacturing side, in the lower left, the regulation mandates the use of recyclable packaging and packaging with low recyclability will be banned from sale starting in 2030. On the recycling side, on the right, the regulation sets mandatory targets for the percentage of recycled materials in packaging. The first category mainly covers food packaging, which will be required to contain at least 10% recycled content by 2030. The second category is nonfood packaging, which must contain 35%. This ratio is designed to increase gradually, reaching 65% by 2040. Next page. This is a rule-making approach by Europe based on its environmental strategy to seize initiative with standardization. It is a repeat of 30 years ago. In the 1990s, Europe led the development of ISO standards such as ISO 9001 and 14001, which then were rapidly adopted worldwide as common rules for global companies. PPWR is seen as a similar strategic initiative. In the U.S., some states have introduced targets for the use of recycled materials. And in Japan, the act on the promotion of effective utilization of resources was enacted in May, which do not carry numerical targets. With PPWR in place, we expect significant global growth in demand for environmentally conscious packaging. To stay ahead of this trend, we are proactively developing SX packaging that complies with PPWR requirements. Next page. Let me explain how PPWR imposes regulations. The two requirements on the manufacturing and the recycling sites are positioned on the X and Y axis of the chart on the left. The further a package moves towards the upper right, the higher its environmental performance. Based on this, the acceptability of that package and applicable environmental fees will be determined. For example, in the lower left, we show typical package structure consisting of three layers, a printed layer on the outside, a barrier film layer and a sealant layer for product enclosure. Currently, as shown in one, most packages are constructed by laminating multiple materials with different functions. However, such structures will no longer be marketable after 2030. To improve recyclability, packages will need to transition to monomaterial structures as shown in 2. However, such material will be prohibited from 2030 due to the absence of recycled content. Advancing to the configuration shown in 3 will allow market entry. But due to the low recycled content, environmental fees will be imposed as a formal penalty. Under the current framework, these fees are borne by brand owners. To avoid such penalties, packages will ultimately need to evolve into the structure shown as a primary target in 4 by 2030. The image in the bottom right of the slide illustrates how this transition affects the unit cost of packaging. Approximate cost for each configuration is shown with one as 103, which barely meets the minimum requirements would be subject to substantial environmental fees. To ensure economic rationality, we need to realize configuration 4, the primary target. The difference between 3 and 4 creates an incentive for brand owners to shift toward SX packaging, and it also serves as a source of profitability for our company. Let me now explain our competitive advantage in achieving configuration 4 using a recently developed monomaterial package as an example, along the value chain. First, we add functions like heat resistance into resin and use special processing to convert them into film. This special processing is strengthened by the technology of Irplast, an Italian film manufacturer we acquired in May. Next, this film is converted into a barrier film with GL coating technology, our most powerful asset. With our global converting footprint now, including Sonoco, we can deliver SX packaging solutions to the global market. For our first target, we have already completed the design and in-house production of all materials and are currently rolling out to our customers. Furthermore, for the high-end target shown on the right, we have developed materials that combine heat resistance and barrier performance, enabling us to take a lead globally in establishing the next-generation ultimate package and prepare proposals for our customers. In this way, by expanding our business scope into the upstream film business and integrating it with the downstream conversion business through a vertical integration strategy, we strive to become a one-of-a-kind company, providing diverse SX packages to our customers. Finally, in 5, we introduced specific examples of SX packaging that have already been recognized for their value in the market. The left example is a package for retort pouch food, which currently uses aluminum foil. By replacing this with monomaterial, we can ensure recyclability. The middle example is a laminated tooth package for toothpaste. Currently, it consists of different plastics layered together, making it difficult to recycle. However, we have prepared a package that replaces this with the monomaterial and to further improve environmental performance, drastically minimize the use of organic solvents. The right is the refill pouch for shampoo designed to increase the recycled material content on the recycling side. Aiming for the high recycled content required for nonfood packaging, we have achieved a 30% recycled content rate. As described, the transition to SX packaging has already begun centered around major global brand owners, and we are confident that this trend will continue to grow in the future. Next, Tatewaki will explain Toppan's global packaging strategy in response to this trend.

I, Tatewaki, will now explain our packaging strategy. First, I will discuss the market size of the global flexible packaging market. In 2021, the market size was USD 103 billion, approximately JPY 14 trillion, and it has been steadily expanding since then. It is projected to reach USD 153 billion, approximately JPY 21 trillion by 2030, 1.5x the current size. The average growth rate is expected to be 4.5% annum. The packaging business is closely tied to population growth, so Japan is expected to see only modest growth, while Asia Pacific, Europe and North America are projected to grow steadily. Next, I will explain our target markets. The chart on the left classifies products with the vertical axis representing barrier performance. Within this classification, we have identified the value-added high barrier and high-performance barrier markets as our growth targets. Additionally, these markets have higher unit prices and profit margins compared to consumer packaging. In particular, the high-performance Barrier segment is seeing strong demand for the development of recyclable SX packaging and monomaterial packaging. As noted in the graph on the right, this field has a higher growth rate than consumer packaging and is expected to grow as a new market. Please refer to 3. I will explain our strategy for these target markets. The diagram on the left shows the general structure of high-barrier packaging materials that we target. In this configuration, the cost of film accounts for approximately 50% of the total packaging cost. The diagram on the right illustrates our vertical integration strategy, our core strength. By increasing the in-house production rate of film, which accounts for approximately 50% of the total cost, we can enhance cost competitiveness. At the same time, by acquiring unique material technologies, we can secure a significant competitive advantage in the film business. In Packaging, by leveraging our global platform that we have developed, we can achieve local production for local consumption, giving us a very advantageous position in terms of SX packaging delivery, price and supply. Next, please refer to 4. This shows the history of our business expansion and footprint expansion to date, which has enabled us to realize this vertically integrated strategy. The left side shows our own investment projects and the right shows M&A projects. Since launching the GL barrier plant in the U.S. in 2016, we have systematically expanded our film and packaging capabilities over the past decade. In the Film business, we began our upstream expansion in earnest with the acquisition of an Indian film company in 2017, followed by the expansion of film coating capacity in Indonesia in 2024 and the acquisition of Italian company Irplast in 2025, all focused on the SX field. As for our Packaging business, starting with M&A activities in ASEAN, we have gradually expanded into European and American markets. Now with the acquisition of Sonoco, we have established a significant presence in the Americas, which we consider our most important market. In particular, during the first half of fiscal 2025, we achieved aggressive business expansion through the construction of a barrier film factory in Europe, the acquisition of Irplast and the acquisition of Sonoco in the U.S. Please refer to 5. As a result of these business expansions, this year's regional sales revenue are shown accordingly, enabling us to establish global platforms in Film, Barrier and Packaging businesses as a leading global packaging company. The overseas ratio is also expected to exceed 50% this fiscal year, reaching 56%. As of fiscal 2025 in Europe, the core businesses will be Film and Barrier film, while in the Americas, the core business will be packaging following the acquisition of Sonoco. Next, I will explain the growing market demand in Europe, which is the leading region for target SX packaging based on actual performance. First, regarding legislations. As explained earlier by Suzuki, PPWR regulating packaging materials will come into effect in August 2026 and all packaging materials must comply by 2030. In response, global companies in food and FMCG sectors have declared environmental targets and committed to changing their packaging materials. Simultaneously, leading distribution and retail companies have also declared compliance with packaging regulations for the products they handle, making the expansion of SX packaging in Europe a certainty. Please refer to 7. This shows the actual sales trends in Europe for barrier films, which are essential for SX packaging since 2019. Sales have been steadily increasing overall until 2025, but by 2024, recyclable grades already accounted for 37% of sales. For fiscal 2025, based on the first half performance, 2/3 are expected to be recyclable grade. We anticipate continued steady growth with over 90% of products expected to be recyclable grade by fiscal 2030. Please refer to 8-1. To address the increasing demand for Barrier films in June, we opened a new barrier film plant in Czech, making it our first in Europe. To meet the increasing demand in Europe, the Czech plant alone will be insufficient, so we plan to combine capacity from both Japan and the U.S. Please refer to 8-2. We have also completed the acquisition of Irplast, an Italian company with unique film forming capabilities for PP film. Irplast holds industry-leading technology for achieving recyclable monomaterial packaging. And through this acquisition, we have secured a superior position in material technology for SX packaging combined with GL Barrier. Please refer to 9. This is the acquisition of Sonoco's TFP business. Sonoco, which has numerous sites in the massive North American market has long been an attractive company for us. We reached an agreement for acquisition terms in December last year and completed the acquisition on April 1, welcoming Sonoco into the Toppan Group. The TFP business, which has 22 locations, not only in the United States, but in Canada and Brazil as well, combined with their existing products will undoubtedly become a major asset for manufacturing and selling SX packaging materials in the Americas, which is expected to become the mainstream worldwide, starting with Europe. Our objective is to leverage their management resources, expand our SX solutions to global companies with which they have strong relationships and achieve local production for local consumption, thereby realizing business expansion in the Americas. A map illustrating our global strategy discussed earlier is shown on this slide. Based on technology and knowledge developed in Japan, we have obtained certification and commenced mass production of sustainable packaging materials in Europe. We will expand this technology to the Americas and Asia Pacific regions to achieve mass production and local production for local consumption. In the expansion of sustainable packaging materials, there will be time lags due to the progress of regional infrastructure and legal frameworks. However, these efforts are essential for addressing global challenges, such as global warming and marine pollution, and we are confident that our leading-edge technology will be deployed worldwide. Finally, I will briefly explain the drivers for business growth until 2030. Regarding sales, we expect to achieve annual growth of 5% based on 3 main pillars: steady organic growth in the market, sales expansion in our focus area, the SX market and synergies from the acquisition of Sonoco's TFP business. Regarding operating margin, in addition to profit increases resulting from the aforementioned sales growth, we aim to achieve cost reduction synergies through globalization and scale and strive to improve our non-GAAP operating margin from 9.3% this year to over 12%. This concludes my explanation of our global packaging strategy. Thank you for your participation.