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

This is Kurobe, the CFO. Thank you for taking the time out of your busy schedules to join our fiscal 2025 half year results briefing. I will now explain the details of the first half results. Please turn to Page 3. In the first half, consolidated net sales increased 4.3% year-on-year to JPY 863.6 billion and non-GAAP operating profit, which excludes mainly the effects of acquisition-related costs, rose 14% to JPY 38.6 billion. While consolidated operating profit was generally in line with the plan, the Information & Communication and Living & Industry segments fell short of plan, whereas the Electronics segment and adjustment items exceeded plan. Non-GAAP operating profit, net of onetime costs such as gains on sale of investment securities increased 41.5% to JPY 24.5 billion. The key points of the results are shown on the right. On a non-GAAP basis, Information & Communication had flat sales and higher profit. Living & Industry had higher sales and profit and Electronics posted lower sales and profit. However, profit grew compared with Q1. I will explain the performance of each segment later. Now from this fiscal year, for exchange rate processing, we changed to yearly average rate from year-end rate. Accordingly, prior year figures have been retrospectively revised. Unless otherwise stated, the prior year figures in the following pages are modified retrospectively. Next, please turn to Page 4. From this briefing, we will explain year-on-year changes in operating profit on a non-GAAP basis. From the previous year's operating profit of JPY 33.9 billion, foreign exchange impact was negative JPY 1.6 billion and infrastructure development cost, negative JPY 1.4 billion. Amid our growth businesses, Erhoeht-X impact was plus JPY 1 billion and the Japan SX and overseas living was a significant positive of JPY 8.6 billion due mainly to the consolidation of Sonoco TFP business. On the other hand, the semiconductors were minus JPY 3.3 billion. In existing business, structural reform conducted last year had a positive impact of JPY 3.2 billion. As a result of these factors, non-GAAP operating profit amounted to JPY 38.6 billion. Next, I will explain the status of each segment. Please turn to Page 5. Net sales in the Information and Communications segment were JPY 425.4 billion, essentially flat year-on-year, while non-GAAP operating profit increased 6.5% to JPY 14.5 billion. Overall, profit increased due mainly to structural reforms in existing businesses, but results fell short of plan due to shortfalls in overseas security and BPO. By subsegment, digital business sales increased overseas due to the HID and dzcard business, joining the scope of consolidation and growth in the government ID business and Marketing DX. Profit was higher for Marketing DX, while in overseas security, it was down due to deferrals of large projects to the second half. Nevertheless, on a non-GAAP basis, profit increased. Overseas security is expected to meet its full year plan. In BPO, although sales to the financial sector increased, sales and profit decreased because there were less large-scale public and private sector projects than the previous year. In Secure Media, smart cards performed well, but overall sales decreased due to a decline in the financial printing business following U.S. election solution projects in the previous year. Profit increased due to higher smart card sales and improved DPS profitability. In Communication Media, sales decreased due to the continued contraction of the publication and commercial printing markets and the impact of the cyclical nature of the textbook business, but similar profit level to the previous year was maintained as the effect of structural reform offsetting the lower sales. Next page summarizes the first half results and full year outlook for Erhoeht-X for your reference. In the first half, while Security and Hybrid BPO fell short of the previous year's results and of the plan, overall, the business recorded higher sales and profit. For the full year, we revised the second half plan based on the first half performance. Sales and profit are expected to grow over the full year with the progress of scaling in second half. Moving on to the Living & Industry segment, Page 7. Net sales were up 19.9% year-on-year to JPY 330.5 billion and non-GAAP operating profit increased 41.5% to JPY 24.7 billion. Overall, non-GAAP operating profit grew significantly. However, in the Sonoco TFP business, newly consolidated from the second quarter, demand in the North American market fell and onetime start-up costs were higher than initially expected, so results fell short of plan. In the Packaging business, overseas sales increased significantly due to the consolidation of the TFP business and Irplast as well as strong performance in barrier film for Europe. In terms of profit, Europe and Asia saw roughly higher profit, while in the U.S., profit fell due to lower demand in the food market and the recording of onetime M&A costs. In Japan, SX packaging continued to grow steadily, resulting in higher sales and profit. In the decor material business, while the market recovery is still ongoing, sales of decorative sheets in Europe and South America remained strong. Profit increased due to cost reductions and structural reforms. In Japan, both decorative sheet market share and the spatial design business grew, resulting in higher profit. Next, Page 8. On the left, we show performance impact of the packaging business M&A leading to new consolidations in Q2. In the first half of fiscal 2025, sales grew by JPY 55 billion from adding Sonoco TFP business and Irplast. Negative profit impact came from M&A-related costs of JPY 4.5 billion, onetime start-up costs of JPY 1.7 billion and amortization of goodwill and intangible assets of JPY 3.9 billion. Excluding these items, operating profit increased by JPY 5.8 billion. Similarly, for the full year of fiscal 2025, sales will increase by JPY 160 billion and profit by JPY 16 billion, and we are essentially adding businesses that have operating margins of around 10%. For the next fiscal year, M&A-related costs will be 0 and onetime start-up costs will also be 0 from the second quarter onward, making these significant drivers of profit growth. On the right-hand side, we have listed the sales by region for the entire packaging business and for SX packaging in the first half. For SX packaging, sales are steadily expanding in Japan, Europe and Asia. Next is the Electronics segment. Please turn to Page 9. Net sales in the Electronics segment were down 14.4% year-on-year to JPY 118.9 billion, and non-GAAP operating profit was down 19% to JPY 20.6 billion, but overall results exceeded the plan. This includes an approximately JPY 1.5 billion negative impact from foreign exchange effects. In the subsegments, semiconductors had flat sales and lower profit overall. Although FC-BGA posted lower sales and profit, it has been on a recovery trajectory since Q2. In Q1, although in network switches, there was impact from inventory adjustments of some customers. We catered to demand from the rapidly recovering consumer market. In Q2, profit margin improved on the back of higher share of products with high unit prices for applications such as server CPUs. Photomasks performance was strong globally, driven by demand for cutting-edge products in Asia, Europe and North America. In Displays, sales dropped overall, while profit remained flat. Anti-reflective films had lower sales and profit due to inventory adjustments, but we see recovery trend from Q2. For Display Solutions, profit increased due to the effects of structural reforms. This concludes the performance review of each segment. Please turn to Page 10. I will explain the main points of the first half income statement. Gross profit margin improved by 0.4 points year-on-year to 23.5%, driven by the expansion of high value-added products such as SX packaging and by structural reforms. The ratio of SG&A expenses increased by 1 percentage point. The main factor was consolidation of new entities, including M&A expenses and increased amortization of goodwill and intangible assets. Of this, M&A-related expenses are onetime costs limited to this fiscal year. Nonoperating income and expenses decreased to a positive JPY 1.3 billion from positive JPY 4.1 billion a year ago due mainly to higher interest paid with more borrowings and lower dividends received due to divestment of securities. Page 11 presents the status of the balance sheet for your reference. Regarding liabilities, I will explain the items disclosed in today's earnings report. At the end of the fiscal year ending March 2025, we executed a new short-term borrowing of JPY 270 billion for the Sonoco TFP business acquisition. Of this short-term borrowing, JPY 120 billion has already been refinanced to a longer-term syndicated loan in Q2. In addition, JPY 80 billion will be financed through the issuance of unsecured straight bonds announced in today's earnings report. Next is the status of producing strategic shareholdings. Please turn to Page 12. We continue to reduce our strategic shareholdings in the first half. As a result, the ratio of strategic shareholdings to consolidated net asset was 14.8% at the end of September, achieving our current medium-term plan target of below 15%. We will continue to reduce these holdings aiming to be below 15% at the end of March 2026 and to achieve below 10% early in the next medium-term plan period. This concludes my presentation. Oya will now explain the full year results forecast.

I am Oya, the COO. I will explain the full year forecast and provide an outline of next fiscal year's performance. Page 14. As we made a timely disclosure today, we have revised our full year plan based on the first half results and the business environment expected in the second half. I will first give you an overview. The revised full year figures, net sales, JPY 1.79 trillion; operating profit, JPY 70 billion on a GAAP basis, JPY 97.2 billion on a non-GAAP basis; profit attributable to owners of parent, JPY 70 billion on a GAAP basis, JPY 82.5 billion on a non-GAAP basis. The revised ROE, 5.4% on a GAAP basis, 6.4% on a non-GAAP basis. We have also revised our assumed exchange rates based on the recent market environment. U.S. dollar from JPY 140 to JPY 145 per dollar and from JPY 154 to JPY 169 per euro. Page 15, the revisions by segment. The table compares the initial plan, the revision announced on October 16 following the new listing of Tekscend Photomask and the revision announced today. Operating profit is shown on a GAAP basis. First, for the Information and Communications segment, we revised sales downward by JPY 5 billion and operating profit by JPY 4 billion from the initial plan. This reflects the impact of continued market contraction of Communication Media and the revision based on Erhoeht-X' first half performance. For overseas security business, the deferral of large projects are included as positive factors for the second half. For the Living & Industry segment, we revised sales downward by JPY 16 billion and profit by JPY 4.5 billion. Following the inclusion of the Sonoco TFP business, onetime start-up costs are being incurred this fiscal year, resulting in numbers higher than initial plan. However, as Kurobe explained earlier, these onetime start-up costs will be gone from the second quarter of next fiscal year, becoming a profit driver next year. From a market standpoint, in the packaging business, we have factored in continued demand weakness in the U.S. food market and lower film and barrier film demand due to deferral of full-scale SX packaging adoption by European customers suffering from sluggish performance. For the Electronics segment, sales have been revised downward by JPY 69 billion and profit by JPY 14.5 billion from the initial plan, reflecting the application of the equity method for Tekscend Photomask and the delayed sales expansion of the new ToF sensor business. Ordinary profit has been revised downward in line with the revision of operating profit. Profit attributable to owners of parent was revised upward with the outlook for gains on sales of investment securities and structural reform costs. Please note that all negative factors expected have been incorporated into this revision. Page 16. I will explain the year-on-year changes in non-GAAP operating profit under the revised full year plan. From last year's operating profit of JPY 97.6 billion excludes the JPY 13.1 billion impact of applying the equity method for Tekscend Photomask from the second half, and you get a base of JPY 84.5 billion. From there, the impact of bonus provision period change is negative JPY 5 billion, foreign exchange negative JPY 3.1 billion and infrastructure development cost, negative JPY 4.1 billion. Among growth businesses, Erhoeht-X will be positive JPY 6 billion, Japan SX and overseas living, a significant positive of JPY 17.1 billion with new Sonoco TFP business and other consolidations. Semiconductor-related business is expected to be negative at JPY 0.8 billion. Cyclical businesses will be negative JPY 5.9 billion, while existing businesses will be positive JPY 8.6 billion due to the effect of structural reforms. As a result, non-GAAP operating profit is forecast to be JPY 97.2 billion. Next, I will explain the full year figures and second half outlook for each segment. Please turn to Page 17. For the Information & Communications segment, we forecast full year sales to be JPY 902 billion, down 2.5% year-on-year, and non-GAAP operating profit to be JPY 49.7 billion, down 4%. Overall, despite lower sales and profit in existing businesses, the growth business of digital business is expected to make a meaningful profit contribution due to progress in scaling. By subsegment, digital business expects to see sales continue to grow from the first half with the consolidation of HID and dzcard and further growth in the government ID and marketing DX businesses. Profit is also expected to grow in line with sales, reflecting large overseas security projects that were deferred to be booked in the second half. For BPO, orders are expected to increase in the focus areas of the financial, public and private sectors. Flat growth is expected for sales and profit with impact related to large-scale orders in the previous year becoming minimal. In Secure Media, smart card sales are expected to fall. Sales are expected to be lower overall due to the decline following U.S. election solution projects in financial printing last year. Profit is expected to decrease due to lower sales. Communication Media sales are expected to fall due to a decline for publication, commercial printing and business forms as well as the impact of the cyclical nature of the textbook business. Although the effects of structural reform are expected to contribute, it won't fully offset the impact of lower sales, so profit is expected to fall. In the second half, there will be a JPY 2.4 billion negative impact from the standardization of the bonus provision period. This impact is not included in the subsegment figures, but is reflected in total segment numbers. Moving on to the Living & Industry segment. Please turn to Page 18. For Living & Industry segment, full year net sales are expected to grow 31.4% year-on-year to JPY 723 billion. Non-GAAP operating profit is expected to increase 45.7% to JPY 56.7 billion. Overall, due to the impact of newly consolidated businesses, non-GAAP operating profit is expected to grow significantly for the full year. As for the second half forecast of the Packaging business, overseas, while the PFT business and Irplast have been newly consolidated, the impact of higher onetime start-up costs and lower demand in the U.S. food market will persist. In barrier film, demand in Europe was strong in the first half. However, due to customers' weaker performance, environmentally oriented initiatives are being delayed by roughly 1 year. Due to environmental regulations, the trend in response in Europe will not change, but a temporary softening of demand is observed. Demand in Asia remains firm and overseas markets overall are expected to achieve higher sales and profit. In Japan, SX packaging is expected to continue its robust expansion from the first half, resulting in higher sales and profit. In the decor materials business overseas, the market recovery is still ongoing, but sales and profit are expected to increase due to expansion of decorative sheet sales, reduction of costs and the effects of structural reforms. In Japan, sales and profit are expected to increase due to growth of the spatial design business. In the Living & Industry segment as well, bonus provision period standardization will have an impact of negative JPY 1.4 billion. Next is the Electronics segment. Please turn to Page 19. For the Electronics segment, full year net sales are forecast to decline 32.9% year-on-year to JPY 190 billion, and non-GAAP operating profit is expected to decline 33.1% to JPY 35.8 billion. In the second half, in semiconductor, no sales of -- or operating profit will be posted for photomasks following the transition of Tekscend Photomask to the equity method. And for FC-BGA, following Q2, the proportion for server CPUs and network switches is expected to increase. We will capture strong demand through the new Niigata production line, which becomes fully operational and profit levels are expected to rise significantly in the fourth quarter. In addition, qualifications for high-end AI server switches and AI ASIC are progressing toward mass production in the next fiscal year. In display-related business, antireflective films in the second half are expected to see a recovery trend due to taking in demand for high value-added products. For Display Solutions, profit is expected to increase due to the effects of structural reforms. Foreign exchange will have a full year negative impact of JPY 2.8 billion on the segment as a whole. Negative impact of bonus provision period standardization is expected to be JPY 0.6 billion. This concludes the performance forecast for each segment. Please turn to Page 20. This shows the full year forecast for capital investment, depreciation and R&D expenditures from the second half, reflecting the impact of the transition of Tekscend Photomask to the equity method. Capital investment and depreciation in electronics have been revised. For the other segments, the forecast is in line with the initial plan. R&D expenditures have also been revised accordingly. Finally, I will explain the outline of next fiscal year's performance. Please turn to Page 21. Next fiscal year, profit is expected to increase significantly due to growth in focus areas and a decrease in onetime costs incurred this year. The first half sales will be negatively affected by the absence of previous year's contribution from Tekscend Photomask, but excluding that factor, operating profit will increase. For net profit, the impact of Tekscend Photomask is minimal. It will directly benefit from the profit growth. By segment, in Information and Communication, while we maintain profitability of the existing printing business with cost reductions, the scaling of digital business and BPO profitability stabilization will enable growth businesses to drive expansion of both sales and profit. In Living & Industry, while we need to keep a close eye on the risk of weakening consumer sentiment, the Sonoco TFP business will enter a full-scale profit contribution phase in the packaging business. We will generate synergies through a vertically integrated synergy from films to packaging. Although higher goodwill and other amortization will continue up to Q1, the disappearance of onetime expenses in the current fiscal year will contribute about JPY 8 billion to profit growth. In Electronics, ratio of high-end products will be even higher for FC-BGA, supported by certified AI-related products and full year operation of the new Niigata production line, we expect higher sales and profit. In parallel, we will continue to strengthen development and investment aimed at establishing next-generation package substrate technologies. At the company level, the lack of this fiscal year's bonus provision period standardization impact will grow the profit by JPY 5 billion. Details of the plan for next fiscal year will be explained in May, together with the announcement of the new medium-term management plan. We continue making every effort to enhance corporate value and meet your expectations. We appreciate your continued support. That concludes my presentation.