Artience : Presentation Question & Answer session summary First Quater of FY2024 Results Briefing

Financial Results Briefing for the First Quarter of the Fiscal Year Ending December 31, 2024

Question & Answer (Transcript)

• Date/time: May. 17, 2024 10:00am - 11:00am (Japan time)
• Speakers:

• Hiroyuki Hamada : Senior Managing Director, in charge of Corporate Divisions
• Takeshi Arimura: Operating Officer, General Manager of Finance & Accounting Department
• Masaki Nagatsubo: Operating Officer, General Manager of Corporate Planning Division

• Presentation Material:https://ssl4.eir-parts.net/doc/4634/tdnet/2444146/00.pdf

TRANSLATION:

This is a transcript of Financial Results Briefing for the Fiscal Year Ending December 2024, Question & Answer session, held on May. 17, 2024. This is an English translation of the Japanese original, prepared only for the convenience of shareholders residing outside Japan. The original Japanese version will prevail should there be any difference in the meaning between the English version and the Japanese version.

DISCLAIMER:

The forecast or projections in this material are based on the assumptions and beliefs of our management in light of the information available as of May. 17, 2024. Changes in global, economic and business conditions could cause actual results to differ materially from these forecasts.

The content of this transcript have been edited or revised by the company.

Q.1: I would like to ask you to discuss a little more about the printing and information segment in your presentation, which came as a surprise. Also, please talk about the factor of the significant improvement in this Q1. Additionally, is the Q1 operating profit of JPY1.1 billion something that will continue throughout the year? In the past, printing and information profits have been around JPY4.6 billion, so it would not be surprising to see profits exceeding JPY4 billion, but that was about 10 years ago, and the market has changed considerably. Could you please discuss how a profit of nearly JPY4 billion can be generated throughout the year in that area? At least for now, do you think you will be able to maintain these profits from the first quarter to the second quarter?

A.(Hamada): To be honest, we were in the red for quite a while for the Japanese market, which offset overseas profits. However, last year, we continued to implement various structural reforms, which finally bore fruit and matched the market size.

We struggled to negotiate price adjustments, given rising raw materials prices, but finally, we managed to implement price adjustments starting in Q3 of last year. Our profits have improved

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considerably in the three oil-based products, which are offset printing inks, sheet-fed inks, and newspaper inks. With that, finally, we are getting closer to break-even.

UV curable inks and LED curable inks, the pillars of growth, remained strong both in Japan and overseas, and these contributed the most. Overseas, sales and profits increased in all regions, and the segment earned about JPY1.1 billion as a result of a considerable increase in domestic sales, which had previously been negative, and the steady expansion of profits overseas.

We are unsure if it will go to JPY4 billion, but if this trend continues, we think it is promising. At the same time, however, the size of the domestic market is decreasing, so we still need to be flexible and change our structure accordingly. Functional coatings have a growth potential, which I am looking forward to, and I expect that our performance will be different from what it used to be.

Q.2: By the way, as for the effect of domestic improvement in Q1, was the effect of the current price revision significant, or on the other hand, was the effect of structural reforms significant? A.(Hamada,Nagatsubo): The growth of functional inks contributed considerably. Of course, structural reforms have also contributed to this improvement. Both factors impacted the domestic sales.

UV curable inks are included in functional inks. UV curable inks, for example, have been progressively selected over conventional oil-based products in received orders that require a quicker turnaround, and since UV curable inks have a higher profit margins, these factors contribute to the bottom line.

(Page 12 of the presentation material of FY2024 First Quarter Results Briefing)

Q.3: Please let me ask about CNT dispersions for LiB. Sales in Q1 totaled JPY1.2 billion, recovering from JPY700 million in Q4 of the previous year. You have a new movement this time. First, one new company has been confirmed in Q1. What kind of manufacturer is this? I think it can be a battery manufacturer in North America. Is it a completely new client? If you start this company next year, there will be four new companies next year. Is that correct? And in Zhuhai, China, you said that the number of shipments will increase by more than 20% over the initial estimate. Could you talk about the background? And as for the HV application, which was released in February this year, how will this contribute?

A.(Hamada): We have three offers plus one, and now, we have four companies, but we are just starting out next year, and some of them are like sample shipments, so I think it will be 2026 before they really take effect. However, I believe it will be 2026 before shipments come into full swing. On the other hand, some of the bearish market activities can recover in the US, and I expect at least one

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company can possibly launch new shipments on its full scale. We can't disclose the name of new company, but the company ranks in the top 10 battery manufacturers in the world. It means that we supply goods in the North American market.

And in Zhuhai, China, we have not received details, but I think the number of car models adopted by battery manufacturers will increase.

More difficult dispersions is expected to improve battery performance. I was told that we received offers in anticipation of dispersions for ternary system.

As for the HV application, we will supply the product, but the volume is small, so it's not that impactful, to be honest.

With all of that, our prospects the JPY6.5 billion per year for this year will remain the same so far.

(Page 9 of the presentation material of FY2024 First Quarter Results Briefing)

Q.4: I want to ask about the status of color materials for color filters for LCDs. In Q1, sales of large panels grew, while sales of small- and medium-size panels, your strong point, did not grow much. You place more weight in H2, and H1 is like a quick break, so to speak?

A.(Hamada): I think that the market for small- and medium-size PCs will likely regain momentum beginning in H2 of this year, as those PCs that sold during the COVID-19 pandemic finally need replacement. The demand can contribute to our profit line.

As for some large panels, the costs of raw materials and other things have risen, so the cost of production has also increased, and we would like to evaluate the price of our products as well.

We need to think about asking for a price increase, on the contrary, because different products have different profitability, so I am unsure what the overall impact can be. That said, I communicate with the operation teams about the need to consider the implications of those. It won't impact the profitability, not so as much as it used to in the past.

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(Page 8 of the presentation material of FY2024 First Quarter Results Briefing)

Q.5:I would like to ask you about the colorants and functional materials, specifically the materials for color filters that you discussed. Can you tell us about the current business composition ratio, etc.?

A year ago, we were told that large displays accounted for roughly 70% of sales and small- and medium-size displays for about 30%, but looking at the data this time, I see that you have newly adopted some products for sensors. I wonder if you could give us an update on the new parts. In addition, can you tell us the reason why you decided to adopt the new products for sensor applications?

A.(Hamada): I used to say roughly 30% for medium and small, but that is now less than 20%.

As for sensors, we have been working on the development of products for sensor applications for a long time now. We came to the adoption phase and started supplying them, and we expect to see considerable growth in the future. Our main customers are overseas. I'm under the impression that our products are applied to smartphone cameras or something similar.

Q.6:If that's the case, are those products for sensor applications, are they in the range of 5% to 1% sales composition? They are small in presence, yet you see growth potential. Is that correct? In addition, is the profit margin higher than that of the medium and small types in the resist materials for color filters?

Also, it is often said that sensors and other products are a market that grows at about 10% per year, while your company is expanding applications in addition to that, can we expect that the growth of your resists and pastes for sensors can grow at more than 10% per year, more than the growth of the market for sensors?

A.(Hamada): Although they account for a small portion of sales, yet they have a high profit margin. We believe that they will contribute considerably to profits in the future. That is not just for this fiscal year, but I believe it will grow considerably in the long run.

A.(Nagatsubo): That is what we expect as we work on the business. Since we have just started, I think we have the potential to grow. For example, if I take this year's sales figure, I expect that we can more than double the figure by the last year of the 2026 Medium-term Management Plan.

Q.7: I would like to ask the pigment business.

I know there have been a lot of news about Heubach, a major pigment company, going through bankruptcy proceedings, and I was wondering how this affects your company.

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I also wonder if, in recent years, you have expanded your market shares not only in the pigment market, but also in the ink market due to the declining competitiveness of competitors out there. Is this also the case for the plastic colorant market, in which, for a likely reason, it can be challenging sometimes to make a profit?

A.(Hamada): Regarding Heubach's bankruptcy, it is unclear whether they will continue their business in the future. I have heard that they will likely stay in business, but we are still researching. We procure pigments from Heubach for a portion of our businesses, and we would like to handle the matter while maintaining our inventory.

As for pigments, we use both in-house pigments and those we procure from our business partners, depending on the usage. We typically work with our business partners in China and India for general-purpose products, while we produce pigments in-house when we can fully leverage our advantage. We will continue to operate our business using such distinctions.

Q.8:I saw in your presentation material the products that contribute to sustainability in the packaging business, so can you please talk about that? Looking at the data, I see that sustainable products are growing in Korea and other countries. What is your assessment of this growth?

My perception is that the ink products contributing to sustainability come with expensive raw material prices, yet the profitability can be low in printing and other industries. Customers are unwilling to accept high selling prices, making it impossible to set higher selling prices simply because the material costs are high. In other words, I'm under the impression that the spread and the sales mix can deteriorate. Is that what is happening right at the moment, or are you successful in holding lofty price tags to your clients and maintaining a high spread? In addition, is there anything like a shift in market share because of this?

A.(Hamada): There are different requirements for sustainability in different countries. Water-based ones in the overseas market contribute fairly well to the expanding market. We sell highly environmentally friendly products. There are various ways to accommodate environmental friendliness, and among them, water-based product sales have grown in the overseas market.

A.(Nagatsubo): For example, there is a demand in Korea for water-based and flexographic printing on flexible packaging materials, which is considerably more profitable than existing gravure inks. A.(Hamada): They actively communicate what type of packaging materials they use. In accompanying that, society is shifting to accept a certain range of prices, in my opinion.

Q.9: For sustainability contributing products in the packaging business segment, since it is water-based, the raw material price is not that much higher than conventional products, and as long as you can set the selling price high, the spread and profitability can be enhanced. Is that the logic? Is it correct to say that because there is less price competition, profitability is better, which leaves you with an opportunity to gain market share?

A.(Nagatsubo): In the example of South Korea, I think the biggest factor is that we have no competitors at the moment. But I'm under the impression that competitors will come up with similar ink products in the future.

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(Page 11 of the presentation material of FY2024 First Quarter Results Briefing)

Q.10:Regarding the colorants and functional materials business segment, you discussed that in both domestic and overseas markets the inkjet inks sales and profits increased and you expect the business to bolster the next pillar of your company. Could you give us some background on the growth, including the main applications, as well as your company's market share in those regions, the market competition, and some advantages of the inkjet products?

A.(Hamada): Regarding inkjet ink products, there are UV curable, water-based, and solvent inkjet

inks. If you categorize them by market, they can be divided into these categories: flexible packaging, signage, labels, cardboard, and construction materials. There are players in each field, but we started with UV labels, where most suppliers are based in Europe, and we obtained fairly high market shares. As for India, we handle solvent-based for signs and billboards, which are coming along nicely. In China, we have UV labels and water-based. In Japan, we have flexible packaging. We have multiple target areas, and we handle all these over four locations, so we can expect various growth trajectories. As for inkjet, we believe it is growing because of our advantages. We can replace some of the conventional printing methods and enable digital image conversions.

Q.11: You mentioned that, with UV labels, you have a fairly high market share. Can you comment on the reason why you succeeded in acquiring such a high market share, and perhaps what is so strikingly different about your products?

A.(Hamada): We run a significant portion of the inkjet ink business partnering with printer manufacturers. We supply products to those printer manufacturers who sell our products to their clients under their brands. We utilize this OEM format a lot.

Since we often work with printer manufacturers in that scheme, once we partner up, the relationship does not change often. When these printer manufacturers face generation change, then, the question comes up: Will our business be adopted again? So far, things are going smoothly, and we have a significant market share when it comes to UV labels.

That said, some printer manufacturers produce products in-house, so excluding that part of the market, we assess that we hold a fairly large market share for inkjet inks as far as the external sales market goes.

Q.12: I understand that you will be selling cross shareholdings this fiscal year. What is your understanding of the current progress, including negotiations with the major shareholders?

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A.(Hamada): As we promised when we addressed the medium-term management plan, we stay committed to implementing more than JPY10 billion within the three years set forth in the medium-term management plan. We promised to implement JPY10 billion, or possibly higher, and we will adhere to that target. However, we would like to refrain from mentioning specific negotiations, etc., because of the impact on stock prices and other factors.

Q.13: I would like to ask you about your projections for FY2025 and beyond. I understand that you assume the position of a pigment manufacturer, but I would like to hear your answer as a user of inorganic pigments.

A major Japanese titanium dioxide manufacturer has announced a withdrawal from titanium dioxide pigments by 2025. I don't know how much you use domestic products, but what is your company's outlook for the future? Is it safe to assume that your dependency on domestic manufacturers is low, when or if you use it, just like the case for inks and plastic colorants?

A.(Hamada): In the titanium dioxide field, we have heard from various titanium dioxide manufacturers that they may stop production in some cases, and we would like to take appropriate measures. There are some details that we don't know yet, so we are going to keep a close eye on those details and ensure that we can manage the situation, particularly now, by working with the operation division. For our overseas operations, not at all, but for Japan, we have some expectations for domestic manufacturers to a certain extent. It may be necessary to apply some measures in the future depending on the policies adopted by Japanese titanium dioxide manufacturers.

Q.14 : So, can we assume that the price increase will be reflected in the prices, and it might be after 2026 because of the high volume of the product?

A.(Nagatsubo): Currently, in Southeast Asia and other regions, we procure titanium dioxide from regions outside of Japan, not the Japanese-made titanium dioxide. Considering that and other circumstances, I would like to take action by selecting alternatives for, for example, gravure ink products in Japan.

【END】

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