Toagosei : Financial Factbook 2020

Financial Factbook 2020

Management's Discussion & Analysis

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The financial section was translated into English based on some disclosed documents including the securities report of the Japanese version and is provided for information purpose only.

Overview of Fiscal 2020

During the reporting term (January 1 to December 31, 2020), the momentum of the spread of the novel coronavirus (COVID-19) continued unabated, and although there were signs of economic recovery in some countries, the global economy was generally weak. Furthermore, uncertainty over the future deepened due to social turmoil following the U.S. presidential election and the intensifying U.S.-China battle for hegemony. The Japanese economy struggled to strike a balance between infection control and socio-economic activities, as the spread of COVID-19 entered its third wave.

In the overall surroundings of Toagosei Group (hereinafter "the Group"), demand for automobile and electronics-related products recovered to pre-COVID-19 levels toward the second half of the year, but the recovery of products for paper manufacturing and other products was delayed, causing major changes in the demand structure. Under these circumstances, the Group focused on shipping products for semiconductor-related and antibacterial and antiviral markets and strived to maintain and continue safe and stable operations and reduce costs, thereby lessening the extent of profit decline.

As a result, net sales in the reporting term decreased by 8.0% year on year on a consolidated basis to ¥133,392 million, while operating income decreased by 10.5% to ¥12,336 million, ordinary profit decreased by 14.3% to ¥13,054 million, and net income attributable to owners of parent decreased by 21.6% to ¥8,142 million.

Sales by Segment

Commodity Chemicals

Sales of electrolytic products decreased as weak demand in a wide range of industries such as pulp and paper, metal and steel, and automobile-related resulted in a reduction in sales volume. Sales of acrylic monomer products decreased mainly due to sluggish sales in the first half of the year and the effect of a downturn in product prices linked to lower raw material prices, despite the recovery of sales volume toward the second half of the year. Sales of industrial gas decreased mainly due to a slow recovery of demand. As a result, sales in this segment decreased by 10.9% year on year to ¥58,495 million.

Although the decline in raw material and fuel prices resulted in variable cost improvement and fixed cost reduction, segment income decreased by 16.4% to ¥4,550 million due to lower sales volume and sales prices.

Polymer & Oligomer

Sales of acrylic polymers decreased due to a reduction in sales volume caused by the effect of sluggish demand for products for pulp and paper and products for the automobile-related market in the first half of the year. Sales of acrylic oligomers decreased as the recovery of sales volume toward the second half of the year could not make up for the slump in sales in the first half of the year. Sales of polymer flocculants decreased due to a decline in exports and lower sales prices. As a result, sales in this segment decreased by 7.4% year on year to ¥26,944 million.

Segment income decreased by 10.9% to ¥3,141 million mainly due to the effect of lower sales volumes of acrylic polymers and polymer flocculants, despite the variable cost improvement stemming from a reduction in raw material prices.

Management's Discussion & Analysis

Adhesive Material

Sales of instant glues decreased mainly due to weak sales volumes in both domestic and overseas markets from the impact of the spread of COVID-19. Despite the launch of some products for new applications, sales of functional adhesives decreased due to stagnant demand of products for the automobile and electronics-related markets in the first half of the year, in addition to the cutback on sales of some unprofitable products. As a result, sales in this segment decreased by 10.0% year on year to ¥10,054 million.

Segment income decreased by 42.4% to ¥781 million, mainly due to the lower sales volumes of instant glues and functional adhesives as well as a downturn in sales unit prices of some functional adhesives putting pressure on profits, despite profit improvement as a result of fixed cost reduction.

Performance Chemicals

Sales of high-purity inorganic chemicals increased mainly thanks to a steady increase in demand for semiconductors throughout the year following the expansion of telework. Sales of inorganic functional materials increased, as increased interest in antibacterial and antiviral products in light of the spread of COVID-19 drove up demand, while sales of the ion-trapping agent for electronic components were also strong. As a result, sales in this segment increased by 10.2% year on year to ¥8,980 million.

Segment income increased by 27.1% to ¥2,690 million mainly thanks to higher sales volumes of both high-purity inorganic chemicals and inorganic functional materials, despite a rise in fixed costs caused by the continued aggressive capital investment in response to strong demand.

Plastics

Sales of piping equipment and products for construction and civil engineering decreased due to weak demand mainly from the impact of the spread of COVID-19. Nursing care product sales decreased as the recovery in sale volumes of in-home care products and other products toward the second half of the year was not able to make up for the slump in the first half of the year. Sales of elastomer compounds decreased mainly due to sluggish demand for some products and delays in new development projects in Southeast Asia. As a result, sales in this segment decreased by 6.6% year on year to ¥25,285 million.

Segment income decreased by 3.7% to ¥1,188 million mainly due to the effect of an increased fixed cost burden at a Thai subsidiary, despite the variable cost improvement resulting from the reduced prices of major raw materials for piping equipment and nursing care products.

Other Businesses

Sales for this segment, which comprises of new product development operations, goods transportation services, and trading house operations, decreased by 3.7% year on year to ¥3,633 million, and segment loss totaled ¥45 million.

Annual Report 2020

Management's Discussion & Analysis

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Cash Flows	Economic Prospects for Fiscal 2021

Cash and cash equivalents at end of the year stood at ¥43,800 million, an increase of ¥686 million from the previous term-end.

Net cash provided by operating activities increased by ¥2,056 million year on year to ¥20,671 million due to decreases in inventories and income taxes paid, despite a decrease in income before income taxes.

Net cash used in investing activities decreased by ¥4,493 million year on year to ¥11,362 million due to a shift from negotiable certificates of deposit to time deposits and shortening of investment horizons for some investments.

Net cash used in financing activities increased by ¥3,908 million year on year to ¥8,491 million due to an increase in purchases of treasury stock.

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Business Performance Prospects for Fiscal 2021

Vaccinations have begun in some countries as a promising measure to prevent the spread of COVID-19, but it is likely to take some time before the vaccines are distributed widely around the world and they start taking effect. In addition, there are concerns over the impact of the intensifying U.S.-China battle for hegemony on the global economy. In Japan, it is hoped that the government's measures to prevent the spread of COVID-19 will be successful in reviving socio-economic activities, but it remains unclear when that will be achieved at this point in time. Furthermore, the chemical industry is facing stronger calls for speedy and effective actions to realize a carbon-free society.

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Basic Policy on Shareholder Returns and Dividends for Fiscal 2020 and 2021

For the current term ending December 31, 2021, we forecast net sales of ¥143.0 billion, operating income of ¥14.0 billion, and net income attributable to owners of parent of ¥10.4 billion.

The Company makes it a basic shareholder return policy to continue paying a stable dividend targeting a consolidated payout ratio of 30% or more and improve the consolidated total payout ratio by implementing measures such as the acquisition of treasury

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Management's Discussion & Analysis

stock. The Company will determine the dividend by comprehensively considering the strengthening of the management structure, enhancement of internal reserves, and the future outlook and progress of its businesses. In the Medium-Term Management Plan "Stage up for the Future" from 2020 to 2022, the Company aims to improve the consolidated total payout ratio and EPS by purchasing treasury stock (around ¥10.0 billion over three years).

For the current term ended December 31, 2020, we are planning a term-end dividend of ¥15 per share. During the fiscal year under review, the Company paid an interim dividend of ¥15 per share, amounting to an annual dividend of ¥30 per share (payout ratio of 48.1%). In addition, the Company acquired treasury shares worth ¥3,882 million during the fiscal year under review and retired 3,696,299 shares of treasury stock, including those repurchased shares. The total payout ratio taking into account the acquisition of treasury shares is 95.4%.

For the next fiscal year, the Company plans an annual dividend of ¥30 per share (payout ratio of 36.6%; an interim dividend of ¥15 and a term-end dividend of ¥15). Based on the above basic policy, on February 12, 2021, the Company announced the Determination of Matters Regarding Treasury Stock Acquisition (Treasury stock acquisition based on regulations of the Articles of Incorporation pursuant to provisions of Article 165, Paragraph 2 of the Companies Act) and shall acquire its treasury stock worth ¥4 billion again during the next fiscal year with the aim of strengthening shareholder return, improving capital efficiency,

raising corporate value, and implementing flexible capital policies.

The total payout ratio is expected to be 74.8% as a result.

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Business Risks

Of the matters concerning "Management's Discussion & Analysis," and "Consolidated Financial Statements and Others" contained in this report, major risks deemed to have the potential of significantly impacting the Group's financial position, business performance, and cash flows are stated below, provided, risks that may significantly impact investors' decisions are not limited to those described herein.

The Group established a Risk Management Committee as a mechanism for the routine identification and assessment of potential risks. Based upon this, risk countermeasures are formulated and the status of those countermeasures is checked, while measures are taken for the risks stated below. However, these countermeasures are not able to completely control the probability of risks emerging and the impact of risks if they emerge.

Forward-looking information stated herein is based on judgement by the Group as of the end of the fiscal year under review.

(1) Natural disasters

The Group has production and sales bases in Japan and overseas. If these bases are hit by natural disasters such as earthquakes, typhoons, heavy rains, tornadoes, gusts of wind, floods, tsunamis,

Annual Report 2020