Toppan Holdings Inc

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 863.6 billion yen, and non-GAAP operating profit, which excludes mainly the effects of acquisition-related costs, rose 14% to 38.6 billion yen. While consolidated operating profit was generally in line with the plan, the information and communication and living and industry segments fell short of plan, whereas the electronic segment and adjustment items exceeded plan. Non-GAAP operating profit net of one-time costs such as gains on sale of investment securities increased 41.5% to 24.5 billion yen. The key points of the results are shown on the right. On a non-gap basis, information and communication had flat sales and higher profit, living and 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 change 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 33.9 billion yen, foreign exchange impact was negative 1.6 billion yen, and infrastructure development cost negative 1.4 billion yen. Amid our gross businesses, airhead cross impact was plus 1 billion, and the Japan Essex and overseas living was a significant positive for 8.6 billion, due mainly to the consolidation of Sonoco TFP business. On the other hand, the semiconductors were minus 3.3 billion yen. In existing business, the structural reform conducted last year had a positive impact of 3.2 billion yen. As a result of these factors, non-GAAP operating profit amounted to 38.6 billion yen. Next, I will explain the status of each segment. Please turn to page 5. Net sales in the information and communication segment were 425.4 billion yen, essentially flat year-on-year, while non-GAAP operating profit increased 6.5% to 14.5 billion yen. Overall, profit increase due mainly to structural reforms in existing businesses, but results fell short of plan due to shortfalls in overseas security and BPO. By sub-segment, digital business sales increased overseas due to the HID and DZ card 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-gap 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 LH course 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 and industry segment, page 7. Net sales were up 19.9% year-on-year to 330.5 billion yen, and non-GAAP operating profit increased 41.5% to 24.7 billion yen. 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 one-time startup 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 Ilplast, 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 one-time 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 remain 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 55 billion yen from adding Sonoco TFP business and Ilplast. Negative profit impact came from M&A-related costs of 4.5 billion yen. One-time startup costs of 1.7 billion and amortization of goodwill and intangible assets of 3.9 billion yen. Excluding these items, operating profit increased by 5.8 billion yen. Similarly, for the full year of fiscal 2025, sales will increase by 160 billion yen and profit by 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 zero, and one-time startup costs will also be zero 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 electronic segment. Please turn to page 9. Net sales in the electronic segment were down 14.4% year-on-year to 118.9 billion yen, and non-GAAP operating profit was down 19% to 20.6 billion yen, but overall results exceeded the plan. This includes an approximately 1.5 billion yen negative impact from foreign exchange effects. In the sub-segments, semiconductors had flat sales and lower profit overall. Although FCBGA 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. Photomask's 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 than 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 one-time costs limited to this fiscal year. Non-operating income and expenses decreased to a positive 1.3 billion yen from positive 4.1 billion yen 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 270 billion yen for the Sonoco TFB business acquisition. Of this short-term borrowing, 120 billion yen has already been refinanced to a longer-term syndicated loan in Q2. In addition, 80 billion yen will be financed through the issuance of unsecured trade bonds announced in today's earnings report. Next is the status of reducing strategic shareholdings. Please turn to page 12. We continued 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 that sells $1.79 trillion Operating profit, 70 billion on a GAAP basis, 97.2 billion on a non-GAAP basis. Profit attributable to owner's parent, 70 billion on a GAAP basis, 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 involvement. U.S. dollar from 140 to 145 yen per dollar and from 154 to 169 yen 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 text and photo masks, and the revision announced today. Operating profit is shown on a GAAP basis. First, for the information and communication segment, we revised sales downward by ¥5 billion and operating profit by ¥4 billion from the initial plan. This reflects the impact of continued market contraction of communication media and the revision based on LH Cross's first half performance. For overseas security business, the deferral of large projects are included as positive factors for the second half. For the living and industry segment, we revised sales downward by 16 billion yen and profit by 4.5 billion. Following the acquisition of the Sonoko TFP business, one-time startup costs are being incurred this fiscal year, resulting in numbers higher than initial plan. However, as Kurobe explained earlier, these one-time startup 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 69 billion yen and profit by 14.5 billion from the initial plan, reflecting the application of the equity method for text and photo mask 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 97.6 billion yen, exclude the 13.1 billion yen impact of applying the equity method for text and photo mask from the second half, and you get a base of 84.5 billion yen. From there, the impact of bonus provision period change is negative 5 billion yen, foreign exchange negative 3.1 billion, and infrastructure development costs negative 4.1 billion. Among growth businesses, L8 Cross will be positive 6 billion, Japan Essex and Overseas Living a significant positive of 17.1 billion with new Sonoco TFB business and other consolidations. Semiconductor-related business is expected to be negative 0.8 billion yen. Cyclical businesses will be negative 5.9 billion, while existing businesses will be positive 8.6 billion due to the effect of structural reforms. As a result, non-GAAP operating profit is forecast to be 97.2 billion yen. Next, I will explain the full year figures and second half outlook for each segment. Please turn to page 17. For the information and communication segment, we forecast full-year sales to be $902 billion, down 2.5% year-on-year, and non-GAAP operating profit to be $49.7 billion, down 4%. Overall, despite lower sales and profit in existing businesses, the growth of digital business is expected to make a meaningful profit contribution due to progressing scaling. By sub-segment, digital business expects to see sales continue to grow from the first half with the consolidation of HID and DZ card 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 India, smart car 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 2.4 billion yen negative impact from the standardization of the bonus provision period. This impact is not included in the sub-segment figures but is reflected in total segment numbers. Moving on to the living industry segment, please turn to page 18. For living and industry segment, full-year net sales are expected to grow 31.4% year-on-year to ¥723 billion. Non-GAAP operating profit is expected to increase 45.7% to ¥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 TFT business and Uplus have been newly consolidated, the impact of higher one-time startup 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 one 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 and industry segment as well, bonus provision period standardization will have an impact of negative 1.4 billion yen. Next is the electronic segment. Please turn to page 19. For the electronic segment, full-year net sales are forecast to decline 32.9% year-on-year to 190 billion yen, and non-GAAP operating profit is expected to decline 33.1% to 35.8 billion yen. In the second half, in semiconductor, no sales or operating profit will be posted for photo masks following the transition of text and photo mask to the equity method. For FCBGA 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, anti-reflective 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 2.8 billion yen on a segment as a whole. Negative impact of bonus provision period standardization is expected to be 0.6 billion yen. 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 test and photo mask 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 one-time costs incurred this year. The first half sales will be negatively affected by the absence of previous year's contribution from TEX and Photomask, but excluding that factor, operating profit will increase. For next profit, the impact of TEX and 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 an industry, while we need to keep a close eye on the risk of weakening consumer sentiment, the Sonoco TFB 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 one-time expenses in the current fiscal year will contribute about 8 billion yen to profit growth. In electronics, ratio of high-end products will be even higher for FCBGA, 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 in 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 5 billion yen. 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.