Nippon Denko (5563) FY2025 FY Earnings Report

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Executive Summary

The fiscal year ended December 2025 resulted in lower revenue and earnings, as the core ferroalloy business became loss-making. Revenue was ¥772.8B (-1.2% YoY), Operating Income was ¥51.6B (-24.7%), Ordinary Income was ¥27.0B (-44.4%), and Net Income was ¥14.2B (-48.5%). The Operating Income margin declined to 6.7% from 8.8% in the previous year, a decrease of 2.1pt. In addition, the expansion of equity-method investment losses (-¥13.9B, compared with -¥11.0B in the previous year) widened the declines at the Ordinary Income and Net Income levels.

Factors Affecting Earnings

【Revenue】Company-wide Revenue was ¥772.8B, a slight decrease of -1.2% YoY. While the ferroalloy business, which accounted for 62.7% of the sales mix, declined to ¥484.4B (-6.4% YoY) amid weak market conditions, the Functional Materials Business at ¥148.2B (+6.0% YoY), Incineration Ash Recycling Business at ¥88.9B (+14.7% YoY), and Aqua Solutions Business at ¥16.6B (+5.5% YoY) secured revenue growth. The decline in the ferroalloy business was therefore the primary cause of the company-wide stagnation.

【Profit and Loss】Operating Income was ¥51.6B (-24.7% YoY). In addition to the gross profit margin declining by approximately 1.2pt YoY to 16.2%, SG&A expenses increased by 8.5% YoY to ¥73.3B, putting pressure on the profit margin. At the Ordinary Income level, the main factors were the ferroalloy business segment result falling into a loss of ¥21.3B, a deterioration of ¥31.1B from the ¥10.9B profit in the previous year, and the expansion of equity-method investment losses. Consequently, Ordinary Income declined to ¥27.0B (-44.4% YoY). The company recorded ¥1.9B in extraordinary losses, including ¥4.6B in losses on disposal of fixed assets, which also reduced Net Income as a temporary factor. In conclusion, the company posted lower revenue and earnings.

Segment Analysis

On a segment profit basis, using Ordinary Income as the standard, the ferroalloy business recorded a loss of ¥21.3B, deteriorating from the previous year’s profit of ¥10.9B, and significantly damaged company-wide profitability. Meanwhile, the Incineration Ash Recycling Business maintained a high profit margin of 23.3% (profit of ¥20.7B, +46.9% YoY), the Power Business maintained a profit margin of 29.1% (profit of ¥4.1B), and the Functional Materials Business maintained a profit margin of 13.0% (profit of ¥19.2B, +16.1% YoY). Although the Aqua Solutions Business achieved higher revenue, profit declined to ¥1.1B (-8.7% YoY), making the conversion of revenue growth into earnings a challenge. The high-profitability businesses were unable to fully offset the ferroalloy business’s losses, resulting in a -44.4% YoY decline in company-wide Ordinary Income.

Key Financial Indicators

【Profitability】The Operating Income margin of 6.7% (8.8% in the previous year) and Net Income margin of 1.8% (4.0% in the previous year) both declined, due to the contraction in the gross profit margin to 16.2% and the increase in the SG&A expense ratio to 9.5%. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥145.7B, exceeding 10 times Net Income, but the principal factor supporting this was a ¥78.4B decrease in inventories; therefore, it does not necessarily reflect recurring earnings power. 【Investment Efficiency】ROE was 2.0%, indicating low capital efficiency relative to the strong capital base represented by an Equity Ratio of 76.0%. Research and development expenses were ¥6.8B, equivalent to 0.9% of Revenue. 【Financial Soundness】Liquidity is strong, with current assets of ¥444.2B compared with current liabilities of ¥139.8B, while the Equity Ratio of 76.0% indicates a substantial financial cushion.

Cash Flow Analysis

Operating Cash Flow increased significantly by 144.5% YoY to ¥145.7B, but the primary driver was a ¥78.4B decrease in inventories, rather than a recurring improvement in earnings. Meanwhile, trade payables decreased by ¥23.5B, becoming a source of cash outflow in terms of working capital. Investing Cash Flow was -¥55.8B, primarily reflecting ¥48.3B in acquisitions of property, plant and equipment and intangible assets. Financing Cash Flow was -¥89.1B. Including ¥16.5B in dividend payments and ¥40.3B in share repurchases, shareholder returns and capital expenditures were funded within the ¥89.9B range of Free Cash Flow. However, the high OCF in the current period depended heavily on inventory reduction, and the sustainability of OCF in subsequent periods will be affected by any rebound in inventory levels and sales trends.

Quality of Earnings

Comprehensive Income of ¥28.2B diverged from Net Income of ¥14.2B, primarily due to a ¥12.9B increase in valuation differences on other securities. The factors affecting Net Income included both the recurring element of ¥13.9B in equity-method investment losses, which deteriorated by ¥2.9B YoY, and the temporary element of ¥1.9B in extraordinary losses, including ¥4.6B in losses on disposal of fixed assets. Non-operating expenses were substantial at ¥28.9B, creating a structure in which approximately half of EBIT of ¥51.6B was lost in the transition to Profit Before Tax of ¥25.1B, making it difficult for operating-level profit to flow through to Net Income. The fact that OCF significantly exceeded Net Income provides cash-based support for earnings, but its substance was influenced by the accrual-related factor of inventory reduction and is not directly linked to a high level of recurring earnings power.

Earnings Forecast and Guidance

The company’s forecast for the fiscal year ending December 2026 is Revenue of ¥750.0B (-2.9% YoY) and Ordinary Income of ¥60.0B (+121.9% YoY). Although the company expects declining revenue, it plans to more than double Ordinary Income. Achievement of this plan presupposes a reduction in the ferroalloy business’s losses or a return to profitability, as well as an improvement in equity-method investment losses. Compared with Ordinary Income of ¥27.0B in the current period, achieving the plan will require a substantial improvement in the earnings structure, making it important to monitor quarterly progress.

Shareholder Returns

Annual dividends for the current period totaled ¥12, consisting of an interim dividend of ¥5 and a year-end dividend of ¥7, including an ordinary dividend of ¥6 and a ¥1 commemorative dividend marking the company’s 100th anniversary. Against total dividend payments of ¥16.5B, the Payout Ratio was 116.3%, exceeding Net Income for the current period. Including ¥40.3B in share repurchases, total shareholder returns amounted to ¥56.8B, and the Total Return Ratio reached approximately 400%. Free Cash Flow of ¥89.9B covered the combined dividends and share repurchases; however, the current-period FCF was significantly supported by inventory reduction, requiring caution when evaluating the sustainability of returns based solely on cash-based coverage. From the fiscal year ending December 2026, the annual dividend floor will be raised from ¥10 to ¥11, and the company’s forecast dividend is ¥13.

Risk Factors

1. Deterioration in the profitability of the ferroalloy business: The ferroalloy business, which accounts for 62.7% of the sales mix, recorded a segment loss of ¥21.3B, deteriorating by ¥31.1B YoY. Fluctuations in market conditions and raw material prices have a significant impact on company-wide earnings.

2. Expansion of equity-method investment losses: Equity-method investment losses were ¥13.9B, expanding from ¥11.0B in the previous year, and continue to place pressure on the conversion from Operating Income to Ordinary Income and Net Income.

3. Inventory efficiency and working capital: Inventories decreased by 27.0% YoY to ¥153.5B, but still accounted for 34.6% of current assets. The increase in OCF during the current period depended on inventory reduction, and a rebound in inventory levels could affect future cash flow.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Return

The Company’s Operating Income margin and Net Income margin were both below the industry median, placing its profitability toward the lower end of the industry.

Growth and Capital Efficiency

The Revenue growth rate was also significantly below the industry median, indicating relative underperformance within the industry in terms of growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The core ferroalloy business becoming loss-making was the primary cause of the company-wide decline in revenue and earnings and the decrease in ROE. By business, the Incineration Ash Recycling Business, with a profit margin of 23.3%, and the Functional Materials Business, with a profit margin of 13.0%, maintained high profitability, highlighting the differences in profitability across the business portfolio.

2. The increase in OCF during the current period depended heavily on inventory reduction and must be distinguished from a structural improvement in recurring earnings power. OCF levels in subsequent periods will be affected by inventory trends and a recovery in sales.

3. With a Payout Ratio of 116.3% and a Total Return Ratio of approximately 400%, the company continues to provide shareholder returns at a high level relative to current-period earnings. The sustainability of the ¥13 dividend forecast for 2026 and the increased dividend floor depends on the extent to which the company achieves its planned Ordinary Income of ¥60.0B.

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional as necessary.

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