TOCALO : Updated Research Report by Shared Research Inc. (Q3 FY03/24 report update)

Research Coverage Report by Shared Research Inc.	Coverage initiated on: 2019-11-19
Last update: 2024-03-12

3433

TOCALO

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INDEX

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. Key financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5. Recent updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6. Trends and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.

Quarterly trends and results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7. Company forecast for FY03/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18. . Medium-termmanagement plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23. . .

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31. . Business overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31. . Business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32. . Group structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40. . Profitability analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53. .

Market and value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54. . Competitive landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55. . Strengths and weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56. .

Historical results and financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58. . Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58. . Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58. . Cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60. . Historical performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60. .

Other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91. . News and topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94. .

Company profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95. .

TOCALO 3433

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Executive summary

Business overview

TOCALO Co., Ltd. (TOCALO) provides surface treatments that improve the performance of materials used across a range of industries by adding properties such as abrasion and heat resistance, conductivity, insulation, and heat shielding and dissipation. Its core technology is thermal spraying, which involves coating target surfaces by spraying metals or ceramics that have been melted using high temperature heat sources (e.g., plasma and gas). The company particularly excels in functional thermal spraying that provides both growth potential and high added value, and leads the Japanese market for thermal spraying with a share of 40% (Shared Research estimate based on data from Yano Research Institute, Digital Research, and other sources). The company also offers other surface treatments as ancillary services. These include the Toyota diffusion (TD) process, zinc alloy coating (ZAC), plasma transferred arc (PTA) process, and physical vapor deposition (PVD) process. (See the box on the next page for details.)

TOCALO's surface treatments are made to order. Accordingly, selling volume is not a business priority. The company procures coating materials and generates sales by applying surface treatments to goods and parts provided by customers. In FY03/23, it reported a GPM of 36.1%, an SG&A ratio of 14.1%, and an OPM of 21.9%, on a consolidated basis. Over half of the parent company's total manufacturing costs in FY03/23 were labor (29% of the total) and outsourcing costs (24%). Other manufacturing costs included materials (14%), consumables (11%), utilities (5%), depreciation (7%), and other costs (10%). TOCALO's business is labor-intensive, with personnel expenses accounting for about 50% of SG&A expenses.

The thermal spraying industry divides into companies that conduct thermal spraying internally and companies that perform thermal spraying as a contracted service. In 2018, the market for contracted treatment in Japan was worth approximately JPY60.0bn, while the global market was about JPY700.0bn (source: Yano Research Institute). Some overseas competitors sell thermal spraying materials and equipment in addition to providing contracted treatment services, but TOCALO specializes in services. Overseas sales accounted for 23.3% of sales in FY03/23 and mainly came from Japanese companies that have expanded abroad. The company also receives royalty income from licensing agreements with overseas companies, including competitors.

By area of application, 20% of thermal spraying in Japan is associated with industrial equipment, 20% semiconductors and flat panel displays (FPDs), 13% steelmaking, 10% bridges and structures, 10% paper manufacturing, and 27% other uses (2018 actual; Yano Research). At TOCALO, semiconductor/FPD-related sales at the parent made up about 48% of consolidated sales in FY03/23. The bulk of sales are to the Tokyo Electron Limited group (TSE Prime: 8035). Semiconductor-related business is TOCALO's growth driver, and TOCALO and Tokyo Electron have built a close relationship that allows them to conduct joint development.

In September 2004, TOCALO acquired all shares of Japan Coating Center Co., Ltd. (JCC), expanding into the thin coating technology known as the physical vapor disposition (PVD) process. PVD is a surface treatment method in which metals (e.g., titanium and chromium) are ionized with reactive gases in a vacuum to form highly adhesive ceramic coatings that are hard and dense but thin. Applied to surfaces of cutting tools, metallic molds, and other items, these coatings add functionality such as abrasion and corrosion resistance. JCC's profit margin is high (14.6% in FY03/23; before segment profit adjustments), but not as high as that of the Thermal Spraying (Parent) business. Shared Research notes that synergies between the parent and the subsidiary have generated.

By segment, Thermal Spraying (Parent) accounted for 75.2% of sales in FY03/23, Domestic Subsidiary (JCC) for 5.0%, Overseas Subsidiaries for 13.8%, Other Surface Treatments for 5.7% and Royalty Income 0.4%. The segment profit margins (recurring profit basis) were 23.1% in Thermal Spraying, 14.6% in Domestic Subsidiary, 25.0% in Overseas Subsidiaries, and 17.0% in Other Surface Treatments (before segment profit adjustments).

Trends and outlook

In FY03/23, sales were JPY48.1bn (+9.9% YoY), operating profit JPY10.6bn (+3.0% YoY), recurring profit JPY11.0bn (+4.1% YoY), and net income attributable to owners of the parent JPY7.4bn (+6.4% YoY). On a full-year basis, business in the core semiconductor and FPD fields grew, resulting in the second consecutive year of record sales and the third consecutive year of record profits in all categories, including recurring profit. The expected annual dividend is JPY50.0 per share, up from the company's previous forecast of JPY45.0 per share (JPY45.0 per share in FY03/23), and the actual payout ratio was 41.4% (39.6%).

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The company plan for FY03/24 calls for sales of JPY47.0bn (-2.4% YoY), operating profit of JPY8.7bn (-17.6% YoY), recurring profit of JPY8.7bn (-20.9% YoY), net income attributable to owners of the parent of JPY5.8bn (-21.1% YoY), and EPS of JPY96.7. Factoring in the effects from inventory adjustments at customers in the mainstay semiconductor/FPD industries, management forecasts sales and profit declining YoY for the first time in four years. The company is planning an annual dividend of JPY50.0 per share, the same as in FY03/23, and expects a payout ratio of 51.7%. The company has decided to revise its dividend policy and is targeting to increase the dividend payout ratio to about 50%, effective from FY03/24. At the Q3 results announcement (April-December) at end-January 2024, the company maintained its initial forecast.

On November 9, 2021, the company publicly announced its medium-term management plan for the first time ever. This medium-term management plan clearly defines the company's vision for 2030 and outlines the growth strategy the company plans to implement over the five-year duration of the plan, which concludes with FY03/26. For FY03/26, the company has set a sales target of JPY53.0bn (versus actual sales of JPY39.3bn in FY03/21) and a recurring profit target of JPY12.0bn (versus actual recurring profit of JPY8.9bn in FY03/21). In addition to maintaining and enhancing its financial strength and profitability, the company also clearly indicated that it would aim to increase shareholder returns. However, the company additionally stated that it would periodically monitor and review expansion associated with its business operations targeting semiconductors (expected to be a major driver of results during this medium-term management plan), as it is highly subject to impact from changes in trends within the semiconductor market.

In May 2022, the company announced the progress made on its medium-term management plan. Since only half a year had passed since the plan was created, there had basically been no change. However, the company has indicated that both sales and recurring profit are growing faster than originally envisioned. The company suggested that semiconductor- related sales and recurring profit would be revised when the financial results for FY3/23 were announced, but it has maintained a cautious stance to date.

Strengths and weaknesses

Shared Research believes that TOCALO's three main strengths are its portfolio of diverse surface treatments that makes the company the leader in a niche market; its ability to acquire top-class customers in major industries through joint development focused on meeting future needs; and stable earnings due to high domestic repeat demand for technologies with added value.

Shared Research has identified three notable weaknesses: a lack of peripheral technologies and mass production bases necessary to process large orders; lackluster cultivation of overseas markets; and low profitability of the Other Surface Treatments business. (See the "Strengths and weaknesses" section for details.)

Surface treatment technologies offered by TOCALO

Thermal spraying

A surface treatment technology that involves forming coatings on the workpieces by spraying them with molten metals, ceramics, cermet*, and other materials.

*Cermet: a composite material that is created by combining powder from hard compounds (metal carbide, nitride, etc.) with metal bonding materials, then sintering the mixture

Chemically defined zinc alloy coating (CDC-ZAC)

A chemical densification treatment for forming composite ceramic coatings through chemical reactions. It is characterized by excellent corrosion resistance and high degrees of hardness, which are unique properties of ceramics.

Toyota diffusion (TD) process

A surface treatment method that enables the formation of super-hard coatings. It is essential to the metallic mold industry as a surface treatment technology.

Plasma transferred arc (PTA) process

An overlay-welding method that utilizes plasma and produces excellent impact resistance.

Physical vapor deposition (PVD) process

This process minimizes heat deformation of the workpiece because it allows for a wide selection of temperature ranges, enabling treatments that best suit the substrate (the material to which spraying deposit is applied).

Source: Shared Research based on company data

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KeyIncome statement financialFY03/14	daFY03/15		taFY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22	FY03/23	FY03/24
(JPYmn)	Cons.	Cons.		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Orders	23,097	27,137		28,343	29,506	36,851	38,915	38,011	39,021	45,394	48,419
	YoY	10.2%	17.5%		4.4%	4.1%	24.9%	5.6%	-2.3%	2.7%	16.3%	6.7%
Order backlog	2,774	3,843		3,440	3,983	6,725	6,081	6,195	6,143	7,896	8,349
	YoY	21.9%	38.5%		-10.5%	15.8%	68.8%	-9.6%	1.9%	-0.8%	28.5%	5.7%
Sales	22,599	26,068		28,746	28,964	34,109	39,558	37,896	39,294	43,813	48,144	47,000
	YoY	8.0%	15.4%		10.3%	0.8%	17.8%	16.0%	-4.2%	3.7%	11.5%	9.9%	-2.4%
Gross profit	7,564	8,964		9,727	10,536	12,646	13,761	12,780	14,814	16,585	17,365
	YoY	10.8%	18.5%		8.5%	8.3%	20.0%	8.8%	-7.1%	15.9%	12.0%	4.7%
	Gross profit margin	33.5%	34.4%		33.8%	36.4%	37.1%	34.8%	33.7%	37.7%	37.9%	36.1%
Operating profit	3,483	4,568		4,806	5,646	7,110	7,741	6,550	8,890	10,255	10,558	8,700
	YoY	19.9%	31.2%		5.2%	17.5%	25.9%	8.9%	-15.4%	35.7%	15.4%	3.0%	-17.6%
	Operating profit margin	15.4%	17.5%		16.7%	19.5%	20.8%	19.6%	17.3%	22.6%	23.4%	21.9%	18.5%
Recurring profit	3,657	4,890		5,028	5,801	7,363	8,076	6,812	8,914	10,571	11,003	8,700
	YoY	19.6%	33.7%		2.8%	15.4%	26.9%	9.7%	-15.7%	30.9%	18.6%	4.1%	-20.9%
	Recurring profit margin	16.2%	18.8%		17.5%	20.0%	21.6%	20.4%	18.0%	22.7%	24.1%	22.9%	18.5%
Net income	2,176	3,031		3,016	4,070	4,836	5,441	4,404	5,463	6,909	7,350	5,800
	YoY	16.2%	39.3%		-0.5%	34.9%	18.8%	12.5%	-19.1%	24.0%	26.5%	6.4%	-21.1%
	Net margin	9.6%	11.6%		10.5%	14.1%	14.2%	13.8%	11.6%	13.9%	15.8%	15.3%	12.3%
Per-share data
Issued shares FY-end(000 shares)	63,200	63,200		63,200	63,200	63,200	63,200	63,200	63,200	63,200	63,200
EPS	35.8	49.9		49.6	67.0	79.6	89.5	72.5	89.9	113.6	120.8	96.7
EPS (fully diluted)	-	-		-	-	-	-	-	-	-	-	-
Dividend per share	12.5	15.0		18.8	21.3	26.3	30.0	25.0	35.0	45.0	50.0	50.0
Payout ratio	34.9%	30.1%		37.8%	31.7%	33.0%	33.5%	34.5%	38.9%	39.6%	41.4%	51.7%
DOE	3.3%	3.7%		4.2%	4.4%	4.9%	5.1%	3.9%	5.0%	5.9%	5.9%
Book value per share	390.2	427.4		456.9	504.1	562.1	617.8	662.3	727.1	807.3	884.8
Balance sheet (JPYmn)
	Cash and cash equivalents	10,181	8,404		8,197	8,387	9,234	12,660	16,889	16,227	17,110	16,912
Total current assets	19,700	21,527		20,830	23,000	25,941	27,749	31,837	33,140	36,365	38,827
Tangible fixed assets	12,735	14,055		16,151	20,305	24,589	27,395	26,786	28,594	30,740	33,037
Investments and other assets	553	597		914	911	1,871	1,838	2,160	2,183	2,180	2,163
Intangible assets	519	467		97	115	260	295	338	264	231	235
Total assets	33,507	36,647		37,992	44,331	52,664	57,278	61,122	64,183	69,517	74,263
	Accounts	2,442	3,189		3,036	1,229	1,434	1,271	1,157	1,194	1,397	1,425
	payable
	Short-term debt	1,137	943		511	905	879	1,218	2,153	1,802	1,460	1,490
Total current liabilities	7,393	8,383		7,877	8,884	14,054	13,362	11,323	12,193	13,334	14,272
	Long-term debt	653	284		117	2,419	1,701	3,337	6,045	4,267	2,825	1,449
Total fixed liabilities	1,421	1,112		1,045	3,195	2,470	4,250	7,163	5,097	3,723	2,347
Total liabilities	8,814	9,495		8,922	12,079	16,524	17,613	18,487	17,291	17,058	16,620
Total liabilities and net assets	33,507	36,647		37,992	44,331	52,664	57,278	61,122	64,183	69,517	74,263
Total interest-bearing debt	1,790	1,227		628	3,324	2,580	4,555	8,198	6,069	4,285	2,939
Cash flow statement(JPYmn)
Cash flows from operating activities	3,465	4,546		4,534	5,238	7,611	8,044	6,621	10,588	9,873	9,894
Cash flows from investing activities	-177	-4,889		-895	-6,537	-4,681	-4,617	-4,217	-4,615	-5,044	-5,094
Cash flows from financing activities	-165	-1,475		-1,743	1,581	-2,217	40	1,871	-3,798	-4,547	-4,561
Financial ratios
ROA (RP-based)	11.5%	13.9%		13.5%	14.1%	15.2%	14.7%	11.5%	14.2%	15.8%	15.3%	11.7%
ROE	9.5%	12.2%		11.2%	13.9%	14.9%	15.2%	11.3%	12.9%	14.8%	14.3%	10.7%
Equity ratio	70.8%	71.5%		73.3%	69.1%	64.9%	65.6%	65.9%	68.9%	70.6%	72.5%
Capex, other (JPYmn)
Capital	2,513	2,678		3,730	5,936	6,361	5,965	2,313	4,822	4,385	4,855	5,000
expenditures
Depreciation	1,388	1,440		1,560	1,703	1,948	2,658	2,991	2,771	2,783	2,987	3,200
R&D expenses	653	746		862	834	905	1,003	1,159	1,296	1,296	1,400	1,450
	R&D ratio	2.9%	2.9%		3.0%	2.9%	2.7%	2.5%	3.1%	3.3%	3.0%	2.9%	3.1%
Employee data (JPYmn)
No. of employees
(ex. temp.	802	824		857	898	955	1,021	1,060	1,121	1,176	1,300
workers)
	Temporary workers	242	243		239	245	236	251	263	253	265	164
Total no. of employees (incl. temp. workers)	1,041	1,056		1,080	1,123	1,163	1,239	1,304	1,344	1,414	1,402
Sales per employee	21.7	24.7		26.6	25.8	29.3	31.9	29.1	29.2	31.0	34.3
Operating profit per employee	3.3	4.3		4.5	5.0	6.1	6.2	5.0	6.6	7.3	7.5

Source: Shared Research based on company data

Notes: Per- share data is adjusted for stock splits. Figures may differ from company materials due to differences in rounding methods.

Citing the application of the accounting standard for revenue recognition from FY03/22, the company has not released YoY growth rates, but Shared Research has provided estimates as the size of the impact appears to be limited.

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Recent updates

Recognized with B score in Climate Change Report 2023 published by CDP

2024-02-21

Tocalo Co., Ltd. has announced that it has been recognized with a B score, the third highest rating in an eight-tier evaluation, in the Climate Change Report 2023 published by CDP*1, an international non-profit organization based in the UK.

The company has identified climate change as a key management issue and has strengthened its efforts to address environmental issues, such as activities to reduce CO2 emissions and the development of coating technologies that contribute to decarbonization. The company is also working to improve its disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and recognizes that these efforts have been positively evaluated. With the company having been recognized with a B score, it aims to actively engage in addressing social issues and work toward the realization of a sustainable society.

*1: The CDP (formerly known as the Carbon Disclosure Project) is a project operated in collaboration by institutional investors, managed by the non-profit organization CDP, based in London. It asks top companies by market capitalization in key countries to disclose their environmental strategies and greenhouse gas emissions. The project started in 2000. While it was formerly known as the "Carbon Disclosure Project," it has been officially called "CDP" since 2013 due to the expansion of its scope of activities. The CDP sends questionnaires to leading companies around the world asking for information disclosure, then analyzes and evaluates the responses. The answered questionnaires are generally made public, and the scoring based on the efforts is announced worldwide, serving as an important indicator for measuring corporate value.

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Trends and outlook

QuarterlyCumulative	trendsFY03/23and	results FY03/24						FY03/24
Cumulative (JPYmn)	Q1		Q1-Q2			Q1-Q3		Q1-Q4		Q1		Q1-Q2			Q1-Q3		Q1-Q4			% of Est.	FY Est.
Sales	11,906		23,996			36,424		48,144		11,787		22,971			34,804					74.1%	47,000
	YoY	10.9%		13.7%			13.0%		9.9%		-1.0%		-4.3%			-4.4%						-2.4%
Gross profit	4,444		8,931			13,302		17,365		4,112		7,940			11,905
	YoY	3.1%		8.7%			7.8%		4.7%		-7.5%		-11.1%			-10.5%
	Gross profit margin	37.3%		37.2%			36.5%		36.1%		34.9%		34.6%			34.2%
SG&A expenses	1,720		3,349			5,078		6,807		1,843		3,644			5,500
	YoY	10.9%		7.8%			6.2%		7.6%		7.2%		8.8%			8.3%
	SG&A ratio	14.4%		14.0%			13.9%		14.1%		15.6%		15.9%			15.8%
Operating profit	2,724		5,581			8,224		10,558		2,268		4,295			6,404					73.6%	8,700
	YoY	-1.3%		9.2%			8.9%		3.0%		-16.7%		-23.0%			-22.1%						-17.6%
	Operating profit margin	22.9%		23.3%			22.6%		21.9%		19.2%		18.7%			18.4%						18.5%
Recurring profit	2,948		6,033			8,678		11,003		2,380		4,590			6,729					77.3%	8,700
	YoY	3.8%		15.5%			12.1%		4.1%		-19.3%		-23.9%			-22.5%						-20.9%
	Recurring profit margin	24.8%		25.1%			23.8%		22.9%		20.2%		20.0%			19.3%						18.5%
Net income	1,912		3,919			5,669		7,350		1,539		2,985			4,280					73.8%	5,800
	YoY	2.5%		13.7%			13.4%		6.4%		-19.5%		-23.8%			-24.5%						-21.1%
	Net margin	16.1%		16.3%			15.6%		15.3%		13.1%		13.0%			12.3%						12.3%
Cumulative			FY03/23							FY03/24						FY03/24
Quarterly (JPYmn)	Q1		Q2			Q3		Q4		Q1		Q2			Q3		Q4		% of Est.	1H Est.
Sales	11,906		12,090			12,428		11,720		11,787		11,184			11,833
	YoY	10.9%		16.7%			11.7%		1.2%		-1.0%		-7.5%			-4.8%
Gross profit	4,444		4,487			4,371		4,063		4,112		3,828			3,965
	YoY	3.1%		14.8%			6.1%		-4.3%		-7.5%		-14.7%			-9.3%
	Gross profit margin	37.3%		37.1%			35.2%		34.7%		34.9%		34.2%			33.5%
SG&A expenses	1,720		1,629			1,729		1,729		1,843		1,801			1,856
	YoY	10.9%		4.8%			3.1%		11.8%		7.2%		10.6%			7.3%
	SG&A ratio	14.4%		13.5%			13.9%		14.8%		15.6%		16.1%			15.7%
Operating profit	2,724		2,857			2,643		2,334		2,268		2,027			2,109
	YoY	-1.3%		21.5%			8.1%		-13.6%		-16.7%		-29.1%			-20.2%
	Operating profit margin	22.9%		23.6%			21.3%		19.9%		19.2%		18.1%			17.8%
Recurring profit	2,948		3,085			2,645		2,325		2,380		2,210			2,139
	YoY	3.8%		29.5%			5.1%		-17.9%		-19.3%		-28.4%			-19.1%
	Recurring profit margin	24.8%		25.5%			21.3%		19.8%		20.2%		19.8%			18.1%
Net income	1,912		2,007			1,750		1,681		1,539		1,446			1,295
	YoY	2.5%		26.8%			13.0%		-12.1%		-19.5%		-28.0%			-26.0%
	Net margin	16.1%		16.6%			14.1%		14.3%		13.1%		12.9%			10.9%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
By segment			FY03/23							FY03/24						FY03/24
Cumulative (JPYmn)	Q1	Q1-Q2		Q1-Q3	Q1-Q4	Q1	Q1-Q2		Q1-Q3	Q1-Q4			% of Est.	FY Est.
Sales	11,906	23,996		36,424	48,144	11,787	22,971		34,804				74.1%	47,000
	YoY	10.9%	13.7%		13.0%	9.9%	-1.0%	-4.3%		-4.4%					-2.4%
	Thermal Spraying (Parent)	9,010	18,205		27,615	36,184	8,797	16,748		25,294				74.3%	34,063
		YoY	9.4%	13.8%		13.5%	9.5%	-2.4%	-8.0%		-8.4%					-5.9%
		% of total	75.7%	75.9%		75.8%	75.2%	74.6%	72.9%		72.7%					72.5%
	Domestic Subsidiary	591	1,197		1,820	2,414	623	1,230		1,859				70.0%	2,656
		YoY	-3.3%	-0.7%		0.4%	0.6%	5.4%	2.8%		2.1%					10.0%
		% of total	5.0%	5.0%		5.0%	5.0%	5.3%	5.4%		5.3%					5.7%
	Overseas Subsidiaries	1,577	3,140		4,814	6,622	1,607	3,422		5,291				72.9%	7,254
		YoY	24.7%	20.1%		15.0%	16.3%	1.9%	9.0%		9.9%					9.5%
		% of total	13.2%	13.1%		13.2%	13.8%	13.6%	14.9%		15.2%					15.4%
	Other Surface Treatments	697	1,367		2,060	2,745	745	1,515		2,286				79.5%	2,877
		YoY	16.8%	14.4%		14.4%	9.7%	6.9%	10.8%		11.0%					4.8%
		% of total	5.9%	5.7%		5.7%	5.7%	6.3%	6.6%		6.6%					6.1%
	Royalty income	29	86		113	177	14	54		72				48.0%	150
		YoY	26.1%	7.5%		8.7%	3.5%	-51.7%	-37.2%		-36.3%					-15.3%
Segment profit (recurring profit)	2,948	6,033		8,678	11,003	2,380	4,590		6,729				77.3%	8,700
	YoY	3.8%	15.5%		12.1%	4.1%	-19.3%	-23.9%		-22.5%					-20.9%
	Recurring profit margin	24.8%	25.1%		23.8%	22.9%	20.2%	20.0%		19.3%					18.5%
	Thermal Spraying (Parent)	2,278	4,463		6,623	8,341	1,787	3,171		4,693
		YoY	6.1%	12.2%		11.0%	3.2%	-21.6%	-28.9%		-29.1%
		Recurring profit margin	25.3%	24.5%		24.0%	23.1%	20.3%	18.9%		18.6%
	Domestic Subsidiary	85	175		276	352	114	284		420
		YoY	-44.1%	-28.6%		-21.6%	-25.3%	34.1%	62.3%		52.2%
		Recurring profit margin	14.4%	14.6%		15.2%	14.6%	18.3%	23.1%		22.6%
	Overseas Subsidiaries	437	885		1,235	1,653	376	887		1,378
		YoY	23.8%	28.4%		8.9%	7.5%	-14.0%	0.2%		11.6%
		Recurring profit margin	27.7%	28.2%		25.7%	25.0%	23.4%	25.9%		26.0%
	Other Surface Treatments	122	244		359	468	130	260		410
		YoY	4.3%	8.9%		8.5%	0.0%	6.6%	6.6%		14.2%
		Recurring profit margin	17.5%	17.8%		17.4%	17.0%	17.4%	17.2%		17.9%
	Adjustments	23	264		183	188	-29	-12		-172
By segment			FY03/23							FY03/24
Quarterly (JPYmn)	Q1	Q2		Q3	Q4	Q1	Q2		Q3	Q4
Sales	11,906	12,090		12,428	11,720	11,787	11,184		11,833
	YoY	10.9%	16.7%		11.7%	1.2%	-1.0%	-7.5%		-4.8%
	Thermal Spraying (Parent)	9,010	9,195		9,410	8,569	8,797	7,951		8,546
		YoY	9.4%	18.5%		13.1%	-1.7%	-2.4%	-13.5%		-9.2%
	Domestic Subsidiary	591	606		623	594	623	607		629
		YoY	-3.3%	1.8%		2.8%	1.2%	5.4%	0.2%		1.0%
	Overseas Subsidiaries	1,577	1,563		1,674	1,808	1,607	1,815		1,869
		YoY	24.7%	15.8%		6.5%	19.9%	1.9%	16.1%		11.6%

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	Other Surface Treatments	697	670	693	685	745	770	771
		YoY	16.8%	12.0%	14.4%	-2.3%	6.9%	14.9%	11.3%
	Royalty income	29	57	27	64	14	40	18
		YoY	26.1%	0.0%	12.5%	-4.5%	-51.7%	-29.8%	-33.3%
Segment profit (recurring profit)	2,948	3,085	2,645	2,325	2,380	2,210	2,139
	YoY	3.8%	29.5%	5.1%	-17.9%	-19.3%	-28.4%	-19.1%
	Recurring profit margin	24.8%	25.5%	21.3%	19.8%	20.2%	19.8%	18.1%
	Thermal Spraying (Parent)	2,278	2,185	2,160	1,718	1,787	1,384	1,522
		YoY	6.1%	19.4%	8.8%	-19.0%	-21.6%	-36.7%	-29.5%
		Recurring profit margin	25.3%	23.8%	23.0%	20.0%	20.3%	17.4%	17.8%
	Domestic Subsidiary	85	90	101	76	114	170	136
		YoY	-44.1%	-3.2%	-5.6%	-36.1%	34.1%	88.9%	34.7%
		Recurring profit margin	14.4%	14.9%	16.2%	12.8%	18.3%	28.0%	21.6%
	Overseas Subsidiaries	437	448	350	418	376	511	491
		YoY	23.8%	33.3%	-21.3%	3.7%	-14.0%	14.1%	40.3%
		Recurring profit margin	27.7%	28.7%	20.9%	23.1%	23.4%	28.2%	26.3%
	Other Surface Treatments	122	122	115	109	130	130	150
		YoY	4.3%	14.0%	7.5%	-20.4%	6.6%	6.6%	30.4%
		Recurring profit margin	17.5%	18.2%	16.6%	15.9%	17.4%	16.9%	19.5%
	Adjustments	23	241	-81	5	-29	17	-160

Source: Shared Research based on company data

Note: Figures may differ from company materials due to differences in rounding methods.

	Orders				FY03/23							FY03/24
	Cumulative (JPYmn)		Q1		Q1-Q2		Q1-Q3		Q1-Q4		Q1		Q1-Q2		Q1-Q3		Q1-Q4
	Orders	12,627		25,045		37,949		48,419		12,276		24,316		36,177
	YoY	16.2%		16.6%		12.8%		6.7%		-2.8%		-2.9%		-4.7%
	Thermal Spraying (Parent)	9,533		18,779		28,443		36,195		9,057		17,702		26,505
			YoY	15.3%		16.1%		12.0%		5.8%		-5.0%		-5.7%		-6.8%
	Domestic Subsidiary	585		1,206		1,822		2,402		659		1,295		1,933
			YoY	-1.0%		0.9%		1.2%		0.7%		12.6%		7.4%		6.1%
	Overseas Subsidiaries	1,864		3,707		5,638		7,115		1,815		3,757		5,445
			YoY	36.7%		32.3%		25.8%		16.4%		-2.6%		1.3%		-3.4%
	Other Surface Treatments	644		1,351		2,045		2,706		744		1,560		2,292
			YoY	-0.5%		3.9%		4.1%		0.9%		15.5%		15.5%		12.1%
	Orders				FY03/23							FY03/24
	Quarterly (JPYmn)		Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4
	Orders	12,627		12,418		12,904		10,470		12,276		12,040		11,861
	YoY	16.2%		17.1%		6.1%		-10.9%		-2.8%		-3.0%		-8.1%
	Thermal Spraying (Parent)	9,533		9,246		9,664		7,752		9,057		8,645		8,803
			YoY	15.3%		16.8%		4.8%		-12.1%		-5.0%		-6.5%		-8.9%
	Domestic Subsidiary	585		621		616		580		659		636		638
			YoY	-1.0%		2.8%		1.8%		-1.0%		12.6%		2.4%		3.6%
	Overseas Subsidiaries	1,864		1,843		1,931		1,477		1,815		1,942		1,688
			YoY	36.7%		28.2%		15.1%		-9.5%		-2.6%		5.4%		-12.6%
	Other Surface Treatments	644		707		694		661		744		816		732
			YoY	-0.5%		8.3%		4.5%		-8.1%		15.5%		15.4%		5.5%
	Order backlog				FY03/23							FY03/24
	(JPYmn)		Q1	Q2	Q3	Q4		Q1		Q2		Q3	Q4
	Order backlog	8,647	9,031	9,534	8,349	8,852	9,748	9,794
		YoY		37.3%	36.8%	24.4%	5.7%	2.4%	7.9%	2.7%
		Thermal Spraying (Parent)	6,527	6,578	6,832	6,016	6,276	6,970	7,227
				YoY		34.2%	31.2%	15.6%	0.2%	-3.8%	6.0%	5.8%
		Domestic Subsidiary	40	56	48	34	70	100	107
				YoY		2.6%	14.3%	0.0%	-26.1%	75.0%	78.6%	122.9%
		Overseas Subsidiaries	1,744	2,025	2,283	1,951	2,159	2,286	2,106
				YoY		53.0%	64.9%	71.1%	33.8%	23.8%	12.9%	-7.8%
		Other Surface Treatments	333	370	370	346	346	391	353
				YoY		30.6%	19.4%	0.5%	-10.4%	3.9%	5.7%	-4.6%

Source: Shared Research based on company data

Note: Figures may differ from company materials due to differences in rounding methods.

Factors affecting RP change		FY03/23				FY03/24
Cumulative (JPYmn)	Q1	Q1-Q2		Q1-Q3	Q1-Q4	Q1	Q1-Q2		Q1-Q3	Q1-Q4
Recurring profit	2,948	6,033		8,678	11,003	2,380	4,590		6,729
YoY change	109	811		940	432	-568	-1,443		-1,949
	Sales	717	1,775		2,556	2,530	-109	-661		-1,080
	Variable cost ratio	-65	-90		-338	-520	-280	-515		-539
	Personnel expenses	-336	-721		-959	-1,121	-169	-275		-395
	Depreciation	-76	-116		-137	-160	14	3		-25
	Forex impact	194	431		430	342	-108	-158		-103
	Other	-325	-468		-611	-638	85	166		195
Factors affecting RP change		FY03/23				FY03/24
Quarterly (JPYmn)	Q1	Q2		Q3	Q4	Q1	Q2		Q3	Q4
Recurring profit	2,948	3,085		2,645	2,325	2,380	2,210		2,139
YoY change	109	702		129	-508	-568	-875		-506
	Sales	717	1,058		781	-26	-109	-552		-419
	Variable cost ratio	-65	-25		-248	-182	-280	-235		-24
	Personnel expenses	-336	-385		-238	-162	-169	-106		-120
	Depreciation	-76	-40		-21	-23	14	-11		-28
	Forex impact	194	237		-1	-88	-108	-50		55
	Other	-325	-143		-143	-27	85	81		29

Source: Shared Research based on company data

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Cumulative Q3 FY03/24 results (out January 31, 2024)

Cumulative Q3 (April-December, nine months) results summary

Results for cumulative Q3 FY03/24 (April-December 2023) were as follows.

Sales: JPY34.8bn (-4.4% YoY)

Operating profit: JPY6.4bn (-22.1% YoY)

Recurring profit: JPY6.7bn (-22.5% YoY)

Recurring profit margin: 19.3% (-4.5pp YoY)

Net income attributable to owners of the parent: JPY4.3bn (-24.5% YoY)

Orders: JPY36.2bn (-4.7% YoY)

Order backlog: JPY9.8bn (+2.7% YoY)

Sales

Sales in the Thermal Spraying segment (handled by TOCALO, the parent company), which accounts for approximately 73% of consolidated sales, decreased 8.4% YoY to JPY25.3bn. This was mainly due to a temporary adjustment phase in the semiconductor market, resulting in an 18.5% decrease in semiconductor/FPD-related sales, the mainstay customer fields in Thermal Spraying, to JPY14.5bn. However, the increase in sales for applications other than semiconductors/FPDs in Thermal Spraying (industrial machinery and other thermal spraying) partially offset the decrease in semiconductor/FPD- related sales, and limited the decrease in Thermal Spraying sales to 8.4%. Sales for Overseas Subsidiaries (mainly China and Taiwan), Domestic Subsidiary, and Other Surface Treatments segments also increased YoY, but could not fully offset the decrease in Thermal Spraying.

As a result, cumulative Q3 (April-December) consolidated sales decreased 4.4% to JPY34.8bn.

Recurring profit and recurring profit margin (RPM)

Segment profit decreased 29.1% YoY for Thermal Spraying (Parent), but increased 11.6% YoY for Overseas Subsidiaries, 52.2% YoY for Domestic Subsidiary, and 14.2% YoY for Other Surface Treatments. The company's segment profit is linked to recurring profit in the income statement. The mainstay Thermal Spraying segment saw a 29.1% YoY decline in profit due to a decrease in sales from the high-profit semiconductors and FPDs, and increases in profit at Overseas Subsidiaries and other segments could not fully offset the profit decline at Thermal Spraying.

Consequently, consolidated recurring profit for cumulative Q3 (April-December) decreased 22.5% YoY to JPY6.7bn. RPM fell 4.5pp YoY to 19.3% due to changes in sales mix (decrease in sales from high-profit semiconductors and FPDs) and the impact of higher personnel and outsourcing costs. This is the first time in four years that cumulative Q3 RPM has fallen below 20%, since the 18.5% recorded in April-December 2019.

Orders

Cumulative Q3 (April-December) FY03/24 orders decreased 4.7% YoY to JPY36.2bn. Orders for the Thermal Spraying segment's mainstay semiconductor- and FDP-related applications declined due to the adjustment phase in the semiconductor market, which became evident from the latter half of the previous fiscal year (FY03/23). While orders for the Overseas Subsidiaries segment declined YoY due to the deterioration of the semiconductor market conditions, orders for the Domestic Subsidiary segment increased due to the recovery of production in the automobile industry, which is its main customer base, and orders in the Other Surface Treatments segment also increased YoY. However, these were not enough to compensate for the decline in orders in the Thermal Spraying segment (a decline in semiconductor and FPD- related orders). The breakdown of the JPY36.2bn of orders received in cumulative Q3 FY03/24 is shown below.

Thermal Spraying (parent): JPY26.5bn (-6.8% YoY)

Semiconductor/FPD-related: JPY15.3bn (-15.6% YoY)

Industrial machinery-related: JPY3.9bn (+29.6% YoY)

Steel making-related: JPY2.8bn (-9.3% YoY)

Other businesses: JPY4.5bn (+7.2% YoY)

Domestic Subsidiary: JPY1.9bn (+6.1% YoY)

Overseas Subsidiaries: JPY5.4bn (-3.4% YoY)

Other Surface Treatments: JPY2.3bn (+12.1% YoY)

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Orders for the semiconductor/FPD-related applications in the company's mainstay Thermal Spraying in cumulative Q3 declined 15.6% YoY due to inventory adjustments at major semiconductor manufacturing equipment manufacturers, the company's largest customers, against the backdrop of a full-scale adjustment phase in the semiconductor market.

While the orders from customers other than the largest customer exceeded expectations, it was not enough to offset the decrease from the largest customer, resulting in an expanded decline compared to the 14.8% decline YoY in 1H (April-September).

As for orders other than semiconductor/FPD-related applications in Thermal Spraying, orders for industrial machinery- related applications increased 29.6% and other businesses increased 7.2%, but steel making-related orders decreased 6.5%. As a result, the decline in orders for semiconductor/FPD-related applications could not be covered, and Thermal Spraying orders declined 6.8% YoY to JPY26.5bn, the first YoY drop in cumulative Q3 in four years.

Aside from Thermal Spraying, Domestic Subsidiary orders increased 6.1% YoY as domestic automobile production recovered, and Other Surface Treatments orders increased 12.1% YoY, mainly for agricultural machinery. Nevertheless, Overseas Subsidiaries orders decreased 3.4% YoY despite contributions from the foreign exchange impact (exchange rate difference resulting from the depreciation of the yen), due to the impact from the adjustment phase of the semiconductor market.

Order backlog

The order backlog grew 2.7% YoY to JPY9.8bn as of end-Q3 FY03/24 (end-December 2023). The breakdown of the JPY9.8bn order backlog as of end-Q3 is shown below.

Thermal Spraying (parent): JPY7.2bn (+5.8% YoY)

Semiconductor/FPD-related: JPY4.7bn (-1.0% YoY)

Industrial machinery-related: JPY537mn (+39.1% YoY)

Steel making-related: JPY1.2bn (+10.9% YoY)

Other businesses: JPY722mn (+30.6% YoY)

Domestic subsidiary: JPY107mn (approx. 2.2x YoY)

Overseas subsidiaries: JPY2.1bn (-7.8% YoY)

Other Surface Treatments: JPY353mn (-4.6% YoY)

Order backlog for the mainstay Thermal Spraying decreased 1.0% YoY, but order backlog for industrial machinery- related applications, steel making-related applications, and other businesses increased YoY. As a result, order backlog for Thermal Spraying of JPY7.2bn surpassed the JPY7.0bn recorded at end-September 2023, reaching a record high for two consecutive quarters. Furthermore, as order backlog for Domestic Subsidiary, Overseas Subsidiaries, and Other Surface Treatments segments also grew YoY, consolidated order backlog increased by 2.7% to JPY9.8bn. The JPY9.8bn order backlog exceeded the JPY9.7bn recorded at end-September 2023, reaching a record high for two consecutive quarters, as was the case for the Thermal Spraying segment.

The increase in the order backlog essentially indicates future sales growth, excluding for Domestic Subsidiary. However, the company is adjusting shipments of its mainstay semiconductor/FPD-related products to some customers due to the impact of the weakening semiconductor market.

In addition, in the semiconductor/FPD-related order backlog, the company has seen an increase in items for development products or those in transition to mass production (with slightly delayed delivery), which contribute less to the company's earnings, while mass production items, which contribute a great deal to earnings, have decreased. As a result, the company believes it will be difficult for sales to recover rapidly from Q4 (January-March) due to the existing order backlog.

Factors affecting changes (YoY) in recurring profit

Recurring profit, which is closely linked to segment profit in each segment, decreased by JPY1.9bn YoY, from JPY8.7bn in cumulative Q3 FY03/23 to JPY6.7bn. Factors contributing to the change are as follows.

1. downward impact of JPY1.1bn due to a decrease in sales
2. downward impact of JPY539mn due to a rise in the variable cost ratio
3. downward impact of JPY395mn due to an increase in personnel expenses
4. downward impact of JPY25mn due to an increase in depreciation
5. downward impact of JPY103mn due to foreign exchange effects
6. upward impact of JPY195mn due to other factors

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