TOCALO : Q2 Financial Results Briefing for the Fiscal Year Ending March 2024

TOCALO Co., Ltd.

Q2 Financial Results Briefing for the Fiscal Year Ending March 2024

November 8, 2023

Event Summary

[Company Name]	TOCALO Co., Ltd.
[Company ID]	3433-QCODE
[Event Language]	JPN
[Event Type]	Earnings Announcement
[Event Name]	Q2 Financial Results Briefing for the Fiscal Year Ending March 2024
[Fiscal Period]	FY2023 Q2
[Date]	November 8, 2023
[Number of Pages]	35
[Time]	13:30 - 14:10
	(Total: 40 minutes, Presentation: 23 minutes, Q&A: 17 minutes)
[Venue]	Webcast
[Venue Size]
[Participants]
[Number of Speakers]	4
	Kazuya Kobayashi	Representative Director, President and
		Executive Officer
	Hiroshi Goto	Director, Managing Executive Officer,
		General Manager of Administration
	Kenji Hosomi	Manager of Accounting Division
	Hiroshi Shimizu	Manager of Corporate Planning Division
[Analyst Names]*	Mitsuhiro Osawa	Ichiyoshi Research Institute

*Analysts that SCRIPTS Asia was able to identify from the audio who spoke during Q&A or whose questions were read by moderator/company representatives.

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Presentation

Moderator: Thank you for your patience. It is time to begin the financial results briefing of TOCALO Co., Ltd. This briefing will be held in a hybrid format with a live-streamed online session in addition to the on-site session. First of all, I would like to introduce the four people who are attending from the Company. First, this is Mr. Kazuya Kobayashi, Representative Director, President and Executive Officer.

Kobayashi: I am Kobayashi. Thank you for joining us today.

Moderator: Thank you. Next is Mr. Hiroshi Goto, Director, Managing Executive Officer, General Manager of Administration.

Goto: I am Goto. Thank you for your time.

Moderator: Thank you. Next is Mr. Kenji Hosomi, Manager of Accounting Division.

Hosomi: I am Hosomi. Thank you for your participation.

Moderator: Thank you. Next is Mr. Hiroshi Shimizu, Manager of Corporate Planning Division.

Shimizu: I am Shimizu. Thank you for your time.

Moderator: Thank you.

Mr. Kobayashi will give you an explanation today. After the explanation, there will be time for taking questions from the audience. We will then take questions from those who are participating online. If you have any questions, please enter your company name and your name, and then enter your questions via chat. Questions will be accepted even during the explanation.

Then, Mr. Kobayashi, please start.

Kobayashi: Hello, everyone. I am President Kobayashi. Thank you very much for taking the time out of your busy schedule today to participate in the financial results briefing of TOCALO. It appears that nearly 60 people have joined us today for both on-site and the live webcast. Let me begin my explanation. Thank you for your cooperation.

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I would like to begin by introducing myself. Since this is the first time that I participate in the financial results briefing, let me tell you a little about my background. I joined the Company in 1989 and was assigned to the Tokyo Plant. After working in the manufacturing department of the Tokyo Plant for about four years, I was transferred to the Thermal Spraying Technology R&D Laboratories and then to the Akashi Plant. During my time at the Akashi Plant, I worked on a large-scale FPD production plant, from FPD production to plant construction, and then I launched FPD production.

After that, I was transferred to the Kitakyushu Plant and became the Kitakyushu Plant Manager in 2014, where I established business with overseas semiconductor equipment manufacturers. After that, I returned to the Akashi Plant again, and in 2021, I became Managing Executive Officer and General Manager of the Production Headquarters, and this fiscal year I became President and Representative Director.

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As for my policy, because I participated in the formulation of our medium-term management plan when I was General Manager of the Production Headquarters, I would like to continue to actively promote the medium- term management plan. Of these, since I am from a manufacturing background, I would like to focus on the three points in particular. The first is to make products with the highest priority on safety. I would like to introduce such systems as ISO45000 or JISQ45100 to our company and promote the creation of a safe workplace.

Also, our current focus is on "creating a clean, functional, and people-friendly workplace." Our goal is to create a workplace where both men and women can work regardless of gender, and I will continue to promote this. Then we are going to do sincere manufacturing, which is a matter of course, but I would like to make sure that we are complying with work procedures and satisfying the quality standards of our customers.

In addition, as you can see in this page saying, "Each worker must have a sense of responsibility", what I am saying within the company is that I want each worker to be particular about his or her own quality, and I encourage each worker to be aware that he or she is responsible for making the product.

And last but not least, I would like to thoroughly improve production efficiency. I would like to focus on further improving thermal spraying efficiency and automating our production system to thoroughly increase production efficiency.

That is my policy, though I explained it very briefly.

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Now I would like to get into today's content. These are the three items I will explain today.

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First, I would like to provide highlights of the financial results for Q2 of the fiscal year ending March 2024.

The graphs compare semiannual results with the previous four semi-annual periods.

The left graph shows net sales and operating margin, and the right graph shows ordinary profit and ordinary profit margin. The results for H1 of the current fiscal year were net sales of JPY22.9 billion, ordinary profit of JPY4.5 billion, ordinary profit margin of 20.0%. We experienced the first decline in net sales in nine semi- annual periods due to the decline in the semiconductor field since H2 of the previous fiscal year. Ordinary profit was down 7.6% against H2 of the previous fiscal year.

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Compared to H1 of the previous fiscal year, when the semiconductor field was strong, sales were down 4.3% YoY, partly due to the semiconductor market entering an adjustment phase. Ordinary profit decreased 23.9% YoY due to changes in the sales mix as well as increases in labor and R&D expenses.

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This is an analysis of YoY changes in ordinary profit. Ordinary profit for H1 was JPY4.59 billion, a decrease of JPY1.442 billion YoY. The main factors were a decrease in sales and an increase in the variable ratio due to a change in the sales mix, as well as higher labor costs.

As for the foreign exchange effect, the weaker yen boosted profits, but the positive effect was about JPY158 million less YoY.

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Next, I would like to discuss sales by segment. In the largest segment, thermal spray on a non-consolidated basis, sales declined due to a large drop in semiconductors and FPDs, despite strong sales in industrial machinery and other fields. Other segments performed well, especially the other surface modification segment, which saw an increase in sales for agricultural machinery parts.

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