Toagosei : Financial Factbook 2022

Financial Factbook 2022

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 2022

During the period under review (January 1 to December 31, 2022), the global economy was impacted substantially from various fronts. The rising number of cases of the omicron variant of COVID-19 and Russia's military invasion of Ukraine resulted in supply chain disruptions. Additionally, economic sanctions against Russia have taken effect. The shortage of energy, food and mineral resources has caused historically high inflation, forcing countries around the world to tighten their monetary policy severely.

The Japanese economy experienced a rapid increase in prices of raw materials, fuels, and imported products due to the yen's depreciation caused by Japan's efforts to maintain monetary easing measures to escape deflationary pressures. Consequently, corporate earnings and household spending were constrained.

Against that backdrop, the Group hiked selling prices and promoted cost cutting efforts. Nevertheless, sales volumes were generally weaker because of ongoing production cuts in the automotive, smartphone, and their peripheral industries.

As a result, Toagosei Group recorded the following financial results for the period under review.

Net sales: ¥160,825 million (+2.9% YOY)

Operating income: ¥14,382 million (-18.6% YOY)

Ordinary income: ¥16,446 million (-13.4% YOY)

Net income attributable to owners of parent: ¥12,494 million (- 9.3% YOY)

Furthermore, net sales declined by ¥7,940 million and operating income by ¥94 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Outlined below are the results for our reportable segments.

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Sales by Segment

Commodity Chemicals

Electrolysis products experienced a downturn in sales volume but selling prices were increased to cope with higher raw material and fuel prices, leading to increased sales revenue. Acrylic monomer products saw a downturn in sales volume, but price hikes based on higher raw material and fuel prices resulted in higher sales revenue. Industrial gases posted a decline in sales revenue on weaker sales volume, despite price hikes initiated in response to rising raw material and fuel prices. As a result of the above, this segment posted net sales of ¥74,225 million (+5.6% YOY). Furthermore, net sales declined by ¥2,246 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Operating income totaled ¥6,691 million (-16.3% YOY) due to diminished sales volume, despite upward revisions to selling prices based on rising raw material and fuel prices. Furthermore, operating income increased by ¥1 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Polymer & Oligomer

Acrylic polymers saw a decline in sales revenue on lower sales volume of automotive related products. Acrylic oligomers recorded lower sales volume for displays and other products, but net sales remained on par with the previous year due to the weak yen. Polymer flocculants posted an increase in sales revenue overall including exports and saw increased sales revenue thanks in part to selling prices hiked in response to rising raw material and fuel prices. As a result of these factors, this segment posted net sales of ¥35,807 (+2.6% YOY). Furthermore, net sales declined by ¥2,150 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Operating income fell to ¥4,258 million (-19.3% YOY), impacted substantially by lower sales volume. Furthermore, operating income decreased by ¥130 million due to the application of

Management's Discussion & Analysis

Accounting Standard for Revenue Recognition (ASBJ Statement

No. 29).

Annual Report 2022

Management's Discussion & Analysis

Adhesive Material

Instant glues for consumers experienced a slight decline in sales volume due to the effects of diminished customer traffic at home improvement stores, etc., but the effects of the weaker yen contributed to an increase in sales revenue overall. Functional adhesives posted significantly lower sales volume amid the impacts of reduction production of smartphones, resulting in a decline in sales revenue. As a result, this segment posted net sales of ¥11,134 million (-1.8% YOY). Furthermore, net sales declined by ¥461 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

The operating loss declined by ¥1,100 million compared to the previous fiscal year to ¥255 million owing to diminished sales volume of functional adhesives, depreciation, and rising advertising expenses and technological research costs overseas. Furthermore, operating loss increased by ¥5 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Performance Chemicals

High-purity inorganic chemicals recorded increased sales revenues amid higher sales volume of products for semiconductors. Inorganic functional materials saw an increase in sales revenue as sales volume of antimicrobial agents and deodorants increased, which offset the decrease in sales volume of ion-trapping agents to electronics components due to the reduced production of smartphones. As a result, this segment posted net sales of ¥10,466 million (+7.0% YOY). Furthermore, net sales increased by ¥103 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Operating income came to ¥2,361 million (-3.6% YOY) amid higher depreciation and technological research costs incurred in the healthcare and cellulose nanofiber domains. Furthermore, operating income increased by ¥42 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Plastics

Piping equipment posted increased sales revenue on price hikes in response to rising raw material and fuel prices. Nursing care products also saw higher sales revenue amid strong sales of new products including walkers, etc. Products for construction and civil engineering posted net sales on par with the previous fiscal year as diminished sales volume was largely offset by hikes to selling prices in response to rising raw material and fuel prices. Elastomer compounds recorded higher sales revenue on increased sales volume for automobile and medical applications. As a result, this segment posted net sales of ¥27,754 million (+6.2% YOY). Furthermore, net sales declined by ¥706 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Operating income totaled ¥1,759 million (+22.7% YOY) as a result of price hikes implemented in response to higher raw material and fuel prices along with sales of piping equipment placing greater emphasis on profits. Furthermore, there were no effects on operating income from the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Other Businesses

This segment covers goods transportation and trading-house operations. The segment posted net sales of ¥1,436 million (-62.7% YOY). Furthermore, net sales declined by ¥2,478 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Operating loss totaled ¥434 million. Furthermore, operating loss increased by ¥2 million due to the application of Accounting Standard for Revenue Recognition (ASBJ Statement No. 29).

Management's Discussion & Analysis

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Cash Flows

Cash and cash equivalents at end of the year stood at ¥44,839 million, a decrease of ¥1,664 million from the previous term-end.

Net cash provided by operating activities increased by ¥10,230 million year on year to ¥10,988 million due to increases in inventories and income taxes paid, as well as a decrease in income before income taxes.

Net cash used in investing activities decreased by ¥6,659 million year on year to ¥3,579 million due to a decrease in amounts managed in time deposits, despite an increase in purchases of property, plant and equipment.

Net cash used in financing activities increased by ¥819 million year on year to ¥9,464 million due to increases in dividend payments and purchases of treasury stock.

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Business Performance Prospects for Fiscal 2023

For the current term ending December 31, 2023, we forecast net sales of ¥178.8 billion, operating income of ¥14.0 billion, and net income attributable to owners of parent of ¥10.6 billion.

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Economic Prospects for Fiscal 2023

The future outlook is expected to remain highly unclear due to uncertainties such as the situation in Ukraine, new variants of coronavirus, inflation, and trends in interest rates.

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Basic Policy on Shareholder Returns and Dividends for Fiscal 2022 and 2023

Basic policy on shareholder returns: We aim for sustainable dividends that deliver growth in consolidated total shareholder returns. Our benchmark for consolidated payout ratio is 30%, and our benchmark for consolidated total shareholder returns is 50%. When deciding the dividend for a given period, we consider:

• the above policy,
• the need to reinvest earnings in projects that will increase our growth prospects and achieve sustainable management, and
• the need to retain a portion of earnings to cover risks such as rapid changes in the external environment and business risks.

Annual Report 2022