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 FY03/21, it reported a GPM of 37.1%, an SG&A ratio of 15.1%, and an OPM of 22.6%, on a consolidated basis. Over half of the parent company’s total manufacturing costs in FY03/21 were labor (29% of the total) and outsourcing costs (25%). Other manufacturing costs included materials (13%), consumables (10%), utilities (4%), depreciation (9%), 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 22.2% of sales in FY03/21 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 47% of consolidated sales in FY03/21. The bulk of sales are to the Tokyo Electron Limited group (TSE1: 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 (16.6% in FY03/21; 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 77.1% of sales in FY03/21, Domestic Subsidiary (JCC) for 5.2%, Overseas Subsidiaries for 12.3%, and Other Surface Treatments for 5.4%. The segment profit margins (recurring profit basis) were 22.0% in Thermal Spraying, 16.6% in Domestic Subsidiary, 26.8% in Overseas Subsidiaries, and 6.4% in Other Surface Treatments (before segment profit adjustments).
In FY03/22, sales were JPY43.8bn (+11.5% YoY), operating profit JPY10.3bn (+15.4% YoY), recurring profit JPY10.6bn (+18.6% YoY), and net income attributable to owners of the parent JPY6.9bn (+26.5% YoY). Thermal spraying for industrial machinery struggled somewhat, but business in the core semiconductor and FPD fields grew, driving increased performance. Performance at subsidiaries worldwide also contributed, such that the company posted record highs for two consecutive years in sales and all forms of profit, including recurring profit. Annual dividends will be JPY45.0 per share (JPY40.0 per share in the previous plan), and the payout ratio is expected to be 39.6%.
The company plan for FY03/23 calls for sales of JPY47.5bn (+8.4% YoY), operating profit JPY11.0bn (+7.3% YoY), recurring profit JPY11.0bn (+4.1% YoY), net income attributable to owners of the parent JPY7.2bn (+4.0% YoY), and projected EPS of JPY118.1. Based on the current status of orders received, the company plans to post record highs for a third consecutive year, in part due to continued growth in thermal spraying for semiconductors. The company is planning an annual dividend of JPY45.0 per share, the same as in FY03/22, and expects a payout ratio of 38.1%.
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.
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.)
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
|Gross profit margin||33.5%||34.4%||33.8%||36.4%||37.1%||34.8%||33.7%||37.1%||37.9%|
|Operating profit margin||15.4%||17.5%||16.7%||19.5%||20.8%||19.6%||17.3%||22.6%||23.4%||23.2%|
|Recurring profit margin||16.2%||18.8%||17.5%||20.0%||21.6%||20.4%||18.0%||22.7%||24.1%||23.2%|
|Issued shares FY-end('000 shares)||63,200||63,200||63,200||63,200||63,200||63,200||63,200||63,200||63,200|
|Dividend per share||12.5||15.0||18.8||21.3||26.3||30.0||25.0||35.0||45.0||45.0|
|Book value per share||390.2||427.4||456.9||504.1||562.1||617.8||662.3||727.1||807.3|
|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|
|Total current assets||19,700||21,527||20,830||23,000||25,941||27,749||31,837||33,140||36,365|
|Tangible fixed assets||12,735||14,055||16,151||20,305||24,589||27,395||26,786||28,594||30,740|
|Investments and other assets||553||597||914||911||1,871||1,838||2,160||2,183||2,180|
|Total current liabilities||7,393||8,383||7,877||8,884||14,054||13,362||11,323||12,193||13,334|
|Total fixed liabilities||1,421||1,112||1,045||3,195||2,470||4,250||7,163||5,097||3,723|
|Total liabilities and net assets||33,507||36,647||37,992||44,331||52,664||57,278||61,122||64,183||69,517|
|Total interest-bearing debt||1,790||1,227||628||3,324||2,580||4,555||8,198||6,069||4,285|
|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|
|Cash flows from investing activities||-177||-4,889||-895||-6,537||-4,681||-4,617||-4,217||-4,615||-5,044|
|Cash flows from financing activities||-165||-1,475||-1,743||1,581||-2,217||40||1,871||-3,798||-4,547|
|Capex, other (JPYmn)|
|Employee data (JPYmn)|
|No. of employees (ex. temp. workers)||802||824||857||898||955||1,021||1,060||1,121|
|Total no. of employees (incl. temp. workers)||1,041||1,056||1,080||1,123||1,163||1,239||1,304||1,344|
|Sales per employee||21.7||24.7||26.6||25.8||29.3||31.9||29.1||29.2|
|Operating profit per employee||3.3||4.3||4.5||5.0||6.1||6.2||5.0||6.6|
|Cumulative (JPYmn)||Q1||Q1-Q2||Q1-Q3||Q1-Q4||Q1||Q1-Q2||Q1-Q3||Q1-Q4||% of Est.||FY Est.|
|Gross profit margin||36.9%||37.1%||37.6%||37.1%||40.2%||39.0%||38.3%||37.9%|
|Operating profit margin||22.8%||21.9%||22.3%||22.6%||25.7%||24.2%||23.4%||23.4%||23.8%|
|Recurring profit margin||22.9%||21.7%||22.1%||22.7%||26.4%||24.8%||24.0%||24.1%||24.0%|
|Gross profit margin||36.9%||37.4%||38.4%||35.9%||40.2%||37.7%||37.0%||36.7%|
|Operating profit margin||22.8%||20.9%||23.0%||23.6%||25.7%||22.7%||22.0%||23.3%|
|Recurring profit margin||22.9%||20.5%||22.9%||24.3%||26.4%||23.0%||22.6%||24.5%|
|Quarterly (JPYmn)||Q1||Q2||Q3||Q4||Q1||Q2||Q3||Q4||% of Est.||FY Est.|
|Thermal Spraying (Parent)||7,872||7,093||7,738||7,438||8,238||7,762||8,322||8,721||103.8%||31,830|
|Other Surface Treatments||546||483||531||552||597||598||606||701||101.7%||2,460|
|Segment profit (recurring profit)||2,276||1,898||2,305||2,435||2,839||2,383||2,516||2,833||103.6%||10,200|
|Recurring profit margin||22.9%||20.5%||22.9%||24.3%||26.4%||23.0%||22.6%||24.5%||24.0%|
|Thermal Spraying (Parent)||1,859||1,550||1,843||1,508||2,148||1,830||1,986||2,122|
|Recurring profit margin||23.6%||21.9%||23.8%||20.3%||26.1%||23.6%||23.9%||24.3%|
|Recurring profit margin||15.2%||12.1%||26.0%||24.5%||24.9%||15.6%||17.7%||20.3%|
|Recurring profit margin||34.0%||21.7%||27.7%||25.7%||27.9%||24.9%||28.3%||26.7%|
|Other Surface Treatments||54||-5||47||39||117||107||107||137|
|Recurring profit margin||9.9%||-1.0%||8.9%||7.1%||19.6%||17.9%||17.7%||19.5%|
|Thermal Spraying (Parent)||7,482||7,037||8,067||7,573||8,265||7,913||9,218||8,816|
|Other Surface Treatments||512||455||561||545||647||653||664||719|
|Thermal Spraying (Parent)||4,428||4,372||4,701||4,836||4,864||5,015||5,910||6,005|
|Other Surface Treatments||211||183||212||205||255||310||368||386|
|Factors affecting RP change||FY03/20||FY03/21||FY03/22|
|Variable cost ratio||141||221||280||224||250||585||799||1,068||5||-80||-245|
|Factors affecting RP change||FY03/20||FY03/21||FY03/22|
|Variable cost ratio||141||80||59||-56||250||335||214||269||5||-85||-165|
Full-year results for FY03/22 were as follows.
EPS was JPY113.6. The company plans to pay a year-end dividend of JPY25.0 per share, and expects an annual dividend of JPY45.0 per share (JPY35.0 per share in FY03/21). Based on the company plan, the payout ratio is expected to be 39.6% (38.9% in FY03/21).
The company’s main segments—Thermal Spraying (Parent), Domestic Subsidiary, Overseas Subsidiaries, and Other Surface Treatments—all saw increased sales and profits. The core field of thermal spraying for semiconductors in particular demonstrated growth in both sales and profits, driving growth in performance, in the backdrop of increased capital investments in the semiconductor industry, including makers of semiconductor manufacturing equipment. As a result, in consolidated performance for FY03/22, the company posted record highs for two consecutive years in sales and all forms of profit. Furthermore, the recurring profit margin, one of the company’s management indexes, was 24.1%, an increase of 1.4pp over FY03/21. The recurring profit margin did not exceed the record high (26.6% in FY03/07), but it did approach that level, with the fourth highest figure in the company’s history.
Results for the most recent Q4 (January–March 2022; three months) were as follows.
Looking from a quarterly basis (3-month increments), both sales and operating profit increased YoY for nine consecutive quarters.
Shared Research will update the report following the results briefing and subsequent interviews with the company.
|(JPYmn)||1H||2H||Full year||1H||2H||Full year||1H Est.||2H Est.||FY Est.|
|Thermal Spraying (Parent)||14,965||15,176||30,141||16,000||17,043||33,043||36,496|
|Semiconductor and FPD equipment parts||9,019||9,157||18,176||9,938||10,705||20,643||23,768|
|Other Surface Treatments||1,029||1,083||2,112||1,195||1,307||2,502||2,595|
|Cost of sales||12,074||12,627||24,701||12,880||14,348||27,228|
|Gross profit margin||37.1%||37.1%||37.1%||39.0%||36.8%||37.9%|
|Operating profit margin||21.9%||23.3%||22.6%||24.2%||22.6%||23.4%||22.7%||23.6%||23.2%|
|Recurring profit margin||21.7%||23.6%||22.7%||24.8%||23.5%||24.1%||22.7%||23.6%||23.2%|
The company announced the following new company forecast for FY03/23.
Forecasted EPS is JPY118.1. The annual dividend forecast is JPY45.0 per share (same as the forecast for FY03/22). Based on the company forecast, the payout ratio will be 38.1% (39.6% expected in FY03/21).
Based on the high level of new orders received for semiconductors and FPD at end-March 2022 and recent movement in new orders, the company expects to see increased sales and profits in FY03/23 as well. It is planning to post record highs for the third consecutive year in sales and all forms of profit. Even so, the company expects to see some risk factors, for example in rapid price increases for materials and a deterioration in international relations. Based on these risk factors, the company expects the recurring profit margin to be 23.2% (-0.9pp YoY).
Shared Research will update the report following the results briefing and subsequent interviews with the company.
|Results vs. Initial Est.||FY03/14||FY03/15||FY03/16||FY03/17||FY03/18||FY03/19||FY03/20||FY03/21||FY03/22|
|Sales (Initial Est.)||21,000||23,000||27,500||28,000||30,000||39,000||36,000||36,500||41,000|
|Results vs. Initial Est.||7.6%||13.3%||4.5%||3.4%||13.7%||1.4%||5.3%||7.7%||6.9%|
|Operating profit (Initial Est.)||2,730||3,500||4,866||4,440||5,900||7,900||5,200||5,800||9,000|
|Operating profit (Results)||3,483||4,568||4,806||5,646||7,110||7,741||6,550||8,890||10,255|
|Results vs. Initial Est.||27.6%||30.5%||-1.2%||27.2%||20.5%||-2.0%||26.0%||53.3%||13.9%|
|Recurring profit (Initial Est.)||2,800||3,600||5,000||4,600||6,000||8,200||5,500||6,000||9,000|
|Recurring profit (Results)||3,657||4,890||5,028||5,801||7,363||8,076||6,812||8,914||10,571|
|Results vs. Initial Est.||30.6%||35.8%||0.6%||26.1%||22.7%||-1.5%||23.9%||48.6%||17.5%|
|Net income (Initial Est.)||1,680||2,178||3,222||2,978||4,000||5,400||3,520||3,880||5,800|
|Net income (Results)||2,176||3,031||3,016||4,070||4,836||5,441||4,404||5,463||6,909|
|Results vs. Initial Est.||29.5%||39.2%||-6.4%||36.7%||20.9%||0.8%||25.1%||40.8%||19.1%|
|Medium-term management plan||FY03/21||FY03/22||FY03/26||5-year|
|% of total||46.3%||47.1%||49.1%|
|iron/steel industrial machinery||21,118||22,500||27,000||5.0%|
|% of total||53.7%||52.9%||50.9%|
|Recurring profit margin||22.7%||24.0%||22.6%|
|Equity ratio||68.9%||70.2%||maintain about 70%|
|DOE||5.0%||5.2%||maintain about 5.0%|
|Capital expenditures||4,822||6,000||Total25.0bn - 35.0bn||5.0-7.0 bn/Year|
|R&D ratio||3.3%||3.3%||maintain about 3%|
On November 9, 2021, the company announced its medium-term management plan. The plan covers the five-year period extending from FY03/22 through FY03/26 (comparisons have been made using FY03/21 results as a point of reference), but the company also views it as a process toward achieving its long-term vision, which is based upon ideal circumstances the company aims to establish by 2030. This medium-term management plan is the first that the company has announced to the public. TOCALO is using the occasion of its 70th anniversary to present its vision for the future to its stakeholders.
The company has identified 10 issues based on analyses of its surrounding business environment and major changes affecting this environment. Having identified these issues, the company established its vision of becoming a company that "contributes to a prosperous future for people and nature" by 2030 through its surface treatments, which primarily consist of thermal spraying. As a part of this process, the company has set the following performance targets for FY03/26 (five years after the beginning of the plan) using FY03/21 results as a launch pad (basis of comparison). The company will aim to achieve the targets in this plan by expanding existing businesses and by branching into new business areas.
Sales generated through thermal spraying for purposes not involving semiconductors (iron and steel, industrial machinery, etc.) in FY03/21 (JPY21.1bn) include JPY20.9bn in sales categorized according to the company's previous reporting segment structure and JPY221mn in sales stemming from the Royalty Income segment. Accordingly, this JPY21.1bn figure differs from the figure of approximately JPY20.9bn indicated by data from the company.
In addition these earnings target, the company also aims to maintain or exceed current levels associated with financial strength, ROE and other measurements of earning power, and dividend payout ratio.
In formulating this medium-term management plan, which is the first that has been announced to the public, the company first examined its surrounding earnings environment. Then, the company identified the following 10 issues with the goals of further expanding the business domain associated with its core thermal spraying technologies and enhancing its four strengths (development of advanced functional coatings, flexible production support, capacity for providing solutions in response to customer needs, and robust financial strength capable of supporting development investment).
When identifying these 10 issues, the company established a table in which the horizontal X-axis consisted of four customer categories (semiconductors and FPDs, iron and steel, energy and environment, and industrial machinery and others) and one additional category that applies to all of these customer categories (management and operation). Meanwhile, the vertical Y-axis included three categories: market development, development, and manufacturing (production). Then, the issues were mapped out across this table using a cross-functional format that compares the five categories on the X-axis and the three categories on the Y-axis. The 10 issues identified by the company in this way are shown below.
TOCALO's medium-term management plan was formulated and is being executed based on the company's goal of addressing these 10 issues.
While formulating its medium-term management plan, the company reaffirmed its management philosophy and vision and defined its corporate mission. Then, based on changes in the global earnings environment (which the company refers to as "megatrends"), the company decided upon the future direction of its growth strategy. In order to solidify this growth strategy, the company has decided to further develop its current business model.
The company's management philosophy is to "contribute to society as a specialized manufacturer of surface treatment processes centered on thermal processing and establish ourselves as a corporate group with advanced technologies and a highly profitable structure." Shared Research has selected some of its key points and summarized them below.
When formulating its medium-term management plan, the company established a new long-term vision for 2030: "contribute to a prosperous future for people and nature." In terms of content, this vision is essentially the same as the company's current corporate philosophy. However, by making it clearer and more concise than the latter, the company has reaffirmed its commitment to both the ideals it has always held and the achievement of its future goals.
The company has established a mission to facilitate the realization of its renewed management philosophy and vision of contributing to a "prosperous future for people and nature." The mission of TOCALO's corporate group is "to enhance corporate value through continuous growth with an emphasis on ESG." In addition, the company has adopted to the following four initiatives to facilitate the execution of this essential mission.
By implementing these four initiatives, the company aims to achieve its absolute mission of enhancing "corporate value through continuous growth with an emphasis on ESG."
In formulating its medium-term management plan, the company deeply analyzed changes affecting the global earnings environment ("megatrends"), including the launch of efforts targeting the achievement of carbon neutrality by 2050. Based on these analyses, the company has identified the following three megatrends as keys to future growth and identified the most advantageous direction it should take moving forward.
In response to these three megatrends, the company plans to actively implement growth strategies, develop new products, and cultivate new markets. In addition, the company has identified specific themes for each of these three megatrends.
Finally, the company says that it will focus on "People and the Environment (Nature)" as two core initiatives (growth strategies) on which its corporate group will place particular emphasis. In the area of "people," the company plans to develop applications for the semiconductor and FPD industries, and in the area of "environment (nature)," it plans to develop applications in the fields of energy and materials. However, these two growth strategies will be difficult to implement successfully within a short period of time. Accordingly, the company has stated that it is not attempting to achieve concrete results through these strategies by FY03/26; rather, it has presented them with the intention of indicating its future direction.
The company also stated that it would work on "further developing its business model." In accordance with this intention, the company has grouped the 10 issues identified above into several thematic categories. "Conversion of customers into partners" and "targeting of markets aimed at diversifying sources of revenue" have been left to stand as separate and independent themes. "Enhancement of service system" and "global expansion" have been grouped under the theme "enhancement of market development." "Establishment of technological superiority" has been placed under its own theme, "strengthen technology development systems." Meanwhile, the company grouped "enhancement of manufacturing processes," "further enhancement of quality control systems," and "reduction of environmental impact" under the theme "advancement of manufacturing." Finally, "creation of comfortable working environments" and "enhancement of internal controls" were included under the theme "sustainable growth toward a 100-year company."
Within its medium-term management plan, the company has set earnings targets for FY03/26, which is a key point in the the course the company will take to achieve its long-term vision for 2030. The launch pad (basis for comparison) will be results generated in FY03/21.
The basis for comparison the company is using to calculate rates of change in business performance over the five-year duration of its medium-term management plan is results generated in FY03/21 (the launch pad year). However, in FY03/2021, a decrease in retirement benefit expenses stemming from one-time factors boosted recurring profit by the same amount (approximately JPY358mn). Therefore, the company believes that its recurring profit in FY03/21 was effectively about JPY8.6bn, and maintains that this figure should be used as a basis for comparison. Using this JPY8.6bn figure as a comparative launch pad, Shared Research estimates that recurring profit will grow at a rate of 40.4% over the course of the five-year plan. The company projects that its recurring profit margin in FY03/26 will decline by 0.2pp compared to FY03/2021, but as discussed later on in this report, this prediction was made because the company expects a temporary increase in its depreciation burden due to ongoing high levels of capital investment. This projected recurring profit margin is still commensurate with the benchmark of 20% set by the company as a profitability target.
Although the company did not disclose specific figures, it established sales targets for new businesses in fields such as agriculture and medical care in FY03/26. Fundamentally, these new businesses do not constitute a part of the company's current (existing) businesses. The company has also indicated that it will divide its existing businesses into three categories: businesses to be expanded (semiconductor, FPD, and environment and energy-related operations), businesses to be downsized, and businesses to be maintained. The TOCALO did not specifically indicate which businesses it plans to downsize or maintain.
TOCALO does not, however, view these earnings targets as goals that it is fully committed to achieving, but rather as benchmarks for sustainable growth. The company maintains this viewpoint because results generated through its semiconductor-related operations, which will drive its performance moving forward, are highly dependent on market trends. Currently, the company's semiconductor-related sales are growing in line with expansion in the market for wafer fab equipment used in front-end processes associated with semiconductor manufacturing equipment. However, past trends have proven that performance within the semiconductor market varies greatly between periods of expansion and contraction, and the company has accordingly decided to closely monitor market trends and revise its forecasts on a regular basis.
In order to generate this expansion in earnings, the company will continue to make high levels of capital investment: over the five years ending with FY03/26, the company plans to invest between JPY25.0bn and JPY35.0bn (between JPY5.0bn and JPY7.0bn per year) to maintain and improve its technological superiority. Listed below is a summary of the company's most recent capital expenditures.
In its medium-term management plan, the company projects that capital expenditures will remain at roughly the same peak level at which trended during the period spanning from FY03/17 through FY03/19 for the next five years (including FY3/2022).
These high levels of capital expenditure are mainly related to efforts aimed at increasing semiconductor production, new technological processes, and production efficiency. The company has indicated how total capital expenditure will divided among these categories, but Shared Research assumes that the largest share of this total will be allocated to efforts aimed at increasing semiconductor production for at least the first two to three years of the plan (which include FY03/22).
Additionally, the company has indicated that it will maintain R&D expenses at a rate of about 3% of consolidated sales. Included below is a summary of the company's most recent research and development expenses.
If we were to calculate projected research and development expenses in FY03/26 (the final year of the five-year medium-term management plan) using this ratio of 3%, they would amount to approximately JPY1.6bn.
In its medium-term management plan, the company has also set financial targets and shareholder return goals.
At the end of its medium-term management plan, the company outlined two initiatives aimed at reducing its environmental impact: an initiative consisting of measures targeting the elimination of greenhouse gas emissions and another initiative comprising measures designed to prevent water and air pollution.
As a broader target that includes the implementation of these initiatives, the company is aiming to reduce greenhouse gas emissions in FY2030 by 46% compared to levels in FY2013. This rate of reduction is the same as the rate specified in targets issued by the government of Japan. However, the company has designated 2021 and 2022 as a period during which it will prepare for the implementation of these initiatives.
Situational awareness and improvement efforts to be applied to all processes associated with the company's business activities
TOCALO does not release a medium-term business plan or numerical targets, but defines its strategy for sustainable growth as the development of new products and markets. The company focuses on five target markets: semiconductor and FPD; energy and environment; advanced materials (high-performance iron and steel materials, highly functional film, paper/nonwoven fabrics, etc.); transportation (high-speed railway, aircraft, etc.); and medical care.
TOCALO’s action plan toward sustainable growth includes the following three points:
TOCALO’s first encounter with a semiconductor equipment maker dates back to the winter of 1994. Before dawn on January 17, 1995, the Great Hanshin earthquake caused the company’s headquarters to collapse and also damaged the company’s factories in Kobe and Akashi. Despite this tragedy, TOCALO achieved fast recovery through its efforts in the semiconductor and FPD fields. The company then pushed forward with its development of thermal spraying technologies for semiconductor equipment, and in 1997, was awarded an order to apply thermal spraying to etching chamber parts. The company calls 1997 the first year of its semiconductor era. In 2000, TOCALO began mass producing new ceramic coatings through thermal spraying and began applying its thermal spraying technology to the mass production of chamber parts in etching equipment for 300mm wafers. These moves spurred steady progress for the company. The feature size of state-of-the-art semiconductors (very large-scale integrated circuits) is becoming miniaturized and the structure of these semiconductors multi-layered; and the trend toward using dry etching processes (use of plasmas or etchant gases to remove portions of substrate layers based on specific patterns defined by photoresist masks) is becoming increasingly more common. Moving forward, TOCALO will further strengthen its production capacity and enhance its development of next-generation coating technology.
In September 2004, the company acquired all shares of Japan Coating Center Co., Ltd. (JCC) to enter the field of physical vapor disposition (PVD), which enables the formation of a thin coating. The PVD process adds functionality, such as abrasion and corrosion resistance, to the workpieces (cutting tools, metallic molds, etc.) by forming hard, dense, thin, and highly adhesive ceramic coatings on their surfaces. These coatings are generated by ionizing metals, including titanium and chromium, in a vacuum with reactive gases. Through the acquisition of JCC, the company began covering a wide range of coating technologies from thick coating created by thermal spraying and other surface treatments to thin coating made by the PVD process. This setup will give the company more breadth and depth in target market areas.
TOCALO comprises a parent company, five consolidated subsidiaries, one non-consolidated subsidiary, and one affiliated company. It primarily conducts thermal spraying but also provides peripheral services, including the Toyota diffusion (TD) process, zinc-allow coating (ZAC), plasma transferred arc (PTA) process, and physical vapor deposition (PVD) process. These are all surface treatments that improve the performance of the workpiece through the application of coatings that have different properties from the substrate (the material to which spraying deposit is applied).
The company’s strength is in R&D aimed at finding possibilities for new coatings. TOCALO is also proficient in solution-based marketing that resolves customers’ worksite issues. Rather than just providing simple proposals, the company actively works with customers to develop new applications, as seen in its partnership with Tokyo Electron, and this approach has propelled it to gain top market share in the industry. The company emphasizes three-pronged management involving “manufacturing, marketing, and technological development.”
By segment, Thermal Spraying (Parent) accounted for 76.7% of sales in FY03/21, while Domestic Subsidiary accounted for 5.1%, Other Surface Treatments 5.4%, and Overseas Subsidiaries 12.2%. As for recurring profit in FY03/21, Thermal Spraying (Parent) accounted for 78.6% of the total, Domestic Subsidiary 4.7%, Other Surface Treatments 1.6%, and Overseas Subsidiaries 15.1%. Overseas sales, which comprised 19.4% of total sales in FY03/21, primarily came from Japanese companies that have expanded abroad. While some overseas competitors sell thermal spraying materials and equipment in addition to providing contracted treatment services, TOCALO specializes in services. The company has licensing agreements with a number of overseas companies including competitors and receives royalty income (JPY220mn in non-operating profit in FY03/21).
|Thermal Spraying (Parent)||15,904||16,324||19,176||21,933||22,309||26,183||30,400||28,221||30,141|
|% of total sales||76.0%||72.2%||73.6%||76.3%||77.0%||76.8%||76.8%||74.5%||76.7%|
|Domestic Subsidiary (PVD process)||1,698||1,826||1,949||1,978||2,111||2,312||2,493||2,364||2,018|
|% of total sales||8.1%||8.1%||7.5%||6.9%||7.3%||6.8%||6.3%||6.2%||5.1%|
|% of total sales||-||11.8%||12.2%||11.3%||9.7%||10.7%||11.3%||13.0%||12.2%|
|Other Surface Treatments||-||1,790||1,758||1,572||1,736||1,971||2,204||2,384||2,112|
|% of total sales||-||7.9%||6.7%||5.5%||6.0%||5.8%||5.6%||6.3%||5.4%|
|% of total sales||89.4%||83.3%||82.9%||82.4%||84.3%||82.7%||81.3%||80.6%||77.2%|
|% of total sales||10.6%||16.7%||17.1%||17.6%||15.7%||17.3%||18.7%||19.4%||22.2%|
One of TOCALO’s strengths is its ability to handle a wide variety of surface treatments, ranging from thick coating (e.g., thermal spraying, TD process, ZAC, and PTA process) to thin coating (e.g., PVD process). Of the different categories in thermal spraying (metalized contact thermal spraying, maintenance thermal spraying, and functional thermal spraying), the company excels in functional thermal spraying, which is high value-added and has strong growth potential. It has captured more than 40% of the thermal spraying market in Japan (scale of about JPY60.0bn in 2018; source: Yano Research Institute) and holds the top share.
A coating shop: The company’s sales come from coating treatment fees. Although it is a manufacturer, it does not make original products. Workpieces inside of the company’s factories belong to its customers.
Niche business in a niche market: TOCALO’s coating treatments are mainly applied to goods and manufacturing equipment components. The customers are manufacturers spanning a wide range of sectors from industrial to lifestyle-related, resulting in a customer mix that helps TOCALO navigate through changing economic climates.
Made-to-order production: The company’s coating technology is both important and essential to customer production lines and products. Accordingly, the company develops coatings that are specially adjusted for each customer.
R&D driven: By responding to advanced technological demand, the company targets further growth that will enable it to meet diverse customer needs.
Thermal spraying is a surface coating treatment that uses thermal energy to create molten or semi-molten materials, which–through the addition of kinetic energy–are simultaneously atomized into fine droplets that are emitted at high speeds (spraying). These droplets then make contact with and accumulate on the workpieces, creating a coating. Since thermal spraying can accommodate broad ranges of temperatures and speeds generated from thermal and kinetic energy, it allows for the application of various spraying materials as long as they can be turned to a molten or semi-molten state. Furthermore, there are relatively few limitations on substrates (the material to which spraying deposit is applied), allowing for a high degree of freedom when choosing which spraying and substrate materials to use together. Compared to surface treatments such as plating or physical vapor deposition, coating layers created through thermal spraying do not excel in terms of structural control and density. However, the technology allows for broad selection of materials and is characterized by its high speed and capacity to be applied to large surfaces.
|Method ||Coating material ||Substrate material ||Adhesion ||Deposition rate (mm/h) ||Principle ||Film thickness |
|Thermal spraying ||Metal, alloy, ceramics, plastics, glass ||Metal, ceramics, plastics, wood, paper product ||Excellent ||Flame: 15kg/h|
|Thermal spraying; spraying; stacking ||Thick |
|Plating ||Metal, alloy ||Materials resistant to corrosion by plating liquid ||Relatively good ||0.01–0.25 ||Wet plating; reduction of ion; precipitation ||Thin, thick |
|Chemical vapor deposition (CVD) ||Heat-resistant metal, sulfide, ceramics, selenium compound ||Materials resistant to heat (500–2000 degree Celsius) and chemical corrosion by evaporation materials ||Relatively good ||0.01–2.00 ||Chemical reaction of gases; precipitation ||Thin |
|Vacuum deposition ||Pure metal, alloy, compound ||Surface without gas emission ||Good with substrate heating; Excellent when substrate is cleaned with sputtering ||0.015–4.500 ||Vaporization; precipitation ||Thin |
|Ion plating ||Pure metal, alloy, carbide, nitride, oxide ||Surface without gas emission ||Excellent ||0.005–1.500 ||Dry plating; reduction of ion; precipitation ||Thin |
Coating technologies can be divided into thick coating, which includes thermal spraying and plating, and thin coating, which includes chemical vapor deposition (CVD), vacuum deposition, and ion plating. Plating has long been used as a coating technique because it is inexpensive and produces relatively high adhesive properties. However, when compared with thermal spraying, plating takes more time, only allows for metals and alloys to be used as coating materials, and has an extremely large impact on the environment. Thermal spraying, on the other hand, is widely used as a coating technology in industrial circles despite its higher costs compared to plating, because the method coats quickly and is applicable to a wide range of coating materials, including metals, ceramics, plastics, and glass.
(hard chrome plating)
|Thermal spraying |
| Process||Wet ||Dry |
| Coating characteristics||Difficult with complex shape ||Difficult with complex shape |
| Deposition rate||Low ||High |
| Coating material selection||Extremely limited ||Very wide |
| Film adhesion||High ||High |
| Film hardness||Hv800–900 ||Hv1100 or higher |
| Hydrogen embrittlement||Highly susceptible ||None |
|Environmental impact||Very large ||Small |
|Purpose ||Sprayed material ||Application |
|Corrosion resistance ||Zinc, aluminum, aluminum-zinc alloy, plastics, stainless steel ||Chemical plants, steel structures, marine structures |
|Abrasion resistance ||Cemented carbide (WC/Co), self-fluxing alloy, Co-Cr-Al alloy, Al2O3-TiO2, stainless steel) ||Hot-rolling hearth roll, press mold, hot-extrusion dies, pump shaft sleeves and seals, water wheel paddles, printer dampening rollers, various mechanical parts |
|Gap adjustment ||Si-Al-polyester, Ni-C ||Jet engine compressor sliding units, housing for turbo charger compressor |
|Heat resistance ||Zirconia (ZrO2-Y2O3, ZrO2-CaO, ZrO2-MgO), M-Cr-Al-Y alloy, Ni-Cr alloy ||Gas turbine blades, jet engine combustion chamber wall, rocket engine nozzles |
|Insulation property ||Al2O3 ||Electric parts |
|Conductive property ||Cu, Al, Ni-Cr alloy ||Electric heaters |
|Decoration ||Brass, various types of ceramics ||Furniture, manhole covers |
|Biocompatibility ||Pure titan, hydroxyapatite ||Artificial bones, artificial hip prostheses, artificial tooth roots |
|Other ||Zirconia ||Oxygen sensors, electrolytes for solid oxide fuel cell |
Thermal spraying equipment is categorized by the heat source it uses, which includes combustion gas, electricity, and laser. Based on the types of spraying material and gas pressure levels applied, equipment using combustion gas can be further broken down into wire, rod, or powder flame spraying equipment, high velocity flame spraying equipment (for high velocity oxy fuel [HVOF] and high velocity air fuel [HVAF] processes), and detonation spraying equipment (for D-gun treatment). Equipment using electricity as the heat source includes arc spraying equipment (for wire spraying that utilizes arc discharge) and plasma spraying equipment (for atmospheric plasma spraying, low-pressure plasma spraying, high-pressure plasma spraying, and underwater plasma spraying among others). Compared to atmospheric plasma spraying, low-pressure plasma spraying allows for faster spraying of molten particles, and can form a coating with higher density and bonding strength. It is widely used as an indispensable thermal spraying method in advanced fields such as high-performance coating for components of semiconductor and FPD manufacturing equipment.
Wire flame spraying method: Main characteristics are as follows (the same characteristics also apply to arc spraying):
1) The workpiece can be held at a low temperature during spraying, preventing undesirable thermal impact such as dimensional changes, deformation, cracking, or deterioration of strength.
2) Allows for a wide selection of coating thickness (normally 0.1–5.0 mm)
3) Produces a coating with excellent abrasion resistance because the particles that form the coating via this method achieve hardness beyond that of their raw material state. Hard materials, such as metallic oxide, nitride, and carbide are also interpositioned and dispersed within the coating for added strength.
Arc spraying method: Advantages over flame spraying that uses combustion gas are as below:
1) Thermal spraying capacity is more than twice as high and is more efficient when applied to articles with large surface areas
2) Has a higher degree of sectional adhesion, leading to stronger overall adhesiveness
3) Offers higher compressive strength, enabling use under heavy loads
Plasma spraying method: “Plasma” refers to ionized gases that form when gases are heated and their molecules separate into atoms and further break down into electrons and positive ions (electrolytic dissociation). Plasma spraying is a thermal spraying treatment that utilizes a high-temperature and high-speed gas jet, or “plasma jet,” that gathers these gases and uses them to melt and spray out metals, alloys, and refractory materials including various types of ceramics, or cermet, which is a combination between ceramics and metals or alloys. Plasma spraying methods include atmospheric plasma spraying (APS), which is conducted in normal atmospheric air, and vacuum plasma spraying (VPS), which is conducted within a chamber with atmosphere and pressure controls.
Wire flame spraying: A thermal spraying treatment in which metal or alloy wire is melted by an oxy acetylene (propane) flame, atomized to form a fine spray, and propelled to the substrate to form a coating. Both wire flame spraying and arc spraying are categorized as wire treatments. A wide range of wires can be used, including materials with low melting points such as aluminum, zinc, and babbit metals, as well as metals and alloys such as copper, bronze, monel, carbon steel, stainless steel, and molybdenum.
Rod flame spraying: A thermal spraying treatment in which ceramic rods molten by a combustion gas flame (primarily oxy acetylene) is atomized into particles and sprayed onto the substrate. Only particles that have been completely melted are propelled to the substrate using compressed air, forming a ceramic coating that is high density and highly adhesive.
Powder flame spraying: A thermal spraying treatment in which self-fluxing alloys* in powder form are molten by an oxy acetylene (propane) flame. Particles of the molten material are then sprayed onto the substrate. The method also involves a fusing treatment performed after spraying (heating the applied coating to its melting point), which strengthens the bond between the coating and the substrate, forming a nearly nonporous coating that offers high degrees of adhesion and excellent corrosion resistance. In the fusing and solidifying process, the coating deposits a solid layer of boride and carbide, also adding high abrasion resistance to the coating. The treatment is also characterized by excellent resistance to corrosion from most chemical solutions, erosion resistance, cavitation erosion resistance, and hot hardness.
*Self-fluxing alloy: any alloy used in thermal spraying which does not require the addition of a flux in order to wet the substrate and coalesce when heated.
High velocity flame spraying: In high velocity oxy fuel (HVOF) spraying, a type of high velocity thermal spraying, the pressure inside the spray gun combustion chamber is raised to generate a high velocity flame that is comparable to a flame produced through explosive, detonative combustion. Spraying material in powder form, fed into the center of the jet stream generated by this flame, achieves a molten or semi-molten state; the resulting particles are then continuously sprayed onto the substrate at a high velocity. This method allows for the creation of an extremely dense and adhesive coating because it forces the sprayed particles to collide with the substrate at supersonic speeds. The true value of HVOF spraying lies in its capacity to form a carbide cermet coating that is particularly resistant to abrasion. This method produces coatings of more uniform quality than detonation spraying because it forms coatings continuously.
Source: Shared Research based on company data
Wire flame spraying (combustion gas)