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TOCALO 3433
トーカロ
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2021-12-03
2021-10-29
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Summary
TOCALO Co., Ltd. provides surface treatments that improve the performance of materials 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.
Machinery
Key dates
2019-11-19
Coverage initiation
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 FY03/21, 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).
Trends and outlook
Full-year FY03/21 results were sales of JPY39.1bn (+3.1% YoY), operating profit of JPY8.7bn (+32.3% YoY), recurring profit of JPY8.9bn (+30.9% YoY), and net income attributable to owners of the parent of JPY5.5bn (+24.0% YoY). Industrial machinery and steelmaking-related sales slumped, but mainstay semiconductor/FPD-related sales grew significantly, spearheading the earnings recovery. With the added benefit of cost reductions, profit rebounded to a new record. Due to the strong earnings performance, the company hiked its 2H dividend forecast from JPY17.5 per share to JPY22.5. Full-year DPS amounted to JPY35.0 (payout ratio of 38.9%). This was a significant increase from FY03/20 (JPY25.0 per share).
Full-year FY03/22 forecast: The company revised up its full-year FY03/22 forecast after reporting Q2 results, and now projects sales of JPY42.5bn (+8.2% YoY), operating profit of JPY10.1bn (+13.6% YoY), recurring profit of JPY10.2bn (+14.4% YoY), net income of JPY6.6bn (+20.8% YoY), and EPS of JPY108.5. The YoY comparison figures are calculated using FY03/21 figures retroactively adjusted to the accounting standard for revenue recognition that has been applied from FY03/22. Thermal spraying (handled by the parent company) is the company’s core business. Sales generated by thermal spraying for semiconductors and flat-panel displays (FPDs) continued to rise, and the company expects to achieve record profit for the second consecutive fiscal year, thanks primarily to the standardization of order acquisition and operations and heightened productivity. The company also revised up its dividend forecast after announcing Q2 results, and for FY03/22 it now forecasts an annual dividend of JPY40.0 per share, up from JPY35.0 per share in FY03/21.
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 itsbusiness 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.
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
Key financial 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.
Recent updates
Upward revision to its forecasts for full-year FY03/22
TOCALO Co., Ltd. announced revisions to earnings forecast and dividend forecast.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: From FY03/22, royalty income has been reclassified from non-operating income to sales. Q1-Q2 and Q1-Q4 FY03/21 results are retroactively adjusted.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: From FY03/22, royalty income has been reclassified from non-operating income to sales. Q1-Q2 and Q1-Q4 FY03/21 results are retroactively adjusted.
Note: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results (out October 29, 2021)
Summary of results in 1H
Results for 1H FY03/22 (April–September 2021) were as follows.
The company plans to pay an interim dividend of JPY20.0 per share (versus its previous forecast of JPY17.5 per share).
By segment, sales generated by the core thermal spraying business (which is handled by the parent company and accounts for 75.8% of total sales) grew 6.9% YoY, as a downturn in industrial machinery-related sales was offset by strong sales of semiconductor-related products against a backdrop of robust demand. Upbeat sales offset an increase in personnel and other fixed costs, and recurring profit exceeded the company's existing forecast by over 21%. On a quarterly (three-month) basis, both sales and operating profit increased YoY for the seventh consecutive quarter.
1H results by segment
Thermal Spraying (handled by TOCALO, the parent company)
This is the company's largest segment, accounting for 75.8% of its consolidated net sales (in 1H FY3/22). Sales in the Thermal Spraying (parent) segment grew and continued to drive overall consolidated earnings. The JPY16.0bn in sales generated through this segment breaks down as follows.
The double-digit increase in sales generated by thermal spraying for semiconductors and FPDs (associated with high profit margins) fully compensated for the decline in sales stemming from thermal spraying for industrial machinery and steel. More than 90% of sales from thermal spraying for semiconductors and FPDs were generated by thermal spraying for semiconductors, and sales associated with thermal spraying for FPDs are trending downward. Sales from thermal spraying for industrial machinery and steel, which declined YoY in 1H, were firm in Q2 (July–September 2021), and the rate of decline associated with these sales was consequently smaller in Q2 than in Q1 (April–June 2021). The substantial decline in sales generated through thermal spraying for industrial machinery was largely due to ongoing stagnation related to bearings.
Under these circumstances, segment profit increased by 16.7% due higher sales generated through thermal spraying for semiconductors and FPDs and stabilized production. In the past, the company's semiconductor-related business activities were often affected by inconsistency in factory operations during busy periods, which would result in lower production efficiency. However, the company is becoming increasingly adept at standardizing order sizes from each of its customers during peak periods (JPY4.5-5.0bn per quarter), including its largest customer Tokyo Electron Limited (TSE1: 8035) and its group companies, which are disclosed in the company's annual securities report. By standardizing these order sizes, the company has been able to increase its number of factory personnel and reduce overtime work, thereby ensuring stable operations with higher production efficiency, even when facing large order levels.
These factors have led to improved productivity, and the profit margin in this segment during 1H (April–September 2021) amounted to 24.9%, up 2.1pp from 22.8% in 1H FY03/21. The segment's profit margin was 26.1% in Q1 (April–June 2021) and 23.6% in Q2 (July–September 2021); the company's Q2 profit margin has been lower than Q1 in nearly every fiscal year due to seasonal factors that affect the number of operating days within these two quarters (summer holidays, etc.).
Domestic Subsidiary
The company's domestic subsidiary (Japan Coating Center Co., Ltd.) mainly conducts physical vapor deposition (PVD) processing (a surface modification process for cutting tools, knives, and molds) and primarily serves clients in the automotive industry. In 1H, the company booked a strong volume of orders from automobile parts and construction machinery manufacturers for PVD processing on cutting tools, and sales rose about 35% YoY. Mainly as a result of this increase in sales, segment profit grew by more than 100% YoY, and the segment's profit margin rose by 6.6pp YoY.
Overseas Subsidiaries
This segment includes subsidiaries in China, Taiwan, and the U.S., but essentially consists of subsidiaries in the former two countries, China and Taiwan. In 1H, order bookings made within China's oil sector were lackluster from start to finish, and steel-related performance also continued to struggle. However, recoating operations related to semiconductors and FPDs generated strong results, and sales consequently increased by nearly 20% YoY. The company also observed a double-digit increase in segment profit, but the segment's profit margin declined by 1.1pp YoY, mainly due to weak performance in Q1 (April–June 2021).
Other Surface Treatments
Both segment sales and profit increased due to generally strong order bookings. Segment profit reached the same level as that of domestic subsidiaries. Results in 1H grew thanks in part to a particularly significant YoY increase in Q2 (July–September 2021).
Factors affecting change in recurring profit
Recurring profit, which is closely linked to segment profit, increased by JPY1.0bn from 4.2bn in 1H FY03/21 (April–September 2021) to JPY5.2bn. Factors contributing to the increase included upward impact of JPY1.3bn stemming from growth in sales, a contribution of JPY48mn stemming from a decrease in depreciation and amortization, and a boost of JPY155mn from foreign exchange impact. Meanwhile, results also incurred downward impact of JPY80mn stemming from a higher variable cost ratio, JPY219mn from an increase in labor costs, and JPY116mn from other factors.
Given this context, the reader should be aware that the company limited the rise in its variable cost ratio (which has a downward impact on profit) to arate lower than the rate at which its sales grew. The main factors enabling the achieve of this feat were improvement in the company's marginal profit ratio caused by its standardization of operations (mentioned above) and its curbing of costs associated with the outsourcing of processing operations. The company's successful limitation of increases in labor costs and sundry expeses also contributed to the growth of its profit margin (recurring profit margin increased by 3.1pp from 21.7% in 1H FY03/21 to 24.8%).
Latest results: Q2 (July–September 2021)
The company's most recent results (in Q2 [July–September 2021]) were as follows.
Performance figures were lower than in Q1 (April–June 2021), but this was the result of a variety of factors affecting the number of operating days that occurred within the two quarters (summer holidays, etc.). However, sales, recurring profit, and net income increased YoY by a greater rate than those same values did in Q1, while operating profit rose by the same YoY rate as Q1 operating profit. The double-digit increase in quarterly sales in Q2 made a particularly significant contribution to growth in profit. Both quarterly sales and quarterly operating profit rose for the seventh consecutive quarter (YoY).
Full-year FY03/22 company forecast
Notes: 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.
Overview of company forecast
Based on 1H results, the company revised up its forecasts for full-year FY03/22, as outlined below.
The company forecasts EPS of JPY108.5 and projects that it will post record highs in the category of sales and in all profit categories for the second consecutive fiscal year. Meanwhile, it expects to pay a year-end dividend of JPY20.0 per share (versus its previous forecast of JPY17.5 per share), for an annual dividend of JPY40.0 per share (JPY35.0 per share).
As reason for the upward revisions, the company said that it expected semiconductor-related sales in particular to continue outpacing its initial forecast in 2H. However, TOCALO said the revised forecast factors in risk in the form of a lack of visibility over COVID-19 effects. With the increase in dividend forecast accompanying the upward revision to its earnings forecast, the company is now expecting a consolidated divided payout ratio of 36.9%.
Sales projections by segment
The company releases sales projections for its individual reporting segments. Effective from FY03/22, the company has established a royalty income segment in addition to its previously existing four segments: thermal spraying (parent company), domestic subsidiaries, overseas subsidiaries, and other surface modification. However, the company projects that the royalty income segment will account for only 0.4% of net sales in FY03/22.
The company's sales projections for each segment are as follows.
The company upwardly revised the sales projections it released for all segments at the beginning of FY03/22. Excluding the Royalty Income segment (in which sales are much lower than in other segments), the company expects sales in all segments to increase YoY.
Out of all segments for which upward revisions were made, the upward revision to projected sales in the Domestic Subsidiaries segment was the smallest. The smaller size of this revision was due to the company's conservative incorporation of impact stemming from adjustments to automobile production that reached full swing in late August. However, since the end of October, when the company announced its current projections, automakers have begun to cease their implementation of these adjustments. Shared Research believes that the company took a conservative approach toward accounting for this return to normal levels of production when formulating its projections. Accordingly, Shared Research also believes that any concern that the company will fall substantially short of its announced sales projections is decidedly minimal.
The company also raised its projections for the Overseas Subsidiaries and Other Surface Treatments segments. It has indicated that its upward revisions to sales projections for the Overseas Subsidiaries segment were due to continuously remarkable growth in semiconductor-related performance in China and Taiwan, and has also stated that it is harboring no major concerns regarding the segment at this time.
Breakdown of sales projections for the Thermal Spraying (parent) segment
The company's sales forecast for its mainstay Thermal Spraying (parent) segment breaks down as follows.
TOCALO projects that it will generate JPY20.0bn in sales through thermal spraying for semiconductors (primarily) and FPDs, and considering its current processing (production) capabilities, production concerns are virtually non-existent. The company believes that this projection is reasonable because it can confidently forecast results generated through thermal spraying for semiconductors and FPDs three months in advance based on orders already booked. Shared Research understands that, given its processing capacity and impact stemming from its standardization of order bookings and production, the company is not likely to fall short of its sales projections, nor is it likely to substantially exceed them. According to the company, if its quarterly sales exceed JPY5.5bn, it will need increase its workforce and expand its facilities. Based on the company's current capital expenditures, sales generated through thermal spraying for semiconductors will not increase further until FY03/23 or later.
On the other hand, the company lowered its initial forecast for sales generated through thermal spraying for industrial machinery due to delayed recovery in performance related to bearings. According to the company, order bookings are gradually returning to previous levels, but they are not as strong as it had anticipated at the beginning of FY03/22. The company's revised forecast projects that sales generated through thermal spraying for industrial machinery will decline by nearly 5% YoY. Meanwhile, the company has raised its forecast for sales generated through thermal spraying for iron and steel and predicts that these sales will grow YoY. However, it also expects that these sales will not reach the level they did in FY03/20. The company also increased its initial projection for sales generated through thermal spraying for other purposes but simultaneously forecasts that these sales will decline YoY.
As can be seen through these projections, the company forecasts that sales generated through thermal spraying for semiconductors will be outstandingly strong, while performance from thermal spraying for other purposes will fall short of full recovery.
Breakdown of recurring profit projections in the company's forecast and factors affecting change in recurring profit
Note: The company has not disclosed by-segment breakdowns of its recurring profit forecast (JPY10.2bn). However, the company sees continued profit growth at the Thermal Spraying (Parent) segment and no change to the trend of growing profit at the Overseas Subsidiaries segment. In particular, the company expects further improvement in profitability associated with thermal spraying (handled by the parent company) as it successfully standardizes operations during the current peak season. In addition, the company expects that its procurement of raw materials and supplies will stabilize as its standardization of order bookings and operations solidifies, thus reducing concerns over prolonged lead times before sales are recorded.
The company forecasts that recurring profit will increase by approximately JPY1.3bn from JPY8.9bn in FY03/21 to JPY10.2bn. In lieu of a by-segment breakdown, the company has released projections concerning factors that it expects will affect overall change in recurring profit. It anticipates upward impacts of JPY2.2bn from growth in sales and JPY103mn from a decline in its variable cost ratio. At the same time, it expects downward impacts of JPY909mn from higher labor costs, JPY128mn from an increase in depreciation and amortization, and JPY25mn from other factors.
Capital expenditures, depreciation, and R&D expenses
TOCALO has made no changes to its initial capital expenditure forecast. The company forecasts FY03/22 capital expenditures at JPY6.0bn (+24.4% YoY), its highest level in three years. This breaks down to JPY5.0bn at Thermal Spraying (Parent), JPY100mn at Domestic Subsidiary, and JPY900mn at Overseas Subsidiaries. The biggest capex item, JPY5.0bn at the Thermal Spraying (Parent) segment, breaks down to JPY1.5bn for building a new plant at Mizushima (slated to conclude in November 2021), JPY1.0bn for a new building at the Tokyo Plant, and JPY2.5bn for other (semiconductor-related equipment and equipment to develop next-generation coatings). Overseas spending includes construction on a new plant in Taiwan.
On the other hand, the company has revised its initial forecast for depreciation and amortization (JPY3.1bn) downward to JPY2.9bn (+4.7% YoY). This revised figure of JPY2.9bn is at roughly the same level as the record high depreciation and amortization the company reported in FY03/20 (JPY2.991bn). Additionally, the company has not changed its initial forecast for research and development expenses (JPY1.4bn). However, due to the upward revision the company made to its sales forecast, the company's projected research and development expenses to sales ratio has fallen by 0.1pp from its initial level of 3.4% to 3.3%.
Initial company forecast and results
Notes: Figures may differ from company materials due to differences in rounding methods
Medium-term management plan
Summary of medium-term management plan
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.
Awareness of current circumstances (business environment, etc.)
Awareness of issues (10 issues)
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, flexibleproduction support , capacity for providing solutions in response to customer needs, and robust financial strength capable of supporting development investment ).
TOCALO's medium-term management plan was formulated and is being executed based on the company's goal of addressing these 10 issues.
Renewed awareness concerning the company's management philosophy and vision and formulation of a corporate mission
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.
Management philosophy and long-term vision
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.
Mission
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."
Advantageous future direction and three keys to growth as observed from the perspective of megatrends
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.
Two initiatives of particular focus (growth strategies)
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.
Numerical targets associated with the company's medium-term management plan
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.
Earnings targets for FY03/26
Breakdown of JPY53.0bn sales target
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.
Capital expenditures and research and development expenses
Capital expenditures
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).
Research and development expenses
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.
Establishment of financial targets and shareholder return goals
In its medium-term management plan, the company has also set financial targets and shareholder return goals.
Maintenance of a strong financial position
Maintenance of earning power (ROE, recurring profit margin, etc.)
Most recently, the company reported recurring profit margins of 17.9% in FY03/20 and 22.8% in FY03/21. It projects a recurring profit margin of 24.0% in FY03/22.
Dividend payout ratio
Most recently, the company reported DOE of 3.9% in FY03/20 and 5.0% in FY03/21. It projects DOE of 5.3% in FY03/22.
Initiatives aimed at reducing environmental impact
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.
Measures targeting the elimination of greenhouse gas emissions
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.
Measures designed to prevent water and air pollution
Situational awareness and improvement efforts to be applied to all processes associated with the company's business activities
As mentioned above, the medium-term management plan that the company announced on November 9, 2021 along with its long-term vision for 2030 is the first that the company has every publicly announced. Accordingly, comparing or contrasting it with a previous plan is impossible. However, Shared Research had previously included the following description of the company's medium-term strategy in this report. For the time being, the section below will remain in the report for purposes of reference and comparison with the company's newly announced medium-term management plan. This section will be removed from the report at roughly the same time at which the company announces its financial results for FY03/22.
Overview: Achieving sustainable growth
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:
Building on success
Made progress in the semiconductor and FPD fields–the largest pillar among TOCALO’s target markets
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.
Diversified revenue sources by offering a range of coatings from thick to thin
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.
Business
Business overview
Surface treatment centered on thermal spraying
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.”
Segments
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).
Business model
Focus on functional thermal spraying
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.
Key phrases that describe TOCALO
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.
Characteristics of thermal spraying
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.
Arc: 25㎏/h
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)
(WC/12Co cermet）
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.