Since its inception in July 1947, Toyo Tanso has consistently devoted itself to the development, manufacturing, and sales of high-performance carbon products that use coke as the base material. For example, in 1974, the company successfully mass-produced large-size isotropic graphite ahead of domestic and overseas rivals. Its products offer excellent conductivity (thermal/electrical) and durability (thermal/chemical), and are also lightweight and easy to machine.
Electrical Equipment
Executive summary
Business overview
Pioneer with leading share in niche market for carbon specialties: Since its inception in July 1947, Toyo Tanso has consistently devoted itself to the manufacturing and sales of high-performance carbon products that use coke as the base material. For example, in 1974, the company successfully mass-produced large-size isotropic graphite ahead of domestic and overseas rivals. The market for carbon products comprises carbon specialties, electrodes, carbon fiber, refined graphite, electric brushes, heat agents, carbon black, and activated carbon. The company sells a broad range of high-value-added products focused on carbon specialties (e.g., crucibles for single crystal silicon manufacturing, electrical discharge machining [EDM] electrodes, bearings, sealing materials, pantograph sliders, carbon brushes, and metal organic chemical vapor deposition [MOCVD; a type of method used for growing crystalline layers] equipment susceptors). Carbon products are lightweight, easy to process, and offer excellent thermal and electrical conductivity as well as thermal and chemical resistance.
Toyo Tanso has established a structure in which it consolidates production of base material “isotropic graphite” (i.e., graphite with uniform properties in all directions) at the Takuma plant in Kagawa Prefecture, Japan, and conducts processing and direct sales in Japan and overseas. The company sells its products directly to customers, and the close ties it has formed as a result allow it to develop and manufacture products that conform to the diverse range of its customers’ needs. In short, by providing high-mix, low-volume production, the company is able to differentiate itself from rivals that mass produce products such as electrodes and carbon fiber. The bulk of the company’s carbon-product offerings are consumables, and demand for its products accordingly originates from replacement of equipment-related embedded components and capital investment.
All of the company’s products are special carbon (fine carbon) products. In FY12/20, special graphite products accounted for 44.5% of sales, carbon products for general industries for 27.2%, compound materials and other products for 25.1%, and related goods for 3.3%. The company has noted that compound materials and other products deliver the highest margins, followed by special graphite products, and carbon products for general industries. In recent years, Toyo Tanso has been focusing on compound materials and other products (semiconductor applications such as silicon carbide [SiC] coated graphite products and MOCVD equipment susceptors) and sees sales in this category doubling (vs. 2018) by 2022.
Toyo Tanso develops products for fields that require high performance and quality, and has cultivated new fields in which it offers a diverse product line-up. In the semiconductor field, it has captured a worldwide market share of 40% in crucibles for single crystal silicon manufacturing. It also has a high market share for high-purity graphite used in optical fiber manufacturing equipment. The company has developed copper-alloy-impregnated carbon sliders that are widely used as pantograph sliders by Japan Railways Group (JR Group; 80–90% share) and other private railway companies. It pioneered the development of carbon products impregnated with materials such as alloy or resin and has a long track record of developing new applications for such products.
Trends and outlook
Toyo Tanso posted three consecutive years of sales and profit growth following its listing on the TSE First Section in March 2006, culminating in a record-high recurring profit of JPY7.8bn in FY05/08. However, subsequent earnings worsened due to factors such as rapid changes in external factors (global financial crisis, crashing prices for solar cells) and languishing corporate functions (ballooning fixed costs, asset and capital inefficiencies). However, the company has not posted operating losses in the last 19 years (it has reported three modest net losses over the period). In recent years, business restructuring has been successful against the backdrop of expanding global economy, and earnings have recovered from FY12/17 to FY12/18.
Toyo Tanso’s medium-term (five-year) management plan targets FY12/22 sales of JPY50.0bn, operating profit of JPY8.0bn (OPM of 16%), and ROE above 8% for existing core businesses. The company is also looking into alliances and M&A focused on carbon-related businesses and technology. It budgets capital expenditures of JPY30.0bn (total for FY12/18–FY12/22). Following structural reforms in 2016–2017, Naotaka Kondo became president and CEO in May 2018, and continues to lead initiatives under the medium-term management plan. While the company has made no change to its basic roadmap, given the COVID-19 pandemic, it thinks attainment of the JPY50.0bn sales goal will come sometime after the initially targeted timeframe of FY12/22. The company intends to release its medium-term outlook as soon as it is ready.
In FY12/20, the company reported full-year consolidated sales of JPY31.2bn (-14.2% YoY), operating profit of JPY3.4bn (‑33.9% YoY), recurring profit of JPY3.9bn (-25.5% YoY), and net income attributable to owners of the parent of JPY2.7bn (‑9.6% YoY). The decline in sales and earnings was driven by the slump in the economy in the wake of the pandemic, especially the drop in demand for transportation equipment-related applications, such as automobiles and aircraft, and various other industrial applications.
For FY12/21, Toyo Tanso forecasts full-year consolidated sales of JPY36.5bn (+16.9% YoY), operating profit of JPY5.6bn (+63.6% YoY), recurring profit of JPY6.0bn (+54.8% YoY), and net income attributable to owners of the parent of JPY4.2bn (+57.8% YoY). The company maintained its full-year forecast when reporting when announcing Q3 earnings. It projects that business performance will continue to recover in 2H (July–December 2021) based primarily on an increase in revenue generated by products associated with composite and silicon semiconductor applications. The EPS forecast is JPY200.3. There is no change to the company’s annual dividend forecast of JPY50.0 per share, for a dividend payout ratio of 25.0% (Shared Research calculation).
Strengths and weaknesses
Shared Research sees Toyo Tanso’s strengths as 1) a leading share in a niche market for carbon specialties, 2) an integrated structure with consolidated materials (isotropic graphite) production and global network of processing and sales bases underpinning direct sales to local customers, and 3) rapid decision-making due to strong leadership by a member of the founding family.
We believe the company’s weaknesses are 1) delays in upgrading manufacturing facilities due to prolonged restraint of capital investment, 2) high-mix and low-volume production resulting in management complexity, and 3) delayed expansion into European and US markets (See the “Strengths and weaknesses” section for details).
Key financial data
Note: FY12/13 was an irregular seven-month period (due to change in accounting year).
Note: Figures may differ from company materials due to differences in rounding methods.
Recent updates
1H FY12/21 flash update / Revision to its FY12/21 forecast
Toyo Tanso Co., Ltd. announced earnings results for 1H FY12/21; see the results section for details.
On the same day, the company announced a revision of its FY12/21 forecast.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Q3 FY12/21 results
Results summary
The company's cumulative Q3 results (nine months; January–September 2021) are as follows:
Sales generated by highly profitable products drove overall performance, growing YoY due primarily to strong demand in the semiconductor market. In particular, sales of special graphite products for electronics-related applications grew 26.3% YoY and sales of compound materials and other products (three major products: SiC-coated graphite products, C/C composite products, and graphite sheet products) rose 13.6% YoY.
The company's Q3 results (three months; July–September 2021) are as follows:
Q3 sales and operating profit growth rates were higher than in 1H (January--June 2021). Shared Research believes that a change in the product mix owing to higher sales of semiconductor-related products boosted profits. Quarterly sales and operating profit rose YoY for three consecutive quarters.
Shared Research will update the report following post-results interviews with the company in the coming days.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
Company outlook for FY12/21
Overview of the company’s forecast
FY012/21 forecast
The company maintained its full-year forecast at the time of its Q3 results announcement. The company's current projections for FY12/21 are as follows:
Its EPS projection is at JPY200.3 and the company has also maintained its year-end dividend of JPY50.0 per share, which will be the annual dividend as no interim dividend was paid. Cumulative Q3 progress versus forecast is 75.2% for revenue, 74.1% for operating profit, and 75.4% for net income, generally coming in around three-quarters of full-year forecasts.
The following information was prepared by Shared Research in response to the company's upward revision of its FY12/21 forecast at the time of its Q2 results announcement in August 2021. There will be some changes to this information following an interview with the company after its Q3 results announcement, but it will remain in place until then.
Previously, the company had projected JPY33.6bn in revenue, JPY4.0bn in operating profit (OPM of 11.9%), JPY4.3bn in recurring profit, and JPY2.9bn in net income. The company made this second upward revision to its forecast (the first being in Q1 [May 2021]) based on its prediction indicating that the pace of recovery in its earnings will pick up speed beginning in 2H. This revised forecast includes a marked improvement in profitability, projecting an OPM that is 3.4pp higher than that of the company’s previous forecast. At the same time, the company made no changes to its full-year dividend forecast of JPY50.0 per share. Consequently, Shared Research estimates that the company’s dividend payout ratio will amount to 25.0%. For details regarding Q1 results and the previous upward revision made to the company’s forecast made during Q1, please refer to the section entitled “Historical performance.”
The following factors are expected to drive YoY change (compared to FY12/20) in operating profit. The company forecasts a YoY increase of JPY2.2bn in operating profit (JPY3.4bn in FY12/20→JPY5.6bn in FY12/21).
Toyo Tanso projects that an increase in its contribution margin (which includes impact from growth in revenue) will be the largest source of upward impact on profit. The company anticipates that upward impact will absorb all downward impact stemming form increases in various costs, including fixed costs. Additionally, it forecasts that this growth in its contribution margin will be the result of an increase in overall revenue and improvement in its product mix resulting from recovery in revenue generated through the sale of highly profitable products (which also occurred in 1H). Specifically, the company anticipates expanded performance in the Special Graphite Products (electronics applications) segment and the Compound Materials and Other Products segment. The company is currently observing growth in performance from silicon carbide products for semiconductor-related applications. In addition, the company expects future expansion in sales of products associated with composite semiconductor applications and SiC-coated graphite products (one of the three major products of the Compound Materials and Other Products segment). Toyo Tanso reached the decision to revise its forecast upward based on its view that profitability would improve because the profit margins associated with these products are particularly high when compared to those of the company’s other products.
At the same time, the company also anticipates downward impact from factors such as growth in fixed manufacturing costs stemming from increased operation and an uptick in costs associated with overtime, as well as other personnel costs. The company does not believe, however, that these sources of performance decline are a sign of any structural deterioration, primarily because it has concluded that these factors are largely the result of residual impact from unfavorable operating conditions, and the company’s corresponding efforts to lower personnel costs, in 2020.
Outlook for capital investment, depreciation, and R&D expenses
At the halfway point of the year, the company revised its projections for capital investment, depreciation, and R&D expenses. Its revised projections are as follows:
Toyo Tanso maintains that the reduction in its capital investment projections stems mainly from changes in planned investment times and states that it will steadily conduct investment essential to raising added value and improving productivity. The company adjusted the timing of investment plans because it decided to prioritize augmentation of its capacity to produce semiconductor-related products (for which demand exceeded expectations in FY12/21), with an especially strong focus on enhancing production of products associated with composite and silicon semiconductor applications, which generated a robust volume of inquiries.
Lead times (time required to produce and deliver products following order receipt; varies by product) associated with the company’s core products typically span from several months to a half-year. Meanwhile, current order bookings are on pace to exceed their previous peak in FY12/18, and the company is concerned that lead times could become longer if no changes are made. The company reassessed its capital investment priorities based on assessments of these conditions. Toyo Tanso’s targets for capital investment aimed at raising added value are included below. The reader should be aware that these targets include investment of this type conducted since FY2019 and investment that will be conducted after FY12/21.
In addition to these items, the company is currently conducting capital investment targeting other production equipment that can add value and increase productivity, such as carbon products for mechanical applications, carbon brushes, and processing equipment of subsidiaries.
Toyo Tanso believes that this well-balanced capital investment, which targets clearly defined priorities, will contribute to results in FY12/22 and later accounting periods. The company booked its highest-ever operating profit in FY05/08 (JPY8.0bn; the company’s fiscal year ended on May 31 at the time), but under its current Medium-Term Management Plan, the company is also aiming to generate operating profit of JPY8.0bn in FY12/22, the final year of the plan. Although the company has not specifically referenced any achievement of record-high profit, it maintains that it has the capacity to generate more operating profit in FY12/22 than in FY12/18, when it booked JPY7.0bn in operating profit.
Business Strategy
R&D strategy (R&D briefing held on December 14, 2020)
Toyo Tanso’s history of creating technologies
As portrayed by the genealogy of its products, Toyo Tanso has expanded its research and development themes and created advanced technologies in response to changes in the needs of its customers as industries develop and become more sophisticated.
R&D strategy aiming to allow Toyo Tanso to maintain its position as a technology company
The company aims to establish itself as the de facto standard in special graphite products worldwide and become the quality leader in carbon. To that end, its policy is to take a customer-inspired approach to assure quality, reduce costs, and deliver enticing new products.
Its R&D roadmap includes prioritizing improvement and innovation in production technologies and strengthening international operations.
In R&D activities, the company ascertains customer needs at the individual community level, both domestically and internationally, and fast tracks development by starting small. Commencing small-scale development can uncover needs of which even the customer was unaware.
The company further plans to globalize its R&D centers and utilize and collaborate with international academia.
Fortifying R&D framework
To consolidate its foothold as the quality leader in carbon, in September 2020, the company upgraded its development organization. It switched over to a cross-applicational configuration, but development functions were scattered throughout the company. For example, some production technology and production process research was handled by the production divisions, and this made it difficult to implement technology strategies comprehensively. In response, the company revised its framework to consolidate its development functions and implement an end-to-end technology strategy. Management believes this has enabled it to optimize resource allocations for each individual development theme, accelerate the development cycle, and bring new developed products to market in a timely manner. It is also implementing locational optimization of its R&D operations both domestically and internationally.
R&D achievements in FY2020
Approach to raw materials: The company entered into a joint venture agreement concerning its thermally expandible graphite (TEG) business with Air Water Inc. (TSE1: 4088) and Nankai Chemical Co., Ltd. in May 2020. Given the heavy influence that feedstocks have on product quality, with this merger, the company aims to bolster technological development with a renewed focus on raw materials, achieve higher quality, and develop new applications.
Future oriented investment: In May 2020, the company announced additional production capacity for large-diameter graphite products. It aims to boost productivity by reviewing device design and manufacturing methods and otherwise upgrade production technologies and production processes.
Consolidation strategy: In September 2020, the company consolidated its development divisions.
Proactive promotion of developmental materials: In October 2020, the company put out information on carbon/carbon (C/C) composites for oil quenching
Priority growth sectors
Energy: C/C composites for solar power manufacturing, and porous carbon
Electronics: Graphite for power semiconductor manufacturing, TaC/SiC hybrid coated graphite materials
Mobility: High-density C/C composites for oil quenching, extrusion resin materials, and new sliders
Social infrastructure: Noise reducing sliding material
Life science: Carbon brushes for cleaners, C/C materials for home appliances
Application research that is nearing completion
Joint research related to catalyzer usage (National Institute of Advanced Industrial Science and Technology)
Commissioned development of recycled pure water (Toyo University)
Fundamental research
Joint research related to porous carbon (Oita University)
Joint research related to carbon brushes (Nihon Institute of Technology)
Commissioned research related to isotropic graphite (Fraunhofer Society)
SDG objectives
▷ Toyo Tanso’s graphite products are used in the manufacture of power semiconductors, which help boost energy efficiency and conserve energy and are increasingly being used in electric vehicles and railways. The company’s graphite products also have numerous applications related to energy and environmental issues, and it believes its products contribute to solutions for challenges associated with energy and the environment.
Toyo Tanso’s customers face various challenges such as the need to improve energy efficiency in manufacturing processes, and the company provides solutions for those issues.
The company is aware of the energy and environmental issues involved in carbon production, and plans to steadily address those issues.
New products launched over the past year
Once it brings a newly developed product to market, Toyo Tanso keeps a close watch on sales for a period of five years. According to the company, the value of sales on newly developed products has risen year to year over the past several years, and newly developed products have grown to account for a greater percentage of overall sales.
Copper-impregnated graphite for electrical discharge machining (EDM)
Impregnated graphite for electrical discharge machining (EDM) are EDM electrode materials that are optimal for processing ultra-hard alloy dies used in the fabrication of components for automobiles and smartphones.
High-purity graphite sheets
With the high-purity graphite sheets it markets under the product name “Perma-Foil,” the company has developed a superior cost-performance grade of high-purity sheet.
TaC/SiC susceptors for SiC epitaxy
Toyo Tanso’s TaC/SiC susceptors for SiC epitaxy are hybrid susceptors with characteristics of both tantalum carbide EVEREDKOTE™-B and SiC coated graphite PERMA-KOTE™, and help deliver higher quality SiC wafers. They are used in jigs for configuring electronic devices on SiC power semiconductor wafers. The company sees good prospects for expanding demand for these new products.
Energy control-oriented product development
Toyo Tanso’s carbon materials are widely used in fields that make use of thermal energy. Its existing products have been used in numerous materials employed in thermal processing in industrial furnaces. In recent years, electric energy is another field where demand is growing. The company’s graphite and carbon materials are widely used in energy fields such as energy conservation, storage, and electricity generation and energy creation, and it is pursuing R&D from an energy control perspective.
High-density C/C composites for oil quenching
During oil quenching*, when oil seeps into C/C composites, soot is given off during reheating, which is detrimental to the quality of the workpieces being treated. High-density C/C composites for oil quenching have nearly zero oil absorption.
C/C composites are light, roughly one-sixth the weight of their metallic counterparts. They are a high-density material and resistant to corrosion and distortion. Toyo Tanso’s C/C composites are advantageous because they help facilitate the promotion of energy conservation and automation through their expanding applicability as a substitute for conventional metallic materials and their lightness, which helps reduce the overall weight of manufacturing systems. Longer-lasting materials also means less waste, helping to reduce environmental burden. The company plans to commence production in 2021 and launch sales both domestically and internationally.
Replacement of conventional metallic materials with the company’s high-density C/C composites for oil quenching helps reduce weight. With so many metal processing production lines being automated, reduced weight is an advantage in terms of energy efficiency during delivery and transportation of metal materials. Depending on the production site, weight reduction can reduce power consumption for the overall process by several tens of percent.
In addition, replacing metallic materials with Toyo Tanso’s high-density C/C composites results in longer-lasting equipment, which reduces waste and decreases environmental impact. Less frequent replacement also helps reduce replacement and maintenance costs.
CNovel™ for fuel cells
It is projected that the 2020s will see the rise of a market for fuel cell vehicles (FCVs) and that automobiles will grow to account for 82% of fuel cell use by the 2030s (according to Fuji Keizai). There is a rapidly growing market for use in freight and transportation applications such as forklifts in North America and buses and trucks in China. Efforts to move away from gasoline and other fossil fuels also means a potential surge in demand for renewal energy-based hydrogen.
However, owing to the cost of hydrogen safety measures and transportation, R&D efforts are underway to convert hydrogen to ammonia for use in combustion. Toyo Tanso’s CNovel™ works effectively as a catalyst for ammonia synthesis and as a catalyst carrier for fuel cells. The company is currently working to enhance CNovel™ performance.
Fuel cell CNovel™ is targeted at the vehicle fuel cell market, and the company is marketing it primarily to Chinese and North American customers for use as a next-generation model catalyst carrier for 2025 onward. It is currently conducting sample evaluations at the mounting stage, and it has so far produced high output and long life.
CNovel™ for ammonia synthesis catalysts is also projected to have strong demand from applications including chemical catalysts for energy storage (ammonia conversion and storage of hydrogen), ammonia-fired power generation to reduce CO2 emissions, and advancements in industrial furnace technologies.
In terms of the development timeline, the company aims to get CNovel™ into use as a next-generation catalyst carrier from 2025. Productization by 2025 requires a final decision to use CNovel™ as a material by 2022, and the company is currently concentrating on catalyst carrier development. Development is mostly geared toward customers in China and North America, where the evaluation and development of transportation and industrial machinery proceeds rapidly. Customers have been conducting sample evaluation and test runs on CNovel™ catalyst carriers mounted on buses and trucks, and the company says the customers have been very pleased with the high output and long life of its prototypes. According to catalyst manufacturers, CNovel™ catalyst carriers have also passed automobile industry standard tests in North America.
Graphite for growing single-crystal SiC
Toyo Tanso is developing isotropic graphite for SiC power semiconductors. Like single-crystal silicon semiconductors, power semiconductors are moving to wider-diameter sizes, and the company is considering designing graphite materials compatible with larger-area architectures.
The company has an edge in the design and fabrication of crucibles and structural components and materials. Crucible technology for single-crystal silicon crucibles alone is not enough since the methods used in graphite crucibles for silicon semiconductors are different from those for SiC semiconductors. Hence, Toyo Tanso is working to develop products with the right kind of specs for the customer in terms of the purity and size of the graphite crucibles into which the SiC wafer materials are placed.
The company concluded the development stage for this new spec graphite material in 2020, and expects to move ahead to mass production evaluation conducted by SiC wafer manufactures in 2021. Basic development has already been completed, and testing on production lines is also underway. Progress is also being made on graphite material fabrication design.
Medium/long-term development outlook
Process innovation
The company plans to use process innovation to raise “QCDST2” to a new level. It has added two “Ts” to QCDS to make it “QCDST2”. The first T stands for “Technology” and the second “Time,” signifying the ability to provide the right products on time. Toyo Tanso has until now developed new graphite fabrication technologies. Developing technologies covering not only processing techniques, but processing methods as well, the company is undertaking the challenge of adopting carbon extrusion molding. If achieved, extrusion molding offers the advantage of high hourly output production. It also has the potential to contribute to cost reduction on vehicle components as the automotive industry further embraces electric vehicles. Notably, growth in motors will be accompanied by growth in bearings and brushes, and the company is studying fabrication technologies for those needs as well.
Toyo Tanso is also working to develop raw material control technologies. To make maximum use of coke (carbon fuel), the main ingredient in graphite, and push the boundaries of pulverizing and forming technologies, the company is not only running solo efforts on technological development, but is also collaborating with equipment makers, makers of pulverization machinery, and raw materials suppliers.
By undertaking this range of technological development, the company aims to stabilize the supply chain across raw materials suppliers, Toyo Tanso itself, and its customers.
The company further plans to roll out activities to improve the quality of its customer products and speed up their product commercialization by collaborating with external research institutes to uncover needs and challenges that its customers are not yet aware of and promptly provide products and solutions to address those issues.
Expansion of the brushes business
Carbon brushes are the product on which the company was founded. It is stepping up its development of carbon brushes for use as energy infrastructure materials used in mechanisms such as lightning protection systems on renewable energy wind turbines. Electric railways also contribute to the curtailing of CO2 emissions, and trains in Japan and elsewhere use Toyo Tanso products, including slide plates for power supply pantographs and brushes for return current ground contacts. The company plans to market power-controlling carbon technologies internationally as well.
Carbon materials for contribution to recycling-based society
Toyo Tanso is undertaking development aimed at reducing the volume of incinerated waste. As a means of recycling for carbon materials, the company takes used graphite products, pulverizes them, and reuses them as raw material. Along with raising the usage rates of such recycled materials, the company is working to develop ways to extend product life cycles. Furthermore, by developing applications that can be used in other fields, the company aims to achieve comprehensive reduction of incineration and waste disposal volumes. In carbon life cycle research as well, it is conducting joint development and joint research.
Developing such technologies is not something the company can accomplish on its own. By joining forces with raw materials suppliers and customers, it aims to develop technologies to reduce environmental impact along the entire supply chain.
Position of R&D in the medium-term management plan
The company’s medium-term management plan calls for resources to be concentrated in four key product areas* promising growth, profitability, and stability. By focusing R&D on these four areas, Toyo Tanso aims to develop technologies and products that accurately match customer needs and allow the company to execute its business strategy.
Long-term R&D policies
Enhancement and innovation of production technologies
Graphite manufacturing involves a difficult process requiring six to twelve months at temperatures of several thousand degrees Celsius, and in the past many aspects of research and development have relied on human intuition. With the adoption of new technologies (including simulations and sensing) that make possible quantitative analysis of various aspects of the process, the company hopes it can reduce the length of the manufacturing process, improve quality, and reduce costs. Production process R&D, which could lead to manufacturing breakthroughs, is therefore an important long-term theme.
Enhancement of overseas development
By establishing global R&D bases and diversifying development leveraging overseas academia, the company aims to provide fine-tuned response to customer needs that differ from region to region, thereby advancing its overseas presence. It will also be focusing on human resources development that produces technicians and engineers who can help it conduct business on a global scale.
Toyo Tanso’s strengths in technological development
The company has realized strong relationships with its customers by dealing with them directly in most transactions and communicating with them closely, using its technologies to respond to their sophisticated needs. These solid relationships with customers allow the company to quickly gain an understanding of customers’ latest needs and identify potential seeds for development. By conducting R&D that effectively balances these needs and seeds, the company is able to provide customers with products possessing high added value.
Medium-term management plan
Substantial changes in earnings environment following the release of the company’s Medium-Term Management Plan
In February 2019, the company announced the following Medium-Term Management Plan. The final year of this plan is FY12/22. Since the announcement, however, Toyo Tanso’s earnings environment has undergone substantial changes, with the company observing sluggish sales caused by trade friction between the US and China and the COVID-19 pandemic and encountering favorable conditions stemming from a sharp rise in semiconductor demand that began at the end of FY12/20. Despite these changes, the company has not made any revisions to its Medium-Term Management Plan, leaving its earnings targets for FY12/22 unaltered (JPY50.0bn in revenue, JPY8.0bn in operating profit, OPM of 16%, and ROE of at least 8%).
The company does not update its Medium-Term Management Plan on a rolling basis (by reviewing results and adding one more year to the plan at the end of each fiscal year). However, due to the major changes in business environment mentioned above, Shared Research believes that the company will make an announcement regarding its plan sometime during 2022. The company has already launched efforts targeting business expansion, including a FY12/21 reprioritization of its capital investment targets. Shared Research will closely monitor developments to see how returns generated through this capital investment are reflected under the company’s next Medium-Term Management Plan.
The following section was composed by Shared Research in February 2019, when the company announced its Medium-Term Management Plan. Since the company has made no substantial changes to the course of its Medium-Term Management Plan, we have decided to leave this section unedited to allow for future observation and comparison.
Numerical targets
Toyo Tanso’s medium-term management plan (FY12/18–FY12/22) targets FY12/22 sales of JPY50.0bn, operating profit of JPY8.0bn (OPM of 16%), and ROE above 8%. The company expects growth to be driven by its mainstay existing businesses (independent and existing domains), but is also looking into alliances and M&A focused on carbon-related businesses and technology as an additional source of growth.
Road map for capital investment
The medium-term management plan calls for capital investment of JPY30.0bn (total for FY12/18–FY12/22) to be mainly allocated toward existing and independent domains. Toyo Tanso has already formulated a road map for capital expenditures at its four domestic plants, and is accordingly expanding production capacity in added-value and priority fields. For example, it plans to invest around JPY3.1bn in additional production capacity for SiC-coated graphite products scheduled to come online in 2020. This will help meet rising demand for MOCVD, silicon epitaxy (Si-Epi), and silicon carbide epitaxy (SiC-Epi) applications, manufacturing capacity is estimated to be 1.5 times that of YoY FY12/18. To accommodate growing demand for (MOCVD and SiC) semiconductor applications, the company will invest around JPY2.0bn in additional production capacity for high-purity products slated to go into operation in 2020. In addition, Toyo Tanso plans aggressive investments to enhance production efficiency and upgrade aging production facilities. Consequently, it sees free cash flow (FCF) temporarily turning negative from FY12/19.
Shareholder returns
Toyo Tanso aims to steadily increase dividends while maintaining a balance between shareholder returns and capital investment to drive future growth with the aim of achieving continuous profit expansion. In principle, the company pays dividends from surplus once per year in the form of a year-end dividend. It increased the dividend in FY12/17 and FY12/18 in tandem with a recovery in earnings. In FY12/19, it plans to keep the dividend unchanged YoY at JPY50 (payout ratio of 30%).
Efforts to strengthen organization capabilities
Toyo Tanso has started initiatives to strengthen its organizational capabilities with a view to firmly supporting achievement of the medium-term targets under an optimal management structure. It established the Corporate Planning Division to develop and promote a unified growth strategy for its products, applications, functions, and regions. In addition, it set up the Planning Department, Group Companies Administration Department, Market Strategy Department, and Sales Engineering Department, under the umbrella of the Corporate Planning Division. These organizational changes went into effect from February 1, 2019.
Toyo Tanso aims to strengthen its organizational capabilities on three fronts. First, the company will clarify responsibilities and authority, and deepen its commitment to both. This entails ensuring managerial transparency across the entire group, including for management teams of domestic subsidiaries. Second, it will reinforce controls for strategic operations. To this end, it will have the Corporate Planning Division function as a control tower for business strategy. Third, it will reinforce management of subsidiaries. This involves having the head office centrally manage corporate governance, stepping up collaboration on strategy execution with the entire group, and building a solid strategy promotion framework that spans the globe. In addition, the company will set up teams that tackle business- and theme-specific issues across its organization (cross-functional teams).
Background to medium-term management plan TVC2022
Toyo Tanso posted three consecutive years of sales and profit growth following its listing on the TSE First Section in March 2006, culminating in a record-high recurring profit of JPY7.8bn in FY05/08. However, subsequent earnings worsened due to factors such as rapid changes in external factors (global financial crisis, crashing prices for solar cells), languishing corporate functions (ballooning fixed costs, asset and capital inefficiencies, sluggish development of new products), and company-specific problems (limitations in approach centered on specialization and self-sufficiency). Following the structural reforms in 2016—2017, Naotaka Kondo became president and set out to advance the company’s medium-term management plan with a fresh perspective. Under the plan named “TVC 2022: Toyo Tanso Value up Challenge 2022,” the company aims for continuous growth and expansion of enterprise value.
Note: FY12/13 was an irregular seven-month period (due to change in accounting year).
Awareness of potential problems
Toyo Tanso has experienced short-term growth-stagnation cycles, and while its external environment raises challenges such as maturing established markets, fluctuations in supply/demand balance, and the rise of competitors in emerging markets, the emergence and rapid growth of new fields and technologies (such as electric vehicles, the Internet of Things (IoT), and advanced energy solutions) are providing new opportunities. Against this backdrop, the company announced in February 2019 that it had identified three problem areas that could undermine its vision for sustainable growth and expansion of enterprise value.
Skewed business portfolio
Business structure dependent on special graphite products
Special graphite products accounted for nearly half (49%) of total sales in FY12/18. In recent years, Toyo Tanso has faced growing competition from European companies that are catching up and from Chinese companies that are entering the market. These changes in the competitive landscape have made it difficult for Toyo Tanso to achieve sustainable growth by relying solely on special graphite products. The company led the market for isotropic graphite in 2010 with a share of 30% (output basis), and we understand that it still commands a similar market share after factoring out the Chinese makers, which have emerged with significant momentum in recent years.
Earnings structure susceptible to conditions in the electronics market
Shipments of special graphite for semiconductor applications are affected by the so-called silicon cycle. Historically, Toyo Tanso’s sales have more or less tracked movements in the global semiconductor market (World Semiconductor Trade Statistics [WSTS]), the global semiconductor production equipment market (Semiconductor Equipment and Materials International [SEMI]), and sales trends in the Japanese semiconductor and FPD production equipment market (Semiconductor Association of Japan [SEAJ]). The only exception to this rule has been FY12/16, when the company restructured its businesses. Like semiconductors and FPD equipment, special graphite products carry the risk of high earnings volatility, which makes it difficult to continue investing in the business and develop it as a major earnings pillar.
Expansion centered on ex-Japan Asia
In FY12/18, ex-Japan Asia generated just over 46% of sales and Japan just under 37%. While Toyo Tanso has built robust foundations in Japan and other parts of Asia, it has a limited presence in other regions, especially Europe and the US, which means it is losing business opportunities in such markets.
Inadequate investment
Capital expenditures peaked at JPY10.1bn in FY05/10, when construction of the third plant in Takuma (Kagawa Prefecture) was completed, and reached a subsequent high of JPY8.1bn in FY05/12, when production capacity for that plant was expanded.
The company thereafter held back on capital expenditures. Facing a deterioration in earnings, the company prioritized cost reductions through business restructuring (reducing expenses and downsizing bases of operation) and held off on investment aimed at fueling medium to long-term growth.
Barriers to promotion of growth scenario
Growth scenario lacks concrete strategies
The new medium-term management plan unveiled in February 2018 includes numerical targets such as “JPY30.0bn in strategic investments” and “ROE of 8%,” but it lacked specific strategies for achieving those targets.
Strategy promotion framework still a work in progress
The company’s individual strategies lack consistency, and there is no central management function.
Positioning
Following the business restructuring in 2016—2017, Toyo Tanso shifted its management focus to growth from FY12/18, entering a phase during which it aims to “lay the groundwork for innovation.” It looks for FY12/22 (the final year of the medium-term management plan) to usher in a period of growth, during which it will start reaping the benefits of previous efforts. To this end, the company needs to secure funding and strengthen its corporate functions and organizational capabilities, while decisively executing its strategies under a strong management team. It believes the envisioned growth will hinge on “the development of stable management foundations that do not rely on any particular market” and on “improvement in production efficiency to support rapid advances in the future.”
Market environment
Market environment: Although the company looks for a certain degree of production adjustments in the electronics, automotive, general industry, and other fields, it expects stable growth over the medium to long term due to the adoption of new technologies such as IoT, AI, and EV.
Competitive landscape: Toyo Tanso has not secured a dominant position in any of its businesses, and therefore sees room for further growth in existing business fields. As its rivals continue to make bold investments, including in M&A, the company believes it needs to establish a firm market position by building on the foundations for growth it has established in existing businesses and strengthening alliances and M&A in areas it cannot cover independently (carbon-related businesses and technologies).
Risk factors: Chinese manufacturers are likely to step up competition in the field of value-added isotropic graphite. The company believes industry realignments that have affected overseas and other carbon fields could occur in the carbon sector specialties.
Medium to long-term vision
Developing growth drivers and strengthening earnings base: The company aims to transition to a business structure that is not dependent on special graphite products by establishing new growth drivers and reinforcing its earnings base through initiatives in growth fields and a focus on added-value products.
Establish stable product portfolio: The company looks to reduce the volatility of its earnings structure that is susceptible to conditions in the electronics market, and build stable business foundations by diversifying target markets.
Become a global company: The company plans to strengthen production, sales, and management capabilities of subsidiaries, and transform itself from an Asia-centric to a global company by accelerating overseas operations mainly in Europe, the US, and emerging markets.
Priority initiatives and business positioning
The company has positioned “strengthening and innovation of production technology” and “reinforcing of overseas operations” as priority initiatives. The former mainly entails enhancing productivity and shifting to value-added products. Over the long term, initiatives in this category include optimizing production functions, establishing next-generation production facilities powered by AI and automation as deemed appropriate, and efforts to address environmental issues and future worker shortages. The latter reflects an acute awareness of the fact that, while the company has achieved a firm position in Japan, it has a range of applications that have yet to capture market share overseas. Toyo Tanso believes it needs to step up its processing functions overseas, and is pushing for facility rollouts/upgrades and personnel training at its subsidiaries in Germany and China.
The company positions its three mainstay product categories into distinct business types: special graphite products differentiate the company from rivals; carbon products for general industries provide stability; and compound materials and other products are a growth business. Although special graphite products tend to drive earnings when market conditions are favorable, their earnings are volatile in nature. For this reason, the company says it will refrain from overexpansion in this field, but instead focus on high-value-added fields. Its carbon products for general industries (for mechanical and electrical applications) are not susceptible to conditions in the electronics market and underpin a business foundation that steadily generates cash. Compound materials and other products (SiC, C/C, and graphite sheets) carry the highest margins among the three product categories, and the company plans to develop these into an earnings driver.
Business strategy direction
Toyo Tanso plans to concentrate its resources into four fields, all of which are expected to deliver growth, profitability, and stability: (1) Special graphite: expand share in high-value-added fields; (2) Carbon for mechanical applications: attract overseas customers through stronger cost competitiveness; (3) Carbon for electrical applications: make further inroads in automotive and industrial carbon brushes; and (4) SiC coating, C/C composite, graphite sheets: attract overseas customers by strengthening application development for compound materials. The high-value-added fields within special graphite is distinguished by high stability and margins. Product quality is a key requirement, so the company does not view competition from Chinese manufacturers as a major threat. Carbon for mechanical applications is poised for steady growth, and the company believes it can achieve further expansion by increasing cost competitiveness through enhanced production technology. The company expects carbon for electrical applications is expected to grow steadily, and (similar to special graphite) believes it faces little threat from Chinese manufacturers, as customers put a premium on quality. As for SiC coating, C/C composite, and graphite sheets, Toyo Tanso is competitive on the technology front, but says it could gain further stability and efficiency if the company were able to secure customers in Europe or the US.
Business strategy
Special graphite products
Toyo Tanso has captured a certain market share in Japan and Asia, but it has a limited presence in Europe and the US. In the Chinese market for solar cells, the company is facing competition from new local players. It estimates its main target markets for special graphite products to be worth JPY63.0bn (semiconductor-related applications JPY58.0bn, high-value-added EDM applications JPY5.0bn). It sees the semiconductor-related applications market growing at a CAGR of 18% from 2017 to 2022. The company plans to increase sales of special graphite products from JPY17.0bn in FY12/18 (excluding JPY3.2bn in sales for Chinese high-temperature reactor-pebble-bed modules [HTR-PM]) to JPY20.0bn in FY12/22. By bolstering sales of processed products rather than materials, it will aim to expand its share in high-value-added fields. For example, Toyo Tanso plans to pursue a strategy of selection and concentration by focusing on semiconductor-related applications (such as MOCVD equipment susceptors, crucibles for single crystal silicon manufacturing) and high-value-added EDM applications, both fields that face little risk of erosion by Chinese manufacturers. It aims to expand its market shares in Asia and North America by enhancing the volume and quality of overseas processing and technology sales and by improving lead times. In China, it will target expansion through a balance between solar cell applications, which are prone to fluctuations, and general-purpose EDM applications.
Carbon products for general industries (carbon products for mechanical applications)
Toyo Tanso has started supplying carbon products for general industries to German automotive companies, and is making steady moves toward further expansion. It holds a high market share for pantograph sliders in Japan, and sees related operations gaining further traction as it expects to win orders from Chinese subway operators.
In terms of main target markets, Toyo Tanso estimates the automotive water pump applications market to be worth JPY22.0bn and pantograph sliders JPY2.0bn. It sees the automotive water pump applications market expanding at a CAGR of 8–10% from 2017 to 2022, and the market for pantograph sliders at 7–12%. The company intends to strengthen overseas operations for automotive applications and pantograph sliders. It aims to expand production infrastructure at its German subsidiary with a view to capturing market share centered on automotive applications in Europe and the US, and looks to establish a certain presence in these areas. It will develop pantograph sliders for the Chinese market, which is expected to grow and cultivate overseas markets for these products; sliders for high-speed rail in Japan are already under development.
Carbon products for general industries (carbon products for electrical applications)
Although Toyo Tanso commands a certain market share for home appliance/power tool applications and some automotive applications, it has only captured several percent of the overall market for carbon brushes, where it faces little competition from major Chinese rivals and little threat from new Chinese entrants. In terms of main target markets, the company estimates the industrial applications market to be worth JPY45.0bn, the automotive applications market JPY45.0bn, and the home appliance/power tool applications market JPY60.0bn. It sees these markets growing at a CAGR of 4% from 2017 to 2022. It intends to make further inroads into automotive and industrial carbon brushes. While pursuing share gains through aggressive investment in product quality improvements, the company is also exploring potential alliances and approaches to strengthen its presence in this product category by leveraging other capabilities.
Compound materials and other products (SiC coated graphite products)
Toyo Tanso holds a high share in MOCVD equipment aftermarket sales to Japanese, South Korean, and Taiwanese customers, and is expanding sales by growing its share of supply to Chinese, European, and US customers. It has captured high shares in SiC-Epi and Si-Epi aftermarket sales. In terms of main target markets, the company estimates the MOCVD equipment market to be worth JPY12.0bn and aftermarket sales JPY9.0bn. It sees these markets expanding at a CAGR of 14% from 2017 to 2022, and intends to double sales of related products by FY12/22 (relative to FY12/18).
Compound materials and other products (C/C composite products, graphite sheets)
Toyo Tanso has captured a certain market share for C/C composite products for industrial furnaces in Japan, but it still has a limited presence in this field overseas. It mainly supplies graphite sheets for semiconductor and automotive applications in Japan, but it has ample room to grow product sales in untapped applications or areas (chemical and oil/gas companies, and overseas automotive customers). In terms of main target markets, the company estimates the industrial furnace applications market to be worth JPY35.0bn and the graphite sheet market (piping applications for chemical and oil/gas plants) JPY7.0bn. It sees the market for industrial furnace applications growing at CAGR of 5–10% from 2017 to 2022, and the graphite sheet market at 5–7%. It intends to step up overseas operations involving C/C composite products for industrial furnace applications and strengthen development of graphite sheet applications. In industrial furnace applications, Toyo Tanso will focus on North America, where it has yet to build up a presence, and aim to expand market share by strengthening technology sales. Anticipating demand growth for industrial furnace applications, the company expanded related production capacity in 2018. For graphite sheets, the company will continue to focus on semiconductor and automotive applications and develop new piping applications for untapped areas such as chemical and oil/gas plants. It invested roughly JPY700mn in production capacity expansion to improve graphite sheet production efficiency in 2018.
Business
Business model
Concentration on carbon specialties
Toyo Tanso develops, manufactures, and sells high-performance carbon products that use coke as the base material. Carbon products can be divided into carbon specialties, electrodes, carbon fiber, refined graphite, electric brushes, heat agents, carbon black, and activated carbon. The company has adopted a business model of direct sales of a range of products, concentrating on carbon specialties. While it has made forays in the electrode field and product areas other than carbon in the past, it has decided not to enter these markets due to the presence of a large number of competitors and in view of the company’s limited management resources. Instead, Toyo Tanso has adopted an approach of focusing on carbon specialties, particularly isotropic graphite.
Growth in existing businesses
President Naotaka Kondo says there are a large number of products and areas the company has yet to explore in the field of carbon specialties alone. Accordingly, Toyo Tanso rolled out a strategy of reinforcing the company’s business foundations by expanding existing businesses, while strengthening operations in overseas markets, which offer vastly higher growth potential than the domestic market. The company plans to invest in automation and robotization of production lines (for which upgrades have lagged), expand production capacity, and aggressively pursue M&A opportunities.
Carbon is a chemical element that occurs abundantly in the natural world, and it is used in variety of fields from regular living environments to general industry, transportation equipment, and cutting-edge fields such as environment, energy, aerospace, and medical care. Despite its widespread use, however, carbon still bears untapped potential. Toyo Tanso thinks carbon can play an even greater role and be applied to more fields, so is combining it with different materials (such as metals, ceramics, or resins) and exploring other uses.
Anticipating customer needs through direct sales
Toyo Tanso’s key strengths are its technological and design proposal capabilities accumulated through product development centered on high-performance and high-quality applications. On the sales front, the company aims to differentiate itself from rivals by leveraging product development that anticipates customer needs through a robust direct-sales structure.
Business overview
Summary
The Toyo Tanso group mainly manufacturers, processes, and sells high-performance carbon products that use isotropic graphite materials as the base material. It pioneered this field in 1974, when it started mass-producing large isotropic graphite materials ahead of domestic and overseas rivals, and has since led the market, enjoying first-mover advantages while expanding usage applications. The group has established a system, under which it manufactures isotropic graphite and other carbon materials at consolidated manufacturing sites in Japan to ensure production efficiency, supplies these materials to processing and sales bases in Japan and overseas, and sells its products directly to local customers. It achieves stable product supply with short lead times through integrated production (covering all aspects from raw material to finished products) and a unique sales structure. Toyo Tanso has developed close ties with customers through its direct sales approach, and it is able to rapidly develop products in line with diverse customer needs and provide high-mix, low-volume production.
Pioneer in isotropic graphite materials
Carbon materials consist of graphite materials manufactured through heat treatment at high temperatures, and other carbon materials. Isotropic graphite is a type of graphite that exhibits the same material properties in all directions. It is manufactured by applying uniform pressure from all directions to the raw material during the forming process. Toyo Tanso developed the cold isostatic press (CIP) method (application of pressure of 1 t/cm2 in water) to manufacture isotropic graphite ahead of rivals in Japan and overseas.
The manufacturing process of isotropic graphite comprises the following 10 processes, and the entire process from raw materials input to completion takes between six and eight months: (1) pulverizing; (2) kneading, pulverizing, and mixing; (3) isostatic pressing; (4) baking (roughly 1,000ºC, about one to two months); (5) pitch impregnation; (6) graphitizing (roughly 3,000ºC, about two months); (7) machining; (8) high-purity treatment; (9) chemical treatment; and (10) quality control.
In FY12/20, special graphite products accounted for 44.5% of sales, carbon products for general industries for 27.2%, compound materials