Bridge Report:（4205）ZEON Fiscal Year ended March 2024

Tetsuya Toyoshima President and CEO	ZEON CORPORATION（4205）

Company Information

Stock Information

* Share price as of closing on May 14. All figures are from the financial results for the fiscal year ended March 2024.

Earnings Trend

*Unit: million yen, yen. Estimates are those of the company. Effective from the beginning of March 2022, the "Accounting Standard for Revenue Recognition" (ASBJ Statement No. 29) and others are applied. Net income is net income attributable to owners of the parent company. The same applies hereinafter.

This Bridge Report presents ZEON CORPORATION’s earnings results for the fiscal year ended March 2024.

Table of Contents

Key Points
1. Company Overview
2. Fiscal Year ended March 2024 Earnings Results
3. Fiscal Year ending March 2025 Earnings Forecasts
4. Measures for Achieving Management with a Focus on Capital Costs and Stock Price
5. Conclusions
<Reference 1: Medium-term Management Plan>
<Reference 2：Regarding Corporate Governance>
<Appendix：Fact Sheet>

Key Points

• In the fiscal year ended March 2024, sales decreased 1.6% year on year to 382.2 billion yen, and operating income dropped 24.6% year on year to 20.5 billion yen. The Elastomer Business experienced decreases in both sales and profit. Although the synthetic rubber segment saw increases in sales and profit due to the increase of shipments and favorable exchange rates, the segment of chemical products suffered reduced shipments and falling market prices, leading to decreased sales and profit. The Specialty Materials Business saw increased sales, but profit decreased. Specifically, the specialty plastics segment benefited from a recovery in large-sized TV film sales, but profit dropped due to the costs of starting a new production line and the impact of the Noto Peninsula Earthquake. The battery materials, chemicals, and electronic materials segments all faced declines in both sales and profit. However, due to the recording of gain on sale of investment securities as extraordinary income, net income rose 194.3% year on year to 31.1 billion yen. The year-end dividend was raised from the previous forecast of 20 yen/share to 25 yen/share, leading to an annual dividend of 45 yen/share, up 9 yen/share from 36 yen/share in the previous fiscal year. The dividend payout ratio stood at 30.6%.

   

• For the fiscal year ending March 2025, the company expects sales to rise 3.9% year on year to 397 billion yen, and operating income to increase 29.3% year on year to 26.5 billion yen. Both the Elastomer Business and Specialty Materials Business are expected to see increases in sales and profit. In the Elastomer Business, synthetic rubber, latex, and chemical products are all expected to achieve larger sales and profits. The Specialty Materials Business is expected to see growth in sales and profit from optical plastics and optical films. The assumed foreign exchange rates and market conditions are set at 1 U.S. dollar = 145 yen, 1 euro = 155 yen, domestically produced naphtha = 68,000 yen, and 900 U.S. dollars for Asian butadiene. The dividend forecast is composed of an interim dividend of 23 yen/share, a year-end dividend of 24 yen/share, and an annual dividend of 47 yen/share, showing a 2 yen/share increase. This marks the 15th consecutive annual dividend increase since the fiscal year 2010, with a forecast dividend payout ratio of 55.9%.

   

• The results in the fiscal year ended March 2024 exceeded the company's forecast announced in January. For the fiscal year ending March 2025, the Elastomer Business is expected to benefit from a recovery in demand, while the Specialty Materials Business is expected to see increased sales and profit due to the demand recovery and the subsiding of the Noto Peninsula Earthquake’s impact. The enhancement of shareholder return in their financial report attracted our attention. As they recorded extraordinary income in the fiscal year ended March 2024, dividend payout ratio exceeded 30%, and for the fiscal year ending March 2025, even though net income is projected to decrease, a dividend increase of 2 yen is forecast. Additionally, on the earnings announcement day, a significant share buyback was announced, demonstrating their robust commitment to shareholder returns and stock price measures. The market of lithium-ion batteries for electric vehicles, for which the company provides materials, is expected to grow in the future, although it is anticipated to remain at the same level between the fiscal year 2023 and the fiscal year 2024. Moreover, the outlook for cyclo olefin polymer (COP), valued for their optical and medical properties, remains bright. At present, EPS is expected to be close to 200 yen if the company achieves the profit level it is aiming for in the fiscal year ending March 2027. Against this backdrop, the stock price is below the BPS (1,714.88 yen) level. PBR exceeding 1 is considered a milestone, and we will continue to pay attention to business developments and shareholder returns.

1. Company Overview

ZEON CORPORATION is a petrochemical manufacturer that maintains numerous products with a large share of the global markets including synthetic rubber used in automobile parts and tires, synthetic latex used in surgery-use gloves, and other products. The Company’s strengths include its creative technology development function, R&D structure, and high earnings generation capability.
Many of the products and materials manufactured by Zeon are used in a wide variety of products including automobile parts and tires, rubber gloves, disposable diapers, cell phones, LCD televisions, perfumes and other products commonly used in everyday life.
The Zeon Group is comprised of the parent company, 60 subsidiaries and 7 affiliated companies. Zeon also has manufacturing and marketing facilities in 16 countries around the world. (Annual Securities Report for the fiscal year March 2023)

（Source: the company）

[1-1 Company Name and Management Vision]

The company name “Zeon” is derived from the Greek word for earth “geo” (phonetically pronounced “zeo” in Japanese) and the English word reflecting eternity “eon,” and reflects the Company’s principle of “deriving raw materials from the earth and perpetually contributing to human prosperity” through the development and application of creative technologies.

(Zeon’s original name “Geon,” used at the time of its establishment, was derived from the trademark acquired for the vinyl chloride plastics “Geon” from B.F. Goodrich chemical Company in the United States, with which it had capital and collaborative technological agreements. The company name was changed to “Zeon” when the capital agreement was dissolved in 1970.)

[1-2 Corporate History]

Zeon was established as a joint venture company formed by the Furukawa Group of companies: Nippon Light Metal Co., Ltd., Furukawa Electric Co., Ltd., and Yokohama Rubber Co., Ltd. in April 1950 to acquire and use the vinyl chloride resins technology from B.F. Goodrich Chemicals Co.

In 1951, Goodrich acquired 35% of the shares of Zeon for full-scale technological and capital partnership, and in 1952 mass production of vinyl chloride resins began in Japan for the first time.
In 1959, Goodrich transferred synthetic rubber manufacturing technologies to Zeon, which, in turn, started Japan’s first mass production of synthetic rubber. Manufacturing facilities were also expanded to match the growing demand for automobile parts.

In 1965, use of the Company’s unique technology called Geon Process of Butadiene (GPB) for the efficient manufacture of butadiene (main raw material of synthetic rubber) from C4 fraction was operational.
Goodrich transferred its specialty synthetic rubber business to Zeon along with the shift in its main business focus toward vinyl chloride resins. Capital ties were dissolved in 1970. Along with these changes, the Company name was changed from Geon to Zeon in 1971.
Also, in 1971, Zeon developed a unique technology called Geon Process of Isoprene (GPI) and began using it to manufacture raw materials including high-purity isoprene, Petroleum plastics, and synthetic perfume ingredients from C5 fraction.

After entering the 1980s, Zeon aggressively launched new businesses in various fields including photoresists and other information materials, synthetic fragrance, and medical-related applications in addition to its main synthetic rubber business.
In 1984, production of hydrogenated nitrile rubber Zetpol®, which currently has top share of the worldwide market, began at the Takaoka Plant.
In 1990, manufacture of cyclo olefin polymer (COP) ZEONEX®, which is the main product of the specialty materials business using the GPI method to extract and synthesize products, was started at the Mizushima Plant.
In 1993, Zeon entered China with its electronics materials business.
In 1999, Zeon Chemicals L.P. (Consolidated subsidiary in the United States) acquired the specialty rubber business of Goodyear Tire & Rubber Company of the United States to become the world’s top manufacturer of specialty rubber.

In 2000, Zeon discontinued production of vinyl chloride resins at the Mizushima Plant, and thus withdrew from the Company’s founding business.
Since the 21st century came, the company has been operating business actively. For example, by releasing ZeonorFilm®, an optical film for LCD, strengthening global production and sales systems, starting the commercial operation of solution-polymerized styrene-butadiene rubber(S-SBR) in Singapore, upgrading the equipment for optical films for LCD in Himi-shi, Toyama Prefecture, starting the operation of the world’s first mass-production factory for super-growth carbon nanotubes, and establishing a joint venture for manufacturing and selling S-SBR in cooperation with Sumitomo Chemical.

[1-3 Business Description]

Zeon’s main products use various extracted from naphtha, which is extracted by distillation of crude oil.
When the naphtha is heated, carbon monoxide gas (C1), ethylene (C2), and propylene (C3) are extracted in sequence.
Zeon uses butadiene extracted in the GPB method developed in-house from C4 fraction, isoprene monomer, piperylene, dicyclopentadiene, and 2-butyne extracted from C5 fraction using the GPI method, as raw materials to be processed into synthetic rubber, synthetic latex and various other materials.

GPB Process … A technology for efficiently manufacturing highly pure butadiene
GPI Process … A technology for economically manufacturing highly pure isoprene, petroleum resins, synthetic aroma chemicals, and other useful components.
（Source: the company’s website）

Zeon has three business segments: 1) the Elastomer Business, where manufactured basic materials are sold to customers; 2) the specialty materials business, where basic materials are submitted to primary processing for sale to customers as processed materials, and 3) the other business.

*Both are results for the fiscal year ended March 2024. Composition ratio is before elimination and company-wide.

Elastomer Business
Elastomers are “high molecular compounds that have rubber-like elastic properties,” an example of which is synthetic rubber. As described in the corporate history section of this report, in 1959 Zeon became the first company in Japan to mass-produce synthetic rubber, which became the foundation underlying all of Zeon’s businesses. This business includes the segments of synthetic rubbers, synthetic latices, and chemicals products (Petroleum resins, thermoplastic elastomers) businesses.

1) Synthetic Rubbers Business
<Example of final product: Tires>
Zeon provides the world’s leading tire manufacturers with the world’s highest-quality synthetic rubber for use in tires. Among the various types of synthetic rubber manufactured are styrene butadiene rubber (SBR), which promotes superior abrasion resistance, aging resistance and mechanical strength properties, butadiene rubber (BR), which includes a superior balance between elasticity, wear and low-temperature properties, and isoprene rubber (IR), which features similar properties as natural rubber but with higher quality stability.
It is expected that the demand for S-SBR for fuel-efficient tires, which was developed by improving the characteristics of SBR, will grow rapidly. In order to increase the supplying capacity for coping with it, the first line of Singapore Factory started operation in September 2013, and the second line in April 2016. The supplying capacity of Singapore Factory is now 70,000 tons.

<Example of product: Automobile Parts>

（Source: the company）

Radiator hoses, fuel hoses, fan belts, oil seals, and various other car engine parts use specialty synthetic rubber that has superior oil resistance and heat deterioration-resistant qualities.
Zeon is the world’s number one manufacturer of specialty synthetic rubber and features high quality levels and high market share of specialty synthetic rubber automobile parts. In particular, Zeon’s Zetpol® hydrogenated nitrile rubber, used for timing belts, displays superior heat and oil resistance and mechanical strength characteristic and claims high share of the worldwide market.
Furthermore, a new grade of Zetpol® has vastly improved the performance of products using the original versions of Zetpol®.
Products using the new grade of Zetpol® are heat resistant at temperatures that exceed the limits for the original version of Zetpol® by 10 degrees centigrade, thereby extending the life of seals and gaskets, and are in strong demand for use in next generation bio-fuel engines. The new grade of Zetpol® is well suited to extrusion processing which is being leveraged to expand its usage in various hoses. Products using Zetpol® have also been well received by customers and are being used increasingly as a replacement material for more expensive competitive rubber in Japan, Asia, Europe, and North America.

2) Synthetic Latices Business
Synthetic latex is liquid rubber that synthetic rubber dispersed in water. It is used to manufacture gloves, paper coating, textile processing, adhesives, paints, and cosmetic puffs, etc. Zeon has high share of NBR latex used in cosmetic puffs in the world.

3) Chemicals Business
Zeon produces C5 fraction by its unique in-house GPI method, and turn it into materials for adhesive tapes and hot melt adhesive traffic paint binder and a wide variety of other products.

Specialty Materials Business
Zeon deals in high value-added materials and parts that are created using its unique technologies including polymer design and processing technologies.
This is composed of the specialty plastics business, including optical plastics and optical films, the specialty chemicals business, including specialty chemicals, battery materials, electronic materials and polymerized toners, and the medical devices business.

1) Specialty materials Business
◎ Optical plastics and optical films
Cyclo olefin polymer is thermoplastic polymer developed using raw material extracted from C5 fraction using GPI methods and synthesized with Zeon’s own unique technologies. The commercial products are ZEONEX® and ZEONOR®.
ZEONEX® leverages its high transparency, low water absorption, low absorptive and chemical resistance properties for use in camera and projector lenses and other optical applications and in medical use containers including syringes and vials.
ZEONOR® leverages its high transparency, transferability, and heat resistance properties for use as transparent general use engineering plastics used in light guide plates, automobile parts, semiconductor containers and a wide range of other product applications.

ZeonorFilm® is the world's first optical film by the melt extrusion method from the cyclo olefin polymer. It is excellent in optical properties, low water absorption / low moisture permeability, high heat resistance, low outgassing, and dimensional stability. It is used in a wide range of applications such as displays for LCD TV, smartphones, tablets, and OLED displays.

(Source: the company）

“Diagonally-stretched optical film” is also Zeon’s world first development.
The OELD application as anti-reflection film is progressing, and demand for small- to medium-sized flat panel display applications is growing. The company’s optical films are produced in 3 bases: Takaoka city, Toyama prefecture, Himi city, Toyama prefecture, and Tsuruga city, Fukui prefecture.

ZEOCOAT® is organic insulation material used in electronic devices such as cellphones, smartphones, and LCD televisions.
ZEOCOAT® was successful in improving both the picture quality and reliability of displays because of its high transparency, extremely low water absorption and low gas generation properties.
Zeon will aggressively expand its marketing efforts for OELDs, which will be thinner displays than LCD, thin-film transistors using new semiconductors, and flexible displays.

2) High Performance Chemicals Business
◎ Battery Materials
Zeon provides materials for Li-ion battery in this segment; anode / cathode binders, binder for functional layer (heat resistant separator), and sealant. Currently, Li-ion batteries are widely used as a power source for mobile devices such as smartphone and notebook computers and there is a strong demand for batteries with higher capacity.
Adoption for electric vehicles, including hybrid and plug-in hybrid cars, and industrial power sources (such as smart grids, etc.) is expanding, since it is lightweight and compact and can store a lot of energy. On the other hand, there was a problem that lifetime tends to decrease under high temperature usage.
The company has advanced the function of Li-ion battery binder and succeeded in developing an aqueous cathode binder, which greatly contributes to longer battery life. In addition, Zeon succeeded in commercializing anode binder, which can raise the storage capacity of Li-ion battery by 5% to 15%. Furthermore, as part of its efforts to expand the product lineup while paying attention to environmental burdens, the company embarked on full-scale development of adhesive slurry for separator coating designed as an aqueous product.
The company believes that its binders and sealants for the cathode, anode, and functional layer (heat-resistant separator) will contribute to the improvement of the five major performance parameters of lithium-ion batteries: durability, capacity, productivity, safety, and quick charge, and thus contribute to the popularization of electric vehicles.
Recognizing the potential of lithium-ion batteries and working on them earlier than any other company, ZEON continuously proposes specialty materials for further generalizing new material functions and developing new batteries that meet needs in automobile applications, such as quick charging, as the top innovator in the market of lithium-ion battery binders.

Binder for Battery

（Source: the company’s website）

◎ Specialty Chemicals
Zeon deals in specialty chemicals that use derivatives from C5 fraction, such as synthesized fragrances for cosmetics and flavor used in foods, characteristic solvents, and plant growth regulator.
The Company holds the world’s top share of the synthesized fragrances in green note. They provide a wide range of specialty products including ingredients for intermediary bodies used in medical and agricultural chemicals, alternative solvents to CFCs, cleaning agents, urethane expanding agent, and functional ether agents.

3) Medical Devices Business

Along with the start of development of artificial kidneys in 1974, Zeon aggressively promoted its medical device business. In 1989, a subsidiary Zeon Medical Inc. was established to conduct development, manufacturing, sales, and all other functions of the medical field for the Zeon Group. Zeon has shown bountiful development track record both in gastroenterology and cardiovascular area.
“The Offset Balloon Catheter” as a means of differentiation in the gallstone removal process and with Japan’s first biliary covered stent “Zeostent Covered in the area of gastroenterology products, and the world’s smallest diameter “XEMEX IABP Balloon PLUS” as a device to aid the heartbeat at times of acute myocardial infarction in the area of cardiovascular products.

* FFR: fractional flow reserve ratio for quantitatively evaluating the severity of lesions and determining treatment strategies in diagnosing and treating coronary arteries.

【New Specialty Materials Development: ~Carbon Nano Tube (CNT)~ 】
Aggressive R&D activities have allowed Zeon to launch various new materials into the market, and particularly high expectation is in the development of “single-wall carbon nanotubes (CNT)”.

1) What is Single-Walled CNT?
Carbon Nanotubes (CNTs) are cylindrical nanostructure formed by hexagonal lattice of carbon atoms. In 1993, Sumio Iijima, Ph.D., head of the Applied Nanotube Research Center of the National Institute of Advanced Industrial Science and Technology (AIST), discovered this structure for the first time in the world and named Carbon Nanotubes (CNTs). CNTs are categorized into single-walled and multiple-walled CNTs. Multiple-walled CNT is relatively easy to manufacture and the developments for commercial applications already started.

At the same time, single-walled CNT exhibits the following properties and is superior to multiple-walled CNT:
- 20 times stronger than steel
- 10 times more heat conductive than copper
- Half as dense as aluminum
- 10 times the electron mobility of silicon
- lightweight but highly flexible
- has extremely high electric-and heat-conductivity properties
Possible CNT applications are electrical conductivity assistance agent in Li-ion batteries, transparent conductive film used in electronic paper and ultra-thin touch panel because of its high elasticity and strength, and as a thermal interface material. Because of its ability to absorb a wide spectrum of light, practical applications of single-walled CNT are being promoted in the area of electromagnetic wave absorbing materials for use in a wide range of fields including energy, electronics, structural materials, and other specialty materials.

Conventional single-walled CNT has several major issues including high levels of impurities, low levels of productivity and high manufacturing costs, which are about several tens of thousands to hundreds of thousands of yen per gram.

2) Zeon’s Efforts and Position
Against this backdrop, the company aims at establishing technologies that are necessary for the commercialization of new products using single-walled CNT developed in Japan with its numerous superior qualities in response to the worldwide social demands to realize a low-carbon society.

3) Future Endeavors
Having established the mass production technology based on the super growth method, Zeon completed the CNT production facility and started mass production, the first in the world in November 2015 in its Tokuyama plant at Shunan-city, Yamaguchi Prefecture.
Zeon is the only company in the world that has established mass production technologies for single-wall CNT. Companies around the world request for its product samples. Consequently, shipments of samples have already begun. Zeon has also begun to propose practical applications of this product. Developing a technology for suppressing lithium dendrites with the sheets based on carbon nanotubes is expected to contribute to significant improvement in the life of lithium metal electrodes (negative electrodes) and to accelerating the practical application of high energy density and large capacity lithium metal electrodes (negative electrodes) (from the company's press release on January 25, 2022).
At the same time, single-wall CNT is a type of nanomaterial that is extremely small and fiber shape. Therefore, there is a concern that it may have some impact upon biological processes depending upon its size and shape.
Currently, the AIST is conducting standardization of the evaluation process, and activities for the OECD endpoint measurement are being conducted, with global standardization and legal and regulatory aspects being considered.

Other Business
The combination liquid for Reaction Injection Molding (RIM) using the ingredient dicyclopentadiene (DCPD) as a raw material.

[1-4 ROE Analysis]

ROE exceeded 10% in the fiscal years ended March 2021 and March 2022. In the fiscal year ended March 2023, however, the demand environment deteriorated, so net income margin shrank and ROE was at a low level. Although the fiscal year ended March 2024 showed a numerical recovery due to the posting of extraordinary income, the actual situation was unchanged from the fiscal year ended March 2023. In addition to recovery of demand and profitability improvement in the future, we would like to expect medium- and long-term increase in profitability based mainly on growth in the Specialty Materials segment.

*Prepared by Investment Bridge Co., Ltd. based on the disclosed material.

[1-5 Characteristics and Strengths]

1. World’s Leading Creative Technology Development Capability
The GPB method used to manufacture butadiene from C4 fraction is the most important development in Japan’s postwar history of chemicals and is licensed to 49 plants in 19 countries around the world.
In addition, the Mizushima Plant is the world’s only plant with GPI method to extract high-purity isoprene and other effective substances from C5 fraction. This Zeon’s GPI method is a completely unique technology, which is not provided to other companies.
These two technologies represent the creative technological capabilities that are among the strengths of Zeon. They also are highly regarded and have received numerous awards in the global markets. Regarding technologies, Zeon has received 54 awards since 1960 including the GPB and GPI methods, in addition to 28 awards since 1982 for its environment conservation and safety efforts.

2. High Worldwide Share
Zetpol®, ZEONEX®, and ZEONOR® are representative of the products born from Zeon’s highly creative technologies, which have allowed it to acquire high shares of worldwide markets. In addition, their Leaf alcohol for in cosmetics and food flavorings and NBR latex for cosmetic puffs have the world’s top share.

3. R&D Structure that Continues to Yield Creative Technologies
Zeon seeks to conduct R&D activities based upon its basic corporate philosophy of "contributing to society by continuously creating the world's No.1 products and businesses based on innovative and original technologies that are unique to ZEON, even in niche markets, in fields in which ZEON excels, and that no one else can imitate, and that are friendly to the earth."
The Company’s main R&D center is in Kawasaki City, Kanagawa Prefecture. Zeon has also established the Precision Optics Laboratory and Medical Laboratory at the Takaoka Plant, the Specialty Chemical Product Research Facility at the Yonezawa Plant, the Toner Research Facility at the Tokuyama Plant and C5 Chemicals Laboratory at the Mizushima Plant for more efficient R&D activities to be conducted closer to the manufacturing sites. The technical support bases are in the U.S., Germany, Singapore, and China. New research and development initiatives have also been launched, including the establishment of the Emergence Promotion Center, which specializes in new businesses and technologies, and is taking on the challenge of sustainable research and development, including efforts to address the SDGs, which are to be attained by 2030.

2. Fiscal Year ended March 2024 Earnings Results

[2-1 Consolidated Earnings]

*Unit: million yen. Figures in compared with forecast are percentage compared with the forecasts announced on January 31, 2024.

Sales and Operating Income Declined Year on Year.
Sales decreased 1.6% year on year to 382.2 billion yen, and operating income dropped 24.6% year on year to 20.5 billion yen.
The Elastomer Business experienced decreases in both sales and profit. In the synthetic rubber segment, while prices dropped in response to raw material costs, the increase of shipments and favorable exchange rates led to increased sales and profit, particularly driven by the automotive sector's recovery. In the synthetic latex segment, excess inventory of medical and hygiene gloves continued to suppress supply improvement, resulting in decreased sales; however, cost reduction efforts led to an increase in profit. The segment of chemical products faced a delay in the global demand recovery for adhesive tapes and labels, resulting in the decrease in shipments and declining market prices, which caused decreased sales and profit.
The Specialty Materials Business saw increased sales, but profit decreased. Although the telework-related surge in demand for optical films for mobile devices subsided, sales of films for large-sized TV sets recovered, and demand for optical plastics for medical applications remained strong, leading to increased sales. However, increased costs associated with the start of operation of a new optical film production line and the impact of the Noto Peninsula Earthquake resulted in a decrease in profit. The battery materials segment suffered a decline in demand due to the sluggish Chinese economy, weak global EV sales, and changes in European EV subsidy policies, leading to decreased sales and profit. The segment of chemical products saw reduced sales and profit due to a decline in the market for synthetic fragrances. The electronic materials segment faced decreased sales and profit due to the semiconductor market downturn and the decline in utilization rate of factories of semiconductor manufacturers.
Despite an increase in foreign exchange gains in non-operating income, ordinary income dropped 14.3% year on year to 26.9 billion yen. Extraordinary income from the sale of investment securities rose from 3 billion yen to 25.5 billion yen, and impairment losses in extraordinary losses shrank from 19.3 billion yen to 2.5 billion yen in the previous fiscal year, resulting in a 194.3% year-on-year increase in net income to 31.1 billion yen.
The year-end dividend was raised from the previous forecast of 20 yen/share to 25 yen/share, leading to an annual dividend of 45 yen/share, up 9 yen/share from 36 yen/share in the previous fiscal year. The dividend payout ratio stood at 30.6%.

[2-2 Trends by Business Segments]

◎Full year

*Unit: million Yen. Composition of operating profit as % of operating profit on sales.

*Prepared by Investment Bridge Co., Ltd. based on the disclosed material.

[2-3 Quarterly Trends]

*Unit: million Yen.

From the previous quarter (the third quarter of the fiscal year March 2024), sales grew 0.1%, but profit shrank 30.8%.

◎Segment

*Unit: million Yen

【Elastomers】
Quarter-on-quarter increase in sales but decrease in profit.
The demand for and shipment of synthetic rubber remained generally strong. Sales increased due to the growth of shipment volume, but profit decreased due to increased allocation of indirect costs at the end of the fiscal year.

*Synthetic Rubber
While shipment volume increased, particularly for general-purpose products overseas, sales decreased due to seasonal inventory adjustments of specialty products. Profit also declined due to increased allocation of indirect costs at the end of the fiscal year.

*Latex
Sales increased due to the increase of shipments of products for gloves, but operating income remained flat due to increased allocation of indirect costs at the end of the fiscal year.

*Chemical Products
The adhesive market recovered, leading to increased shipment volume and sales. However, profit decreased due to increased allocation of indirect costs at the end of the fiscal year.

【Specialty Materials】
Quarter-on-quarter increase in sales but decrease in profit.
Sales decreased, but profit increased for specialty plastics, while specialty chemicals saw increased sales, but profit decreased.

*Specialty plastics
Sales decreased due to the impact of the earthquake, but profit increased due to the growth of shipment volume of optical plastics. Increased shipment volume of small- and medium-sized films contributed to year-on-year increases in both sales and profit.

*Specialty chemicals
Sales of battery materials experienced quarter-on-quarter and year-on-year increases due to the delay in posting in overseas affiliates. However, profit decreased due to lower shipment volume and flat selling, general, and administrative expenses.

◎Trends in shipment volume by item
* Battery materials
In the fourth quarter (January-March), shipment volume increased 19% year on year, but decreased 32% quarter on quarter. The cumulative shipment volume for the fourth quarter (April-March) increased by 6%.
The volume of battery materials for EVs shipped were up 6% year on year, but down 40% quarter on quarter, due to weak global EV sales and the impact of front-loaded shipments ahead of the Chinese New Year.
The volume of shipments for consumer product and other industries rose 129% year on year and 33% quarter on quarter. The mobile device market gradually recovered, and the sales of battery materials for ESS (energy storage systems) increased, resulting in the year-on-year and quarter-on-quarter increases in shipment volume.

* Optical plastics
In the fourth quarter (January-March), shipment volume increased 12% year on year and 15% quarter on quarter. The cumulative shipment volume for the fourth quarter (April-March) increased by 4%.
Shipments of products for optical applications rose in volume by 18% year on year and by 3% quarter on quarter. The shipment volumes of products for both smartphones and printers increased.
Shipments of products for medical and other applications rose in volume by 10% year on year and by 18% quarter on quarter. The increase in customer demand, along with the recovery of the semiconductor market, contributed to the rise in year-on-year and quarter-on-quarter shipment volumes.

* Optical films
In the fourth quarter (January-March), shipment volume decreased 8% year on year and 27% quarter on quarter. The cumulative shipment volume for the fourth quarter (April-March) increased by 24%.
Shipments of small- and medium-sized product industries rose in volume by 34% year on year and fell in volume by 18% quarter on quarter. Strong demand for smartphones and tablet devices led to a year-on-year increase in shipment volume, but the usual shipment lull for smartphones in fourth quarter resulted in a quarter-on-quarter decrease.
The volume of shipments for large-sized product industries went down 15% year on year and 29% quarter on quarter. The temporary halt in operations due to the Noto Peninsula Earthquake led to year-on-year and quarter-on-quarter declines in shipment volume. However, full recovery was achieved on March 29.

[2-4 Financial standing and cash flows]

◎Main Balance Sheet

*Unit: million yen. Receivables include electronically booked receivables; likewise, payables include electronically booked payables.

Total assets increased 9.3 billion yen from the end of the previous term due to increases in cash, tangible assets, and other assets.
Total liabilities decreased 15.0 billion yen from the end of the previous term due to decreases in ST interest-bearing liabilities.
Net assets increased 24.4 billion yen from the end of the previous term due to increases in retained earnings and foreign currency translation adjustments.
As a result, the equity ratio increased by 3.8 points from the end of the previous fiscal year to 68.1%, and the D/E ratio was 0.02, down 0.06 from the end of the previous period.

(Source: the company)

3. Fiscal Year ending March 2025 Earnings Forecasts

[3-1 Earnings Forecast]

*Unit: million yen.

Sales and operating income are expected to increase 29.3%.
For the fiscal year ending March 2025, the company expects sales to rise 3.9% year on year to 397 billion yen, and operating income to increase 29.3% year on year to 26.5 billion yen. Both the Elastomer Business and Specialty Materials Business are expected to see increases in sales and profit. In the Elastomer Business, synthetic rubber, latex, and chemical products are all expected to achieve larger sales and profits. The Specialty Materials Business is expected to see growth in sales and profit from optical plastics and optical films.
The assumed foreign exchange rates and market conditions are set at 1 U.S. dollar = 145 yen, 1 euro = 155 yen, domestically produced naphtha = 68,000 yen, and 900 U.S. dollars for Asian butadiene.
Ordinary income is expected to increase 2.2% to 27.5 billion yen, as no foreign exchange gains recorded as non-operating income in the previous fiscal year are anticipated. Due to the impact of gains from the sale of investment securities recorded as extraordinary income in the previous fiscal year, net income is projected to decrease 43.7% to 17.5 billion yen.
The dividend forecast is composed of an interim dividend of 23 yen/share, a year-end dividend of 24 yen/share, and an annual dividend of 47 yen/share, showing a 2 yen/share increase. This marks the 15th consecutive annual dividend increase since the fiscal year 2010, with a forecast dividend payout ratio of 55.9%.

[3-2 Trends by Business Segments]

*Unit: million yen.

Business Environment in FY3/25
(1) Elastomer Business
* Synthetic rubber
Sales and profits are expected to increase as demand in the automobile market is strong, although there are regional differences.

＊Latex
The market for gloves is expected to recover gradually.

*Chemical Products
The adhesive tape market is expected to recover gradually, with regional differences.

(2) Specialty materials
* Optical plastics
Demand is expected to remain strong for both optical/medical and other applications.

* Optical films
Shipments are expected to recover due to the full restoration of the production line for large-sized applications. The market for tablet devices and laptop computers is expected to recover, while the market for smartphones is projected to remain sluggish.

* Battery materials
The global decline in EV sales is forecast to keep the performance level flat from the fiscal year 2023.

4. Measures for Achieving Management with a Focus on Capital Costs and Stock Price

In January, measures for achieving management with a focus on capital costs and stock price were announced.
See also <Reference 1: Medium-Term Management Plan>.

I. Overview

II. Analysis of Capital Costs and Capital Profitability

(Source: the company)

Historical WACCs are those estimated by the company.
(Source: the company)

III. Initiatives for Improvement

　To aim to achieve ROIC above WACC by promoting the medium-term management plan　

(Source: the company)

III-1. Business Management
① Improving Profitability of Elastomers

　The company aims to enhance the profitability of its existing business products by means of thorough cost reduction and differentiation. 　

(Source: the company)

　It is currently considering medium/long-term business structure and portfolio reforms.　

　Growth scenarios for special rubbe　

(Source: the company)

② Expanding Sales and Promoting the Provision of New Products in the Specialty Materials Business (COP):

　Under the company's medium-term management plan, it plans to expand sales mainly for medical and other applications.　

(Source: the company)

(Source: the company)

(3) Expand sales of the Specialty Materials Business and promote new products (battery materials)

　Under the medium-term management plan, the company aims to achieve sales growth exceeding that of the EV market. 　

Expanding existing products by providing solutions to customers’ challenges.
Developing and launching differentiated technologies and products into the market.
(Source: the company)

　Offering advantages to stakeholders through the company’s products　

Improving battery productivity and performanceReducing investment in battery manufacturing equipmentLowering environmental impact
*contributing to the reduction of CO₂ emissions, and using materials free of perfluoroalkyl substances (PFAS), an organic fluorine compound.
(Source: the company)

(Source: the company)

④Identify new investments for differentiation

New investments to be determined individually based on market growth and profitability

New business investment to focus on four fields to contribute to ROIC in FY2030 and beyond

(Source: the company)

III-2. Financial Management
①Enhancing Leverage through Effective Use of Interest-Bearing Debt:

　Until fiscal year 2026, they will prioritize the allocation of funds to new investments and research and development, increasing the denominator (invested capital) of ROIC.　

　To keep D/E ratio below 0.3　

(Source: the company)

②Continuous Reduction of Strategically Held Shares:

The company plans to achieve its fiscal year 2026 target for the reduction of strategically held shares ahead of schedule and will continue to work toward further reductions.

*The difference between cash inflow and cash outflow is the increase or decrease in cash and cash equivalents through the expansion of scale.
(Source: the company)

③ Stable and Continuous Shareholder Returns:
　In line with its shareholder return policy, the company will maintain stable and continuous dividends and a dividend payout ratio of 30% or higher.　

(Source: the company)

5. Conclusions

In the fiscal year ended March 2024, the financial results exceeded the company's forecast announced in January, which had been revised downwardly due to the impact of the Noto Peninsula Earthquake. For the fiscal year ending March 2025, the Elastomer Business is expected to benefit from a recovery in demand, while the Specialty Materials Business is expected to see increased sales and profit due to the demand recovery and the subsiding of the Noto Peninsula Earthquake’s impact. While the overall business environment is expected to remain strong, there is some concern regarding battery materials for electric vehicles (EVs). This concern, which was highlighted previously, has become more pronounced with potential risks of excess inventory in the EV market that need to be closely monitored.
The enhancement of shareholder return in their financial report attracted our attention. Recording temporary extraordinary income in the fiscal year ended March 2024, the company revised its dividend payout ratio upwardly to over 30%. For the fiscal year ending March 2025, net income is projected to decrease due to the absence of these extraordinary income, but the dividend is still forecast to increase 2 yen. Additionally, on the day of the earnings announcement, the company announced a significant share buyback program of up to 10 million shares, equivalent to 4.7% of the total number of outstanding shares, demonstrating a robust commitment to shareholder returns and stock price measures.
The market of lithium-ion batteries for electric vehicles, for which the company provides materials, is expected to grow in the future, although it is anticipated to remain at the same level between the fiscal year 2023 and the fiscal year 2024. Moreover, the outlook for cyclo olefin polymer (COP), valued for their optical and medical properties, remains bright. The company plans to continue making proactive investments, focusing on absorbing the associated costs while expanding its business.
Regarding the ongoing medium-term management plan, which is now in its second phase, the company plans to hold an explanatory meeting in June to outline its approach to structural reforms. At present, EPS is expected to be close to 200 yen if the company achieves the profit level it is aiming for in the fiscal year ending March 2027. Against this backdrop, the stock price is below the BPS (1,714.88 yen) level. PBR exceeding 1 is considered a milestone, and we will continue to pay attention to business developments and shareholder returns.

<Reference 1: Medium-term Management Plan>

The company is promoting its Medium-Term Business Plan, “STAGE 30,” which began in the fiscal year ended March 2022. Having completed “Phase 1” of the plan in the fiscal year ended March 2023, the company has entered “Phase 2” of the business plan, which will end in the fiscal year ending March 2027.

[1-1-1　 Overview of the New Medium-term Management Plan]

The corporate philosophy is to contribute to the preservation of the earth and the prosperity of human race.
Zeon’s mission befits the company name’s origin, which is acquiring raw materials from the earth and prospering for eternity. The company’s mission is to contribute to a sustainable planet and a safe and comfortable life for people by providing unique technologies, products, and services.

Based on this mission, the company set its vision for 2030 to be a company that meets the expectations of society and the aspirations of employees.
Furthermore, the company has listed three specific action guidelines for all employees to focus on: “Let’s try first,” “Let’s connect,” and “Let’s polish up.”
Zeon will focus on achieving nine of the SDGs’ target to be a company that meets society’s expectations.

(Source: the company)

[1-1-2 Overview of the Medium-Term Business Plan - Phases and Performance Targets]

(Source: the company)

[1-2-1 Progress of Phase 1]

(Source: the company)

[1-2-2 Explanation of Progress of Phase 1 for Each Corporate Strategy]
（１）Promote a Transformation of “monozukuri” to Realize Carbon Neutrality and a Circular Economy

(2) “Polish up” existing businesses, “explore” new businesses, and developing digital infrastructure to create value for customers
“Polish up” existing businesses①
The company is improving its capacities to enhance the manufacturing of COP* and battery materials. *Cyclo Olefin Polymers

(Source: the company)

“Polish up” existing businesses②
The company is aggressively expanding the capacity for its differentiated product range to ensure the survival of the existing SBUs (Strategic Business Units).

“Explore” new businesses
Among the four key areas of the company, Telecommunication drove a 2.1 billion yen increase in net sales of new business.
It also promoted external collaboration in each area, including the acquisition of two companies in the “Healthcare/Life Science” area to achieve further growth.

（３）Work together to create “stages” to be active on
The company proceeded with the development of workplace systems and environments to provide more choices in life.

[1-3-1 Overview of Phase 2 of the Medium-Term Business Plan]

Phase 1 was positioned as a “run-up period” amid a sluggish external environment. Although no clear quantitative targets were set, progress was seen in each corporate strategy as planning and execution proceeded simultaneously. In Phase 2, without changing the vision for 2030, “A company that lives up to societal expectations and aspirations of employees,” it set performance targets for the fiscal year ending March 2027, with an emphasis on profitability. The company was meticulous about quantifying and defining the target values for the fiscal year 2026, which is the final year of this phase. The company intends to roll out interim targets and measures every two years to achieve the targets for the fiscal year 2030. Additionally, in the overall strategy, there is a policy to establish a “polished management base” and further enhance governance.
New name for the Medium-Term Plan: “STAGE 30”

(Source: the company)

[1-3-2 Company-wide Strategy in Phase 2 of the Medium-term Business Plan]
(1) Promote a Shift to “Manufacturing” to Realize Carbon Neutrality and a Circular Economy

Reduce Scope 1 and Scope 2 CO2 emissions for 2030.
Looking ahead to 2050, to contribute to the reduction of Scope 3 emissions.

* 729,000 tons when calculated based on GHG protocol
(Source: the company)

(2) Promoting a Shift to “Manufacturing” to Realize Carbon Neutrality and a Circular Economy
+ “Polishing up” existing businesses + “Exploring” new businesses

Achieving safe and stable production and promoting sustainable manufacturing.
These will improve labor productivity.

(3) “Polishing up” existing businesses
(1) COP will grow steadily in mainstay optical and medical applications, and battery materials will steadily take advantage of the growth of the global EV market.
Investment Plans for Business Expansion are Ongoing.

The company is currently engaged in production system improvement for battery materials in Europe and North America, and although the areas have not been disclosed, it is considering strengthening the resilience of COPs. By establishing a production system based on local production for local consumption, they aim to promptly and appropriately meet customer needs and expand sales.

(2) Polishing up business efficiency based on cost of capital and ROIC

(3) COP is expected to grow steadily in its mainstay optical and medical applications, while battery materials are expected to steadily take advantage of the growth of the global EV market, thereby expanding the sales ratio of the Specialty Materials Business.
Elastomer Business: Promoting structural reforms with a focus on efficiency
Specialty Materials Business: Expanding sales of COP and battery materials

(4) “Explore” new businesses
Expanding the net sales of new business mainly in four key areas, namely “CASE and MaaS,” “Healthcare/Life Science,” “Telecommunications (5G/6G),” and “Energy Conservation”
■Strengthening resources and mechanisms to ensure that CVC and M&A are spread throughout the company
■Bringing manufacturing, sales, and technology together to release new products to new markets

(5) Work together to create “stages” to be active on

Creating a working environment where employees can work healthily and enthusiastically.

(6) “Polish” a Management Base (new)
Target values for the fiscal year ending March 2027

“Polishing” Corporate Governance.

[1-3-3 Phase 2 of the Medium-Term Business Plan, Financial Targets]
(1) Performance Target
Target values for the fiscal year ending March 2027

Targets in Each Segment

The company intends to expand the operating income from elastomers, mainly by improving the profitability of synthetic rubber.

(Source: the company) 　　　　　 Figures for FY3/23 are the company’s forecasts at the beginning of the term.

(2) Cash Flow Allocation
■Making aggressive investments and conducting R&D to expand enhanced businesses and new businesses while increasing shareholder returns
■Optimizing the capital structure and improving capital efficiency by using funds from the sale of strategically-held shares and interest-bearing debt as resources

(3) Investment Plan
■Concentrating new investments on differentiated products such as COP and battery materials, and new businesses
■Plans to invest approximately 220 billion yen, including approximately 170 billion yen in new investments and 50 billion yen in maintenance and replacement of existing businesses in the period from FY 3/2024 to FY 3/2027

(4) Shareholder Return
■Aim to increase shareholder returns in line with profit growth

・Maintaining stable and consistent dividends
・Maintaining a dividend payout ratio of 30% or higher
・Purchasing treasury shares flexibly, based on market conditions, capital needs, and other factors

(5) Capital Structure
■D/E ratio will rise (maintained at 0.3 or lower) with the increased use of interest-bearing debt and enhanced shareholder returns
■Optimizing the capital structure to enhance corporate value over the medium to long-term

・Procuring more funds with interest-bearing debt to support aggressive investment and optimize the capital structure
・Controlling financial discipline to a level that keeps the single A rating
・Reducing strategically-held shares and improving asset efficiency

<Reference 2: Regarding Corporate Governance>

◎ Organization type, and the composition of directors and auditors

◎ Corporate Governance Report
Last update date: January 31, 2024

Basic policy
Our company respects the interests of a broad range of stakeholders, including shareholders, and aims to earn revenue and continuously improve our corporate value while adjusting the relations of interests. To do so, we will make continuous efforts to establish a system for realizing efficient, sound business administration through corporate governance.
In addition, we will make decisions and execute business operations swiftly after clarifying the functions and roles of each institution and each in-company organization by developing internal control systems. We will properly monitor and disclose its progress and results and strive to improve the transparency of our business administration.

Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)
(All principles are based on the Code revised in June 2021, including the content for the prime market)
Our company follows the principles of the corporate governance code.

Disclosure Based on the Principles of the Corporate Governance Code (Excerpt)

For back numbers of Bridge Reports on ZEON CORPORATION（4205）and Bridge Salon (IR seminar), please go to our website at the following URL. www.bridge-salon.jp

<Major Shareholders>

As of Mar. 31, 2024

<Selected Financial Data>
　　(Units: Million Yen)

<Financial Summary>

<Segment Information>　
(Units: Million Yen)