Industrial furnaces are sold out through 2027, and the company will expand capacity alongside solid SiC focus rings. The President explicitly committed to delivering full-year operating income of JPY 35B.

Summary

For 3Q YTD FY12/2026, revenue was JPY 273,674M (+15.3%) and operating income was JPY 27,507M (+32.0%), with profit growth across all major segments. Three drivers led the way: solid SiC focus rings for memory, full-capacity cathode production on Middle East special demand, and industrial furnaces for MLCCs. President Nagasaka stated plainly that the company can comfortably deliver on its JPY 35B full-year operating income commitment. That said, the 4Q plan remains conservative. It factors in payback from Smelting & Lining (S&L) shipments pulled forward into 3Q and external risks. On the call, management also made three verbal disclosures. It has begun studying a capacity expansion for industrial furnaces at the Shiga plant. It plans to announce a solid SiC focus ring capacity expansion between year-end and January next year. It has begun preparing an anti-dumping petition on carbon black.

Key Points (Earnings Takeaways and Growth Initiatives)

• Management Strategy and Market View
  • The President will not raise guidance on the strength of a single quarter, citing uncertainty over the US administration and oil prices
  • Power semiconductor demand is being driven not only by EVs but increasingly by AI-related adoption. China is recovering faster than the US
  • In the US graphite electrode market, growth is driven more by new EAF construction than by BF-to-EAF conversions. Management expects this tailwind to persist beyond next year
  • AI investment is seen as unavoidable given US-China economic competition. The direct impact of the midterm election results is assessed as limited
• Current Business Progress and Drivers
  • S&L shipped output immediately in 3Q on concerns over transport disruptions. This front-loading explains the profit decline built into the 4Q plan
  • Carbon black operating income rose by JPY 1,186M from 2Q to 3Q (our estimate). Drivers were the redirection of lower Thai exports to the US toward other regions, and customer inventory build-up ahead of the relocation to the new plant
  • Graphite electrode prices outside long-term contracts were raised by roughly 6–10%. Next year's pricing is under negotiation
  • EBITDA rose across major segments. The earnings mix, previously concentrated in Carbon Black and Fine Carbon, is becoming more diversified
• Key Strategic Initiatives and Inflection Points
  • Industrial furnaces: capacity expansion is under way, centered on the Shiga plant, which has more available space. Completion is expected to take around 18 months
  • Solid SiC focus rings: capacity expansion is under consideration, covering the current Korean site and the head office. An announcement is planned between year-end and January next year
  • In his role as chairman of the Carbon Black Association, the President announced plans to prepare an anti-dumping petition against Chinese and Indian product. Work is currently at the data-compilation stage
  • Anticipating higher needle coke prices, the President has instructed management to shorten the lag in passing raw material costs through to selling prices

Outlook and Strategy

• Full-year guidance is unchanged at revenue of JPY 386,000M and operating income of JPY 35,000M. 3Q YTD operating income progress stands at 78.6% (our estimate)
• The 4Q plan implies operating income of JPY 7,492M, down 39.6% QoQ (our estimate). The President ruled out a full-year miss and hinted at upside
• Some S&L shipments will slip into 1Q next year. In addition, early replacement demand for cathodes damaged by production shutdowns may continue for some time next year
• Graphite electrodes: management maintains its view that the US EAF share will rise from about 70% to about 85% by 2030
• The dividend is maintained at JPY 40 per year, as revised upward in 2Q. Share buybacks announced through May have been completed and the shares cancelled

Positive Factors

• Solid SiC focus ring sales volume has already surpassed last year's full-year total. Order backlog is at a record high, and full-year sales are also expected to hit a record
• Industrial Furnaces and Related Products ROS reached 26.0% (18.4% in the prior-year period). 2027 capacity is sold out, and order-taking for 2028 has begun
• S&L operating income rose from JPY 738M to JPY 4,053M. RuC assembly at Chinese smelters is progressing smoothly, supporting ongoing license running royalties
• In the US, countervailing and anti-dumping duties have been imposed on Indian graphite electrodes and are having a deterrent effect
• Sales of resistors for power infrastructure continue to grow on transmission and distribution grid buildout
• FCF was JPY 15.5B, up from JPY -4.8B in the prior-year period. Contributors were the completion of major capex and the sale of cross-shareholdings (JPY 3.5B)

Concerns and Risks

• The timing of the end of Middle East special demand is unclear. The President stated explicitly that he cannot yet guarantee continued replacement demand
• Imports account for about 70% of the US tire market, and low-priced Chinese, Russian and Indian products are gaining share. Recovery in North American carbon black demand is lagging
• Domestic carbon black demand continues to decline YoY, pressured by imports from China and India
• If oil stays above USD 100/bbl, demand could weaken through a broader economic slowdown
• Working capital was JPY -13.6B. Net interest-bearing debt was JPY 113.2B, up JPY 5.3B from the previous fiscal year-end
• Net Income Attributable to Owners of Parent Company grew only 0.8%, a wide gap versus operating income growth

Performance Highlights

3Q YTD revenue was JPY 273,674M (+15.3%) and operating income was JPY 27,507M (+32.0%), delivering double-digit top- and bottom-line growth. Recurring Profit was JPY 26,148M (+27.0%), and Net Income Attributable to Owners of Parent Company was JPY 16,259M (+0.8%). The contribution from the Thai subsidiary consolidated in 4Q 2025 and higher SiC product volumes more than offset two drags on revenue. These were production adjustments at tire customers and the divestiture of the German subsidiary.

Segment Results

*YoY figures for Other are our estimates

• EBITDA: JPY 55,261M (+26.0% YoY)
• EBITDA Margin: 20.2% (+1.7pt YoY), reaching the 20% target under the T-2030 long-term vision
• Consolidated ROS: 10.1% (+1.3pt YoY)
• Adjusted Net D/E Ratio: 0.22x (0.21x at previous fiscal year-end)
• Equity Ratio: 46.3% (47.9% at previous fiscal year-end)
• Credit Ratings: JCR A+, R&I A (both with stable outlook)

Q&A List

• Q

  3Q came in very strong, but the implied 4Q points to lower profits across segments. Could you describe the current business environment, the risks you see in the numbers, and any potential upside?

  A

  The numbers speak for themselves, and I understand the point. But throughout this year I have been determined to defend the JPY 35B operating income target, which we raised twice. I can say clearly that we will comfortably keep that commitment. The biggest quarterly swing came from Smelting & Lining. As mentioned in the presentation, cathode blocks have been at full production since 3Q, arguably beyond full production. However, we were worried about the war, whether we could secure vessels and whether we could actually ship. So, frankly, in 3Q we shipped as soon as we produced and pushed volumes out aggressively. To be honest about where the JPY 35B will land, a shortfall is at least out of the question. As for how much upside we can assume, the US administration has turned out the way it has, so risks cannot be ruled out. Oil prices happen to be falling now, but that could change. Given the many uncertainties, my honest view is that we should not raise the numbers based on one strong quarter.

• Q

  Looking to next year, on graphite electrodes: you mentioned a price reversal in 3Q. How much of that is reflected in actual results? Competitors' earnings calls also point to price increases next year. How do you view demand, mainly in North America, and the scope for price revisions?

  A

  This year, in 4Q, we achieved price increases of roughly 6% to 10%, with some range, on volumes not under long-term contracts. Conditions around steel in the US have improved markedly, and we expect that to continue next year. We think it can be viewed positively not only for next year but over a somewhat longer horizon. That said, it is not risk-free if oil and other inputs rise. Also, though not a direct answer to your question, the global shift from BF to EAF is progressing largely on schedule. The US is leading, but excluding Europe, Japan and others are also on track. From that perspective too, we see the US steel environment as positive.

• Q

  Am I right that next year's price negotiations have not been concluded and are still under way?

  A

  Yes, they are under negotiation right now.

• Q

  On carbon black, competitors' results suggest a mixed picture for next year depending on customer and region. How should we think about base margins next year? Could you also update us on market conditions, mainly in the US and Thailand?

  A

  In a word, we expect very stable progress. But as I have said several times, the US market is a concern. We had said it would enter an uptrend sooner, but that has not materialized. The reason is that US domestic production falls well short of tire demand, and close to 70% is imported. That may surprise you. On those imports, a range of prices have risen, and I believe President Trump bears responsibility for that. Americans have a distinctive culture: even with tires, they prioritize cheaper products when replacing, even at lower quality. That trend continues. The sources are Chinese product, including transshipments, Russian product, and more recently Indian product, and these have increased considerably. I have looked at peers' results, and none are saying anything very definitive. The difference is that peers define the Americas to include Latin America, not just North America. Some Latin American countries are performing well, which gives them some upside. We cover only North America, including Canada, so our situation differs slightly. It is true we would like to see more momentum.

• Q

  On Fine Carbon, the materials refer to a recovery trend in SiC power semiconductor business for China. Given views that SiC remains flat and recovery is uncertain, is something changing in materials demand linked to SiC power semiconductors?

  A

  The Chinese market is indeed showing movement. We had expected it to be slower. But since the end of the first half, not just the end of 3Q, activity has been gradually picking up. In the US and Japan, given how much noise President Trump made, I thought concrete numbers would have appeared sooner, but China is actually moving faster. So I believe this wording is accurate.

• Q

  My impression was that power semiconductors had stalled and any recovery would come next year at the earliest. Is it fair to say things have started to change?

  A

  We need to be careful here, because we tend to equate power semiconductors with EVs. As you know, China produced EVs in large volumes and, unable to absorb them domestically, shipped many to Europe. But European volumes have more than halved. The driver, however, is not just EVs but AI-related applications, where adoption is becoming steady. There is some concern about the impact of the change in administration. But on trend, I expect a steady recovery and growth. So I think China's momentum will produce reasonable results.

• Q

  So the market is broadening beyond EVs to AI, and power semiconductor demand looks set to pick up?

  A

  That is a fair characterization.

• Q

  On US graphite electrodes, the tone of the call and the materials describe a recovery. Historically, such language from the company has often signaled growing confidence or a sense of change in pricing from next year. Are you seeing such a change?

  A

  As explained earlier, the electrode business has shrunk overall following the sale of the German site in Europe, but its quality has improved significantly. That improvement is in the US, which is clearly becoming an attractive market. We expect this to continue not just now or next year but for some time. What is driving it is less the conversion from BF to EAF and more the construction of new EAFs.

• Q

  The direction of funding after this election is unclear, but if infrastructure spending increases, could that be positive for electrodes?

  A

  It would be entirely positive. You can view it that way.

• Q

  You mentioned a 6–10% increase in 4Q. Could market prices rise by 20% or 30%?

  A

  The 6–10% I mentioned refers to our price increases. I do not expect prices to rise sharply or by tens of percent. Looking out to 2030, prices should rise further. But as you know, the US EAF share has limited headroom; it has already reached about 70%. As I have said before, my view on how much it will rise by 2030 is unchanged: about 15pt, from 70% to about 85%. You can regard this as steadily showing up in the numbers.

• Q

  For next year, the main downside risk would seem to be Smelting & Lining, which may include special demand. Politics makes it hard to generalize, but are the other businesses basically heading upward?

  A

  First, on Smelting & Lining next year: page 16 shows a sharp drop in 4Q, even just on profit. We anticipated this because of special demand and shipping constraints, so we deliberately loaded as much as possible into 3Q. That process is not finished. Some volumes could not be shipped and will carry over into next year, but this will likely conclude in 1Q. On whether war-related special demand will really end, my view differs slightly. A customer's plant was partially damaged by an Iranian missile attack, and smelting stopped midway because power was cut. Cathodes that would normally last one or two more years under steady operation were interrupted. Carbon materials exposed to heat are very sensitive. Continuing to use cathodes that have been shut down and reheated causes problems in the smelting process itself. So these well-funded customers are considering when to replace them. It is earlier than normal, but the thinking is emerging that replacing them is better than carrying quality risk, and that is translating into demand. Part of this could be called war-related special demand, but we think it may continue for a while into next year. However, please understand that I cannot state definitively at this stage that it will continue.

• Q

  So rather than falling, Smelting & Lining should see a certain level of demand, and the other businesses do not look too bad either?

  A

  I think that is fair. However, I cannot officially say at this stage that next year's numbers will be dramatically better than this year's.

• Q

  On carbon black, page 16 shows a JPY 1.2B improvement from 2Q to 3Q. What was behind that?

  A

  I do not have all the details in mind, but carbon black did indeed rise from Q2 to Q3. One factor is that US tariff issues put Thai exports into a downtrend, and tire makers redirected those volumes to regions outside the US. Another is that customers built up extra inventory as a precaution during the relocation from the old plant to the new one. There may be nothing else significant. Raw material costs rose from Q2 to Q3, so the price hedging mechanism may also have contributed. We will follow up with the details later.

• Q

  Listening to your comments, carbon black conditions do not sound great, yet profits are strong, which seems inconsistent. Is it being boosted by one-offs?

  A

  No. In my view, carbon black is a business that generates steady, reliable profits rather than one with large swings. When raw material costs rise, we have mechanisms to hedge them, albeit with a slight time lag. Beyond that, the question is how to handle freight and similar items. It is one of the industries where formula-based pricing is well established, so we are not particularly worried.

• Q

  A competitor has said some US carbon black plants are partially shut down. Can you confirm that is not the case for you?

  A

  We have not shut down any plants. Who has announced shutdowns? (After being told that Orion's earnings commentary mentioned a shutdown somewhere.) Perhaps they mean shutdowns could happen in the future. I believe Orion has largely completed its environmental investments as well. As with us and Cabot, every company has spent enormous sums on this, so I do not believe any plant is currently shut down.

• Q

  Where do carbon black price negotiations for next year stand?

  A

  They are just getting started.

• Q

  Please comment on the needle coke environment. Competitors say market prices have risen sharply to USD 1,700 or USD 2,000. Are you securing adequate spreads in response? There is also talk that refinery utilization is so high that decant oil is scarce, leading to needle coke shortages. What is the situation?

  A

  We do not see a needle coke shortage yet. However, we do think needle coke prices have been rising on a quarterly basis and will continue to rise. Here too, we have formulas with customers, so raw material costs are hedged automatically. What we need to consider is the lag before the hedge kicks in. I have instructed that we use this opportunity to shorten it. We should assume needle coke prices will certainly rise going forward.

• Q

  So spreads are adequate and trending better?

  A

  Yes, you can view it that way.

• Q

  What is the inquiry pipeline for industrial furnaces, and what is your outlook for next year based on current visibility?

  A

  As Hirai mentioned at the outset, industrial furnaces for 2027 are completely sold out, and we cannot take new orders. We are currently taking orders for 2028. We expect conditions to remain quite favorable, so you can have high expectations.

• Q

  How do you view the results of the recent US midterm elections, and what positive or negative impacts do you see on your business environment?

  A

  Politics is not my strong suit and I am not a politician, so this is difficult. In the short term, tighter regulation and various other developments cannot be ruled out. But in the bigger picture, I think the direct impact on us is small. For example, AI-related share prices, including ours, have been hit hard, and some may wonder whether that will persist. But even the winning side has plenty of opponents; that is how the world works, and there is no need to be overly negative. Also, the US has become quite dysfunctional, and it is the people's responsibility to restore it. In that sense, there is no need to be overly sensitive. My one concern is oil. If prices surge and stay well above USD 100 per barrel, I think that will affect the economy.

• Q

  Solid SiC in Fine Carbon is already outselling last year with strong orders. Will this continue beyond next year, or are there signs of slowing?

  A

  We expect this environment to continue for some time. We have invested significantly ahead of demand to build capacity, but we think that alone may not be enough. We need to assess the environment more closely and then decide how to respond.

• Q

  You noted that industrial furnace orders are also very strong. Are you considering strengthening capacity to handle the order volume?

  A

  This shows the same trend as solid SiC. We are short-handed and cannot keep up. Customers will not stay quiet if we cannot deliver, so I think we will have no choice but to expand capacity.

• Q

  You said AI investment will not stop despite the midterm results. Could you elaborate on the reasoning?

  A

  President Trump talked about AI constantly and tried to push it forward quickly. There were many opponents. But I believe AI technology must be pursued to restore the US economy. In doing so, there will be temporary obstacles, including local opposition and various regulations. Those need to be addressed with explanations that convince the public. The counterpart is China. This is essentially a US-China economic war, and without it, the US will clearly fall further behind China. So I believe it will have to continue.

• Q

  For the Japanese carbon black market, what are current conditions in demand and competition, including imports, and what is the outlook?

  A

  There has been little major change in domestic carbon black. In more detail, for 10 or 20 years the prevailing view was that production and sales would decline by about 1% a year. In reality, that did not happen; volumes neither grew nor shrank and stayed roughly constant. However, compared with last year and the year before, volumes have declined slightly. This year, a declining trend is also emerging. The cause is imports, from China and India. As I also chair the industry association, I said at a recent meeting that we cannot simply sit idly by and will likely need to file an anti-dumping case. Discussions on starting preparations are under way within the association. Naturally, this must proceed in consultation with the government. We tried something similar about 20 years ago, but neither the government nor others moved much. Today the government's thinking is completely different. It will take some time, but I believe we have no choice, we will do it, and we must do it.

• Q

  I recall similar comments at the association's general meeting. Have you actually taken action, such as requesting an investigation?

  A

  Things are starting to move, but not yet in earnest. To hold proper discussions with the government, we need to come with numbers and solid data. Please understand that we are preparing to do so, and have partly started.

• Q

  On industrial furnaces, am I right that you are basically considering a capacity expansion? Can you comment on the timeline?

  A

  That is correct, and we are doing it. Please consider it already under way.

• Q

  So you are proceeding with capital expenditure?

  A

  Yes, we are.

• Q

  Can you share which plant and the completion timing?

  A

  This business has two plants, one in Sendai and one in Shiga. Industrial furnaces have been getting larger, so we have to center the expansion on Shiga, which has more space. Please consider that we have already begun work there.

• Q

  When is it scheduled to be completed?

  A

  We have not yet announced a date, but generally this kind of project takes about 18 months once started.

• Q

  So roughly 18 months from now?

  A

  Yes.

• Q

  Earlier you mentioned considering another capacity expansion. Is that for SiC focus rings or cathodes?

  A

  Not cathodes. It is for SiC focus rings.

• Q

  You are considering expanding SiC focus ring capacity. If possible, could you comment on which plant and the target timing?

  A

  We have not announced it yet, so it is hard to be specific. But we expect to make it public in the not-too-distant future, either within this year or in January next year.

• Q

  Which plant currently produces them?

  A

  Korea.

• Q

  So you are basically considering Korea?

  A

  We are considering it including the head office.