Review of Operations: Specialty Group

Results Overview

In fiscal 2016, Specialty Group net sales decreased 0.2% from a year earlier, to ¥174.5 billion (US$1.5 billion). That constituted 23.2% of Tosoh’s consolidated net sales, up from 21.6% in fiscal 2015. Group operating income climbed 9.1%, to ¥32.7 billion (US$290.2 million), and accounted for 47.1% of Tosoh’s consolidated operating income, compared with 58.3% a year earlier. The group’s operating margin was 18.7%, an increase from 17.1% in fiscal 2015.

Shipments of ethyleneamines by the Specialty Group decreased in fiscal 2016 as Tosoh’s competitors expanded their ethyleneamine production capacity, exacerbating an imbalance in favor of supply over demand. Overseas, the group also faced increased prices for its ethyleneamine products because of a weak yen.

Among the group’s separation-related products, shipments of liquid chromatography packing materials rose. The group’s diagnostic-related products experienced a similar increase in shipments of in vitro diagnostic reagents. Its shipments of high-silica zeolites (HSZ) likewise increased, thanks to a boost in production capacity in fall 2014, as did its shipments of zirconia for dental applications.

Capital Investments

During the year under review, Tosoh began increasing zirconia powder production capacity at its Nanyo and Yokkaichi Complexes in response to growing global demand, particularly for dental and fashion parts applications. Construction to expand capacity for producing zirconia powder at the Nanyo Complex, in Shunan City, Yamaguchi Prefecture, commenced in June 2015 and was completed in November 2015. At the Yokkaichi Complex, in Yokkaichi City, Mie Prefecture, the construction of zirconia production facilities began in February 2016 and is slated for completion in October 2016. These expansions should boost Tosoh’s zirconia production capacity around 30% at an investment cost of about ¥3.9 billion.

In the meantime, the Specialty Group launched the commercial production of zirconia powder at the Nanyo Complex’s new facilities in March 2016. It is scheduled to do so in April 2017 at the Yokkaichi Complex.

Elsewhere, work is progressing well with the construction of a reaction tower for the Specialty Group’s bromine operations. When completed in fiscal 2018, the state-of-the-art tower will lower production costs and raise competitiveness for Tosoh’s bromine business.

Network Expansion

In fiscal year 2015, the Specialty Group’s Bioscience Division set up Tosoh Europe International N.V., in Belgium. It then opened a branch office of this new company in Dubai, in the United Arab Emirates, to better serve customers in the Middle East and Africa.

Early in fiscal 2016, Tosoh expanded and strengthened its bioscience operations by acquiring Indian in-vitro diagnostics company Lilac Medicare Pvt. Ltd. Lilac’s products have become well known throughout India since that company’s establishment in 1997. And Tosoh is drawing on the renamed Tosoh India Pvt. Ltd.’s domestic network and product familiarity to boost its share of the growing Indian market. Specifically, Tosoh is using the Specialty Group’s immunological and diabetes diagnostic analyzers as stepping-stones toward establishing a firm position in India for its bioscience business.

Organic Chemicals

The Specialty Group has three strategic objectives for its organic chemicals business segment. The first is to boost profitability by reinforcing the production structure and by enhancing cost-competitiveness in ethyleneamines, bromines, and flame retardants. The second is to create new business by capitalizing on growing demand for more environmentally friendly polyurethane amine catalysts, heavy metals treatment agents, and industrial cleaners. The third is to build a superior technological position as a supplier of organic electroluminescent materials.

Tosoh is one of the world’s largest producers of ethyleneamines, and it exports around 80% of its 71,000-metric-ton annual ethyleneamine output. To reinforce its competitive position, in fiscal 2017 and beyond the company will review its manufacturing processes and setup for ways to increase its production of high molecular weight amines. That increase will contribute to a more stable supply of higher amines in the absence of global production capacity increases by competitors who use the same ethylene dichloride production process to make ethyleneamines as Tosoh. At the same time, Tosoh will prioritize lowering its ethyleneamine-related logistics costs and inventories.

The Specialty Group, therefore, will continue its shift to high molecular weight amines while enlarging its ethyleneamine derivative network globally. As part of that drive, it will act on proposals for systems to better produce the isocyanates and polyols for its RZETA^® polyurethane catalyst operations that are so key to the automotive and furniture industries. It will also bolster the formulation capacity of its Toyocat facilities.

To ensure long-term growth for its eco-business products and services, the Specialty Group has a twofold business strategy. It will reinforce its competitiveness in top-of-the-line brands for the environmental and recycling market by continuing to make the piperazine-based agents that are its core environmental product line. It will also look beyond its domestic market to the emerging markets of China and other Asian countries, where rapid economic development poses pressing environmental issues.

Advanced Materials

Zeolites

Tosoh offers a broad lineup of high-quality synthetic zeolite products, consisting of the high-silica zeolite HSZ series and the zeolite molecular sieve Zeolum^® series. The priority for the Specialty Group is to continue meeting steadily growing demand for HSZ products from the automotive, oil and energy, and environmental industries. The group is boosting HSZ production capacity and developing HSZ innovations to accommodate rapidly evolving trends in industry requirements and environmental regulations. And Tosoh is constructing an HSZ manufacturing plant in Malaysia. That plant is scheduled for completion in late calendar year 2016, and sales are anticipated to begin in mid-2017. This will be the first production facility that Tosoh has built in Malaysia, and it will boost the company’s HSZ production capacity 40%.

Ceramics

The goal of the Specialty Group’s zirconia powder operations is to maintain top share of the global fine ceramics market. The group established Tosoh as a major player in the dental materials market when in 2011 it introduced Zpex^®, a translucent, colored, high-strength grade of zirconia. In December 2014, it furthered Tosoh’s presence in dental materials with the launch of Zpex Smile, a high-translucency zirconia for front teeth.

Zirconia’s popularity in fashion parts for wristwatches, car accessories, and mobile phones is another opportunity for sales and profits growth for Tosoh’s fine ceramics.

Battery Materials

Tosoh is the world’s largest producer of electrolytic manganese dioxide (EMD) and a major supplier of EMD to the conventional battery market globally. And the Specialty Group helps maintain and expand the company’s competitive position. The EMD market is mature and competitive, but there are opportunities for growth.

The Specialty Group, meanwhile, is establishing itself as a principal producer of manganese-based cathode materials for the lithium-ion secondary battery market. Demand for lithium-ion secondary batteries is anticipated to grow substantially, and the expanding market for electric vehicles is undeniably a market where Tosoh can contribute. In addition, rising standards of living, improving infrastructure, and growing personal incomes in emerging countries are expanding purchases of handheld, or portable, electronic devices, for which batteries are essential, presenting Tosoh with yet more opportunity to expand its business in battery materials.

Electronic Materials

Thin-film materials and quartz are other areas where the Specialty Group is expanding operations to meet growing demand. The semiconductor market should grow as demand rises for handheld devices, electronics in automobiles and other consumer products, and digital information technologies. So the Specialty Group is implementing measures to serve the next-generation memory and printable electronics markets and is developing and expanding sales of products for atomic layer deposition and coating applications.

Bioscience

Separation and Purification

Tosoh is committed to a major presence in the global bioscience market. Through its Specialty Group, it has established its bioscience brands in the leading markets of Japan, the United States, and nations in Europe. The group now targets high-growth markets in China, India, Southeast Asia, and the Middle East. Over the medium term, the focus is on selling high-performance liquid chromatography (HPLC) separation columns and Toyopearl separation media. Measures in fiscal 2015 to develop and launch grades of separation media and columns for ultrahigh-performance liquid chromatography (UHPLC) systems bore fruit in fiscal 2016 and will be followed by efforts to increase Tosoh’s market share of the UHPLC market for years to come.

Globally, the Specialty Group seeks to increase its share of the separation media market by leveraging the popularity of its Toyopearl AF-r Protein A HC-650F product. The group developed this grade of Toyopearl to address biopharmaceutical industry demand for antibody purification media. Another group offering is Toyopearl Sulfate-650F, a separation and purification medium that Tosoh commercialized in October 2015.

Clinical Diagnostics

Tosoh continues to build its worldwide presence in clinical diagnostic systems. The company has an especially positive reputation in the global diabetes market thanks to a line of Specialty Group glycohemoglobin (GHb) analyzers. And the group plans to increase Tosoh’s share of this approximately ¥50 billion and rapidly growing market.

The Specialty Group’s plans include producing compact, reasonably priced GHb analyzers suitable for developed and developing countries and expanding the support network for all of its GHb analyzer models. Its plans also encompass a 30% expansion of analyzer-related reagent production capacity scheduled for completion in October 2016.

The global molecular testing market, too, is growing steadily and is estimated to be worth over ¥500 billion. Market growth is particularly strong in emerging countries, where molecular testing is most valued in testing for infectious diseases, for which Tosoh’s nucleic-acid amplification testing products are particularly useful. The group has made steady inroads in the market, especially with its next-generation TRCReady-80 system.

Tosoh’s medium-term business plan targets ¥40 billion in operating income for the Specialty Group and an operating margin of 21.7% by fiscal 2019. These aims represent increases of ¥7.3 billion and of 3.0 percentage points, respectively, over fiscal 2016.

The three-year strategy for advanced materials is to develop new grades of and to boost production capacity for HSZ. Initiatives include improving the development system and building an HSZ production facility in Malaysia. Construction of the Malaysian plant is scheduled for completion in late 2016. Sales of its HSZ should start in mid-2017.

The zirconia product strategy is to continuously market distinctive grades while adding capacity. The Specialty Group will work on increasingly translucent zirconia dental materials and on accelerating development to meet customer needs. Tosoh, meanwhile, will complete a production capacity upgrade at the Yokkaichi Complex in fall 2016.

In EMD, quartz glass, and sputtering targets, the Specialty Group will focus on advanced functionality. This includes heightened differentiation in Tosoh’s EMD. It also includes heightened competitiveness in quartz glass by reducing manufacturing costs and developing new materials. The group will also emphasize sputtering targets for touch screen applications and the development of high-performance products. Touch screen demand should grow as emerging economies follow developed countries in expanding smartphone usage.

The strategy for the group’s organic chemicals operations in ethyleneamines, urethane foaming catalysts, and bromine and flame retardant product lines is to improve profitability and to stabilize new business. The Specialty Group is integral to Tosoh’s aim of significantly improving profitability by shifting to high molecular weight amines. At the same time, it will focus on sales of urethane foaming catalysts, most notably highly functional products for Toyocat, and on bolstering Tosoh’s marketing in European nations and the United States for RZETA. Its efforts in bromine and flame retardants will be furthered by Tosoh’s investment in more efficient bromine production facilities, which are slated for completion in spring 2017.

Overall, the strategy for bioscience instruments, columns, separation media, immunoassay analyzers, and reagents is to expand markets through R&D and acquisitions and to cultivate demand in emerging economies. Initiatives include acquiring new technologies and products. The Specialty Group will develop columns and separation media for the biopharmaceutical market and increase production capacity for Toyopearl separation media. It has, meanwhile, complemented its fiscal 2015 launch of its diagnostic AIA^®-CL2400 automated immunoassay analyzer with the compact AIA-CL1200. The group will expand distinctive reagents in growth areas and cultivate the Indian market, through Tosoh India, helped hugely by Tosoh’s completion of its reagent production capacity enhancement in October 2016 to 30% beyond current capacity.