Financial Summary

Recent Updates

Highlights

On January 12, 2012, Daiseki released Q3 FY02/12 results: click here to go directly to Q3 FY03/12 results.

(For original Japanese-only release in PDF format please click here.)

For corporate releases and developments more than three months old please refer to the News & Topics section.

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Trends & Outlook

Quarterly Trends

Q3 FY02/12 Results (Announced on January 12, 2012; please refer to preceding tables)

The company left its full-year forecast unchanged.

Cumulative Q3 sales were up 21.4% YoY at 28.4 billion yen; operating profit grew 13.5% YoY to 4.9 billion yen; recurring profit rose 13.3% to 5.0 billion yen and net income came in at 2.8 billion yen, a 9.7% YoY gain.

Sales came in 4.4% above the company forecast of 27.2 billion yen, while operating profit was largely in line with the forecast of 4.9 billion yen. Looking at operating profit by group company, System Kikou beat its forecast significantly, but Daiseki Eco. Solutions and Daiseki Co. came in around forecast. Meanwhile, Daiseki MCR results were substantially below plan.

Going into Q4 FY02/12, Daiseki Co.'s performance was slightly below forecast, and Daiseki MCR's poor Q3 performance had run into Q4, the company commented. As for the full-year forecast, the company noted actual operating profit figures might come in a several tens of million yen below forecast.

The company made the following comments on its subsidiaries:

Daiseki Co.

• Supply chains have essentially recovered from the damage of the March 2011 earthquake and production at key domestic manufacturing industries, such as the auto sector, has recovered. However, the strong yen and problems in Europe have resulted in a drop-off in global demand and Japanese exports, while the electronics sector has also been shutting down domestic plants and relocating them overseas. As a result, the expected rapid recovery in orders the company had been expecting post-quake - driven by the rebound in the domestic manufacturing sector - turned out to be rather modest.

• While Q3 sales were in line with forecast, operating profit came in at just 1.4 billion yen vs. the 1.7 billion yen forecast.
• Auto production was temporarily hit by flooding in Thailand, but it began to recover from December 2011.
• As for the electronics industry, domestic production levels have remained sluggish due to domestic factory closures and a shift to overseas production.
• Looking at results by facility, the Kanto, Chiba, and Kyushu facilities all posted record high cumulative Q3 sales. The Kanto and Chiba sites benefited from demand related to March 2011’s earthquake in the Tohoku region. Both facilities also have further potential for gaining market share. As for the Kyushu site, the driver behind its solid performance and scope for further growth is its wide span of business and capacity to undertake work from a number of industries.
• The Kanto and Chiba facilities both continued to increase their market shares. The Fukushima nuclear disaster raised concerns over radioactive concentrations in industrial waste, and incineration of such waste has become more difficult. Therefore, industrial waste disposal has shifted away from incineration, and the company has started to receive a number of requests for its combination chemical pretreatment and biologically-activated sludge treatment for waste disposal. Industrial waste incineration has become more difficult due to a shortage of disposal sites for the ash (with elevated radioactive concentrations) that are a byproduct of the process. The company was anticipating thus for its Kanto and Chiba facilities to continue raising their market shares going forward.
• Sales at the Kansai and Hokuriku facilities were sluggish. While the Kansai facility still has room to grow market share performance was hit by a slump in conditions for the electric machinery industry - its core client industry.
• Flooding in Thailand hampered automobile production, which in turn temporarily affected the company’s Nagoya facility (the auto sector being the facility's chief client industry), but the site was recovering from this.
• December 2011 sales were 2.1 billion yen, around 70 million yen below forecast. The company anticipates that January and February 2012 sales will also come in just below plan (January: 1.7 billion yen, February: 1.8 billion yen).

Daiseki Eco. Solutions

• The domestic market for treating contaminated soil bottomed out in 1H FY02/11 and has been recovering since (led by a gradual rebound in the real estate sector in the Tokyo Metropolitan area). Capitalizing on this and synergies with the group, the unit reported significantly higher sales and profits for the period.

• Among the group companies, Daiseki Eco. Solutions was expected to benefit most from quake reconstruction-related demand, however, it is likely this demand won’t begin to kick in properly until FY02/13 (particularly in 2H).

MCR Daiseki

• The utilization rate at the business has continued to run at 100%. Nonetheless, domestic lead prices have fallen substantially owing to the strength of the yen and a significant drop in LME lead prices since September 2011. Consequently, Q3 profit was down vs. Q2.

• Margins fell, squeezed by lower selling prices while procurement prices did not fall as steeply by comparison. Consequently, 3Q saw an operating loss, and a loss was also expected for Q4.

System Kikou

• While fall and winter are usually quite periods for the business, the unit has continued to post results above plan.

1H (Q2) FY02/12 Results (Announced on October 11, 2011; please refer to preceding tables)

Sales were up 27.6% YoY at 19.2 billion yen and beating its forecast (of 18.0 billion yen) by 6.7% due to:

• Growth in the company’s mainstay industrial waste disposal and recycling business (at Daiseki Co.)
• Increased demand for soil contamination research, analysis and treatment (at Daiseki Eco. Solutions)
• The effects of consolidation of the System Kikou business

Operating profit increased 22.7% YoY to 3.5 billion yen trumping the company forecast of 3.2 billion yen by 9.0%. Looking at operating profit by segment, Daiseki Eco. Solutions, MCR Daiseki, and System Kikou all beat company projections by a wide margin, while Daiseki Co.’s figures were roughly in line with forecast. The company made the following comments on its subsidiaries:

Daiseki Co.

• Its three facilities in Kanto, Kyushu and Chiba posted record high 1H sales. The Kanto and Chiba facilities benefited from demand related to March 2011’s earthquake in the Tohoku region. Both facilities also have further potential in terms of gaining market share. The Kyushu facility’s potential, and driver behind its solid performance, is its wider scope of business and capacity to undertake work from a number of industry categories.
• Performance at the Kansai and Hokuriku facilities came in below plan. The Kansai facility still has room to grow market share, but performance was hit by the slump in conditions for the electric machinery industry, which is its core client area.
• Results at the Nagoya facility came in pretty much in line with forecasts. Performance at the facility has been improving led by its main clients in the automobile industry.
• There was an approximate 400 million yen boost from quake-related sales, which offset the negative impact from a fall in domestic manufacturing.
• Excluding soil contamination-related sales (of about 800 million yen), 1H sales (including the impact from March 2011’s earthquake) were 11.9 billion yen, which was slightly below the 12.0 billion yen forecast. With regards to soil contamination-related sales, in a number of cases Daiseki effectively acts as an agent for Daiseki Eco. Solutions but gross profit margin for Daiseki in these instances is low.
• The decline in gross profit margin was due to soil contamination related sales, after backing out sales from this area gross profit margin came in roughly in line with forecast at just over 37.0%.
• September sales were 1.9 billion yen - about 130 million yen below forecast.

Daiseki Eco. Solutions

• Capex in the domestic real estate, construction and manufacturing industries bottomed in 1H FY02/11 and since then the recovery in these areas have contributed to earnings.
• Given the improvement in the external environment, as outlined above, results came in above expectations.
• On October 11, 2011, the company established a Tohoku branch in Sendai City as a new sales base. Among the group companies, Daiseki Eco. Solutions was expected to benefit most from quake reconstruction-related demand, although it likely this demand won’t properly begin to kick in until FY02/12 and beyond.

MCR Daiseki

• The utilization rate at the business has returned to 100% after lead recycling was stopped for 10 days for safety inspections immediately after March 2011’s earthquake in the Tohoku region, and since then MCR’s results have returned to roughly tracking lead prices.
• LME lead price fell sharply in June, 2010 (to 1,559 dollars/ton), but have been in uptrend since: the average price over FY02/11 was 2,206 dollars / ton while the average price for Q1 FY02/12 was 2,595 dollars/ ton and in Q2 it was 2,564 dollars/ ton.
• Higher-than-forecast lead prices (at 2,550 dollars/ton) meant results came in above the company’s projections.
• At the start of September, lead prices dropped sharply, falling below the 2,000 dollars/ton mark. While these moves are difficult to deal with in the short-term, the company was looking to raise the proportion of resources it can source from new channels, such as from non-automotive batteries, and thus reduce its purchase costs.

System Kikou

• The unit became fully consolidated from September 2010.
• Planned tank cleaning and washing equipment exports were postponed until after Q2 FY02/12, and have now been concluded.
• Orders related to reconstruction activities began after March 2011’s earthquake in the Tohoku region.
• Exports of fuel tank cleaning equipment were profitable with operating profit coming in well above projections, and the segment had already hit its full-year forecast by 1H.
• The segment received some orders related to post-earthquake reconstruction.
• Synergies with Daiseki Co. and other group companies were worth approximately 100 million yen in 1H and are expected to reach about 300-400 million yen for the full year.

The company left its full-year forecast unchanged, noting that 1H results were not significantly above forecast and the outlook for the near-term macro-environment was unclear. However, focusing on trends in mining and manufacturing production only, then it is likely Daiseki Co.’s results will improve in 2H and Daiseki Eco. Solutions’ performance will also continue to steadily recover, the company said. Looking at likely Q3 performance, it is worth bearing in mind that lead prices fell sharply in September 2011 (dropping below the 2000 dollar/ton mark) and the yen continued to stay strong. Consequently, MCR may balance its revenues and expenditures, but System Kikou is unlikely to generate much profit during the off-season for projects.

Q1 FY02/12 Results

On July 11, 2011, the company announced Q1 FY02/12 results (see table above).

Sales increased 21.9% YoY to 9.1 billion yen driven by:

• Growth in the company’s mainstay industrial waste disposal and recycling business (at Daiseki Co.)
• Increased demand for soil contamination research, analysis and treatment (at Daiseki Eco. Solutions)
• The effects of consolidation of the System Kikou business

In addition, operating profit rose 7.1% YoY to 1.6 billion yen lifted by higher sales; this figure was roughly in line with company forecasts. Looking at operating profit at the segment-level, both Daiseki Eco. Solutions and Daiseki MCR beat the company’s forecast, on the other hand, System Kikou’s performance came in below expectations and Daiseki Co.’s figures were in line with forecast.

The company made the following comments on its subsidiaries:

Daiseki Co.

• The company was particularly busy in the Kanto region of eastern Japan as it worked to support factory recovery efforts in the quake-affected Tohoku and Kanto regions.
• Meanwhile, supply chains disruptions owing to quake-damage affected order volumes and demand from manufacturers in the Kansai and Chubu regions of Japan, particularly among automobile and electronics makers.
• Due to the quake-related factors outlined above offsetting each other results came in on forecast.
• There were concerns Q1 results would come in below forecast due to the effects of March’s Tohoku earthquake, but results actually were largely in line with projections.

Daiseki Eco. Solutions

• Capex in the domestic real estate, construction and manufacturing industries bottomed in 1H FY02/11 and since then the recovery in these areas have contributed to earnings.
• Given the improvement in the external environment, as outlined above, results came in above expectations.
• Reconstruction-related demand had yet to materialize.

MCR Daiseki

• The utilization rate at the business has returned to 100% after lead recycling was stopped for 10 days immediately after the earthquake for safety inspections and since then MCR’s results have returned to roughly tracking lead prices.
• LME lead price fell sharply in June, 2010 (to 1,559 dollars / ton), but have been in uptrend since: the average price over FY02/11 was 2,206 dollars / ton while the average price for Q1 FY02/12 was 2,595 ollars/ ton.
• Higher-than-forecast lead prices meant results came in above the company’s projections.

System Kikou

• The unit became fully consolidated from September 2010.
• Planned tank cleaning and washing equipment exports were postponed until after Q2 FY02/12 and thus came in below forecasts.
• Orders related to reconstruction activities began after March 2011’s Tohoku earthquake.

The company maintained its 1H and FY02/12 forecasts. However, concerns that March’s Tohoku earthquake would impact Q1 results proved unfounded with performance coming in as planned. Moreover, SR Inc. thinks there is potential for the company to beat its FY02/12 forecasts given a high possibility that reconstruction demand in 2H FY02/12 will exceed the company’s projections.

Full Year (FY02/12) Outlook

The effects of the earthquake

The company said the immediate negative impact from March 11’s Tohoku Earthquake facilities beyond a 10-day stoppage at Daiseki MCR’s melting furnace was minimal. However, as the longer-term impact remains unknown, the company has not factored in the effects of the earthquake into FY02/11 forecasts.

Based on SR Inc. company interviews the positive and negative effects of the earthquake are summarized below:

Positives

• Demand for Daiseki industrial waste disposal services. The company saw increased demand immediately after the earthquake. Daiseki’s Kanto operations (plus its Hokuriku facilities) carried out retrieval of leaking oil and chemical agents in factories in the Tohoku and Kanto region that suffered quake and tsunami damage.

• Demand for System Kikou tank cleaning services. About two weeks after the earthquake System Kikou started to receive requests to deal with fuel tanks that had been affected by the earthquake.

• Demand for Daiseki Eco. soil contamination countermeasures. The Company said it anticipated increased requests from summer 2011 for treatment of soil contaminated by oil, heavy metals, and Volatile Organic Compounds (VOC) left after debris/conventional waste is removed (note: agricultural lands are not covered by the Soil Contamination Countermeasures Law, and so do not fall within the scope of Daiseki Eco.’s business).

Negatives

• Downward pressure on domestic manufacturing due to rolling blackouts and parts shortages.

While the scope and duration of the earthquake’s impact on business are unclear, the Company estimates negative effects will be largely felt in Q1 FY02/12, but from Q2 onwards the positive impact will be supersede any negatives.

Corporate forecast for FY02/12

The company forecast assumes there will be a gradual and continuing economic recovery and did not factor in any impact from Tohoku Earthquake. While there was some variance in performance among the group companies during FY02/11, all of them are forecasted to experience YoY operating profit growth for FY02/12. The company comments regarding capex for its subsidiaries are as follows:

Daiseki Co.

• Service requests for intermediate industrial waste disposal and recycling are expected to rise due to gains in market share, and a domestic manufacturing recovery.
• Operating profit margin is expected to remain about the same as FY02/11’s 23.8%. However, due to high operating leverage if sales hit forecasts then operating profits may come in beyond projections.

Daiseki Eco. Solutions

• Forecasts based on the assumption a recovery in construction and real estate, plus private investment will continue.

Daiseki MCR

• Both sales and profits are expected to increase based on assumptions regarding LME lead prices.
• LME lead prices for FY02/12 is expected to be an average 2,550 dollars/ton (vs. 2,206 dollars/ton in FY02/11)

System Kikou

• The forecast is for the unit to generate 2.5 billion yen in sales, which is above its average annual sales volume between FY12/07-FY12/09 of 2.2 billion yen. The forecast number takes the average past value plus approximately 350 million yen in sales from exports of fuel tank cleaning equipment to China and oil producing nations based on past export orders.
• Operating profit margins is expected to be 6.5% vs. the average 3.6% margin between FY12/07-FY12/09.

Facilities investment

• 2.2 billion yen planned (vs. 1.7 billion yen in FY02/11)
• Breakdown is Daiseki Co. 1.6 billion yen; Daiseki Eco. 200 million yen; Daiseki MCR 272 million yen, and System Kikou 110 million yen.
• At Daiseki Co. the investment funds have been earmarked as follows: 261 million yen for the construction of a sludge plant at the Nagoya facility, 215 million yen for the construction of additional water treatment facilities at the Kanto facility, and 374 million yen for car/vehicle related expenses. Construction of the sludge plant at the Nagoya facility was planned for FY02/11 but was delayed until FY02/12.

Dividends

The forecast is for 20 yen per share (FY02/11: 20 yen/share. Please see “Dividends and Shareholder Benefits” document for details of dividend policy.)

Future Outlook

The company’s mid-term plan is to grow consolidated sales by approximately 12.7% annually from FY02/11 to FY02/14. Implied in the estimates are improving operating and net profit margins.

Daiseki plans to expand its facilities to handle the expected increase in processing volume. The company estimates that the Kansai facility will exceed capacity before FY02/13. Daiseki plans to expand in Kansai close to its existing facility. The company comments that it secured and completed the purchase of the land (about 3,000 tsubo, or 9,900 square meters) for the expansion in 2H FY02/11. The new facility will be at least the same size as the old one and the company expects it to be completed in FY02/13. In order to respond to growing demand in the region, the company plans to treat waste at Hokuriku and Nagoya facilities, which are located relatively close by, in the near future. As of FY02/11 Daiseki MCR was operating at nearly 100% capacity, but new plants are expected to go online by the end of FY02/13.

As of January 2012, the company remarked that posting a new high for operating profit in FY02/13 might be difficult. (The all-time high for operating profit was 8.2 billion yen back in FY02/08.) The company was targeting all-time high operating profit at the parent level (i.e., for Daiseki Co.) and was anticipating a YoY increase in profit at Daiseki Eco. Solutions and Daiseki MCR. Daiseki Co.'s performance is tied to macroeconomic conditions (specifically, trends in industrial production). The company believed the economic climate was very likely to improve in FY02/13 against the multiple difficulties of FY02/12, such as March 2011’s earthquake, the strong yen, the Eurozone crisis and flooding in Thailand.

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Business

Business Description

Daiseki is an environmental specialist focusing on recycling of industrial waste. The main business for the parent company is intermediate processing of liquid waste (waste oil, wastewater, sludge) and separation into reusable components that are then resold. The subsidiaries focus on lead recycling (automobile and industrial batteries) as well as soil treatment and environmental consulting.

The company has three divisions: Environmental Division, Petroleum Products Division, and Other. Sales in the Environmental Division are the overwhelming contributor to consolidated revenue.

Main Business Segments

Environmental Division (94.8% of FY02/11 sales)

The main activities in the Environmental Division are processing (recycling) of industrial waste and services related to contaminated soil. Waste processing is the company's core competence and biggest earnings driver.

Industrial Waste Processing

"Industrial waste" is defined as waste created as a byproduct of any industrial process (vs. generated by individuals). Japan classifies particularly harmful or hazardous waste as “special control industrial waste” (it can contain toxins or other dangerous compounds). After it has been generated, industrial waste travels through three phases: collection and transportation, intermediate treatment (processing to remove any dangerous components), and disposal (final materials are re-introduced to the environment in a non-threatening state). The main activities of the Environmental Division are the first two stages: collection and intermediate treatment.

The general approach to handling industrial waste is making it as small as possible before final disposal (landfills, typically). Reduction in size can be achieved in multiple ways, typically involving crushing, burning, or shredding; burning is the most popular method in Japan. Daiseki specializes in treating liquid industrial waste (such as sludge, waste oil, waste water and special control industrial liquid wastes), but also provides some solid waste recycling (specifically automobile and industrial batteries) through the subsidiary Daiseki MCR. Daiseki’s approach to waste processing is to recycle as much as possible, and has developed technological expertise to capture reusable components. Daiseki does not use incinerators at any of its facilities.

The breakdown of waste processed by Daiseki (parent basis) in FY02/11 was:

• Sludge: 17%
• Waste Oil: 34%
• Waste Acid: 17%
• Waste Alkali: 29%

Waste oil processing can take three main forms, based on the type of oil to be processed and desired output.

1. Lubricant oil. Impurities, degraded oil components, and other contaminants are filtered out of the oil, with only lubricant oil remaining for resale.
2. Recycling into fuel oil. Waste oil is treated to separate oil, water, and other particles, resulting in waste water (processed separately), sludge (semi-solid mixture of particles, also processed separately), and oil - free of contaminants and ready for sale as fuel.
3. Supplement fuel. Waste oil that can’t be recycled into lubricant or fuel oil undergoes a process (additional ingredients, etc.) rendering it fit for use as a secondary fuel (to be burned as a coal alternative or supplement).

Wastewater processing refers to the separation of water from oil and other contaminants. It’s a key step in the company’s other waste recycling activities (oil, sludge). Processing involves three steps:

1. Any oil in the mixture is separated, processed as waste oil, and made into a fuel.
2. Collected waste water undergoes neutralization process followed by coagulation and dehydration. It is then biologically treated with activated sludge and released into river or municipal sewage system.
3. The sludge resulting in the process of neutralization is dehydrated (dewatered), leaving a solid cake-like material which is recycled as a cement raw material.

Daiseki transportation trucks. Source: SR Inc.

Specific steps for sludge processing depend on the contents (sludge from construction activities is different from industrial sludge). After analysis and classification, different treatment options are:

1. Mixing in additional compounds to create supplement fuel.
2. Dehydration to separate water and solid material (typically destined for cement manufacturers).
3. Kneading in chemical compounds to transform the sludge into raw material for cement manufacturers.

Processing can involve an additional step: reclaiming certain recyclable matter, depending on the source and contents of the sludge.

Lead Recycling

The lead recycling business is the main focus of Daiseki MCR (lead batteries were approximately 90% of total FY02/10 volume; solid electronics or similar waste the remainder). Most of the batteries are from automobiles (70%), the others mostly from industrial equipment like backup generators, telecommunication equipment, etc. Processing involves separating lead from other parts of the battery (plastic, internal liquid, etc), most of which can be recycled. The liquid waste (acidic wastewater) is processed and treated. Lead and plastic are then resold.

The company estimates Daiseki MCR’s share at approximately 5% of the domestic market. It is operating at full capacity (as of FY02/11). The plan is to expand capacity by end-FY02/13 (assuming no delays in licensing). Increasing the facility size should have a material impact on consolidated profit margins relatively quickly – the company notes that new waste processing facilities typically require a few years to reach a steady capacity vs. one year for Daiseki MCR. The gross profit margin is somewhat lower than the main waste recycling business (see table above); unlike the main waste recycling business, battery recycling is not seasonal.

Contaminated Soil

The company provides services related to contaminated soil through the Daiseki Eco. Solutions subsidiary. Services include site analysis, testing, decontaminating affected soil, and recycling contaminated soil. Environmental surveys are typically required when factories close or relocate (ensuring no contaminants are left behind), property is redeveloped, etc. The company has recycling centers in Nagoya, Yokohama, and Osaka, together capable of handling a total of 1 million tons of soil per year.

Daiseki Eco. Solutions’ soil processing techniques include recycling (components from contaminated soil become raw material for cement manufacturers), hot soil remediation (removing contaminants via heat exposure at the company’s Nagoya center), and on-site remediation (decontaminating soil without extraction).

Tank Cleaning

The company via its System Kikou unit offers cleaning services for large tanks, pipes and various plant facilities. It has developed a washing technology for large oil tanks called COW (Crude Oil Washing) that is superior to traditional manual methods for cleaning tanks, and as of February 2011 System Kikou boasted nearly 60% of the large tank washing market in Japan.

System Kikou became a fully owned subsidiary in September 2010 and it expects to be able reap the following synergies from the unit from February 2012 onwards:

• System Kikou will compliment Daiseki's small and medium-sized fuel storage tank washing business.
• System Kikou will be able to offer VOC gas recovery services (i.e. the collection of large quantities of VOC gases which are released while large tanks are open) to Daiseki's existing customers (electrical power companies, iron producers, etc.).
• Daiseki Co. will be able to recycle sludge produced by System Kikou’s tank cleaning into fuel.
• Daiseki Eco. Solutions will be able to carry out soil contamination surveys and treatment on sites after removing old oil tanks.
• System Kikou should see its overseas business strengthen, either by exporting cleaning equipment to China and oil-producing countries, or by providing large-tank cleaning services directly in those markets.

Petroleum Products (5.1% FY02/11 sales)

The petroleum products segment encompasses manufacturing and sales of industrial petroleum-based products (lubricants, anti-rusting agents). The segment is minor, with little impact on top-line results.

Main Facilities

Daiseki treatment facility. Source: SR Inc.

Daiseki parent has 6 main recycling works, located near the major industrial areas (Kanto, Chubu, Kinki, Kyushu). All facilities are ISO 14001 certified and licensed to recycle and treat major types of industrial waste.

Proximity to clients has an impact on cost (see Business model); the company’s facilities are located in areas that generated approximately 82% of total industrial waste in Japan during 2008 (data according to the Ministry of the Environment). The company’s plants are highly accessible by major transport links; additionally, 4 of the company’s 6 main facilities (Kyushu, Kansai, Hokuriku, and Chiba) are directly accessible by water.

• Nagoya recycling works – opened in 1963 (oldest facility), handles the most waste in the company’s facility network (quantity and variety); total size: approximately 46,000 square meters. Serves the Chubu area (generated 15.6% of industrial waste in 2008).

• Kansai recycling works – opened in 2002; wastewater, waste oil, and sludge capabilities; total size: approximately 12,000 square meters (biggest recycling facility in Kansai as of 2010). Serves the Kinki area (generated 14.4% of total industrial waste in 2008). As of FY02/10 the plant was operating at approximately 80% capacity, according to the company.

• Kyushu recycling works – opened in 1982; equipped to handle both liquid waste and sludge; total size: approximately 54,000 square meters. Serves the Kyushu area (generated 13.0% of total industrial waste in 2008).

• Hokuriku recycling works – opened in 1973; handles multiple types of industrial waste (liquids, some solids such as glass and concrete); total size: approximately 18,000 square meters. Along with the Nagoya recycling works, serves the Chubu area.

• Kanto recycling works – opened in 1990; equipped to recycle liquid and some solid waste; approximately 47,000 square meters. Serves the Kanto area (generated 27.4% of total industrial waste in 2008). The company indicated that the plant has sufficient capacity to roughly double processing (as of FY02/10).

• Chiba recycling works – opened 1997; approximately 7,000 square meters; focuses on oil recycling. Along with the Kanto recycling works, serves Kanto.

The average facility cost for industrial waste processing is about 1 billion yen (with smaller facilities costing from 500 million yen and larger – up to 2 billion yen). Facilities are typically profitable within the first 3 years of use; with a payback period of less than 7 years (15-18% ROI). The company uses the payback period as a decision-making criterion.

In terms of utilization and room to grow, the company estimates that the current facilities have capacity to generate up to 30 billion yen of revenue (parent basis).

Daiseki Eco. Solutions Facilities

• Recycling centers in Nagoya, Yokohama, and Osaka

Daiseki MCR Facilities

• Headquarters and factories in Tochigi prefecture

System Kikou facilities

• Tomakomai, Kanto, Chubu, Shikoku are operation centers and Yokkaichi is a materials center

Research and Development

Daiseki parent has R&D facilities in all its works; research focuses on improving the recycling (recovery) technology and expansion of treatment methods for handling complex industrial waste. As of FY02/11, the company had 50 personnel dedicated to R&D.

Business Model

The main components of the company’s sales are recycling and waste processing (minor revenue streams include product sales in the petroleum products segment). Prices that Daiseki parent charges for recycling vary for each client, and are largely based on treatment costs (easily recyclable materials cost less). Due to the individual characteristics of manufacturers’ waste, the company doesn’t have a general price list; contract prices are negotiated on a case by case basis. Once set, processing prices are changed infrequently (vs. the company’s petroleum products, which are influenced by market prices of oil). According to the company, recycling prices had broadly been increasing from about 2005 until the 2008 “Lehman Shock” (waste was becoming increasingly complex). Post financial crisis, prices have declined about 7%, but have stabilized to some extent; the company expects prices to be stable through FY02/12.

The company commented that its customers rarely switch to other providers and that it has been growing its market share consistently. The company attributes its success to four factors: price (processing price varies depending on the types of wastes), reliability (strict environmental laws in Japan hold manufacturers responsible to the point of final disposal, making hiring a reliable waste disposal company a necessity), convenience (fast response), and recycling per se (reputation and similar intangible benefits; e.g. manufacturers seeking ISO process certification benefit from participating in waste recycling). As of FY02/10, the company had approximately 5,123 customer accounts (accounts are separated by recycling type and facility) vs. 5,072 in FY02/09 and 4,953 in FY02/08.

The main driver of the revenues is the level of industrial production – recycling volumes that drive revenues directly depend on the amount of waste that industry generates. Volumes lag industrial production by approximately 6 months, especially during the recovery phase (one reason is that manufacturers tend to ship in fewer lots during recessions, producing less waste and holding more waste at their facilities to minimize transportation costs - leading to an initial lag in waste shipment when recovery starts).

Other minor revenue drivers include market prices for lead and petroleum (Daiseki MCR sells recycled lead ingots at market prices trailing by one month and petroleum products are directly influenced by oil prices). Daiseki MCR doesn’t hedge price risk for lead due to the relative illiquidity in the commodity market and the cost of hedging.

Costs are mostly fixed, the largest being labor (55.0% of parent FY02/11 SG&A). Gross profit margins for industrial waste production are relatively stable at approximately 35% (mostly costs for chemicals and other treatments as well as variable costs such as transportation and final disposal).

Understanding the relationship between Daiseki’s sales and profit is straightforward: revenues are driven by volume of processed waste, and profitability is driven by facility utilization rates. The company estimates that a ‘best case’ scenario of full utilization would result in operating profit margins (at the parent basis) in the area of 30%.

Two variables define the company’s existing business growth: increases in either processing volume driven by an upswing in industrial production or market share. The company has been taking share from local competitors who either use less sophisticated processing methods (emphasizing the cost and other benefits of recycling vs. burning) or have insufficient scale to provide regulatory compliance with changing legislation.

Profitability Snapshot, Financial Ratios

The parent company generated over 83% of consolidated FY02/11 gross profit (36.8% Parent GPM).

Consolidated operating profit margins have been relatively stable; processing volumes of Daiseki parent had been on increasing trends until the financial crisis in 2008 impacted industrial production levels; sales growth has slowed while Daiseki’s fixed labor costs reduced OPM. The company suggests that its OPM is relatively high due to gains realized from recycling, indicating that without recycling its estimated OPM would be significantly lower.

Daiseki’s working capital was affected by the acquisition of Tamura Sangyo (renamed Daiseki MCR), included in consolidated results from FY02/08. The impact of Tamura Sangyo’s inventory in FY02/08 results affected inventory turnover (lower), working capital (higher), and the current ratio (higher).

SWOT Analysis

Strengths

• Reputation built on significant experience. Daiseki has been involved in industrial waste processing and recycling for nearly 40 years. Typically experience alone in an industry isn’t a strength; any company that’s managed to survive can cite “experience” as an attribute. Arguably in industrial waste processing however, experience and a solid reputation are important. Waste producers are liable for their waste until/through final disposal, making the choice of a processing company an important decision (if a disposal company does anything improper, the manufacturer could be subject to fines, legal action, etc.). Daiseki’s approach minimizes this risk for companies, and its experience in processing different waste types means its services can be used by different industries.

• Pragmatic management focused on medium-term earnings growth. In SR Inc.'s view, this strength helps, if not drives, high profitability as the company avoided expanding too rapidly - focusing instead on steady market share gains and building client relationships. This translates directly into shareholder value and substantially lower costs of capital, creating a cycle of high returns and steady growth.

• Specialist focus on liquid waste (the parent company). Daiseki operates in a narrow niche where it can leverage technical expertise and its position as a TSE listed company to maximize its competitive advantage. It has been applying the same approach to other areas, buying other specialist firms and combining their specific focus with Daiseki’s core strengths to grow the business.

Weaknesses

• Market bound by industrial production. Daiseki’s business is ultimately bound by domestic industrial production – the number and output of manufacturing companies (a mature and likely shrinking market). Although Daiseki has taken share from competitors in the past, this is not guaranteed in the future.

• Uncertainty of investment payoff for capex. Investments in processing plants are substantial, and can take a long time (licensing alone can span several years). From an investor’s perspective, this means that there is added uncertainty regarding when the heavy up-front investments for new facilities will pay off.

• Limited available M&A opportunities. The company says that most M&A opportunities presenting themselves involve rescuing troubled companies and are generally unattractive. This limits growth opportunities to organic growth and may lead to less efficient use of the balance sheet than would otherwise be possible. The company’s ROE and ROA have been nearly equivalent due in part to the fact that about 1/3 of total assets were kept in cash as of FY02/11, sitting on the sidelines waiting for the next capex increase or a low probability M&A event.

Group Companies

• Daiseki – main group company, engaged in intermediate treatment of industrial waste.
• Daiseki Eco. Solutions (TSE 1712) – specializes in soil contamination: surveys, analysis, and treatment. The company has one subsidiary (Green Arrows Central – treatment and recycling of industrial waste, mainly plasterboard).
• Hokuriku Daiseki – manufacturers and sells lubricant oil and other petroleum products.
• Daiseki MCR – refines lead recovered from batteries for resale.
• System Kikou –washing large fuel tanks and associated pipework and plant equipment.

Group Strategy

The company’s group strategy has been to develop as a specialist environmental group, with industrial waste recycling at the core. Subsidiary businesses are closely aligned to the core recycling business. Daiseki parent and Hokuriku Daiseki buy petroleum products from each other; Daiseki MCR generates wastewater (battery fluid) which is processed by Daiseki; and Daiseki Eco. Solutions captures environmental response projects from currently active manufacturing plants thanks to close cooperation with Daiseki parent. The group structure is appropriate for the company due to the alignment of input and output materials from the different businesses.

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Market & Value Chain

The key market for Daiseki is the industrial waste processing market in Japan.

Industrial waste in Japan is classified in two main categories: industrial waste (a broad term for waste created through commercial activity; examples include wood chips, paper, textiles, and organic waste), and special control industrial waste (hazardous waste which requires special treatment, such as oil, acid, medical waste, asbestos, and waste with toxic heavy metals like mercury and cadmium). Generally speaking, processing special control industrial waste requires more sophisticated techniques than less dangerous forms of waste.

Creation of industrial waste is driven by industrial activity. Data from the Ministry of the Environment indicates that total levels of industrial waste have been mostly stable from 1999 to 2007. However, in 2008 there was a 3.8% YoY decline due to the economic turmoil triggered by the collapse of Lehman Brothers Holdings Inc.

In terms of specific materials in industrial waste processing, the largest single component has historically been sludge (see table below). Liquid waste has been the most volatile, but has also shown the most growth from 1998-2008 (almost doubling vs. flat growth for sludge, plastics, and other types).

The market for industrial waste is highly regulated. The first law outlining specific waste types and stipulating appropriate disposal practices was promulgated in 1970, with additional recycling and waste related laws coming into effect in the early and mid-2000s. In 1998 a manifest system to track waste from its origin through final processing was established. The purpose of the manifest system seems to be increased scrutiny and accountability for waste generators (waste generators are required to submit completed manifests within 10 days after final disposal).The ramifications for waste generators are substantial: if an intermediate processor makes a mistake, disposes of the waste improperly, etc. the ultimate responsibility (liability) rests with the company who created the waste.

Companies competing in industrial waste processing must have specific licenses to process different types of industrial waste. The licensing process is lengthy and requirements are relatively strict (obtaining a license can take several years, limiting market growth and reducing mobility of entrants and exits).

Although the company provides collection services, Daiseki’s business is predominantly involved with intermediate treatment. Data regarding the number of competing collection and intermediate waste processing firms is highlighted below:

The total number of intermediate treatment facilities has been increasing since 1992, however the number of facilities using dehydration (used by Daiseki for sludge and wastewater processing) technologies has declined approximately 40% during 1998-2007. The company suggests that as manufacturers have been creating more complex and technologically advanced products, industrial waste has also become more complicated, increasing processing difficulty. Given increased regulatory pressure on treatment companies and more complex waste types, the contraction of dehydration treatment companies could be interpreted as a “survival of the fittest”.

The main forces shaping the market are the number of manufacturers (level of output) and legal constraints (specific treatments for certain wastes, etc.). The company expects regulatory standards to continue tightening in terms of processing requirements and increased pressure on manufacturers to achieve “zero emission” targets (emphasizing recycling and minimized resource consumption). With respect to the quantity of waste generated by factories, the company expects the number of factories to continue a declining trend which began in the mid-1990s as production moved offshore to minimize costs.

Market Growth

Source: SR Inc.

In terms of the core business (industrial waste recycling), important variables for Daiseki are the total quantity of industrial waste and legal requirements for waste treatment. It seems unlikely that Japanese companies will reverse the off-shoring trend and return to using factories located in Japan, therefore a sideways volume outlook for the market could be considered optimistic. Therefore growth for recyclers is more likely to occur from regulatory changes (higher degrees of quality for final output, more stringent recyclable components, etc.) that could increase the need for recycling expertise.

In this context, Daiseki’s growth opportunities are mostly limited to taking share from other companies (including substitute solutions), something that stricter regulations and growing social and corporate environmental awareness probably make easier.

For Daiseki Eco. Solutions, the company estimates the total market potential to be about 100 billion yen. The market for soil survey and treatment services is driven substantially by the housing and construction industries, and given the declining demographic trends, a long-run increase in market size seems unlikely. Regulatory changes could add uncertainty. Short-term opportunities could develop for soil processing companies as licensing requirements change (changes in April 2010 are expected to weaker, smaller companies are expected to exit the market as the burden on companies providing the services increases).

Customers

Producers of industrial waste are the customer of Daiseki parent. As the processing price changes depending on content of waste, prices are determined individually with each customer. When costs of outsourced final disposal (landfill) increase, it impacts the processing prices set by the company. Collection, treatment, and disposal of industrial waste is governed by Japanese Law. The company’s largest customers account for approximately 2-3% of total sales, meaning that no single client is big enough to cause significant fluctuations in the company’s sales.

Daiseki MCR buys recycled batteries. The recycled components are commodities (lead, plastic, etc.) which prices are determined on the open market.

Suppliers

Daiseki does not have any critical suppliers for its main waste recycling business. The company’s technology and experience are the key processes ingredients. Core suppliers for the lead recycling business are battery brokers and automobile dealerships. The company commented that success in the battery recycling business hinges on keeping utilization levels high to minimize costs; emphasizing the importance of effective sourcing. The balance of power between suppliers and recyclers of batteries seems roughly equal: battery brokers seek the best prices and biggest buyers, whereas recyclers seek to boost utilization through larger quantities.

Barriers to Entry

High. The main limiting factors are licenses, land, and equipment. Obtaining licenses can take 2-3 years or longer for specific treatment types (incineration licenses are more complicated, for example) and types of services offered (collection and transport, different types of industrial waste etc. all require separate licenses). Land and equipment require capital outlays, which can be significant.

An intangible barrier to entry could include building credibility with waste producers to win business. Incumbents have the advantage of track record and experience; new entrants would need a compelling reason for manufacturers to take on the risk of new waste processors - producers are legally liable for their waste from generation through final processing.

Competition

Transportation costs can have significant influences on waste disposal costs so the competitive landscape is determined more by geography than capabilities. The company claims that it has no peers in terms of similar capacities and treatment methods (recycling). The largest waste disposal competitor is Dowa Holdings (TSE 5714), which offers waste recycling (focusing on solid waste such as electronics, metal scrap, vehicles, etc.), waste treatment (using incineration), and operates final disposal facilities (landfills). Other competitors that offer recycling include Kureha Corporation (TSE 4023), Nihon Chemtech (Unlisted), and Towa Oil (Unlisted).

Competing firms for Daiseki MCR include Toho Zinc (TSE 5707), Mitsubishi Materials (TSE 5711), and Mitsui Mining and Smelting (TSE 5706). In addition to listed competitors, the company commented that there are numerous smaller companies that provide similar services; there were over 10,000 companies licensed to perform intermediate treatment of industrial waste as of 2010 (see Market and Value Chain).

Daiseki Eco. Solutions’ most notable competitor is Dowa Holdings (TSE 5714). Dowa has two soil remediation facilities, and offers both on-site and off-site treatment.

Substitutes

Substitutes for waste recycling include a reduction of total waste output (increased material and production engineering to reduce waste), waste minimization before final disposal (through shrinking, crushing, burning, etc.), and illegally dumping waste. R&D specifically for waste reduction seems unlikely unless recycling costs become otherwise prohibitive. Recycling waste can be cheaper than other treatment methods and provide an element of PR for manufacturers (as eco-friendly companies), so the relative attractiveness of recycling vs. alternative seems to be in favor of recycling. Illegal dumping (which is more typical for solid waste), although technically a substitute for waste treatment, is probably irrelevant for blue chip clients of Daiseki.

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Strategy

The company’s strategy has been to increase its range of services and geographies where it competes. The company has historically competed in Chubu area (which generated 15.6% of total industrial waste in Japan in 2008); however nearly twice as much waste is generated in Kanto (27.3% of total industrial waste in 2008, according to the Ministry of the Environment). Daiseki has suggested it intends to increase utilization of its Kanto facility.

Based on its market size and share, the company considers the Kanto (centered on Tokyo) and Kansai (centered on Osaka) regions, followed by Kyushu, to have the most potential growth potential, while they expect Nagoya and Hokuriku to have relatively weak growth.

The factors controlling growth are salespeople and industrial production cycles (essentially, time). The company doesn’t expect any sudden explosive growth, suggesting that low double-digit (steady between 10% and 15%) rates are more reasonable.

Daiseki’s business developed as a liquid waste treatment specialist, but has used M&A to expand into other areas (e.g. Daiseki MCR, then Tamura Sangyo, acquisition in 2007 for battery recycling and its 2010 acquisition of System Kikou for is large fuel storage tank cleaning business). The company indicated that other possible options would be other materials such as plastics and industrial (non-precious) metals.

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Historical Financial Statements

Summary

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

FY02/11 Results

The company released FY02/11 results on April 13, 2011 (see the table above).

Sales rose 8.2% to 31.5 billion yen driven by a recovery in the recycling and industrial waste management units, which lifted operating income 10.8% higher YoY to 5,390 million yen.

While actual performance was generally in line with company forecasts, operating profit at Daiseki Eco., Daiseki MCR, and System Kikou all came in below forecast.

Daiseki Eco. was affected by a lagging recovery in the real estate and construction market, as well as broader industry problems related to the revised Soil Contamination Countermeasures Law, while Daiseki MCR failed to hit targets due to a sudden drop in the price of lead on the London Metal Exchange (LME) in 2Q FY 02/11, according to the company.

The company made the following comments on its subsidiaries:

Daiseki Co.

• Orders for the core business of intermediate industrial waste disposal and recycling recovered in conjunction with a recovery in the domestic manufacturing sector.
• As the company has a high proportion of fixed costs (its marginal profit ratio is around 55%), higher sales lifted its operating profit margin to 23.8% (vs. 19.7% in FY02/11)
• Sales volume of recycled fuel and waste material volumes recovered to pre-Lehman crisis levels, but the unit sales prices have yet to recover to pre-Lehman levels.
• Geographical sales trends were: Hokuriku was up 20.8% YoY; Kyushu up 16.9% YoY; Kanto up 16.3% YoY; Kansai up 15.1% YoY; Chiba up 14.4% YoY; Nagoya up 7.6% YoY. Sales at the Kyushu facility recovered to their pre-Lehman peak while Nagoya witnessed a muted recovery.

Daiseki Eco. Solutions

• The construction and real estate sectors staged a sluggish recovery against a backdrop of a slow recovery in private investment.
• Soil survey numbers – a leading indicator – bottomed out in Q1 FY02/11 and pointed towards a YoY recovery. Similarly, contaminated soil treatment volumes were also recovering after bottoming out in 3Q FY02/11.

Daiseki MCR

• Capacity utilization for lead recycling was close to 100%, while actual results closely tracked the price of lead.
• Average price LME price for lead during FY02/11 was 2,206 dollars/ton (vs. 1,907 dollars/ton for FY02/11).
• Although LME lead prices dropped sharply in FY06/10 (to 1,559 dollars/ton), used battery prices remained high, due to used-battery dealers anticipating a rise lead prices and not lowering prices. This combined with other factors, such as a strong yen/weak dollar, contributed to underperformance.
• LME lead prices bottomed out in FY06/10 and have been trending higher since.

System Kikou

• The unit became fully consolidated from September 2010.
• Posted an operating loss of 17 million yen due to expenses associated with the relocation of its materials center from Kobe to Yokkaichi and a change in accounting method for registering sales to the completed-contract method from percentage of completion.
• Two Crude Oil Washing (COW) units were sold to China, but the proceeds were logged as extraordinary profit rather than sales.

Q3 FY02/11 Results

The company released Q3 FY02/11 results on January 13, 2011 (see the table above). As a percentage of the full year company forecast, the cumulative Q3 numbers were as follows:

• Sales: 72.6% (vs. full year forecast of 32.3 billion yen )
• Operating profit: 77.0% (vs. 5.6 billion yen)
• Recurring profit: 78.8% (vs. 5.7 billion yen)
• Net income: 79.7% (vs. 3.2 billion yen)

The company commented on overall conditions by company as follows:

Daiseki Co.

• Sales were 16.8 billion yen (17.8% YoY, +0.1% over forecasts), operating profit was 4.1 billion yen (+44.7% YoY, +1.5% over forecasts).
• Volumes of industrial waste processing increased as domestic manufacturers continued to recover.
• Many domestic manufacturers appear to have a cautious view about a continued economic recovery, so growth in capital expenditure has been slow.

Daiseki Eco. Solutions

• Sales were 3.7 billion yen (+32.7% YoY, +4.4% over forecasts), operating profit was 56 million yen (-9.2% YoY, -13.8% below forecasts).
• Conditions remained tough due to softness in the housing and construction market.
• The number of survey projects (which the company considers to be a leading indicator for its business) has been on an increasing trend YoY, and the company thinks profitability may improve in the months ahead.

Daiseki MCR

• Sales were 2.4 billion yen (+13.4% YoY), operating profit was 218 million yen (-37.3% YoY).
• Profit increased QoQ due to continued improvement in lead prices which started in June 2010.

There was no change to the full year estimate, but the company did revise the planned full year dividend payment upward, from 19 to 20 yen per share. The company commented that higher cumulative YoY performance was the reason for the dividend increase. Upon the release of the Q3 FY02/11 results, the company made its annual revision to the planned full year dividend payment.

Q2 (1H) FY 02/11 Results

The company released Q2 (1H) FY02/11 results on October 13, 2010 (see the table above). As a percentage of the FY02/11 company estimate, 1H numbers were as follows:

• Sales: 46.6% (15.0 billion yen vs. FY estimate of 32.3 billion yen)
• Operating profit: 50.6% (2.8 billion yen vs. FY estimate of 5.6 billion yen)
• Recurring profit: 51.0% (2.9 billion yen vs. FY estimate of 5.7 billion yen)
• Net income: 52.8% (1.7 billion yen vs. FY estimate of 3.2 billion yen)

Q2 cumulative (1H) operating profit grew 36.5% YoY due to increased sales (+12.5% YoY) and smaller depreciation expense, which drove the SG&A-to-sales ratio down from 15.0% to 13.5% YoY. Operating profit margins therefore improved from 15.5% to 18.8%.

The full year forecasts for parent company Daiseki Co. were revised up, but the consolidated full year forecast was kept unchanged as Daiseki Eco. Solutions, a subsidiary, revised its full year estimates down, offsetting the parent company’s upward revision). The full year capital expenditures were also revised up from 1.5 billion to 2.3 billion yen. The company commented that it had found and would acquire land in 2H FY02/11 to expand the Kansai facility, something it planned for some time.

Q2 cumulative (1H) results by company were as follows:

Daiseki Co.: Q2 cumulative sales were 11.0 billion yen (+22.2% YoY, 4.9% over forecasts) and operating profit was 2.8 billion yen (+59.6% YoY, 15.1% over forecasts). The increase in sales was due to recovering domestic manufacturers, which led to higher volumes for industrial waste processing. Operating profit increased due to higher sales and cost controls (depreciation declined and other SG&A spending was restrained).

Sales at all facilities except Chiba grew more than 20% YoY. Facilities in Kanto, Kansai, and Kyushu had sales exceeding 20%, with those in Nagoya and Hokuriku closer to the 20% mark. Sales at the Kyushu facility recovered to levels last seen before the “Lehman Shock” (this region experienced comparatively milder declines during the crisis). The continued slower rate of recovery in Nagoya was attributed to the sluggish recovery of the automotive industry concentrated in the area.

The full year forecasts for Daiseki Co. were revised up on October 13, 2010. The revised figures were as follows:

• Sales: 21.7 billion yen (previous forecast: 20.8 billion yen)
• Operating profit: 5.1 billion yen (previous forecast: 4.6 billion yen)

Those upward revisions were due to a strong 1H. The company’s sales forecast still assumed a “double dip” in 2H, but as of mid October 2010, the company was seeing signs that it could be smaller than initially expected.

Daiseki Eco. Solutions: Q2 cumulative sales were 2.3 billion yen (-22.8% YoY, 26.2% lower than initial forecasts) and operating profit was 27 million yen (-90.0% YoY, 88.7% lower than initial forecasts). Conditions for Daiseki Eco. Solutions worsened due to a soft housing market and updated environmental laws (the Soil Contamination Countermeasures Act was revised).

Daiseki Eco. Solutions announced a downward revision to full year FY02/11 forecasts on September 17, 2010. The revised figures were as follows:

• Sales: 5.0 billion yen (previous forecast: 7.5 billion yen)
• Operating profit: 162 million yen (previous forecast: 702 million yen)

The company commented that expectations for both fewer orders and lower average price led to the revision. There could be a silver lining, however: the company thinks that although conditions are tough, prices may have bottomed out. Furthermore, the company said that the number of survey projects (which it considers to be a leading indicator for its business) is gradually increasing. Given the uptick in research projects, the company thinks that a recovery in the real estate market could be forming and expects to see stronger demand from 2H.

Daiseki MCR: Q2 cumulative sales were 1.6 billion yen (+25.9% YoY) and operating profit was 134 million yen (-16.1% YoY). Daiseki MCR is operating at 100% capacity, so the price of lead prices is a critical variable for results. Lead prices had been in a downward trend through June/July, which caused a decrease in operating profit. Additionally, the strong yen (about 85 yen/dollar vs. assumptions of 90 yen/dollar) also affected operating profit. There was no change to full year forecasts.

The company thinks that lead prices bottomed around June or July 2010. If this is the case, SR Inc. expects the company’s profit to recover from October or November 2010. This expectation is based on the assumption that changes in lead prices take about three months to impact profit (the period that the company holds lead in inventory).

System Kikou: Following Daiseki’s purchase of System Kikou, it became a fully owned subsidiary on September 1, 2010. System Kikou’s main business is cleaning large fuel storage tanks and pipe systems. In FY12/09, the company generated sales of 2.3 billion yen and operating profit of 128 million yen. Daiseki commented that the market for cleaning large fuel tanks could shrink by about 10 percent due to dwindling numbers of Japanese refineries. Going forward, the company plans to broaden the types of its customers (smaller companies) and services offered (cleaning small and medium-sized tanks). The company said that it bought System Kikou to capitalize on both companies’ strengths: System Kikou needed stronger sales channels (which Daiseki has), and Daiseki couldn’t offer the service because it lacked expertise (which System Kikou has). Therefore, Daiseki expects synergies in these areas. The near-term contributions to consolidated results are minor (in FY02/11, expected sales are about 1.5 billion yen with a few million yen of operating profit, offset by goodwill amortization). System Kikou is also trying to strengthen its overseas business. Specific areas for overseas expansion include exporting machinery or providing large fuel storage tank cleaning services to China and other oil-producing countries. As of early Q2 FY02/11, the company said that it had several hundred million yen in overseas orders

Q1 FY 02/11 Results

The company released Q1 FY02/11 results on July 13, 2010 (see the table above). As a percentage of the 1H company estimate, Q1 numbers were as follows:

• Sales: 48.2% (vs. 1H estimate of 15.5 billion yen)
• Operating profit: 56.0% (vs. 1H estimate of 2.7 billion yen)
• Recurring profit: 56.7% (vs. 1H estimate of 2.8 million yen)
• Net income: 58.6% (vs. 1H estimate of 1.5 billion yen)

Industrial waste processing: Orders increased in the core industrial waste processing business, as recovery continued for domestic manufacturers. Sales of recycled petroleum products improved YoY due to higher fuel oil prices, providing a boost to sales.

Waste treatment volume in Chubu (mainly Nagoya) was improving, but at a slower rate vs. other regions. Growth potential in the Kansai and Kanto areas continued to develop; utilization rose to 80% in Kansai and about 60% in Kanto.

Costs remained under control during Q1, so the increase in sales meant an improvement in gross and operating profit margins. The industrial waste processing business (parent Daiseki Co.) exceeded the company’s budget in Q1, and it’s reasonable to conclude that if momentum continues through Q2, 1H could exceed expectations. The company’s sales forecast includes a “double dip” in 2H, but as of mid July 2010, the company was beginning to see signs that it could be smaller vs. initial expectations. The key factor will be sales trends from October. Industrial waste processing normally peaks in December making it the most important month (SR Inc. understands that the sales budget for December was about 1.9 billion yen).

Daiseki MCR sales were slightly lower than budgeted; lead prices lower than expected were the main culprit ($2,100 per ton vs. $2,250 per ton budgeted for the full year). The company thinks that prices bottomed in June 2010 and should maintain the $1,700-1,800 range in Q2, which means somewhat lower than budgeted results in the quarter. The company expects lead prices to recover in 2H and if that is the case then full year results should be within reach.

Revenue and profits declined for Daiseki Eco. Solutions, undershooting the budget; demand for soil treatment remained sluggish due to difficult conditions in real estate and construction sectors. The company expects this trend to persist through FY02/11, and commented that reaching the subsidiary’s full year forecast may be difficult. However, the number of research projects is gradually increasing, indicating a likely dawn of recovery in the real estate market, and the company expects to see better demand from 2H.

There was no change to the 1H or full year forecasts.

Income Statement

Consolidated sales are driven by the main business of the parent company (industrial waste recycling). The company commented that demand for its services can be driven by industrial cycles (more production means more waste), however sales were on a generally increasing trend during FY02/01-FY02/09. When discussing the YoY decline in FY02/10, the company identified overall contraction in the economy as the main factor.

Gross profit margins are largely stable at approximately between 30.1%-35.0% during FY02/01-FY02/11, driven by GPM at the parent company (typically a few points higher than consolidated results).

Operating profit margins have been on an increasing trend during FY02/01-FY02/08, from 18.0% in FY02/01 to a peak of 23.3% in FY02/08. Operating profit is a function of maximizing utilization to offset fixed costs; the decline in processing volume in FY02/10 impacted OPM for the year.

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Balance Sheet

The company’s balance sheet is highly liquid – as of FY02/11 cash on the balance sheet was more than twice the size of total liabilities.

The capital structure is mostly equity: the equity ratio has averaged 82.6% during FY02/01-FY02/11.

Assets

The company’s assets are mostly current, cash historically being the largest component from FY02/01-FY02/11. Inventories on the balance sheet are related to Daiseki MCR (affecting consolidated accounts beginning FY02/08). The business is based on tangible fixed assets – the plant and equipment used in recycling.

Liabilities

The company’s liabilities are minimal. As of FY02/11 the largest component of total liabilities was accounts payable. Debt on the balance sheet as of FY02/11 was mostly short-term.

Shareholders’ Equity

Changes in shareholder equity have typically been driven by net income minus dividends. The exception from FY02/01-FY02/11 was in FY02/08, when the company issued additional equity to purchase Daiseki MCR.

Per Share Data

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Cash Flow Statement

Operating Cash Flow

Daiseki’s operating cash flow is dominated by net income and depreciation; accounting earnings reflect the actual cash performance of the business. The ratio of net income + depreciation to operating cash flow has averaged over 100% during FY02/01-FY02/11.

Investment Cash Flow

Cash for investments have been dominated by tangible fixed asset purchases (investment security purchases typically have been minor). See major capex items below for detail.

Financing Cash Flow

Financing cash flow in FY02/05 was from bank debt (300 million yen short-term bank loans, 700 million yen long-term bank loans). The FY02/08 increase in cash flow from financing was a combination of debt (250 million yen of short-term bank loans, 800 million yen of long-term bank loans) and equity (7.1 billion yen related to the acquisition of Daiseki MCR)

Simple Free Cash Flow

Simple free cash flows during FY02/01-FY02/11 have been on an increasing trend, with some volatility. The company’s business is mainly driven by tangible fixed assets, which can create lumpy capex spending requirements which can push simple free cash flow into negative territory. The company’s capex during most of FY02/02-FY02/11 appears largely expansionary (see below).

Major capex items:

• FY02/01 – Kansai facility (land, 918 million yen), Nagoya (expansion, 564 million yen)

• FY02/02 – Kyushu (land, 656 million yen), Nagoya (water treatment facility, 539 million yen), Hokuriku (sludge drying facility, 498 million yen)

• FY02/03 – Kansai (new establishment, 1.3 billion yen), Hokuriku (water treatment facility, 230 million yen), Kyushu (sludge processing, 218 million yen)

• FY02/04 – Nagoya (Daiseki Eco. Solutions Nagoya recycling center – land, 395 million yen)

• FY02/05 – Kyushu (water treatment facility, 730 million yen), Nagoya (sludge processing, 678 million yen), vehicles and equipment (233 million yen). Daiseki Eco. Solutions – Nagoya recycling center (182 million yen), Yokahama land and factory (803 million yen)

• FY02/06 – Kanto (land, 1.4 billion yen; construction 1.2 billion yen), vehicles and equipment (282 million yen)

• FY02/07 – Kanto (plant, 970 million yen), Osaka (Daiseki Eco. Solutions Osaka recycling center – land 1.3 billion yen)

• FY02/08 – Nagoya (fuel recycling facility, 327 million yen), Kansai (water treatment 500 million yen), Kanto (construction 212 million yen), vehicles and equipment (270 million yen)

• FY02/09 – Nagoya (fuel and other recycling, 337 million yen; Kanto (fuel recycling, 314 million yen), vehicles and equipment (298 million yen). Daiseki Eco. Solutions – land and soil treatment 557 million yen)

• FY02/10 – Vehicles and equipment (103 million yen), Daiseki MCR (land, 401 million yen)

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Other Information

History

Corporate Timeline

1945 Founded as a petrol refiner in Mie Prefecture

1958 Constructed a plant for lubricating oil refining in Nagoya city, Aichi Prefecture

1958 Established Daido Petrochemical Industry Co., Ltd (Common stock: 2,000,000JPY, as of October 1)

1963 Opened Nagoya Work in Nagoya city

1966 Opened Kyushu Work in Kita-Kyushu city, Fukuoka Prefecture

1970 Opened Hokuriku Daiseki Co., Ltd. in Kanazawa city, Ishikawa Prefecture

1972 Qualified as an industrial waste disposer in Nagoya city

1973 Opened Hokuriku Work in Hakusan city, Ishikawa Prefecture

1980 Opened Osaka Work in Amagasaki city, Hyogo Prefecture

1982 Opened Kyushu Work in Kita-Kyushu city

1983 Awarded a prize by the Clean Japan Center Foundation for our contribution to resource recycling

1984 Changed corporate name to Daiseki Co., Ltd.

1990 Opened Kanto Work in Sano city, Tochigi Prefecture

1995 Listed on OTC market (July 27, 1995; Common stock: 1,207,000,000 yen )

1997 Opened Chiba Work in Sodegaura City, Chiba Prefecture

1997 Received the Secretary of the Minister of Health and Welfare Prize for improvement of the environment

1998 Received the Secretary of the Maritime Safety Agency Prize and the Governor of the Maritime Disaster Prevention Center Prize for our restoration work on the heavy oil spill from a Russian tanker in the Sea of Japan

1999 Changed corporate name of Daiseki Plant Co., Ltd. to Daiseki Kankyo Eng. Co., Ltd.

1999 Listed in the second section of the Tokyo Stock Exchange, Inc. and Nagoya Stock Exchange (Common stock: 1,381,473,500 yen, as of August 5)

2000 Listed in the First Section of the Tokyo Stock Exchange, Inc. and the Nagoya Stock Exchange (Common stock: 2,575,458,956 yen, as of August 1)

2000 Offered for public subscription (Common stock: 3,701,058,956 yen, as of September 1)

2002 Opened Kansai Work in Akashi city, Hyogo Prefecture

2004 Changed corporate name of Daiseki Kankyo Eng. Co., Ltd. to Daiseki Eco. Solutions Co., Ltd.

2004 Daiseki Eco. Solutions Co., Ltd. was listed in the MOTHERS of Tokyo Stock Exchange

2005 Nagoya Recycle Center of Daiseki Eco. Solution Co., Ltd. was accredited as a contaminated soil purification facility by Nagoya Prefecture.

2007 Offered for public subscription 2,200,000 shares and third-party allocation 330,000 shares (as of April 25 and May 22, Common stock 6,382,605,956 yen)

2007 Acquired Tamura Sangyo Co., Ltd. (Utsunomiya city, Tochigi Prefecture）

2008 Daiseki Eco. Solutions Co., Ltd. was listed in the First Section of the Tokyo Stock Exchange and the Nagoya Stock Exchange

2008 Changed corporate name of Tamura Sangyo Co., Ltd to Daiseki MCR Co., Ltd

Daiseki did not start out as an environmental services company; the company’s roots began in 1945 as a gasoline refinery. The company initially started recycling in order to cut costs, but developed expertise which created the platform for a business which it formally entered in 1958 when Daido Petrochemical Industry Ltd. was founded. The first recycling plant was established in Nagoya in 1963, later followed by steady expansion across Japan. The company received a license to recycle in 1972. The company’s name changed to Daiseki in 1984. Over the counter trading of the company’s shares began in 1995, with a listing on the Tokyo Stock Exchange 2nd section in 1999 (transferring to the 1st section in 2000).

The company expanded into battery recycling through the acquisition of Tamura Sangyo in 2007 (later renamed Daiseki MCR).

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News & Topics

October 2011

On October 11, 2011, Daiseki released 1H (Q2) FY02/12 results: click here to go directly to 1H FY03/12 results.

(For original Japanese-only release in PDF format please click here .)

July 2011

On July 11, 2011, Daiseki released Q1 FY02/12 results: click here to go to Q1 FY02/12 results.

(For original Japanese only please click here)

April 2011

On April 13, 2011, the company released FY02/11 results.

March 2011

On March 14, 2011, the company made an announcement regarding the effects of March 11 Tohoku earthquake on its operations. As of 8 a.m. on the 14th, "Damage to facilities owned or operated by the group were minor and will not have an impact on operations."

January 2011

On January 13, 2011, the company released Q3 FY02/11 results and an upward revision to the planned full year dividend payment.

October 2010

On October 13, 2010, the company released Q2 FY02/11 results.

September

On September 17, 2010, the company announced that its subsidiary, Daiseki Eco. Solutions (TSE 1712), revised its earnings forecasts for 1H FY02/11 and FY02/11 downward. Daiseki kept its consolidated estimates unchanged. The company commented that its industrial waste processing business is performing well and should offset the expected lower contribution from Daiseki Eco. Solutions.

August

On August 20, 2010, the company announced the acquisition of System Kikou Co., Ltd., an oil sludge treatment company. The transaction was expected to be completed September 1, 2010. The company commented that this acquisition would have no material impact on consolidated results for the time being.

July

On July 13, 2010, the company released Q1 FY02/11 results.

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Top Management

President Hiroyuki Ito (born April 5, 1943). Ito has spent his entire career with the company, joining the company in 1963 at the age of 20. He was appointed as a Director in 1975 and as a Managing Director in 1978, and as the Representative Director and Vice President in 1990. He was appointed as the company President in 1996.

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Employees

At the end of FY02/11, the company had 498 employees (722 on a consolidated basis); average age 39.0, working with the company for 8.9 years, earning an average of 5.9 million yen.

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Major Shareholders

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Dividends and Shareholder Benefits

Daiseki’s dividend policy is to pay out approximately 20% of the parent company’s earnings; the company considers its business is still in the growth stage, so the payout rate varies (see Per Share Data). Dividends are paid semi-annually (interim and year-end).

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Investor Relations

Result meetings are held after the announcement of interim and fiscal year end results. The company maintains a very comprehensive IR site, with detailed information in both English and Japanese.

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By the Way

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Latest Q&A

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