Nippon Sanso Holdings Corp

Ladies and gentlemen, thank you very much for taking time despite your busy schedules to attend today's Nippon Sensor Holdings Corporation earnings call to explain our financial results for the fourth quarter FIE 2024. My name is Momiyama from IR team. Thank you for joining this conference. Some housekeeping announcements. First, the conference materials are The financial results, pension, and earnings score reference we have just released. I would like all participants to have them at hand. Next, we have three main speakers today. Hamada, President CEO, Draper, Senior Executive Officer, Group Finance and Accounting Office and CFO, and Katsuyama, General Manager of IR. In addition, Moro Ishii, Senior Executive Officer, Group Corporate Planning Office, Miki, the Senior Executive Officer and CSO, Group Sustainability Management Office, and Yoshida, General Manager of Accounting are also in attendance. As for the program for today, first, Hamada President-CEO Draper CFO and Kajiyama General Manager of IRB will present the fourth quarter financial results and FIE 2025 forecasts along with the presentation materials. We have time for Q&A in the end. Zoom simultaneous interpretation function is available for English and Japanese. Please select the language you prefer to communicate with us in the Zoom control panel. If you prefer communicating in English during Q&A, please set the Zoom audio language to English. There are some housekeeping announcements from IR department. I'm Kajiyama from IR department. I have one notification to make. In the notice concerning dividend from surplus released today, there was an incorrect unit of measure in the total amount of dividends and determined amount of dividends column in the Japanese version of the notice. We sincerely apologize for any inconvenience caused. We have promptly obtained the consent of the Tokyo Stock Exchange to release the correction. The English version of the release has not been corrected. This is the end of my report. Thank you. Now, Hamada-san, over to you. Good evening.

In Tokyo, it's not yet dark outside. But good evening, everyone. This is Hamada of Nippon Sansou Holdings. Time flies and it's now time for us to give this financial report. Thank you very much for participating in our Q4 earnings call and with your busy schedule today. First, the global situation. The situation is not necessarily good. There's a series of conflicts between Israel and the Islamic organization Hamas, and Russia is continuing its military attacks on Ukraine. Geopolitical tensions remain high. And there's an economic slowdown in China, a high level of interest rates in Europe and the United States, and the continuation of the Japanese yen depreciation. It's very difficult to forecast the future. And global inflation does seem to be settling down, though. In this business climate, in our group, we have approximately 20,000 employees. All employees and staff have been making steady effort, and thanks to the cooperation of stakeholders, including customers, we are making steady progress towards the final year goals of our medium-term management plan and its vision 2026. I would therefore first like to express my gratitude. Draper and Kajiyama will explain the details of our business performance later, and what is important now is... the business environment surrounding our group we have to have an accurate understanding of this and based on this we have to work on the goals outlined in NS Vision 2026 as well as the strategy of each segment and we also have to consider the role of holdings, the holding company of the group. These are what I think are important points. I would now like to summarize the Q4 results for the full year. First, we've been trying to perform functions of the industry's infrastructure, and we want to utilize our strength in industrial gas business, and as a result, we've been able to improve our performance. And I think this is the result of the customers appreciating our business. And secondly, we've been trying to utilize communication with stakeholders in our corporate management. Mr. Draper and the other members of the RR team together with myself, we've been increasing a number of meetings with investors. And as a result, we've been able to receive a lot of feedback. And we are trying to utilize that feedback from investors as much as possible in our corporate management. Number three, we have been trying to contribute to the electronics industry development. And I will explain about the numbers later on. We are trying to contribute to the electronics industry development, but last year we were in a difficult situation when it comes to gas demand. Semiconductor companies' plants' utilization rate is not increasing. However, customers in the semiconductor industry... they are very quick to respond to change in needs. So we have to be ready to changes in demand as well. Therefore, investment, including capital investment, We made maximum effort in this regarding Japan and Taiwan. We do hope that the market, including for gases, will recover this year. And number four, pursue operational excellence and work hard and encourage each other among other segments. And operation... does not have a narrow meaning. It's not just referring to manufacturing. When we say operational excellence, we refer to the company's business as a whole, and price management is particularly important. From the end of two years ago, we've been focusing on price management, and this is proving to be effective. As a result, our numerical performance is improving. And number five. Core operating income exceeded the target of the NS version 2026. And in our medium-term management plan, we set the various KPIs. And in terms of profitability, improving profitability is one important KPI. And the core operating income amount, we've been able to grow significantly. which means that we've been able to successfully implement the focus themes that we formulated. And in May 2022, we announced the Mutual Management Plan NS Vision 2026 and explained our initiatives for the four years through March 2026, along with the five key strategies or focus fields described here. will be the third year of NS Vision at 2026, so it will be exactly the turnaround point in the strategic review for the fourth quarter of the fiscal year ended in March 2024. I would like to review the progress of various KPI targets in the first half of the management plan and explain the current situation and future of the electronics business, which we expect as a growth engine for the group. Now, the Medium-Term Management Plan, MTP, NS Vision 2026, sets financial KPI targets and non-financial KPI targets for the fiscal year ending March 2026. First, I will explain the progress of our financial KPIs using this slide. We have adopted five indicators as our financial KPI targets. As indicators for growth, number one, there is revenue, followed by indicators for profitability, core operating income, and EBITDA margin. And as safety indicator, we have adjusted net DE ratio. And as indicator for capital efficiency, we have ROCE after tax. These are the five indicators. financial indicators, and the previous Miniature Management Plan was called ORTIS Stage 2, which ended in 2021. And the following year, there was a lot of uncertainty because of the outbreak of COVID-19 as a result. we decided to delay a formulation of the next medium-term management plan by one year. So we were originally scheduling five years for this current medium-term management plan. It shortened to four years. The fiscal year ended March 2023. The next year, the companies were implementing its current medium-term management plan as Vision 2026. When we formulated this medium-term plan, We set our targets based on the assumptions that the exchange rate around March 2022 were 115 yen to the dollar and 125 yen to the euro, a much higher yen than the current level. However, since the uncertainty of the global economy was high even at that time, We set revenue and core operating income in terms of a range, not in absolute terms, as you can see in this graph. Therefore, if this is converted using the average rate for the most recent period, the revenue will be about 1.1 trillion yen and the core operating income will be about 155 billion yen. Even if we consider the impact of the exchange rate, we can say that revenue and income are on track to exceed our forecast. Return on capital employed is what we use to monitor capital efficiency. And this is the same as ROIC, Return on Invested Capital. ROCE itself was introduced as a key management indicator in 2006, and it has been a familiar indicator since that time. From this NS Vision 2026, we have changed the numerator of the formula from a core operating income to NOPAT, Net Operating Profit After Tax, to make it easier to compare with our competitors. The name of the indicator is also changed to ROCE after tax. We continued our effort to improve financial solidness and we've been able to continue to improve our profitability. As a result, we've cleared our target of 6%. Nevertheless, it is still at a low level compared to these major industry peers overseas, so we would like to improve it for the final year of the plan. Going back to EBITDA margin, compared with the first year of the medium-term management plan, there has been about a three-point improvement, but still There are two points up to our target. In addition, the adjusted net DE ratio has steadily improved despite the earlier redemption of 100 billion yen in hybrid financing in January 2024. Consequently, we think as of May 2024, the credit ratings of JCR and RM Credit rating of JCR is WA- and R&I A+, respectively, each improved by one notch. While some KTRs are exceeding the target set for the final year of the medium-term management plans, as I mentioned before, in terms of profitability, there's still room for improvement. Therefore, we will implement strategic priorities to achieve even higher levels of profitability to achieve growth that exceeds GDP rates in all regions.

Next, I will explain the status of non-financial KPIs. We have third-party certification for our key sustainability data to ensure the reliability for external reference. The latest data is disclosed in the integrated report published in September each year. Please note that the actual figures in this table are therefore not for the most recent term, but for FIE March 2023. As in the previous fiscal year, we expect to disclose results for FIE in March 2024 by September. Yippon Sunset Holdings has established the Sustainability Promotion Committee, chaired by CSO Miki, to promote sustainability management in collaboration with operating companies and the thermals in each region. sustainability management as our forecast group-wide strategy. In April 2023, MSCI score was upgraded from BBB to BBB and FTSE score from 3.2 to 3.5 in June 2023. As a result, the group was selected for the first time for the ESG index and included in the investment portfolio of GPIF. We have been making steady progress of the sustainability management. Together with each of directors, executive officers and employees, we intend to contribute improving management while seriously listening to the requests and comments of investors and shareholders. next i will explain the current status and way forward of the electronics business expected to become a growth engine please refer to the graph on the bottom left in fie 2024 the revenue to the electronics industry accounted for 17% of total sales, less than 20%. However, by segment, Japan and Asia and Oceania account for 28% and 40% of the total respectively. However, the US and Europe account for less than 10%, so I think there is a huge growth potential moving forward. The middle graph shows a split buy in the product in the sales to the electronics industry in each segment. For example, in Japan, sales of the general gases other than speciality gas, number two, the special gases, and three, equipment and construction are mostly balanced. In the Asia-Oceania region, speciality gases account for about 70% that can differ by region. The right graph shows product revenue by segment. As you see, Japan in purple is large. As for the US, it's not zero. We provide nitrogen in a slight volume. Consolidated sales net to the electronics industry declined by 2% year-on-year. This term, we expect an increase of customers' capex and utilization rates. We intend to accelerate our group-wide growth by responding to respective regional demands while promoting the photoelectronics strategy. To do so, the key to the next growth is to offer one-stop solution of supplying gases, nitrogen, dry air and other general gases combined with equipment, construction, engineering and other services in Europe, U.S., and Asia and Oceania to meet the required specification of customers based on the accumulated knowledge, technology and experience of Japanese TNSC for nearly four decades. Again, so the facility and the construction route to be enhanced in Asia and Oceania. And using DX, quality management, inventory management will be progress moving forward. TNSC has the organizational capability to offer solutions from the launch of customers production plants production to after sales service when the plant is up and running. We have been deploying this business in this field We also have sufficient technical capabilities to synthesize, purify, mix and manufacture no quality electronic material gases to meet customer specifications. Based on the idea of operational excellence to enhance the group's overall strength, the approach, long refined in Japan, The proposal and offering of a solution for the electronics industry and practice from each region have been shared among heads of electronics businesses in Japan, US, Europe and East Asia to work together as a group to make further contribution to customers. In November 2021, we announced a plan to increase the production capacity of B286, Deboran, and it was completed in japan and rok during fie march 2024 in china it is scheduled to be completed in february 2025 this timing is adjusted to the clutter operation timing of our customers deborah is a difficult product to handle since it is easily explosive and highly degradable, flammable and toxic. In the production plant of Dibaran, there were some accidents and incidents reported. It is used as a doping agent for boron in the semiconductor industry. And we have positioned Dibrand as one of our strategic products and we want to build on this strong manufacturer position while becoming the preferred supplier of choice for our customers. Next, I will explain about the future investment execution plan. Since Q1 FIE 2022 disclosure, to facilitate better grasping of our overall CapEx plan, we indicate the chart by customer industry. Continuous capex is essential to ensure our continued strong growth into the future. So that is the reason why we consider it is important to make the continuous capex. The backlog as of the end of FY2024 is approximately 170 billion yen of which Environment and hydrogen and social contribution related projects account for roughly 50%. As stated in the note at the bottom, the scope of aggregation is roughly 500 million yen or above, and the smaller amount is not included. We intend to continue indicating our growth potential in this manner, quarterly. to share the results of our CapEx. Now, our CFO, Ned Draper, will walk through the financial results overview for the fourth quarter.