Nippon Sanso Holdings Corp

It's now time to begin the Nippon Sansō Holdings Corporation earnings call for fiscal year ending 2026 third quarter. Thank you very much for taking time out of your busy schedule to attend today. My name is Ishimoto from the IR department of the group finance and accounting office. I will be the moderator for this conference. Thank you very much for your cooperation. I'd like to give you some information about today's conference. First of all, the conference materials are the financial results, Tanshin, and an earnings call reference that we have just released. I'd like all participants to have them at hand. Next, we have three main presenters today. Hamada, President, CEO. Draper, Senior Executive Officer, Group Finance Accounting Office and CFO. In addition, Kubo, Executive Officer, Group Corporate Planning Office. Miki, Senior Executive Officer, CSA Group Sustainability Management Office. Yoshida, General Manager of Accounting, and Kajiyama, General Manager of IR, are also in attendance. As for the program today, first Hamada, President, CEO, and then Draper, CFO, will present the third quarter financial results along with the presentation materials. Then there will be time for Q&A. Please note that today's session will be bilingual in Japanese and English. Using the simultaneous interpretation function via Zoom, please select the language you would like to communicate with us in the Zoom control panel. If you would like to participate in the Q&A session in English, please set the Zoom audio language to English. Hamada-san will now be starting the presentation.

Good afternoon, ladies and gentlemen. I am Hamada from Nippon Sansa Holdings. Thank you very much for taking the time to join our third quarter earnings conference call today, despite your busy schedules. Without further ado, let me briefly introduce walk you through the key points summarized on this slide regarding our business performance. Following my overview, our CFO, Mr. Alan Draper, will provide you with a detailed explanation of our financial results. First, let me provide you an overview of our business operations. The overall sales trends, unfortunately, have not shown robust demand growth. and have remained either flat or on the weaker side. On the other hand, in the electronics sector, generative AI data centers or growing semiconductor demand for data centers, sales are on a recovery trend across regions, which we view as a positive development. However, if we look at the macro environment, there are U.S. military actions in Venezuela and concerns over U.S.-Europe tensions regarding Greenland. And after New Year, I don't know whether Japan was the cause, but there are uncertainties regarding Japan-China relationships. So these are all concerns. And China announces the tightening of the export restrictions to Japan. And Dichlorosane, which is a specialty gas, has been announced that there is an initiation of an anti-dumping investigation We are currently assessing the potential impact on some of our business and according to my experience, it should not account for a large volume. However, we would continue to closely monitor the trends as well as the actual numbers. And during this situation, I think each of the regions are doing very well, thoroughly implementing price management and operational excellence or improving efficiencies, including cost reduction. And as a result, profitability has recovered more than we had originally expected. Now, if I may give you the performance highlights. Well, later on, Mr. Alan Draper will provide you with a detailed explanation of the situation in each region and business segment. But I here would like to briefly share the performance highlights for the third quarter, specifically regarding U.S. and Asia and Oceania. First, the U.S. business, as I mentioned earlier. Volume-wise in gas, we cannot say that we have reached a full-scale recovery. However, we have continued execution of price management and thorough cost controls. These have been successful, and in the third quarter non-consolidated basis, core operating income margin has improved up to 15.1%. From the fourth quarter onward, we will continue We have the full-scale launch of new on-site projects. It has been launched and ongoing price management is conducted. Thorough cost controls as well as productivity improvement initiatives will be worked on. Therefore, we expect continuous improvement in profitability. As a matter of fact, with regards to the United States, We thought that we have been thinking that the industry itself will be more booming. However, the fact that the gas industry volume has not fully recovered, the manufacturing industry using gas has also not been recovering full-fledgedly. From our perspective, it is slower than our forecast. We were thinking that from the middle to the third quarter, the industry will be recovering and becoming more active in the U.S. However, there may be some geographical matters or political issues leading to this situation. But still, we believe that our company is doing very well. And when it comes to Asia and Oceania business, As I have briefly touched upon, electronics, rather than Oceania, it's Asia. The sales to the electronics sector is on the recovery track. The third quarter non-consolidated basis core operating income margin improved to 10.7%, and EBITDA margin reached 17.9%. According to the current medium-term management plan, segment EBITDA margin target is 17%, so we're able to exceed that. This means that it marks the first time that all segments have achieved this target on a quarterly basis. As I mentioned at the outset, electronics is for AI, data centers, impact is giving us a positive result. and I may have said this before, we were expecting an early recovery. However, finally, I think we are seeing that recovery is on track. Now, next I would like to talk about the status of investment of our company. I earlier talked about that we will be monitoring the world global situation and we'll be carefully listening to the customers' voices and we have proceeded with capital investments carefully. taking those into account. Now, we have actually stopped most of our capital expenditure because we have not known what will become of the tariff impact. However, the capex through the third quarter totaled to 78.4 billion yen compared to the previous year. It is still at a lower level. However, the industrial gas business. In order to expand industrial gas business, we need to make investments. Therefore, in the latter half of the year, we have seen more momentum recover. So we would like to catch more of those CapEx projects. However, still, there are investment risks. Seeing the uncertainty in the global situation, we I would like to grasp for sure the growth opportunity so that we will be able to grow our business capturing investment opportunities. And I would like to talk about the backlog situation of CapEx later. Now, topics. First of all, we announced the construction of a – well, in our Tsukuba Laboratory. laboratory at the Taiyo Nissan, that we will be making a R&D center for advanced materials for the electronics industry called tentatively called Advanced Electronics Materials Development Building, and we expect it to be completed in March 2027. At this new facility, we aim to develop new products that address not only gas but liquid materials, new products that address the evolution of the electronics industry, And we would like to also promote development through collaboration both within our group and with external partners. And as we have been mentioning from the past, the current midterm management plan will end this March. And a new midterm management plan right now. is being reviewed proactively. NS Vision 2026, which is a current medium-term management plan, will end, as I mentioned earlier, this March. So as for the new MTP starting from April this year, on March 30th next month, we would like to conduct a briefing to explain about the new MTP as our team has announced, and we will have a venue near the Tokyo Station for the briefing. This will be held both face-to-face as well as online, a hybrid format. So we welcome your participation. And additionally, our fourth quarter earnings announcement. and conference call are scheduled for May 11th. And the earnings briefing, where we will explain our business plans for the next fiscal year and beyond, based on this fiscal year's full year results, is scheduled for May 22nd. Now, next, I would like to explain our future capital investment execution plan. As in previous presentations, this chart shows the composition of our capital investment plan by customer industry. Our backlog... Backlog as of December 31, 2025 stood at approximately 150 billion yen, no different from the second quarter. However, there are some replacements. We have added new projects, six of them, and completed. There were four completed projects. There are also foreign exchange impacts as well. However, as we mentioned in the first half, we have not been making CapEx, Nomad CapEx at all. Therefore, in the second half, we would like to make investments for these projects. Our industrial gases itself contribute to a sustainable society, and we are communicating this proactively recently. And we don't know whether this is a good categorization. However, if I may, new CAPEX contributing to a sustainable society, According to our calculation, it is approximately 38% of our total backlog, as shown on the lower part of this slide. For projects below 500 million yen are not included here. So now I would like to hand over to the CEO, Alan, to walk you through the financial results. Alan, please. Holdings.

Please turn to slide eight as I start my presentation on performance. Go to slide nine now, please. For the quarter, October 1, 2025 through December 31, 2025, revenue grew 5.7% or approximately 2% excluding currency impact compared to the same time last year. Core operating income increased by 12.3% or 7.6% on a constant currency basis. CUI margin improved to 15%, up 90 basis points, and EBITDA margin rose 150 basis points to 24.5%. As mentioned by Hamad Hassan earlier, this quarter marks the first time that all NSHD business segments exceeded EBITDA margin of 17%, and as a group achieved more than 24%, meeting our medium-term plan goal. Year-over-year growth and margin improvements were primarily driven by price management, operational excellence, productivity, and best practice initiatives applied across businesses and geographies, and also contributions from acquisitions. On the right-hand side of the page, we summarize the revenue bridge for Q3. Foreign exchange contributed 3.7%, primarily due to yen weakness against major currencies. Price added 1.8%, while pass-through and surcharges decreased about 1%, reflecting lower on-site energy costs. Volumes declined minus 1.8%, and then the other category reflects positive contributions from acquisitions in Europe and Oceania, as well as strong equipment sales in Japan electronics. There were no significant non-recurring items this quarter, resulting in operating income increasing 12.2% year over year. Turning to guidance, as shown on page 23, today we're revising our full-year revenue and profit outlook. Although gas demand remains soft due to ongoing macroeconomic and geopolitical uncertainty, favorable currency tailwind, and continued contributions from M&A, and sustained price and productivity action supported an improved outlook. We now expect to exceed our original revenue forecast by 3.1%, resulting in 1.33 trillion yen, and we expect COI of 196 billion yen, a 2.6% increase compared to our original forecast of 191 billion. The currency rates assumed for the revised forecasts are 150 yen per one USD and 170 yen per one euro. In addition, we also expect to achieve our midterm plan EBITDA margin goal of 24 percent. This one we determined was one of the hardest ones to achieve, and it looks like we're going to achieve favorably. Please turn to page 31. Operating cash flow rose 16.5 percent year over year. Investing cash outflows rose 22 percent, primarily due to the OCEAN acquisition. Free cash was slightly negative for the nine-month period due to acquisition-related payments. Now, we'll review results by segment. In Japan, price management efforts continued in specialty gases and CO2. However, soft volumes more than offset the revenue growth. Industrial gas-related equipment and installation projects performed well, while electronics-related projects decreased versus prior year. Electricity costs remained stable with a slightly downward trend. The revenue for Q3 in Japan was 100.6 billion, down 0.2 billion yen, or minus 0.2 percent year over year. Core operating income of the segment was 12.6 billion yen, up 0.4 billion yen, or 3.4%. CUI margin improved by 40 bps, which is basis points, to 12.6%, and EBITDA margin improved by 70 basis points to 17.4%. Page 11. Revenue growth in the U.S. was supported by favorable foreign exchange, strong price initiatives, and solid equipment installation sales. Inflation headwinds remain, but due to price actions and productivity measures, COI increased year-over-year. Q3 revenue was 92.6 billion yen, up 2.1 billion yen, or 2.3%, year-over-year, excluding currency impact. It was up 1.3%. Core operating income was 13.9 billion yen, up 0.4 billion yen, or plus 2.6% year-over-year, and excluding currency impact, COI was up 2.1%. COI margin and EBITDA margins were 15.1% and 28% respectively, representing an increase of 10 basis points on COI and 80 basis points on EBITDA. We continue to drive price actions, productivity initiatives, and cost reduction, and also savings efforts to improve profits of this business. Slide 12. In Europe, onsite volume softness persisted. However, positive price performance, stable to moderate energy costs, and contributions from the Italian acquisition supported solid year-over-year growth and margin expansion. The revenue for Q3 in Europe was 90.2 billion yen, up 6.9 billion yen, or 8.3% year-over-year. However, excluding currency, revenues were slightly negative at minus 2.3%. Core operating income was up 18.5 billion yen, or up 3.1 billion, or 20.4% increase year on year, while the COI improvement was a more modest 8.6% increase, excluding currency. The core operating income margin improved by 210 basis points to 20.6%, and EBITDA margin rose 280 basis points to 33.5%. Next page, please. Strong revenue and profit growth were driven in the Asian Oceania segment, primarily by the Oceania acquisition and continued strength in specialty gases and electronics-related installation projects. Q3 revenue is 55.5 billion yen, up 10.3 billion, or 22.7 percent year-over-year, or an 18.1 percent improvement with constant currency. Core operating income was 5.9 billion yen, plus 1.9 billion yen, or 47.2% year-over-year. Excluding currency, CUI grew at 40.5%. CUI margin increased 180 basis points to 10.7%, and EBITDA margin was up 240 basis points to 17.9%. Next page, please. Thermos. Thermos experienced weaker results due to sales decline in its core markets of Japan and Korea. In addition, increase in procurement costs more than offset pricing actions and cost optimization efforts. Revenue for Q3 was 7.6 billion yen, down 0.4 billion yen, or minus 5.1 percent year-over-year. The decrease was 5.2 percent X currency. For Core OI, it was 1.3 billion yen, down 0.3 billion yen, or 17.6 percent versus prior year. Ex-currency COI was down 19.2 percent. The segment COI margin declined by 270 basis points to 17.6 percent, and EBITDA margin declined by 240 basis points to 23.2 percent. For your reference, please refer to pages 15 through 21 for the first nine-month detail. I will not cover that information today. As previously explained, we have revised our full-year forecast to show updated financial expectations for this fiscal year. And this concludes my comments and full-year outlook. Thank you very much for your attention.