NISSO GROUP Co.,Ltd. Q4 FY2025 earnings call

• Corporate Structure Update: Nisso Group transitioned to a holding company structure in June 2025, now operating with 19 total entities (13 consolidated subsidiaries, 3 non-consolidated subsidiaries, 2 affiliated companies). The 4th Medium-Term Management Plan (running September 2024 – August 2027) has 2 years remaining.
• M&A Strategy and Track Record:
  • 14 total M&A deals completed since 2016; 4 companies (Taiho, Formtex, Izumi Seisakusho, Anai Komuten) were added to the group in FY2025 August, the first year of the current medium-term plan.
  • Cumulative net investment of 8.04 billion yen has generated 6.0 billion yen in cumulative recovered EBITDA, with strong overall returns; all 3 companies acquired in the first medium-term plan have already fully returned invested capital, and acquisitions from later plans are performing well.
  • 55% of the 5.0 billion yen total M&A investment budget (2.75 billion yen) has already been deployed. The company prioritizes disciplined investment, focuses on manufacturing and adjacent businesses aligned with its core "monozukuri" (manufacturing) capability, and addresses the social issue of business succession at Japanese SMEs.
  • Post-merger integration (PMI) prioritizes preserving acquired companies' talent and culture, with a focus on transparent management, communication, and rolling out consistent financial and governance frameworks. Goodwill impairment risk is low: goodwill-to-equity ratio is only 16.2%, and goodwill amortization as a share of SG&A and revenue remains at a low level with minimal impact on profits.
• Organic Growth and Capital Investment:
  • 720 million yen of the 1.0 billion yen total leading investment budget has been deployed, focused on new products, residential-related development, and digital manufacturing services. The Kanaete manufacturing matching platform, launched in October 2023, has seen steady growth in all key KPIs (item count, SKUs, listed partners, manufacturing partners). The Crafree residential equipment brand opened a permanent flagship showroom in Shinjuku, Tokyo in June 2025, featuring its iF Design Award 2025-winning Nuar product line.
  • In metal processing, Nisso Pronity expanded metal sandwich panel production capacity at its Fukushima No. 2 plant; prior period sales reached 134% of the level two years prior, with continued focus on expanding panel sales. Watanabe Technos is seeing growing inquiries for soundproof enclosures for data center emergency generators, driven by broader data center investment growth, and is expanding production capacity to meet rising orders.
  • In construction, the company is expanding sales territories and strengthening sales to major general contractors, partnering with Nisso Pronity to expand fire-resistant and new non-combustible insulation panels. It is also strengthening work on battery-equipped solar power generation and grid-scale energy storage projects.
  • In tiles, the company is strengthening product lineups for floor tiles, launching new wet-process products, and prioritizing upstream sales focused on the Kanto region.
  • In chemical products, the company has launched cross-group working groups to capture synergies between existing Azuma Rubber Industry and the three newly acquired companies, focused on sales promotion and internalization.
• Group Governance and Support Expansion: To support growth from M&A, the holding company has expanded cross-entity support capabilities. This includes recruiting and training 7 senior professional leaders (dubbed the "Seven Samurai") to drive group-wide strategy, centralizing all group customer information into a shared database, and launching cross-company working groups segmented by metal processing, chemical products, and building materials to drive cross-selling, internalization, and new product development.
• Capital Cost and Shareholder Value Focus: The company estimates its cost of capital at 6-7%. ROE remains above cost of capital but is on a declining trend, PBR trades between 0.4x and 0.6x (below 1x), and the market currently assigns low valuations to the company's growth prospects. Key priorities include improving profitability, reducing earnings volatility (driven by the company's high exposure to flow-type construction/建材 projects that are sensitive to market cycles and project size), growing EPS, and achieving PBR of at least 1x. The company has strengthened IR activities: increasing IR event participation from 1 to 4 times year-over-year, adding quarterly earnings disclosure starting from Q2 FY2025, publishing earnings call videos, holding online investor events, and increasing media exposure to improve market recognition of the company's changed business profile (metal processing now accounts for only 34.7% of revenue, down from 97.6% in 2016, so the current "Metal Products" industry classification does not reflect the diversified business model).
• Shareholder Return: For FY2025 August, the company will pay a total dividend of 40 yen per share, including a 10 yen per share special dividend to commemorate the holding company transition. For FY2026 August, a 2 yen per share increase to 42 yen per share is planned.

1. Metal Processing Segment: Revenue was flat year-over-year; operating profit decreased, driven by higher depreciation expenses and temporary increased outsourcing for data center-related products at Watanabe Technos. It contributed 34.7% of total consolidated revenue as of FY2025 August. Ending order backlog increased 63% quarter-over-quarter (from 1.9 billion yen to 3.1 billion yen), almost entirely from new large data center-related project orders. 2. Chemical Products Segment: Increased both revenue and operating profit, driven by full 9-month contribution from newly acquired Taiho and Formtex, which were added to the group in October 2024. 3. Construction Segment: Significantly increased both revenue and operating profit, driven by strong sales growth from large Tokyo redevelopment projects and successful negotiation and collection of additional construction fees for design changes and extra work in Q3 FY2025. Total ending consolidated order backlog decreased 36.3% year-over-year to 5.589 billion yen, almost entirely due to digestion of these large redevelopment projects, but order backlog bottomed out and reversed quarter-over-quarter across all segments. 4. Tile Segment: Decreased both revenue and operating profit, due to industry-wide decline in domestic housing demand. 5. New Business Segment: Early-stage growth focused on residential equipment sales via EC platforms, with ongoing strategic investment.

• For FY2026 August full year, the company guides: 23.6 billion yen consolidated revenue (up 2.4% year-over-year), 0.9 billion yen operating profit (down 34.9% year-over-year), 0.89 billion yen ordinary profit, 0.52 billion yen net profit, and 1.941 billion yen EBITDA (down 9.5% year-over-year).
• Revenue growth is expected from full-year contribution of the three companies acquired in FY2025, which offsets the expected decline from the digestion of large Tokyo redevelopment projects in the construction segment.
• Lower operating profit reflects higher goodwill amortization from recent M&A, the construction segment revenue decline, and higher costs from new strategic investments, offset partially by the absence of FY2025 one-time costs and incremental profit contribution from new M&A.
• The 4th Medium-Term Management Plan's final target for FY2027 August remains 30.0 billion yen consolidated revenue and 2.7 billion yen EBITDA, with the company continuing to pursue organic growth and M&A to hit these targets. Short-term performance in FY2026 is expected to be tight due to the construction segment reaction, but the company remains focused on medium-term growth investment.

• Earnings volatility is high due to the large share of flow-type construction and building material revenue, which is highly sensitive to macroeconomic investment trends and large project timing.
• The construction segment will face short-term headwinds in FY2026 from the digestion of large Tokyo redevelopment projects completed in FY2025, leading to an expected revenue and profit decline.
• Widespread labor and material cost inflation creates pressure on margins, though the company is progressing with price pass-through to customers.
• The tile industry's annual pricing convention creates a lag for price pass-through when costs rise during the year.
• While current orders for Izumi Seisakusho (automotive plastic processing) are secured for the near term, future U.S. tariff policy could impact Japanese automotive exports and flow through to lower orders for the business.
• M&A investment returns are facing pressure, as more target companies are asking for valuations that imply payback periods longer than the company's 5-year target benchmark.

Q: What is the current status of Watanabe Technos' data center-focused business? / A: Watanabe Technos' order backlog for data center-related products has tripled year-over-year. Nearly all of the 12 billion yen increase in metal processing segment order backlog from Q3 to Q4 FY2025 comes from this segment, driven by a domestic data center construction boom from major global and domestic telecom/tech companies, which is expanding beyond the Kanto region to rural areas. The company is currently evaluating long-term project opportunities that stretch 5 years out. While the segment still represents a small share of total segment revenue, the company is expanding its production capacity this year, already leveraging adjacent Nisso Pronity production capacity for partial manufacturing, and is evaluating overseas sourcing to meet growing demand.

Q: What is the outlook for Nisso Engineering in the construction segment after the large Tokyo redevelopment projects wind down? / A: Nisso Engineering's revenue declined from 6.8 billion yen last year to 4.4 billion yen this year, and FY2026 will remain challenging due to the project digestion hangover. Industry-wide, total construction starting floor area has been in a steep multi-year decline, and steel demand remains very weak per industry reports. However, the company is seeing early large project activity for FY2027, and is focused on strengthening customer relationships and expanding sales territories to build back order volume for that period.

Q: What is the outlook for solar repowering and mounting frame demand for your construction segment? / A: Solar mounting frames are made of steel, so they are fully recyclable with no material issues. Growing demand for repowering (replacing old 10-15 year old solar systems with new higher-efficiency panels) is already driving increasing orders for replacement mounting frames from the company. The trend of adding energy storage after the original FIT incentive expires is also creating additional demand growth for mounting and construction work, so the company expects steady demand growth from this segment going forward.

Q: What is Nisso's target payback period for M&A investments based on EBITDA multiples? / A: The company's target and benchmark for M&A payback is 5 years. However, in the current M&A market, more targets require longer payback periods, so the company will consider deals with 6-7 year payback if they deliver strong synergies and expand the company's core manufacturing capabilities. The 5-year target remains the baseline principle for all investment decisions.