Nippon Air Conditioning Services Co.,Ltd. Q2 FY2026 earnings call

• Company Overview & Core Competencies:

  • Nihon Kucho Service is a comprehensive building facility maintenance service provider founded in 1964, with 99 total locations (89 domestic, 10 overseas). 80% of its 3,284 consolidated employees are technical staff, highlighting the company's technology-focused identity.
  • Core competitive advantages: High technical capability from its large technical workforce, independent manufacturer-unconstrained solution consulting, and end-to-end total support covering maintenance, management and construction across its national network.

• 2Q 2026 Fiscal Year Operational Performance:

  • Delivered record 2Q results, with revenue up 9.2% year-over-year and operating margin increasing from 6.7% to 7.9%, with all segments outperforming prior year results.
  • Improved profitability driven by easing competitive pressure, stronger than expected capital investment activity, successful selective acceptance of profitable projects, and appropriate price pass-through of higher costs.
  • Selling, general and administrative (SG&A) costs increased due to base pay raises, and new depreciation from the newly completed technology and training center, new Hokuriku subsidiary office, and new Kyushu branch office; the company notes its SG&A ratio remains below industry averages, reflecting controlled growth investment.

• 2024 Mid-Term 5-Year Management Plan Progress:

  • The plan sets 8 key performance indicators (KPIs) focused on sustainable value creation through human capital improvement.
  • Completed KPIs achieved target: Employee engagement score (72.0 points vs 70+ target), focus on special facility projects (74.4 score vs 70% revenue target), customer CO2 reduction (achieved ~14,500 tons of CO2 reduced in 2024), average operating margin (6.5% achieved vs 6% target), ROE (12.5% achieved vs 10% target), sustainable shareholder return (met 45 yen per share dividend, 50% payout ratio target).
  • Underperforming KPIs: Core technical capability index CAGR of 0.7% missed target; overseas operating profit is below plan, though Vietnam and Singapore show promising growth.

• Strategic Investment:

  • The new Technology and Training Center launched full operations in April 2025, with realistic training facilities including simulated clean rooms and maintenance mechanical rooms to deliver practical training for new hires and upskilling for existing employees, supporting continued technical capability improvement.

By business segment: 1. PM (Preventive Maintenance, on-site inspection services): 35% of total revenue, performs on-site inspection, maintenance, repair, and replacement of building facility systems centered on air conditioning. 2. FM (Facility Management, on-site management): 29% of total revenue, specializes in on-site facility management particularly for large hospitals, combining maintenance and daily operational management. 3. RAC (Reform and Construction, renewal construction): 36% of total revenue, focuses on renewal construction of existing air conditioning, water supply and sanitation facilities for hospitals, factories, and office buildings. By customer facility type: - Hospital and research facilities: Stable growth in both maintenance and renewal construction, with growing large-scale projects. - Manufacturing factories: Growth in both maintenance and renewal construction, driven by increased equipment replacement and renovation work. - Other special facilities: Growing demand, particularly for data center-related maintenance and inspection work. - Office buildings: Stable growth in maintenance, with renewal construction volume matching prior year levels. By product category: - Annual contracts: 40.4% of 2Q revenue, steady year-over-year growth, with heavy concentration of hospital clients. - Spot maintenance: 24.0% of 2Q revenue, particularly strong growth from manufacturing clients. - Renewal construction: 35.6% of 2Q revenue; order volume grew from 2,001 to 2,066 year-over-year, and average order value increased 20% from 4.04 million yen to 4.866 million yen, driven by successful price pass-through of higher labor costs and selective acceptance of higher-margin projects. Overseas segment: Total 2Q revenue was 0.9 billion yen, with an operating loss. Performance varies by region: China and Thailand struggle due to automotive industry downturn, while Singapore and Vietnam show strong growth.

• Full year 2026 March fiscal year guidance maintained at +2.4% year-over-year revenue growth and +0.2% year-over-year operating profit growth. The guidance was set conservatively in early 2025 due to uncertainty over potential impacts from US tariffs, which have not materialized through the first half. Management remains focused on delivering the current guidance target.
• For the 2024 mid-term 5-year plan ending 2029 March fiscal year, the company maintains its target of 3.5 billion yen in overseas revenue and 175 million yen in overseas operating profit.
• The company maintains its long-term shareholder return guidance: a minimum 40 yen per share annual dividend, 50% consolidated payout ratio, 10% minimum ROE, and ~5% return on equity target.
• Management expects continued long-term industry growth driven by rising demand for air conditioning system upgrades related to decarbonization, workplace environment improvement, energy efficiency, and expanding data center infrastructure.

• The international macro environment remains unstable, with sustained price inflation and ongoing trade policy uncertainty that could lead to project delays or cancellations.
• The overseas segment continues to underperform, with operating losses in the 2Q 2026 period, and China and Thailand facing ongoing downturns tied to weakness in the automotive industry.
• Progress on improving core technical capability index has been slower than targeted under the mid-term plan, requiring additional focused effort to hit long-term goals.
• SG&A costs are rising driven by required wage increases and depreciation from growth investments, which could pressure margins if revenue growth slows.

Q: What has driven the recent improvement in completion construction profit margins, and what is the realistic upper limit for gross margins on this work? / A: The main driver of margin improvement is higher profitability at the initial contract stage, rather than extra change order work. Easing competitive pressure has reduced bidding competition for projects, as most competitors have sufficient work volume, allowing the firm to secure appropriate margins at contract signing. The firm does not set an explicit upper margin limit; it avoids extreme high margins to maintain long-term customer relationships, and expects margins are unlikely to rise more than 10% from current levels.

Q: What is the current status of semiconductor-related maintenance contract orders in the Kyushu region, and what is the future outlook for renewal work? / A: The firm has already secured work on large new semiconductor facility investments in Kumamoto, Kyushu. New construction projects have a 1-2 year warranty period held by the original construction contractor, so the firm expects increased maintenance and future renewal project flow after this period ends. The firm already has extensive existing relationships with semiconductor and AI-related companies, and growing industry activity will steadily increase future work volume.

Q: How has challenging hospital industry operating conditions impacted the firm's order environment? / A: Most of the firm's hospital clients are large facilities with 400+ beds, which generally have more stable operating conditions than smaller facilities. While hospital consolidation is ongoing, the firm typically retains contracts with the merged consolidated facilities, so there is little negative impact on total volume. Contract prices also regularly incorporate annual adjustments for labor cost increases, so there is no material margin pressure from this segment. Overall, the impact is currently neutral, with no material positive or negative changes to the firm's business.