NITTOSEIKO CO.,LTD. Q4 FY2025 earnings call

Evaluation of Previous Mid-Term Management Plan (Mission G-second)

• Growth#1 (Business Expansion Strategy): Both sales and operating profit KPIs were not met. Progress in overseas business expansion was slower than planned, and rising raw material and input costs put pressure on profitability.
• Growth#2 (Environment Strategy): CO2 emission reduction and waste reduction targets were exceeded, outperforming plan.
• Growth#3 (Human Capital Strategy): Both labor productivity improvement and employee engagement KPIs were not met.
• Growth#4 (Financial Strategy): ROIC reached 6.1% and ROE reached 6.1%, both below target. Management recognizes profitability as a core challenge that the new mid-term plan will address.

New Mid-Term Management Plan (Mission G-final, 3-year period starting 2026)

The plan maintains the original four growth strategies, with the theme "Toward the completion of the monozukuri (manufacturing) solutions group, and a new frontier of creation and innovation", focusing on four core priorities: business and product portfolio reform, expansion of environmental and social solution businesses, maximization of human capital through both meaningful and accessible work, and high-efficiency, high-return strategic investment.

• Targets for 2028: Prioritize profitability, with a top target of 6 billion yen operating profit; 63.2 billion yen total sales; 9.6% operating margin; ROE of 9% or higher; ROIC of 8% or higher. Non-financial sustainability targets include 28% CO2 emission reduction vs 2019, 41% waste reduction vs 2019, 98,000+ tons of user CO2 reduction contribution, 7.6% labor productivity improvement, and 3.8 point employee engagement improvement.

Growth#1: Business Expansion Strategy by Segment

• Fastener Business: Target 43.1 billion yen sales by 2028. Leverage 102 patents and original patented products to build competitive advantage, pursue global expansion focusing on expanding sales to non-Japanese companies in the Indian market.
• Industrial Machinery Business: The company is the world's second-largest player in automatic screw tightening machines. Targets achieving global top market share, accelerating development of new competitive products, and pursuing business expansion including M&A to overcome segment challenges. Plans to shift from being a screw tightening driver manufacturer to a "true nutrunner manufacturer".
• Control Business: Continue advancing commercialization of organic solvent recycling equipment and research on PFAS decomposition equipment. Expands environmental business to solve social problems, and enters new markets by applying existing ground survey and part inspection technology.
• Medical Business: Continue R&D for high-purity medical magnesium materials, and expand sales of medical components through group collaboration.

Growth#2: Environment Strategy

Three core priorities: addressing environmental impacts across all business activities, supporting stakeholders and solving social problems, strengthening governance to drive management improvement. The company continues to develop products that solve social issues, including the ongoing joint industry-academia-government development of PFAS decomposition technology to address local PFAS contamination in Ayabe City, where the company is headquartered. Aims to create unique value in environmental business using the company's proprietary technology and know-how.

Growth#3: Human Capital Strategy

Three core priorities: implement "meaningful work" reform to generate earning capacity, build a working environment that improves productivity, and cultivate a team of problem-solvers through clear career paths and expanded learning opportunities. Will build systems to properly evaluate employee growth, expand flexible work options with fair compensation, and improve training and education programs.

Growth#4: Financial Strategy and Cash Allocation

• Core priorities: formulate investment plans with rigorous return calculation and evaluation, improve efficiency through group restructuring, improve PBR and expand shareholder returns. Management recognizes that the company has not yet achieved a PBR of 1x, with profit margin improvement as the core challenge to address this.
• Shareholder return: Updated policy sets a target of achieving 3% or higher DOE by the final year of the mid-term plan, and introduces a progressive dividend with a lower bound of 24 yen (up from the prior 18 yen lower bound).
• Cash allocation policy: Over the 3-year plan period, 21 billion yen total investment is planned, funded primarily by operating cash flow, balancing financial soundness and growth investment:
  1. Capital expenditure: Prioritize concentration of capital in high-growth overseas subsidiaries, focusing on target regions including India, Vietnam and Europe.
  2. R&D: Shift toward profitability-focused new product development, with priority on expanding market share for next-generation products in the high-margin Industrial Machinery segment.
  3. Strategic investment: Make agile investments for M&A and new businesses, including continued product development for the Medical business, research on commercializing PFAS decomposition processes, and preparation for launch of a new product to prevent crane overturning accidents planned for 2026.

Operational Updates

• Global expansion progress: Over the prior planning phases, the company established a new subsidiary for disabled workers in 2019, acquired Nitto Seiko Analytictech (expanding the Control segment) in 2020, launched the Medical business segment in 2020, acquired KM Seiko (expanding the Fastener segment into residential construction) in 2020, established the first European subsidiary in Germany in 2023, and acquired a stake in India's Vulcan Group in 2025. The company now has 30 group companies across 10 overseas countries and Japan, with over 2,200 employees.

For the 2025 December fiscal year, total consolidated net sales reached 50.238 billion yen, a 6.7% increase year-over-year.

1. Fastener Segment: achieved increased revenue and increased profit. Revenue grew driven by the consolidation of an Indian subsidiary starting from Q2, a sharp increase in precision screws for game consoles, and strong performance in CASE-related ADAS products for the automotive sector. Data center demand related to generative AI also contributed to growth, with most of the 405 million yen (13.1% year-over-year) increase in the segment's other sales coming from data center-related products.
2. Industrial Machinery Segment: achieved decreased revenue and decreased profit. The segment saw strong performance in energy-related demand, especially for power sector renewal projects, but overall revenue and profit declined due to slowing global EV sales and the impact of US tariffs that caused moderate stagnation in capital investment.
3. Control Segment: achieved decreased revenue and decreased profit. While demand for chemical/pharmaceutical and domestic analytical/measurement instruments was strong, the segment faced a decline from the reactionary impact of large orders booked in the prior year.
4. Medical Segment: revenue increased year-over-year, which was driven by the company's segment and product portfolio restructuring.

Operating profit for the full consolidated period was 3.431 billion yen, a 3.2% increase year-over-year. The profit increase came from improved profit margins in the strong-performing Fastener segment after supply chain review and manufacturing cost reduction efforts. However, the operating profit margin declined temporarily due to the booking of 302 million yen in India M&A-related expenses, plus increased labor costs from a company-wide 4.06% wage increase (5.7% for employees under 35, 5.9% for employees under 30). Ordinary profit was 3.409 billion yen, a 4.6% decrease year-over-year due to foreign exchange losses.

By overseas region: India sales increased approximately 1 billion yen year-over-year, largely from the subsidiary acquisition; excluding India, total overseas sales increased approximately 200 million yen. Europe, South Asia and Southeast Asia performed solidly and exceeded prior year sales, while East Asia (led by China) and North America (led by the US) came in below prior year levels.

• For the 2026 December fiscal year, management guides for: 52 billion yen total consolidated sales (3.5% increase year-over-year, 1.761 billion yen increase), targeting 6 consecutive years of revenue growth following 2025's all-time high sales.
• Operating profit is guided to 3.8 billion yen (10.7% year-over-year increase), with a 7.3% operating margin, which would exceed 2025's post-Lehman Crisis high of 3.431 billion yen.
• Ordinary profit is guided to 3.8 billion yen (11.5% year-over-year increase), with a 7.3% margin.
• Profit attributable to parent company shareholders is guided to 2.3 billion yen (6.9% year-over-year increase), with a 4.4% margin.
• 2026 segment outlooks:
  • Fastener: Expect continued solid demand from data centers and game consoles driven by generative AI growth; capture India market growth and expand the European market in collaboration with overseas subsidiaries. Improve profit margins through continued high-margin CASE product orders, portfolio review, and cost reduction including raw material sourcing.
  • Industrial Machinery: While automotive market uncertainty remains, expect continued orders from expanding adoption of ADAS features. Strategic reinforcement of overseas sales is expected to secure higher sales to India than prior years; US sales have shown signs of bottoming, and the segment will grow new data center market demand which has already seen growing order volume.
  • Control: Already booked a large system order for a pharmaceutical company, which will contribute to 2026 sales. Expect increased demand for analysis equipment following the implementation of PFOS/PFOA regulations in Japan; growing demand for elemental analyzers and automatic sample combustion devices for petroleum-related clients in India and the Middle East. Organic solvent recycling equipment will launch commercially in 2026 after demo unit development.
  • Medical: Aim to maintain stable sales through product portfolio restructuring aligned with market demand, and continue development work toward commercialization of medical magnesium materials.

• Slowing global EV sales and US tariffs have caused stagnation in capital investment that negatively impacted the Industrial Machinery segment, and this market uncertainty remains for 2026.
• Geopolitical risks and ongoing trade impacts (including US tariffs) create continued uncertainty for business performance, leading management to set a relatively conservative 2026 profit guidance despite the lap of 2025's large one-off M&A expenses.
• China-led East Asia and US-led North America sales have declined year-over-year in 2025, creating continued regional performance pressure.
• The prior mid-term plan missed most of its key targets, including sales, operating profit, human capital KPIs, ROIC, ROE, so the company faces pressure to deliver improved performance under the new 3-year plan.
• Medical magnesium commercialization requires a lengthy process of clinical trials, regulatory approval and stakeholder coordination, so product launch is not expected during the current mid-term plan period, limiting near-term revenue contribution from the new business.
• The company has not yet achieved a PBR of 1x, with profitability improvement remaining a key unaddressed challenge for improving corporate value.

Q: What were the segment-by-segment growth target performance for the previous mid-term management plan?

A: Detailed individual performance figures are not available on hand. Management recognizes that slower-than-planned overseas expansion was the biggest challenge that prevented the overall plan from hitting targets.

Q: Is sales of medical magnesium materials expected to be booked during the new mid-term plan period? What is the current progress of clinical trials?

A: Nitto Seiko expects sales of medical magnesium materials to remain flat compared to current levels through 2028, and product launch is expected to happen after the end of this mid-term plan period. Currently, patents have already been obtained in Japan and the US, with patent applications pending in 6 other countries awaiting approval. Clinical trials and regulatory approval processes are still ongoing, with coordination with medical institutions and Japan's Ministry of Health, Labour and Welfare in progress. The company is still working toward regulatory approval, and has not yet moved to the next specific development stage.

Q: What specific products and applications are growing from generative AI demand across segments, and what is the current sales scale of generative AI-related products?

A: Generative AI has driven strong growth in data center demand, which impacts each segment differently: Fastener segment supplies components for data center equipment; data center facilities are highly sensitive to dust, debris and metal shavings, so the company's proprietary CP Grip product, which absorbs debris during screw assembly, meets this demand and has seen growing adoption as data center construction expands globally, driving Fastener segment growth. Industrial Machinery segment supplies automatic screw tightening machines for data center equipment assembly lines. Control segment supplies flow meters for the cooling systems required for data center equipment. Overall, demand is growing across all segments for data center-related products. For sales scale, the 405 million yen (13.1% year-over-year) increase in Fastener segment's other sales, noted in the supplementary February 10 earnings materials, is mostly attributable to data center-related CP Grip sales. This category is currently grouped into "other sales" as it is growing rapidly, and the company will implement separate aggregated tracking for this demand going forward. No aggregated sales figures are currently available for Industrial Machinery and Control segments. Most of the 400 million yen sales increase in Fastener's other category is driven by data center demand related to generative AI, though not 100% of the increase.

Q: With the 3 billion yen one-off India M&A expense lapsing this year, the 3.8 billion yen 2026 operating profit target seems conservative. What major new expenses are planned for this year that explain the target?

A: There are no major new large expenses planned for the current fiscal year. However, many factors including geopolitical risk and the impact of US tariffs still create uncertainty for performance, so the 2026 forecast is built based on prior year performance to account for this uncertainty.

Q: What is the most important initiative to achieve the ROE and ROIC targets?

A: The most important initiative is portfolio restructuring, including full group restructuring to improve efficiency of management resources and generate synergies across the group's 30 companies, leveraging each company's strengths while restructuring for greater efficiency. In addition, the company will strictly evaluate all investment plans to ensure only effective investments are implemented, while continuing to expand shareholder returns. Under the target of 9%+ ROE and 3%+ DOE, the company plans to advance initiatives targeting a 40% payout ratio as a guideline.