CHARM CARE CORPORATION Q2 FY2026 earnings call

Core Strategic Focus (Medium-Term Plan 2026 June - 2028 June)

• The company is pursuing a "return to origin" strategy focused on its core nursing care business, with a strict commitment to on-site first principles to improve frontline operational capabilities, as all revenue and brand value is generated at the individual home level.

Education and Training Overhaul

• Shifted training from off-site center-based group training to on-site OJT, where head office training staff visit individual homes to provide direct, hands-on coaching to improve in-place care services. Training staff on-site visits have already tripled year-over-year in the first half, with positive feedback from both staff and residents/families.
• Monthly training for home managers conducted directly by the CEO and COO to build management capacity in preparation for increasing new home openings.

Productivity and Staff Compensation Improvement

• The multi-year lean operations project (started 3 years ago) has delivered consistent annual productivity growth, with profit per employee rising steadily year after year.
• Labor cost savings from the lean project are fully passed through to frontline staff as compensation increases, delivering two consecutive years of base pay raises. The company's average employee annual salary is 4.675 million yen, which is significantly above the nursing care industry average of 4.135 million yen.
• Pursuing regulatory approval for relaxed "3:0.9" staffing ratios (vs the legal standard of 3:1), after becoming the first company in Japan to win approval for this relaxed standard in Nishinomiya City last fiscal year. This fiscal year, the company is pursuing approval at 10 additional homes, targeting 5-6 approvals this fiscal year, with plans to expand to more homes next fiscal year.
• Implemented a selective 3-day workweek system in July 2024 as part of work style reform. Approximately 60% of eligible nursing care staff have selected this option, with a voluntary opt-out for staff who cannot accommodate the schedule due to personal or physical needs. The company successfully built scheduling and rotation systems to support mixed 3-day/2-day workweeks across 24/7 operations with mixed employment types.
• The 3-day workweek system has delivered strong results in recruitment: new graduate hiring far exceeded plan, so hiring was closed at 110 confirmed new graduates; mid-career applications increased 20% year-over-year while hiring costs decreased.
• Moving to a specialization and division of labor model: high-skill staff handle complex care tasks (e.g. excretion assistance, transfer) to improve service quality and speed, while other staff focus on routine tasks and resident-centered care to improve customer satisfaction.

Operational Expansion

• New home openings remain a core competitive strength. The company has expanded its geographic footprint into new areas of Kanagawa and Saitama prefectures. After some 2027 openings were pushed back, the 2028 June fiscal year is on track to hit the planned 15 new annual openings, with multiple properties already under consideration for 2029 and beyond. Multiple projects are in late-stage due diligence in the Nagoya region, with announcements coming as soon as agreements are finalized.
• M&A activity: The company acquired the "Merci Masumi" care home from Biken Techno, and rebranded it as "Charm Ikeda Masumicho" starting March 1. While this home has challenges with low occupancy and operational inefficiencies, it has an excellent location, and the company expects to improve performance within 1 year using its operating expertise. Multiple additional M&A opportunities of varying sizes are under active review, with announcements coming when deals are finalized.
• The company raised its annual new opening target from a prior maximum of 10 homes per year to 15-20 homes per year. In the current environment of rising development costs, the ability to secure M&A opportunities is a critical driver of this expanded target, and the company continues to actively source deal opportunities.

Technology Initiatives

• The AI Care Planner co-developed with NTT Group is currently in prototype testing at 4 homes, with full rollout to all homes planned after April. The company expects this tool to significantly improve care manager productivity, creating additional capacity for further staff compensation increases and contributing to higher corporate profits.

1. Care Business (core segment): Revenue increased 12.6% year-over-year, segment profit increased 26.9% year-over-year. Overall profit margin for the segment rose 1.6 percentage points to 14.1% from 12.6% in the prior year period. Existing care-attached homes saw profit margin increase 0.9 percentage points year-over-year. Subsidiary Like Co achieved a 2.5 percentage point profit margin increase to 20.5% from 17.9% year-over-year. M&A-acquired former Care 21 homes have steadily rising occupancy driving strong revenue growth. M&A-acquired CM Care homes are operating at nearly full occupancy, but have operational efficiency improvement opportunities to reach Charm Care's standard profit margin. Second-year and newly opened homes have steady occupancy growth, with one new home exceeding 70% occupancy just 2 months after opening. Overall, the care business segment profit significantly outperformed internal plan targets.
2. Other Businesses:
   • Good Partners Co: On a reported basis, it shows year-over-year revenue and profit decline due to a fiscal year change that resulted in only 8 months of results in the prior year comparison period; on an underlying basis, it achieved growth in both revenue and profit. Its hospice business will see lower insurance revenue from recent visiting nursing care reimbursement revisions, but the company aims to maintain a stable profit margin and continue opening a few facilities annually.
   • Charm Senior Living Co: Currently has upfront expenses from increasing sales consultant headcount, but is contributing to group overall performance by generating a large volume of resident referrals to group homes. Its referral volume is growing steadily, and it is advancing partnerships with organizations holding potential customers to further drive group occupancy.
   • Real Estate Business: This is the final fiscal year for this business segment. The Kokuryo, Chofu City property scheduled for sale in the fourth quarter is progressing as planned, with contract procedures ongoing with the buyer.

• Full year 2026 June fiscal year guidance is maintained unchanged from the initial opening guidance, despite all profit metrics exceeding plan in the second quarter.
• Dividend guidance is also maintained unchanged, with the company continuing its policy of maintaining a payout ratio of 30% or higher, balancing growth investment with shareholder returns, and continuing its track record of consistent dividend increases.
• For 2028 June fiscal year, the company remains on track to hit the target of 15 new home openings.
• The annual new opening target for future periods has been raised from a maximum of 10 to 15-20 homes per year.

• Rising construction costs increase the difficulty of securing economically viable new development projects, requiring higher rents to achieve acceptable returns and forcing the company to revise building specifications to align with higher construction costs.
• Higher-than-usual resident departure due to mortality in the 2025 June third quarter created a year-over-year base effect, and while the company does not expect a similar level of decline this year, it remains cautious about potential downside from unforeseen high departure levels.
• Approval of relaxed staffing ratios varies across municipal insurers, with inconsistent regulatory guidance across regions creating uncertainty around the number of approvals the company will actually secure.
• Reuse (rehabilitation) of existing facilities requires higher expected repair and maintenance costs, and requires significant work to rebrand and reposition properties after acquisition.
• The volume of available reuse/M&A transactions has been lower than the company initially expected.
• CM Care has an attached nursing small-scale multi-function home support business that is new to Charm Care, and the lack of in-house expertise has led to lower than expected profit from this segment, with future of the business still under review.

Q: Productivity improved more than expected this quarter, driving operating profit above plan. What are the main drivers of this better-than-expected improvement? Is it tied to your on-site focused training initiatives?

A: While revenue was slightly below plan, the key driver was that we were able to fully align our staffing levels with actual occupancy this year. Many care facilities keep staffing levels constant even when occupancy falls short of plan, but we have built a dominant regional footprint in both the Tokyo and Kinki regions that allows us to flexibly adjust staffing to match occupancy, and this optimization went extremely well this fiscal year.

Q: What has been your experience so far with the AI Care Planner prototype at 4 homes, in terms of results and the accuracy of output?

A: We have confirmed that the AI produces very appropriate care plans that we would describe as being comparable to a super senior care manager. All AI-generated plans are always reviewed and adjusted by human care managers to create the final plan. Previously, manually created care plans had significant variation in quality and creation time, but the AI eliminates this variation and consistently produces high-quality initial plans, so we are very pleased with the results so far.

Q: What impact will the temporary revision of nursing care reimbursement have on your business?

A: This revision is focused on improving staff compensation, so all of the additional reimbursement revenue will be passed through to staff wages, with no impact on corporate profit. However, the additional pay will help narrow the wage gap between nursing care and other industries, which is positive for our recruitment efforts. Additionally, the revision adds a 7,000 yen per staff monthly add-on for companies that have implemented productivity improvement initiatives like IT adoption, which we qualify for, so this will further strengthen our competitive position in recruitment.

Q: How many of the 10 homes pursuing 3:0.9 staffing approval do you expect to get approved this fiscal year, and how many do you plan to pursue next fiscal year?

A: We expect to submit applications for 9 of the 10 target homes this fiscal year, and we are working to secure approval for at least 5-6 of these. Nationwide, the notification system is progressing slowly, in part because requirements are seen as overly strict, and there is significant variation in requirements across municipal insurance carriers, so the final outcome is still uncertain, but we are working toward that 5-6 approval target. Next fiscal year, we plan to submit applications for at least 20 additional homes, and our commitment to lean optimized staffing remains unchanged.

Q: What is the status of your new opening projects in the Nagoya region?

A: We had expected to announce at least 1-2 confirmed projects in this earning call, and we currently have 2-3 projects that are very close to final agreement, so we expect to be able to announce them soon. We have worked through some initial challenges from higher construction costs and differences in local landowner business practices compared to Tokyo and Kansai, and we have now adapted to the local market, so announcements are coming shortly.

Q: Your performance is ahead of plan, but your stock price has not risen much. Is there any hidden risk we should know about?

A: There are no specific hidden risk factors for our business. We believe that more investors are starting to recognize our strategy of focusing on the core nursing care business laid out in our medium-term plan, as well as our current performance, so we expect that future performance will be reflected in the stock price over time. We also plan to strengthen our IR outreach to better communicate our value to investors.

Q: Will you complete any property sales that would be booked as special profit this fiscal year, after the prior delay?

A: We do not have any planned large special profit from property sales this fiscal year matching last year's level. However, we are currently working through the sale process for one property, so there is a possibility it will close this fiscal year. We will disclose the transaction as soon as it is finalized.

Q: What impact does the current sharp increase in construction costs have on your new opening plans?

A: Higher construction costs make new development much more difficult across the industry, not just for our company. We have to pay higher rent than in prior periods to get projects approved by landowners, so we are revising our building specifications to create more operationally efficient buildings that can accommodate the higher construction and rent costs, and we are moving forward with projects on that basis.

Q: What is the progress of your partnership with Ship Healthcare Holdings?

A: We have been advancing collaboration in joint purchasing to reduce costs, and joint education and training for human resource development. Collaboration between operational and management teams has deepened significantly, and we will continue this work to capture cross-company synergy benefits.

Q: Why does occupancy improve when you acquire homes from other operators, such as the former Care 21 homes and Like Co homes?

A: We do not do anything particularly special, but we have found that many companies in this industry do not conduct consistent, high-quality sales activities. We prioritize doing basic sales activities well, and when we acquire a home, we adjust pricing to an appropriate, competitive level that supports high occupancy — for example, we made modest price cuts on some former Care 21 homes when we took over, to align pricing with market and the property's cost structure. This focus on appropriate pricing and consistent sales is something we do better than many peers, which drives occupancy improvements.

Q: Last year you had higher than expected resident departures due to mortality in the winter. What is the status so far this year?

A: As you noted, last winter had higher than normal mortality-driven departures, which was a nationwide trend. So far this year, we have not seen the same elevated level of departures that we saw last year. We are still being cautious, but we do not expect the same large negative impact that we saw last fiscal year.

Q: What allows you to complete more new openings than your peers? What is your secret?

A: The key is that we get lots of high-quality deal flow from developers and other sources across the industry, which comes from our reputation for making fast, clear decisions on whether to move forward with opportunities. Property owners know that if they bring an opportunity to us, we will give them a quick yes/no decision, which makes them more likely to bring opportunities to us first, and that is the main driver of our high new opening volume.

Q: You plan to open 15 new homes in 2028. Can you secure enough staff for this expanded opening plan?

A: Our lean operations initiatives and compensation improvements have helped us reduce turnover significantly, which is helping with capacity for expansion. Higher compensation has also improved our recruitment ability, so while it is still not easy to secure enough talent, we are on track to have enough capacity to hit our target, and we see the current environment as manageable.

Q: What is your outlook for the nursing care industry over the next 5-10 years? Will consolidated players like your company with active M&A strategies gain residual profit from industry consolidation?

A: We share the view that the industry will become more challenging going forward, with increasing difficulty securing talent and tighter operating conditions. This will make it harder for small and medium-sized operators to continue operating, which will drive further industry consolidation and more M&A activity. With the Japanese government already struggling to afford expanding nursing care benefits, productivity improvement will be mandatory for all operators to survive over the next 5 years, and we started working on this 3 years ago early, so we are well positioned for this trend.

Q: Do you expect demand for upper-middle income nursing care homes to keep growing, and is there still room for new openings in the Tokyo and Kinki regions?

A: The population aged 80+ (our core customer demographic) will keep growing in Japan, and this growth is particularly strong in Tokyo and Kinki regions, so demand will keep increasing. While some areas have slow approval processes for designated facility status, we can open residential care homes first and convert to care-attached status later if that makes economic sense, so there is still plenty of room for new openings in these core regions.

Q: What is your outlook for reuse of existing facilities, what are the economic benefits, and what are the main downsides?

A: Reuse projects (like M&A) have strong economic benefits compared to new development, and reuse is a growing trend across the residential industry, including nursing care. More operators are looking to reuse existing facilities that would otherwise be surrendered, so we expected more deal flow than we have seen so far — the volume of available reuse deals has been lower than we initially anticipated, but we will continue to actively pursue these opportunities when they come. The main downside is that older buildings require higher expected repair and maintenance costs, so we have to properly budget for those expenses, and they require more work to reposition and rebrand when we reopen after renovation.

Q: Why is CM Care's profit margin lower than your company average, and do you expect it to improve to Charm Care's level?

A: CM Care owns two homes, Charm Shinkawasaki and Charm Omori, and their contracted rent is already much lower than our average rent, so once we optimize operations we expect CM Care will eventually achieve even higher profit margins than our existing portfolio. When we acquired the homes, they were operated with a much higher staffing level than required: they were formally run at a 2:1 staffing ratio, but actual staffing was even higher at 1.2:1 to 1.3:1. We have already optimized down to roughly a 2:1 ratio, but we are moving gradually to avoid disrupting frontline operations, and we are currently working toward 2.3:1 to 2.5:1. Additionally, CM Care has an attached nursing small-scale multi-function home support business at Shinkawasaki, which is our first experience with this business line. We do not have existing expertise in this area, so it is underperforming profit expectations, and we are still reviewing whether to continue the business. We expect CM Care's profit margin will reach our company standard within about 1 year.