ELAN Corporation Q4 FY2025 earnings call

Core 2025 FY Operational Highlights

• The business achieved both revenue and profit growth: total consolidated revenue grew 16.7% year-over-year, driven by a net increase of 260 new contracted CS Set facilities, a 400 thousand yen increase in average facility unit price from expanded value-added services, and full-year contribution from the newly consolidated Vietnam subsidiaries. Operating profit grew approximately 0.7 billion yen year-over-year.
• Joint venture with M3 has reached 100 active service instances after full-scale launch in 2025. The added value from these new services has improved satisfaction for medical and nursing care facilities and reduced CS Set churn rate.
• Penetration of value-added products and services continues to expand: CS Set R has reached 12.5% penetration across existing facilities; the original patient apparel "lifte" has expanded to 471 facilities (16.6% penetration), with new maternity wear launched in 2025; nursing care facility apparel "Smile Wear" started full-scale proposal work and is now adopted at 65 facilities.
• Market development progress: Penetration of large and mid-sized medical facilities (core target clients) exceeded 20%; penetration of priority long-term care facilities exceeded 10%; small-scale facilities (a high-growth potential market as long-term care facility counts increase) have also seen growing contracted volumes, even with smaller per-facility revenue. The business mix is shifting toward more small and long-term care facilities, leading to slower user growth than facility count growth, which is a structural market shift.
• Gross margin decline was primarily driven by early-stage investment in lifte: lifte expansion pressured short-term gross profit, but will contribute to profit after upfront costs are fully recognized. Selling, general and administrative (SG&A) expense ratio declined year-over-year, as the prior year included 0.15 billion yen in Vietnam M&A costs and 0.36 billion yen in TOB-related costs that did not recur in 2025.

Capital and Share Price Awareness

• Elan estimates its own cost of capital is 7% to 8%, based on calculation methods and its stable, recession-resistant stock-type business model, but notes investor expected return is 8% to 9%, creating a gap that the business will address.
• ROE reached 20.5% in 2025 (above cost of capital) but has been on a downward trend, driven by margin declines and growing accumulated equity. This is identified as a key management priority for improvement.
• PBR has declined consistently since 2020, driven by a PER drop from ~63x in 2020 to ~16x in 2025. Management attributes this to unclear future growth positioning for investors after the domestic CS Set business moved from high growth to stable growth, rather than fundamental business stagnation. Management will conduct ongoing regular reviews of the PBR structure to drive improvements.

New Mid-Term Management Plan (2026-2028) Core Strategy

• CS Set remains the unshakable core profit pillar: it has high predictability, low churn, and generates stable cash flow to fund future growth investments. Management will continue improving operations, adjusting pricing structure, and adding value to maintain cash generation.
• Set ROE 25% as a lower bound (not just a target): management will continuously evaluate the appropriateness of all capital allocation across business investment, human resource investment, and shareholder returns, and will not relax capital efficiency standards even while pursuing growth investment.
• Key priorities for CS Set: address structural challenges including slowing domestic revenue growth, gross margin decline, and rising churn, and prioritize revitalizing the CS Set business to achieve both growth and profitability.
• Organizational alignment for ROE targets: Decompose ROE into clear KPIs (sales growth, gross margin, churn) that are tied to accountability for executive and department heads. A performance-linked stock option plan is being designed to align individual compensation with ROE improvement, to ensure full accountability for execution.
• M&A strategy has three core directions: 1) Strengthen domestic business base, targeting areas with high synergy with existing business that drive efficiency and added value; 2) Expand into hospital management support services based on the existing CS Set customer base, to expand the value provided to clients; 3) Step up overseas expansion, targeting regions with structural demand growth from improving hygiene and aging populations.
• Capital allocation: Maintain the 30% payout ratio for dividends, and prioritize allocating capital to growth investment, system investment, and future M&A rather than increasing shareholder returns in this period.

1. Domestic segment: Domestic revenue reached 53.214 billion yen, growing 12.6% year-over-year, accounting for approximately 96% of total consolidated revenue (calculated based on total revenue growth adding 7.9 billion yen year-over-year and 2.234 billion yen from overseas). It serves 2,830 contracted facilities as of period end, growing 10.1% year-over-year, with an average facility unit price of 18.8 million yen, continuing to increase year-over-year driven by expanded adoption of value-added services and products. 2. Overseas (Vietnam) segment: Revenue for the two consolidated subsidiaries (100% owned GREEN, 51% owned TMC) was 2.234 billion yen, contributing approximately 4% of total consolidated revenue. After accounting for 0.13 billion yen in goodwill amortization expenses, the segment still recorded positive operating profit.

• For FY2026 ending December, Elan targets 9.7% year-over-year consolidated revenue growth, driven by new CS Set facility gains, value added improvements, new business, and continued overseas business growth.
• The projected operating profit margin for FY2026 is 8.2%, impacted by the change in lifte depreciation method from immediate full expensing to 3-year straight-line depreciation starting in 2026.
• The full-year dividend per share for FY2025 is 15 yen, with a payout ratio of 32.8%. For FY2026, the planned dividend per share is 16 yen, with a planned payout ratio of 30.3%, consistent with the target 30% payout policy.

• The prior mid-term management plan (2023-2025) missed both revenue and profit targets, due to failure to fully incorporate external and competitive environment changes, and overly aggressive planning that relied too heavily on labor capacity. Management has reflected on this and will prioritize growth quality and capital efficiency in the new plan.
• There is a gap between the company's internal estimate of cost of capital and investor expected returns, which has contributed to a decline in PBR and PER that management needs to address.
• The CS Set business faces structural challenges including slowing domestic revenue growth, declining gross margin, and rising churn, which require targeted revitalization efforts.
• Delayed price pass-through to offset inflation-driven cost increases has pressured profitability, which management needs to resolve.
• Early-stage investment in new growth areas may suppress short-term profit, but management views delaying this investment as a larger long-term risk to corporate value.

Q: While the new mid-term plan sets clear KPIs, what specific approaches does Elan plan to use to improve gross margin, and what is the target level?

A: Gross margin improvement is explicitly called out as a core priority in the new mid-term plan. Elan does not compete on price cuts to win clients, and instead focuses on adding value to support higher unit pricing, which clients have accepted even as prices rise, and this strategy will continue. Currently, value added is delivered via products including lifte, CS Set R and CS Set LC. Elan has also started working with M3 to develop new value-added services for CS Set leveraging M3 group synergies; specific details cannot be disclosed yet, but will be announced once adoption scales. In addition, Elan will accelerate price pass-through, which has been slightly delayed, by negotiating price increases with hospitals that fully account for current inflation levels.

Q: Is the understanding correct that the main drag on gross margin is failure to absorb inflation-driven cost increases because prices have not been adjusted, and can group synergies with M3 (such as joint purchasing) help improve profitability going forward?

A: Joint purchasing and related group synergies would have a larger impact on SG&A rather than gross margin, and Elan is currently evaluating this opportunity.

Q: What is the direction and strategy for SG&A over the 3-year mid-term plan period?

A: Elan recognizes that its DX progress has been somewhat delayed. While client billing systems for CS Set were fully digitalized two years ago, Elan will continue to accelerate digitalization and push for paperless internal workflows to control SG&A growth, so continued system modernization is the core direction going forward.

Q: Why did FY2025 results miss the original plan targets?

A: The main reason was that new client acquisition performed worse than the original expectation. Going forward, Elan will prioritize new client acquisition and building loyalty among existing clients to reduce churn.

Q: What is the business strategy for lifte and the Vietnam business in FY2026?

A: For lifte, demand continues to grow strongly, and Elan will continue preparing to meet this rising demand. For the Vietnam business, both TMC (based in Hanoi) and GREEN (based in Ho Chi Minh City) currently operate linen supply businesses. In 2026, Elan will carefully evaluate the potential for expanding into CS Set and other new business lines in Vietnam to set future strategy.