NITTO KOGYO CORPORATION Q2 FY2026 earnings call

• Overall Financial Performance:

  • The half-year consolidated revenue hit an all-time high of 88.9 billion yen, up 8.5% year-over-year, driven by steady capital investment demand and rising IT investment appetite across all segments.
  • Consolidated operating profit reached 5.2 billion yen, up 30.2% year-over-year, as increased marginal revenue from higher sales and improved project pricing offset higher personnel costs from 2025 April salary revisions.
  • Net income attributable to parent company shareholders was 3.4 billion yen, down 34.3% year-over-year, due to the absence of the 2.4 billion yen special gain from negative goodwill that was booked in the prior year period.
  • Consolidated operating cash flow was +4.2 billion yen, investment cash flow was -2.8 billion yen, financing cash flow was -5.7 billion yen, ending cash balance was 28.5 billion yen, down 4.5 billion yen from the start of the period.

• Capital Expansion:

  • Nitto Kogyo will build a second factory at its Tochigi Nomi site, with a total investment of 7.4 billion yen. Completion is scheduled for September 2027, with production starting in April 2028. The factory will expand production capacity and reorganize the production system for information and communications related products including system racks for data centers. The target is to reach 10 billion yen (1.3x current levels) in Nitto Kogyo standalone information and communications product sales by 2030.

• 2026 Mid-Term Management Plan Progress:

  • Core manufacturing/construction/services segment: Started supporting commercialization of wave power generation, a next-generation renewable energy, leveraging Nitto Kogyo's enclosure development/production expertise and EM Solutions' solution capabilities. The company is the only domestic manufacturer to have commercialized OCP-standard compliant system racks for next-generation data centers, which meet Japan's strict seismic requirements to address demand from growing AI-driven data center investment. Temper Kogyo, the group's newly acquired core segment business, achieved break-even in the first half of this fiscal year (its second year in the group) after one-time integration costs in its first year, and group production restructuring is accelerating synergy creation.
  • Distribution segment: Leveraging existing strengths in video solutions to drive steady sales growth in new markets including audiovisual solutions and physical security solutions.
  • Electronic component segment: Seeing steady growth from strengthened overseas alliances and growing sales of electromagnetic/heat countermeasure products for the fast-growing EV automotive market.

• Cost and Pricing Updates:

  • Raw material price increases exceeded expectations, reducing half-year operating profit by 0.3 billion yen. The fourth round of company-wide price revisions will take effect in the second half, so there was no positive impact from price adjustments in the first half. Pre-standard-change pull-in demand for high-voltage power receiving equipment delivered an unexpected 0.5 billion yen positive operating profit impact from improved project pricing in the first half.

1. Electrical and Information Infrastructure Related Manufacturing, Construction, and Services Business: This is the core business, accounting for 62% of total revenue and 76% of total operating profit. It achieved year-over-year growth in both revenue and profit, driven by steady corporate capital investment demand and pre-standard-change pull-in demand for transformers. Sub-segment performance: Distribution panel division saw revenue growth from pull-in demand; Cabinet division had slight revenue decrease due to uncertain US tariff policy and stagnant factory automation demand; Circuit breaker, switch, parts and other division had revenue growth from pre-price-revision pull-in demand; Construction and services division had revenue decrease due to the reverse of large projects booked in the prior year.
2. Electrical and Information Infrastructure Related Distribution Business: Centered on Suntelephone, this segment accounts for 30% of total revenue and 16% of total operating profit. It achieved year-over-year growth in both revenue and profit, driven by increased network material sales from growing corporate IT investment appetite.
3. Electronic Component Related Manufacturing Business: Centered on Kitagawa Industries, this segment accounts for 8% of total revenue and 7% of total operating profit. It achieved year-over-year growth in both revenue and profit, driven by new project wins in the domestic automotive market and recovering demand in the air conditioner related market.

• Full-year consolidated guidance is maintained at the original initial levels, despite the first half results exceeding plan, due to lingering supply chain uncertainty and cost increase risks. The full-year forecast is: consolidated revenue of 192.0 billion yen (+4% YoY), operating profit of 13.6 billion yen (+1.2% YoY), with a projected decrease in net income due to the prior year's special gain not repeating. If achieved, full-year revenue will hit an all-time high, and operating profit will be the second highest in company history.
• Segment full-year forecasts are maintained:
  • Manufacturing/construction/services: 119.0 billion yen revenue (+4.2% YoY), driven by steady private capital investment, the fourth round of price revisions, and sales growth from Temper Kogyo and EM Solutions.
  • Distribution: 58.0 billion yen revenue (+3.5% YoY), driven by continued strong IT investment demand and expanded solutions including renewable energy related electrical equipment.
  • Electronic components: 15.0 billion yen revenue (+4.1% YoY), driven by production recovery in appliance markets and new EV related project wins in automotive markets.
• The 2026 Mid-Term Management Plan sets a target of 200.0 billion yen in consolidated revenue, 15.0 billion yen in consolidated operating profit, and ROE of 9% or higher.
• Dividend guidance is maintained: an interim dividend of 62 yen per share (as planned), with a full-year dividend of 124 yen per share, based on a 50% consolidated payout ratio.
• Full-year operating profit forecasts: higher material prices are expected to reduce full-year profit by 0.65 billion yen, the fourth round of price revisions is still expected to deliver 2.0 billion yen in profit contribution, and personnel cost increases from salary revisions will add 1.2 billion yen in full-year costs.

• Ongoing procurement tightness: Pre-standard-change pull-in demand for top-runner transformers (required for 2026 fiscal year regulatory changes) has far outpaced transformer manufacturer supply capacity, leading to severe supply shortages. High-voltage switches also face shortages due to limited production capacity.
• While pre-procured inventories cover November and December 2025 production, there is notable risk that procurement constraints could impact production volumes and delivery timelines for products scheduled to be delivered in the next fiscal year. Transformer manufacturers have not shared clear information on production timelines for new-standard transformers, creating additional uncertainty.
• Further upside to raw material prices and rising logistics costs could create additional downward pressure on profitability even after price revisions.
• Procurement constraints could lead to project delays that shift revenue recognition into future periods, impacting full-year results.

Q: What specific components are facing shortages, how is production impacted currently, and when can the shortage be resolved?

A: The main shortages are for top-runner transformers (for high-voltage receiving equipment) and high-voltage switches. Starting in April 2026, only new-standard transformers can be sold, which will be larger and more expensive, leading to much higher-than-normal pre-change demand that has exhausted supply. Transformer makers have not shared clear timelines for new-standard production, creating uncertainty. November and December 2025 production is unaffected by pre-procured components, but there is notable risk for shipments planned for next fiscal year. Nitto Kogyo is doing everything possible to secure required components.

Q: Has the demand and competitive environment for data center system racks changed to create new opportunities for Nitto Kogyo, following the new factory investment?

A: AI, automation and electrification will drive a sustained data center construction boom, requiring high-density, high-performance racks with advanced cooling solutions that meet the global OCP open standard. OCP racks are already common globally but have low penetration in Japan, and incoming foreign data center investment will drive adoption growth. While not all Japanese data centers will source domestically, imported OCP racks cannot meet Japan's strict seismic requirements, and Nitto Kogyo is the only domestic manufacturer with commercialized compliant OCP racks, giving it a unique competitive advantage to capture growing demand.

Q: Is continued pull-in demand for pre-standard-change top-runner transformers possible in the second half, and can project pricing continue to exceed expectations?

A: Strong pull-in demand for pre-standard transformers will continue in the second half. If Nitto Kogyo can secure sufficient transformer supplies, results could easily outperform current forecasts. However, procurement is already extremely tight, so the visibility on available supply is too low to update guidance at this time.

Q: What does the reference to "second half uncertainty" for group results in the full-year operating profit forecast mean? Is the uncertainty for both standalone and group results?

A: The uncertainty applies to both standalone and group segments. The main driver is the same procurement tightness for top-runner transformers that impacts the standalone business, which also affects group distribution companies that participate in the high-voltage equipment market. The full-year plan was maintained despite the first half outperformance, so a small 0.15 billion yen upward adjustment for group results was offset by downward adjustments for procurement risks, leaving the overall full-year operating profit target unchanged.