JAPAN PULP AND PAPER COMPANY LIMITED Q2 FY2026 earnings call

Long-Term Vision (OVOL 2030) and Mid-Term Plan (OVOL 2026) Overview

• The company's 2030 long-term vision targets 25 billion yen in consolidated ordinary profit, and aims to become an excellent company recognized beyond the paper industry, building the scale and business structure to be the world's strongest paper distribution group while contributing to a sustainable society.
• The 2026 mid-term plan (3-year plan starting April 2024) focuses on building new systems and capabilities to achieve the 2030 vision, with 3 core basic policies:

1. Expand Communication and Improve Value Provision

• Run the OVOL CREATIVE WORKSHOP SERIES to explore new paper use cases via co-creation with industry partners: 75 companies / 99 participants last year, 46 companies / 48 participants (raised difficulty bar) in 2 sessions this year.
• Launched nationwide hands-on outreach classes to teach children about the circular economy of paper and the environment, with participation from paper wholesalers.
• Participated in Osaka-Kansai World Expo to showcase the paper recycling process and promote the functional and environmental advantages of paper to the general public.
• Expanded IR for individual investors: launched dedicated web pages and scheduled annual investor briefings, and will incorporate market feedback into management.
• Upgraded the DX promotion office to DX promotion headquarters in April this year to accelerate group-wide DX implementation and IT governance, which is identified as one of the 3 core priorities for 2030 vision.

2. Improve Human Capital and Work Engagement

• Held 10 town hall meetings (dialogue sessions between the CEO and managers/non-managers) since last year to share and align on vision, goals, and plans, and to strengthen management connecting capabilities.
• Engagement survey scores already met the mid-term plan's target in the December 2024 and June 2025 surveys; progress on health management and human capital investment KPIs is on track to meet mid-term targets.
• Human capital development and engagement improvement are identified as one of the 3 core priorities for the 2030 vision, and the company will continue to invest aggressively in this area.

3. Promote M&A and Alliances to Expand Revenue Scale

• The French acquired subsidiary has contributed to profit in its first year (slightly below initial plan) with stable local operations; the company continues to pursue top-line growth and cost cutting to expand profit.
• The German acquired subsidiary is facing larger headwinds: 6 months of disrupted operations from prior ownership bankruptcy eroded supplier and customer trust, requiring more time to rebuild than expected, plus faster decline in graphic paper demand than in Japan, leading to large full-year losses this fiscal year. Management reaffirms it is a critical strategic investment for the 2030 vision, and is implementing the second round of large-scale structural reform to target profit contribution from mid-2026.
• Actively pursuing "complementary M&A" to expand into non-paper adjacent segments that leverage existing wholesale infrastructure (inventory, delivery, e-commerce, marketing): focused on 3 core areas (sign & display, flexible packaging, industrial packaging). Annual sales from these 3 areas grew from 33.3 billion yen in 2023 to 47.3 billion yen in 2025, with cumulative growth of 47 billion yen since 2017. The company will continue to actively pursue complementary and strategic M&A going forward.

Financial and Capital Strategy

• Updated dividend policy for the remainder of the mid-term plan: added a 3%+ ROE (DOE) target to the existing 30%+ payout ratio progressive dividend policy, to strengthen shareholder returns and clarify commitment to stable dividends. Interim dividend stays at 14 yen per share, year-end dividend is raised 6 yen to 20 yen per share, for a full-year dividend of 34 yen per share.
• Continued reduction of cross-held policy shares: reduced 3.7 billion yen of holdings in fiscal 2024, bringing the market value ratio of policy shares to consolidated net assets down to 17.5%.
• Implemented a buyback of over 8 million shares, and will cancel 30 million total shares (19.97% of outstanding shares including existing holdings) in November 2025, as part of ongoing flexible capital return.

Core Priorities to Achieve Long-Term Vision

• Amid stagnant core paper/board demand and rising all-in costs (personnel, logistics, energy), the company identifies DX, engagement improvement, and M&A as the 3 core priorities, as incremental improvements are insufficient to offset rising costs.
• DX is prioritized to drive rationalization, efficiency, cost cutting, and competitive advantage in procurement, sales, and logistics to capture survivor profit in mature markets. The company will complete its grand DX design by the end of the calendar year, and implement it as a top priority under CEO leadership.
• Continued investment in human capital to drive engagement, as corporate strength ultimately depends on people and to align employees with the 2030 excellent company vision.
• Continue pursuing strategic and complementary M&A to expand scale and profit, and build the business base required to become the world's strongest paper distribution group.

1. Domestic Wholesale Segment: Decreased revenue and decreased profit. Paper sales volume fell to 94.3% of the prior year period due to ongoing structural demand decline from digitalization. Paperboard sales volume stayed flat year-over-year at 100.7%, as strong trading card demand for white paperboard offset weak demand for food/industrial corrugated base paper. Functional electronics materials sales stayed flat. Segment revenue declined on falling paper sales, and rising SG&A (led by higher personnel costs) pushed operating profit lower. This segment accounts for over 80% of Nippon Paper Pulp Trading's standalone revenue.
2. Overseas Wholesale Segment: Increased revenue, recorded an ordinary loss. The 5 newly acquired subsidiaries in Germany and France from prior-period M&A drove higher European sales volume, offsetting declines in exports to Asia and soft demand across the US, Europe, and Oceania. The segment reported an ordinary loss due to intensifying price competition in Europe and Oceania, and longer-than-expected turnaround time for the acquired German subsidiary. All regional operations within the segment saw year-over-year ordinary profit declines, with only European revenue up from the M&A contribution.
3. Paper Processing Segment: Decreased revenue, increased ordinary profit. Corrugated box business saw lower sales volume and revenue, while recycled household paper (led by strong commercial toilet paper sales) grew both volume and revenue. Overall segment revenue declined, but the profit growth from recycled household paper offset higher manufacturing costs across both businesses, leading to higher segment ordinary profit.
4. Environmental Raw Materials Segment: Decreased revenue, recorded an ordinary loss. Waste paper sales volume fell due to lower domestic demand for paper/paperboard and the transfer of 3 Kanto region facilities, plus lower exports of corrugated waste paper to Southeast Asia from the US. Pulp sales also declined on softening market conditions. Wood biomass power-related businesses underperformed badly, while solar power and Kumamoto comprehensive recycling stayed flat. The segment reported an ordinary loss due to poor profitability of wood biomass fuel sales and an investment loss from an impairment charge on fixed assets at an equity-method affiliate.
5. Real Estate Leasing Segment: Slightly decreased revenue, slightly increased ordinary profit. Revenue fell slightly from a tenant exit, but cost cuts (including lower repair expenses) drove a small increase in ordinary profit.

• Management downwardly revised full-year 2026 (March 2026 end) consolidated guidance from initial May 2025 targets:
  • Operating profit: cut 5 billion yen to 11.5 billion yen (3.6 billion yen lower than prior-year actual)
  • Ordinary profit: cut 5 billion yen to 10.5 billion yen (5.3 billion yen lower than prior-year actual)
  • Net income attributable to parent shareholders: cut 6.5 billion yen to 2 billion yen (5.6 billion yen lower than prior-year actual)
• Segment-level full-year guidance after revision:
  • Overseas Wholesale Segment is expected to remain in ordinary loss for the full fiscal year
  • Environmental Raw Materials Segment ordinary profit is expected to come in around 1 billion yen below the initial forecast
• The dividend policy was updated to add a 3%+ DOE requirement alongside the existing 30%+ payout ratio, and the year-end dividend was upwardly revised by 6 yen to 20 yen per share, bringing full-year dividend to 34 yen per share, even as profit guidance was cut.

• Structural demand decline for core graphic and copy paper across all developed markets (Japan, US, Europe, Oceania) continues, pressuring top-line growth and requiring offset via new adjacent business development
• The turnaround of the acquired German subsidiary is taking longer than initially planned, with larger-than-expected trust/relationship damage from prior ownership bankruptcy and faster-than-expected demand decline, leading to large losses this fiscal year
• Intensifying price competition in overseas wholesale markets (Europe and Oceania) is pressuring profitability
• Wood biomass power-related fuel sales have underperformed badly, leading to a segment-level ordinary loss in H1, and full-year results are expected to come in well below initial plan
• Broad-based cost inflation across personnel, logistics, and energy is pressuring margins, and incremental improvements are insufficient to absorb cost increases
• Impairment losses at equity-method affiliates in the environmental raw materials segment have dragged down H1 profit

Q: The company has a track record of turning around overseas wholesale businesses, and management stated the German subsidiary will see profit improvement from mid-2026. The integrated report targets 100 billion yen to 120 billion yen in sales revenue for Germany and France. When does management expect to hit this sales target? / A: All regions except the US are seeing broad structural demand decline for core paper products. While the company is working to leverage existing wholesale infrastructure for complementary new product lines, it is very difficult to offset the volume decline in general graphic paper with specialty product sales. Given the ongoing market contraction, the 100 billion yen to 120 billion yen target will likely need to be adjusted down by 10-20%. Even so, Germany and France remain strategically important for the company's global scale goals, so their strategic value is unchanged.

Q: What specific steps are included in the planned structural reform for the German business? / A: When the company acquired the German business in December 2024, all 2025 annual contracts were already finalized, so it was impossible to change terms mid-year. The company is now working to improve top-line for 2026 contracts. Initially, the team pursued aggressive price competition to recover market share, but with fast market contraction this strategy grew share but did not deliver profit. Starting in September 2025, the company shifted strategy to prioritize profit over volume/share. Structural reform will center on replacing part of the top management team, headcount review, and inventory and logistics network optimization.