AIR WATER (4088) FY2026 Q2 Earnings Report

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Executive Summary

Operating results turned negative in the first half, primarily due to an impairment loss of 378.3B, making the deterioration in profitability despite higher revenue the key feature of the period. Revenue increased to 5166.4B (+2.4% YoY), but Operating Income fell to -54.5B (276.1B in the previous year, YoY -119.7%), while Net Income declined sharply to -215.8B (173.4B in the previous year, YoY -224.4%). Although the gross profit margin was maintained at 22.5% (slightly improved from approximately the same level of 22.5% in the previous year), increases in SG&A expenses and the impairment loss included in other expenses weighed on operating results.

Factors Affecting Performance

【Revenue】Revenue increased 2.4% YoY to 5166.4B. By segment, HealthAndSafety (1219.0B, +6.5%), EnergySolutions (398.2B, +3.7%), and AgricultureAndFoods (891.6B, +1.6%) contributed to the increase, while DigitalAndIndustry (1599.9B, -3.1%), the largest segment, recorded lower revenue and restrained overall growth.

【Profit and Loss】Gross profit was 1164.3B (gross profit margin 22.5%), improving from the previous year, but SG&A expenses increased to 870.1B (SG&A ratio 16.8%), expanding at a pace exceeding revenue growth. In addition, the impairment loss of 378.3B accounted for the majority of other expenses of 400.2B, causing Operating Income to fall to -54.5B and turn negative from 276.1B in the previous year. Financial expenses of 151.2B exceeded financial income of 29.4B, resulting in Profit Before Tax of -176.2B and Net Income of -215.8B. The results represent higher revenue but lower earnings—more precisely, a shift into the red due to an earnings decline.

Segment Analysis

By segment operating results, DigitalAndIndustry was the largest downward factor, with operating results of -167.1B (operating margin -10.4%, -220.8% YoY), as impairment in this segment deteriorated company-wide performance. HealthAndSafety recorded 72.6B (operating margin 6.0%, +138.9%), delivering a substantial earnings increase and representing the only expanding segment among the four segments. EnergySolutions slipped into a modest loss of -3.5B, while AgricultureAndFoods recorded 14.0B (operating margin 1.6%), a 68.2% YoY decline. The deterioration in company-wide operating results was largely attributable to DigitalAndIndustry alone, while performance across the other segments was mixed.

Key Financial Indicators

【Profitability】The Operating Income margin declined substantially to -1.1% (5.5% in the previous year), while ROE (annualized) was -9.4%, with both indicators reflecting the deterioration in earnings.【Cash Flow Quality】Operating Cash Flow (OCF) remained positive at 446.2B (-7.1% YoY), and the divergence from Net Income of -215.8B was primarily attributable to the non-cash impairment loss of 378.3B. Free Cash Flow was positive at 122.8B, indicating that the period’s underlying cash generation capacity itself remained intact.【Investment Efficiency】Capital expenditures were 364.2B, equivalent to 81.6% of OCF. Although the investment burden was substantial, it was largely absorbed through internal funds.【Financial Soundness】The Equity Ratio was maintained at 38.5% (the same level as 38.5% in the previous year), and cash and deposits were 637.9B. Total assets contracted from 12262.4B in the previous year to 11534.0B, while net assets also declined from 4923.2B to 4594.6B, indicating some pressure on capital accumulation.

Cash Flow Analysis

OCF was 446.2B, down 7.1% YoY, but remained positive. The significant divergence from the net loss of -215.8B is primarily explained by the non-cash impairment expense. Investing Cash Flow was -323.4B, mainly reflecting capital expenditures of 364.2B, and Free Cash Flow, calculated as OCF less Investing Cash Flow, was positive at 122.8B. Financing Cash Flow was -222.0B, with repayment of long-term borrowings and dividend payments of 97.7B representing the primary cash outflows. As a result, cash and cash equivalents declined to 637.9B, but first-half dividends were covered within the range of Free Cash Flow, indicating that cash generation capacity itself was maintained.

Earnings Quality

The deterioration in earnings for the period was primarily attributable to the temporary factor of the 378.3B impairment loss included in other expenses, which should be evaluated separately from recurring operating performance. The gross profit margin improved to 22.5%, indicating that the profitability of the core business at the top-line level has not been impaired; however, SG&A expenses increased faster than revenue, causing operating leverage to work in the opposite direction. Financial expenses of 151.2B substantially exceeded financial income of 29.4B, and the resulting net financial expense placed additional pressure on Profit Before Tax, which should also be noted as an earnings deterioration factor arising outside the core business. While OCF remained positive at 446.2B, Net Income was substantially negative. From an accrual perspective, this indicates that the impact of the non-cash impairment item was significant and that cash-based earning power has not deteriorated to the same extent as accounting earnings.

Earnings Forecast and Guidance

The full-year forecast has been revised to Revenue of 11500.0B, Operating Income of 140.0B (-77.2% YoY), and a loss attributable to owners of the parent of 100B. First-half results were Revenue of 5166.4B (progress rate 44.9%) and operating results of -54.5B. Achieving the full-year Operating Income forecast will therefore require Operating Income of 194.5B in the second half. Profit attributable to owners of the parent was -211.8B in the first half, and achieving the full-year forecast of -100B will require profit of 111.8B in the second half, indicating a high degree of dependence on improved profitability in the second half.

Shareholder Returns

The Q2 dividend was ¥37.50 per share, while the full-year dividend forecast remains unchanged at ¥75.00. Dividend payments during the first half were 97.7B, covered within the Free Cash Flow of 122.8B generated during the same period. As Net Income is forecast to be negative for both the first half and the full year, calculating the Payout Ratio based on earnings has no economic significance; the source of funds for dividends during the period depends on OCF and cash on hand. Share repurchases were minimal at 0.0B, with dividends constituting the primary form of shareholder returns.

Risk Factors

1. Impairment risk: An impairment loss of 378.3B was recorded in the first half, causing operating results in the DigitalAndIndustry segment to deteriorate to -167.1B. The earnings outlook for the affected businesses may have been revised downward, leaving the risk of additional asset revaluations from the second half onward.

2. Profitability deterioration risk: The Operating Income margin deteriorated to -1.1% (5.5% in the previous year), while SG&A expenses increased 4.9% YoY, exceeding the revenue growth rate of +2.4%. If cost increases cannot be sufficiently passed through to prices or fixed costs cannot be adequately absorbed, the recovery in second-half earnings may be delayed.

3. Financial cost burden risk: Total borrowings were 4235.5B, while financial expenses of 151.2B exceeded financial income of 29.4B. When operating results are negative, interest expense cannot be absorbed through Operating Income, and interest rate trends or delays in earnings recovery could affect financial flexibility.

Industry Benchmark (For Reference; Compiled by the Company)

Key Takeaways from the Results

1. Revenue continued to increase and the gross profit margin also improved, but Operating Income and Net Income turned negative due to the impairment loss of 378.3B. The simultaneous occurrence of revenue growth and earnings deterioration is the defining feature of the current period’s results.

2. OCF of 446.2B and Free Cash Flow of 122.8B both remained positive, confirming from a cash-generation perspective that the non-cash impairment loss did not immediately represent a cash outflow.

3. Achieving the full-year plan requires second-half Operating Income of 194.5B and profit attributable to owners of the parent of 111.8B. The degree of improvement from first-half results will be a key focus in evaluating performance from the second half onward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,268–¥1,340 at ±1% for the cost of equity, and ¥1,285–¥1,315 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value will be below book value per share.
• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

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