NOF (4403) FY2026 Q3 Earnings Report

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Executive Summary

For the cumulative Q3 period of the fiscal year ending March 2026, revenue increased while earnings declined, with a slowdown in the core Functional Chemicals Business being the primary cause of the lower profit margin. Revenue increased modestly to ¥1,734.7B (+1.3% YoY), while Operating Income declined to ¥318.3B (△11.0% YoY), Ordinary Income to ¥345.2B (△8.2% YoY), and Net Income to ¥256.1B (△7.5% YoY). The increase in cost of sales and SG&A expenses exceeded revenue growth, causing the Operating Income margin to decline to 18.3% from 20.9% in the same period of the previous year.

Factors Affecting Performance

【Revenue】Consolidated revenue was ¥1,734.7B (+1.3% YoY). While the Functional Chemicals Business, the largest segment, recorded a revenue decline to ¥1,105.6B (△6.0% YoY), the Explosives & Propulsion Business posted substantial revenue growth to ¥295.6B (+50.1% YoY), supporting overall performance. The Pharmaceuticals, Medical, and Health Business was nearly flat at ¥372.6B (△0.1% YoY).

【Profit and Loss】Operating Income was ¥318.3B (△11.0% YoY). The gross profit margin declined by approximately 1.9pt YoY to 35.9%, while SG&A expenses increased by 5.2% YoY to ¥303.8B, exceeding the revenue growth rate. Non-operating income of ¥31.6B, including dividend income of ¥11.4B and foreign exchange gains of ¥6.8B, supported Ordinary Income of ¥345.2B, although earnings continued to decline year on year. Extraordinary income of ¥18.2B was primarily attributable to gains on the sale of investment securities of ¥17.6B, providing a temporary boost to Profit Before Tax of ¥362.1B. Net Income was ¥256.1B (△7.5% YoY). In conclusion, the Company recorded higher revenue but lower earnings, with the decline in profit from the Functional Chemicals Business weighing on consolidated earnings.

Segment Analysis

The Functional Chemicals Business recorded revenue of ¥1,105.6B (△6.0% YoY), Operating Income of ¥202.2B (△17.9% YoY), and a profit margin of 18.3%, down approximately 2.7pt from 21.0% in the previous year, making it the core contributor to consolidated earnings and the primary cause of deterioration. The Pharmaceuticals, Medical, and Health Business recorded revenue of ¥372.6B (△0.1% YoY), Operating Income of ¥106.9B (△8.8% YoY), and the highest profit margin among the businesses at 28.7%. The Explosives & Propulsion Business posted revenue of ¥295.6B (+50.1% YoY), Operating Income of ¥28.4B (+83.1% YoY), and a profit margin of 9.6%, improved from 7.9% in the previous year, demonstrating the strongest growth momentum. The Company has a three-pronged earnings structure comprising the high margins of the Pharmaceuticals, Medical, and Health Business, the scale-based earnings contribution of the Functional Chemicals Business, and the high growth of the Explosives & Propulsion Business.

Key Financial Indicators

【Profitability】The Operating Income margin of 18.3% and Net Income margin of 14.7% both declined from the previous year, but remain favorable in absolute terms. 【Cash Quality】The difference between Ordinary Income and Net Income was ¥89.5B, primarily due to income taxes and other taxes of ¥106.0B, resulting in an effective tax rate of approximately 29.3%, within the normal range. Gains on the sale of investment securities included in extraordinary income amounted to ¥17.6B, equivalent to approximately 6.9% of Net Income, and provided a non-recurring boost. 【Investment Efficiency】Annualized ROE was 12.0%, consisting of a Net Income margin of 14.7% × total asset turnover of approximately 0.6 times × financial leverage of approximately 1.3 times, indicating a profitability-led earnings structure. 【Financial Soundness】The Equity Ratio was extremely high at 75.6%. Interest-bearing debt was limited relative to cash and deposits of ¥756.4B, indicating a conservative and robust financial base.

Cash Flow Analysis

As the disclosed information does not include cash flow statement data, funding trends are analyzed based on changes in the balance sheet. Cash and deposits amounted to ¥756.4B, a decrease of ¥114.2B from ¥870.6B in the same period of the previous year. During this period, property, plant and equipment increased by ¥69.7B, investment securities by ¥74.7B, and inventories by ¥58.7B, suggesting that funds were allocated to capital expenditures, investment in securities, and inventory buildup. Treasury stock increased by ¥150.0B compared with the same period of the previous year, indicating that expenditures related to shareholder returns were also a source of cash use. Net assets amounted to ¥2,835.1B, an increase of ¥39.6B year on year, and the capital base has been maintained through the accumulation of retained earnings and comprehensive income.

Earnings Quality

Against Operating Income of ¥318.3B, non-operating income was limited to ¥31.6B, equivalent to 1.8% of revenue, indicating limited reliance on non-operating income. Non-operating income comprised dividend income of ¥11.4B, foreign exchange gains of ¥6.8B, and other income of ¥10.0B. As these substantially exceeded interest expenses of ¥1.0B, Ordinary Income exceeded Operating Income by ¥26.9B. Of extraordinary income of ¥18.2B, ¥17.6B was attributable to gains on the sale of investment securities, and Profit Before Tax included a temporary net boost of ¥16.9B. The primary cause of the ¥89.5B difference between Ordinary Income and Net Income was income taxes and other taxes of ¥106.0B, resulting in an effective tax rate of approximately 29.3%, with no particular abnormality. Comprehensive Income was ¥305.7B, exceeding Net Income of ¥256.1B, primarily due to the positive contribution of ¥56.0B from valuation difference on securities.

Earnings Forecast and Guidance

Cumulative Q3 progress against the full-year company forecasts was 66.6% for revenue, 69.2% for Operating Income, 69.7% for Ordinary Income, and 64.9% for Net Income, all below the standard progress benchmark of 75%. Net Income showed the weakest progress in particular and remains below plan even after recognizing gains on the sale of investment securities. To achieve the full-year plan, Q4 revenue of ¥870.3B and Operating Income of ¥141.7B will be required. The required Operating Income margin is 16.3%, below the cumulative Q3 actual margin of 18.3%, meaning the plan has been set at an attainable level without assuming further margin improvement.

Shareholder Returns

The Q2 dividend was ¥26.00 per share, and the full-year dividend forecast is ¥61.00, based on a year-end dividend of ¥35.00. Using the company forecast Net Income of ¥394.0B and the average number of shares outstanding during the period, the full-year forecast Payout Ratio is approximately 35.7%, below the 60% benchmark for dividend-only sustainability. Retained earnings amounted to ¥2,341.8B, while interest-bearing debt was limited relative to cash and deposits of ¥756.4B, indicating substantial dividend capacity. Meanwhile, treasury stock increased by ¥150.0B year on year. If share buybacks in addition to dividends are taken into account, the Total Return Ratio should be evaluated separately.

Risk Factors

1. Declining revenue and earnings in the Functional Chemicals Business: Revenue declined 6.0% YoY and Operating Income declined 17.9% YoY. The slowdown in the largest business, which accounts for approximately 60% of total segment profit, is continuing. The recovery in demand and success of passing through price increases in this business will determine consolidated performance.

2. Prolonged working capital cycle: Inventories increased 20.7% YoY to ¥342.9B, while accounts receivable and notes receivable remained high at ¥587.4B. A lengthening collection period for inventory and receivables requires monitoring from a capital efficiency perspective.

3. Reliance on non-recurring items: Of extraordinary income of ¥18.2B, ¥17.6B was attributable to gains on the sale of investment securities, accounting for approximately 6.9% of Net Income. The investment securities balance of ¥493.4B may affect Comprehensive Income and Net Assets through valuation differences resulting from fluctuations in market prices.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's Operating Income margin and Net Income margin both substantially exceed the industry median, indicating a relatively high level of profitability within the industry.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, indicating relatively moderate growth compared with the Company's high profitability.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Although the Operating Income margin of 18.3%, Net Income margin of 14.7%, and annualized ROE of 12.0% declined from the previous year, they remain substantially above the industry median, indicating that the profitability-led earnings structure has been maintained.

2. While the decline in earnings from the Functional Chemicals Business, the largest business, is the primary constraint on consolidated performance, the Explosives & Propulsion Business recorded substantial growth in both revenue and profit, clearly highlighting the differing performance among businesses.

3. Against the robustness of the financial base, represented by an Equity Ratio of 75.6% and cash and deposits of ¥756.4B, the lengthening of the working capital cycle due to increases in inventories and trade receivables is a key point to monitor in assessing whether earnings growth will translate into improved capital efficiency.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,406–¥1,490 at ±1% in the cost of equity, and ¥1,442–¥1,455 at ±0.1 in ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• As Net Assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated using only publicly disclosed data; this does not constitute 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 summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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