Nippon Carbon Co.,Ltd. FY2026 Q2 Earnings Report

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Executive Summary

Despite higher revenue, profit declined at every level, with net income falling sharply in particular due to the reversal of the gain on the sale of investment securities recorded in the previous year. Revenue increased to ¥19.02B (+3.9% YoY), while Operating Income declined to ¥2.48B (-5.1%), Ordinary Income to ¥2.34B (-14.0%), and Net Income to ¥1.67B (-36.9%; Net Income attributable to owners of the parent was ¥1.37B, down -40.5%). The decline progressively widened primarily due to a deterioration in gross margin resulting from a higher cost ratio and the absence of the prior-year extraordinary gain (¥10.52B gain on sale of investment securities). The Company’s underlying cash generation capacity has itself been maintained.

Factors Driving Earnings Fluctuations

【Revenue】Revenue increased to ¥19.02B, up +3.9% YoY. By segment, the core carbon products-related business remained firm at ¥16.03B (+2.1%), accounting for 84.3% of the revenue mix. Meanwhile, the silicon carbide (SiC) products-related business continued to achieve double-digit growth, increasing to ¥2.41B (+14.8%) and driving overall Company growth.

【Profit and Loss】Operating Income declined to ¥2.48B (-5.1%), and the Operating Income margin fell to 13.0% from the previous year. The gross margin deteriorated to 26.3%, primarily due to higher costs, while the SG&A ratio improved to 13.2%, indicating that cost discipline was maintained. By segment, Operating Income from the carbon products-related business fell substantially to ¥1.29B (-23.1%; margin of 8.1%), whereas the SiC products-related business maintained high profitability at ¥0.95B (+19.4%; margin of 39.5%), supporting overall Company profit. Ordinary Income declined further by -14.0%, while Net Income decreased sharply by -36.9% due to the absence of the prior-year extraordinary gain (¥10.52B gain on sale of investment securities). The results represent higher revenue but lower earnings, with the quality of revenue growth having two distinct aspects: cost pressure in the core business and expansion of the highly profitable SiC business.

Segment Analysis

The carbon products-related business increased revenue to ¥16.03B (+2.1%), but Operating Income fell to ¥1.29B (-23.1%), and the margin declined to 8.1%. Although it is the core segment, it has been strongly affected by rising costs. The silicon carbide products-related business maintained high profitability, with revenue of ¥2.41B (+14.8%), Operating Income of ¥0.95B (+19.4%), and a margin of 39.5%. Although small in scale, its contribution to overall Company profit is substantial. The revenue mix was 84.3% for the carbon products-related business and 12.7% for the SiC products-related business. The high degree of concentration in the core business is therefore a structural characteristic that warrants attention.

Key Financial Indicators

【Profitability】The Operating Income margin declined to 13.0% from 14.2% in the previous year, while the Net Income margin attributable to owners of the parent was 7.2%; both declined year on year due to the higher cost ratio and the absence of the extraordinary gain.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥4.67B, substantially exceeding Net Income of ¥1.67B, indicating strong cash backing for earnings. Free cash flow was ample at ¥3.28B, generating cash in excess of capital expenditures of ¥1.39B.【Investment Efficiency】ROE remained low at 2.6%, indicating room for improvement in asset efficiency. The Equity Ratio was extremely high at 75.4%, reflecting a conservative capital structure.【Financial Soundness】Total assets were ¥85.03B and net assets were ¥64.11B, both broadly stable from the previous year. The high Equity Ratio indicates a stable financial foundation.

Cash Flow Analysis

Operating Cash Flow increased to ¥4.67B, up +24.0% YoY, demonstrating cash generation capacity substantially exceeding Net Income of ¥1.67B. Investing Cash Flow was -¥1.39B, all of which was allocated to capital expenditures; the scale of investment decreased from -¥3.11B in the previous year. Financing Cash Flow was -¥2.19B, reflecting the use of funds for shareholder returns, including dividend payments and share repurchases. As a result, Free Cash Flow (OCF + Investing Cash Flow) was ¥3.28B, securing sufficient financial capacity to balance shareholder returns with future investment. Meanwhile, changes in trade receivables and inventories affected OCF from a working capital perspective. Trends in inventory and work-in-process levels will therefore require monitoring when assessing future cash flow stability.

Quality of Earnings

Non-operating income for the current period was ¥0.41B, equivalent to approximately 2.1% of revenue and relatively small. Its primary components were dividend income of ¥0.17B and foreign exchange gains of ¥0.11B, remaining within the range of recurring income. Although an extraordinary gain from the sale of investment securities was recorded in the same period of the previous year, virtually no similar one-time items were recorded in the current period, with only approximately ¥0.02B in loss on disposal of fixed assets. Since prior-year Net Income was boosted by this extraordinary gain, the sharp decline in earnings this period was driven more by the reversal of a temporary prior-year factor than by deterioration in the underlying earnings power of the core business. OCF substantially exceeded Net Income, indicating good earnings quality from the perspective of cash backing.

Earnings Forecasts and Guidance

Progress against the full-year forecast was 46.4% for revenue (¥19.02B / ¥41.00B) and 57.6% for Operating Income (¥2.48B / ¥4.30B), with progress in Operating Income exceeding that in revenue. This appears to reflect the highly profitable growth of the SiC products-related business and the effects of SG&A cost control. The somewhat slower progress in revenue suggests that growth in the core carbon products-related business has been moderate, and the earnings pattern may be weighted toward the second half of the fiscal year. As of this quarter, no revisions have been made to the earnings or dividend forecasts.

Shareholder Returns

The full-year dividend forecast is ¥200 per share, while the interim dividend remains unchanged at ¥100, the same as in the corresponding period of the previous year. The Payout Ratio based on current-period Net Income attributable to owners of the parent of ¥1.37B will be relatively high; however, Free Cash Flow of ¥3.28B more than covers shareholder returns, including dividends and share repurchases, ensuring the sustainability of the funding source for current-period returns. Financing Cash Flow also includes expenditures related to share repurchases. Accordingly, the Total Return Ratio, which combines dividends and share repurchases, will be higher than the dividend-only Payout Ratio. No revision has been made to the dividend forecast.

Risk Factors

1. Declining profitability in the core segment: Operating Income from the carbon products-related business declined -23.1% YoY, with the margin falling to 8.1%, reflecting strong exposure to rising costs. Deterioration in the profitability of the core business, which accounts for 84.3% of the revenue mix, would have a substantial impact on overall Company earnings.

2. Working capital accumulation: Work-in-process inventory was ¥12.49B, while total inventories reached ¥2.98B; trade receivables also remained at a high level. Accumulation of inventory and work-in-process may become a factor behind asset efficiency and cash flow volatility.

3. Apparent earnings decline due to the absence of the extraordinary gain: Net Income declined -36.9% due to the reversal of the gain on sale of investment securities (¥10.52B) recorded in the previous year. Assessing the earnings power of the core business requires comparison at the Ordinary Income level after excluding this temporary factor.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability is above the industry median and ranks relatively high within the manufacturing sector.

Growth and Capital Efficiency

The Revenue Growth Rate is below the industry median, placing the Company at a relative disadvantage in terms of growth.

Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The structure in which the highly profitable SiC products-related business, with a margin of 39.5% and earnings growth of +19.4%, supports overall Company profit has become clear. Although its revenue mix remains small at 12.7%, the impact of future mix changes on the earnings structure will be a key focus given its high growth rate and profitability.

2. OCF reached approximately 2.8 times Net Income, and Free Cash Flow was ample at ¥3.28B, indicating good cash backing for earnings. Meanwhile, ROE remained low at 2.6%, highlighting the challenge of improving capital efficiency under the high Equity Ratio of 75.4%.

3. The decline in profitability of the core carbon products-related business (8.1% margin; -23.1% earnings decline) and high levels of work-in-process and inventories indicate that cost management and working capital efficiency will be key to restoring profitability.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,345–¥4,584 at ±1% for the cost of equity, and ¥4,444–¥4,474 at ±0.1 for ω.

Notes:

• Since forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end 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 value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast 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 with professionals as necessary.

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