4091.T4091.T
LOADING
|||
Unidentified Company Representative : [Interpreted] Now we would like to commence the Nippon Sanso Holdings Corporation earnings call for Q3 FYE2025. Thank you very much indeed for taking time despite your busy schedules. My name is Ishimoto from the IR team. Thank you for joining this conference. Some housekeeping announcements. First, the conference materials are the financial results, TANSHIN and earnings call reference that we have just released. Please have these materials ready. Today's main speakers are Hamada, President, CEO; Draper, Senior Executive Officer, Group Finance and Accounting Office, and CFO; and Kajiyama, General Manager of IR. In addition, Kubo, Executive Officer, Group Corporate Planning Office; Miki, Senior Executive Officer and CSO, the Group Sustainability Management Office; and Yoshida, the General Manager of Accounting, are also in attendance. Today's agenda begins with an explanation from CEO, Hamada; CFO, Draper; and IR GM, Kajiyama covering Q3 results based on the materials. We have time for Q&A in the end. Zoom simultaneous interpretation function is available for English and Japanese. Please select your preferred language in the Zoom control panel. If you prefer communicating in English during Q&A, please set the Zoom audio language to English. Hamada-san, over to you.
Toshihiko Hamada: Hello, from Nippon Sanso Holdings. This is Hamada speaking. Thank you very much for participating in our Q3 earnings call, out of your busy schedules. First, as usual about the global situation. War and conflict situation remain unchanged in the Gaza Strip. There has been a ceasefire underway but we wonder whether this will lead to fundamental resolution of the conflict or not. During the past two or three months, things have not necessarily changed substantially and the geopolitical tensions remain high, we may have to say. However, there was one major event, the President of the United States has changed, a new administration was inaugurated in the United States. For all of us, what kind of impact will there be? What kind of changes will be implemented? We think we have to closely monitor how things will develop. People in the economic world, from academia and school teachers and so forth, nobody can clearly forecast what is likely to happen. But clearly, the new Trump administration is trying to impose tariffs. That has clearly been declared and has started to be implemented. In the case of our company, NSHD, business [differ] with the regions, there are different businesses. And basically, we don't have so much export or import between and among countries, therefore our business is not significantly impacted by tariffs. But we have to watch what the impact tariffs may have on our customers. The future trend of the new US administration, customer industries who may be affected by the new administration and the possible impact on supply chain, we think are important topics that we have to continue to watch. And inflation, Japan is going through interest rate hike and other parts of the world there are interest cuts and in the US, the risk of a resurgence of inflation is a concern. Here as well, maybe there will be significant impact on future business trend or customers. The current situation is not necessarily stable. We have to closely observe how things will develop going forward. Mr. Draper as well as Mr. Kajiyama will explain about our company's financial performance, but first I want to share with you our company's perspective. And mainly in the third quarter, what has been our perspective in conducting our business. That is the topic I would like to first share with you. Since our transition into our current holding company structure, we've been working to strengthen our overall strength as a group, as we've been mentioning from before. In addition, under our business management structure of industrial gas, there were four regions and Thermos, it is extremely important that we respond flexibly to the different circumstances, risks and opportunities in each business region. And this is linked to the economic situation that I referred to as well. It is necessary for us to take into account the individual circumstances of each region and raise our business structure to a higher level, not only as a group, but also for each regional business. This, I think, is important for the holding company as well. While respecting the autonomous management that underpins the growth of each region, we believe that our role as the holding company is to support that growth and further promote collaboration within the group. That is what we refer to as operational excellence. I may have explained about this before. That I think is the function or role that the holding company should play. Recent initiatives tailored to local circumstances include strengthening engineering capabilities and healthcare business in Europe. Additionally, in Australia, we made an acquisition to expand our industrial gas business. We will introduce this in more detail later. In this way, by strengthening the group's overall capabilities and at the same time implementing regional and business strategies, we are working to improve our competitiveness and ultimately our corporate value for any process and holdings as a whole. There are five points listed on this slide. And the two points at the bottom, the project in Australia as well as Europe, I will introduce to you later on. In May 2022, we announced our Medium-term Management Plan, NS Vision 2026. And as written here, we explained our five key focused fields. We are working to implement them. In 2020, we established a business operations structure, comprising of a holding company and four global regions plus Thermos. And we have been focusing on enhancing the overall strength of the group as we have been trying to implement our five key focus fields. Two and a half years have passed since the start of the current midterm plan and depending upon type of business or depending upon the nature of the strategies that we set up, our results are varied but we believe we've been able to see some positive outcomes. We will continue to monitor and verify the outcomes of our midterm plan and reflect that in our future action. And we have about one year remaining in our current midterm plan period. We will continue our efforts to further enhance the overall strength of the group and reflect all of our efforts into our next midterm plan. In the current midterm management plan, we have also outlined the growth strategies for each of the four global regions in our industrial gas business. While each region is working together to strengthen our overall strength as a group, the four industrial gas regions plus Thermos are managing their operations autonomously to address management issues specific to each region. Today, as part of our efforts aligned with the growth strategies in Europe and the Asia Oceania region, we will introduce two acquisitions we disclosed in December, an industrial gas business company in Australia and New Zealand, the Coregas Group; and a homecare business in Spain, Europe, Esteve Teijin Healthcare. These are the two topics I would like to share with you. Now, regarding the acquisition in Oceania, we have concluded a share purchase agreement to acquire 100% of the shares of a Coregas group with the Wesfarmers Limited, their current shareholder. The Coregas Group operates an industrial gas business in Australia and New Zealand. In May of last year, we announced the acquisition of an LPG sales business in northern and western part of Australia. And we completed the acquisition last year. However, the acquisition this time is an acquisition of a company mainly engaged in industrial gas business. The acquisition of Coregas Group, one of Oceania's major industrial gas companies, will enable us to further expand our presence in the region's industrial gas market. And furthermore, our company did not have a business site in New Zealand, so this acquisition will also give us an opportunity to expand geographically. Our current business in Australia and the products and markets of the Coregas Group that we are acquiring are mutually complementary. To help you understand this, we have summarized the main features of both organizations on the table on the slide. There is a geographic mapping conducted, and there are other businesses and products that are not listed on this slide, but today I will focus on the key points so that you can understand the complementary relationship between the two companies. First, our Australian business is currently handled by Supagas, which mainly focuses on LPG, and has been able to expand its sales network across Australia following the recent acquisition of businesses in northern and western Australia. On the map, the red dots show that situation. As for industrial gas, Supagas mainly handles carbon dioxide gas, dry ice, and packaged gas, but their share is still not very large compared to LPG. On the other hand, the Coregas Group, the company that we are going to acquire, their main business is industrial gas, and its main products are air separation gases such as Oxygen, Nitrogen, and Argon. Although their main business is packaged gas, the Coregas Group also owns a large ASU Air Separation Unit for large companies that enables them to supply on-site and supply bulk gases to the market in liquid form. They also supply Medical Gases and Specialty Gases consisting of mixed gas and pure gas. These two companies having different characteristics will be able to, through this acquisition, leverage each other's strengths and drive new growth. We want to accelerate our overall growth through this acquisition. The completion of this acquisition is subject to approval by the Australian Foreign Investment Review Board and competition authorities. If all goes well, the acquisition is expected to be completed in mid-2025. Next, I will explain the acquisition of the homecare business in Spain in Europe. First, let me briefly explain the homecare business. It provides equipment and services for patients with respiratory diseases and are to receive treatment and medical care at home. For example, it supplies oxygen therapy for patients with chronic lung disease and devices that support breathing for those with sleep apnea syndrome. In Europe, we operate these businesses mainly in Spain, Portugal, and Italy. Although small in the overall European market, Oximesa, a Nippon Gases’ subsidiary, holds a solid position in Spain. Esteve Teijin Healthcare, our acquisition partner, operates the same business as Oximesa. However, as shown in the slide, the two companies have little geographical overlap in their service areas. After the acquisition, our presence across Spain will expand, as you can see, significantly. By integrating the expertise and experience of both companies in their respective regions, we will build a system to deliver high-quality services across a border area. As I mentioned earlier in our regional strategy for the mid-term plan, Nippon Gases, which manages our European business, focus on resilient markets less affected by economic fluctuations. Currently, looking at the current economic environment, European heavy industries, inclusive of chemical and steel, are in a tough situation. But homecare, having a direct contact with the human body, so the medical and homecare market is expected to see a stable demand growth due to population ageing and longer life expectancy. We are actively expanding in this resilient market. That is our intention. We expect this acquisition to align with this strategy and enhance the resilience of our European business. The transition is also subject to approval by the Spanish competition authorities. If it all goes according to plan, this transaction is also expected to close in mid-2025. Next, I would like to explain our future investment implementation plans. Since our Q1 financial results for FYE 2022, we have included a chart breaking down our capital investment plans by customer industry to provide a clearer overview. As you can see, continuous capital investment is essential for us to continue to grow stronger in the future. In order for us to sustain our growth, continued CapEx is a must. The backlog as of December 31, 2024 is approximately ¥170 billion. There are some ups and downs. It's difficult to simply say how many projects have been increased, but comparing to Q2, we have a slight increase in the latest quarter. Environment, hydrogen-related projects, it's difficult to define precisely, but for those environment-related projects, and from the nature of industrial gas, there are connections in the way the energy consumption or the energy efficiencies from various fronts for those projects, account for 45% of all. As noted at the bottom of this slide, as usual, the scope of this calculation is for projects worth approximately ¥500 million or more and does not include projects worth less than that. We would like to continue to demonstrate our future growth potential in this way every quarter. Now, CFO Draper will provide an overview of our Q3 financial results.
Alan Draper: Thank you, Hamada-san, and hello, everyone. Thank you for joining our Q3 earnings call for Nippon Sanso Holdings. For the third quarter, October 1, 2024 through December 31, 2024, revenue increased by 3.8%. Excluding favorable currency impact of the weakened yen, revenue increased, by approximately 1.2%. Core operating income or COI, increased 7.5%. Ex-currency, the COI impact was up 4.5%. COI margin as a percent of sales increased by 50 basis points to 14.1% and EBITDA as a percentage of sales also improved by 50 basis points to 23%. Year-over-year growth and margin improvement were driven by price management and operational excellence, with productivity and best practices leveraged across various businesses and countries. These gains were partially offset by the impact of lower volume and cost inflation. Please refer to the right-hand portion of the slide where you can see the year-over-year revenue variance analysis for the consolidated NSHD Group. Regarding the Q3 variance analysis, NSHD experienced a favorable impact of 2.6% from currency. Outside of currency, price was positive 2%, volume, negative 1.4%, pass-through and surcharges slightly favorable with positive 0.4% due to higher energy costs in the on-site business. And the other category, which includes M&A, divestments, deconsolidation and equipment sales, was favorable 0.2%. Operating cash flow improved significantly on a year-to-date basis, approximately 19%, or just over ¥24 billion versus the prior year. Investing activities increased 47% from the previous year due to large capital project spend and acquisition activity. As expected, free cash flow decreased by about 31% on a year-to-date basis because of the higher CapEx and M&A. In addition, during Q3, we refinanced ¥75 billion of hybrid debt and converted them into clean debt. This conversion saves NSHD nearly 90 basis points per annum in effective interest expense. In just over one year, we refinanced ¥175 billion of hybrid debt, and we were able to do that due to our strong financial performance and improving financial soundness. Currently, we are not changing our external sales guidance. The current sales of ¥1.3 trillion appears achievable. We are experiencing better pricing and favorable currency, which offsets the volume softness. However, as indicated during the last quarterly earnings call, we have now adjusted our COI or Core Operating Income, upwards by ¥8 billion, or 4.5%. This increase is a result of better operational performance from price and productivity improvements, as well as the continued currency tailwind from the weak yen compared primarily to the US dollar and euro. The currency in our fourth quarter forecast assumes that the one US dollar equals ¥152.45, and one euro equals ¥165.83. In addition, we do see operating income increasing by ¥1 billion. This is a result of our higher COI, partially offset by the nonrecurring charge from Q2 that was previously mentioned. We are pleased with our business performance and will continue to drive both the quality and quantity of earnings. Thank you for your attention. I will now turn the call over to Kajiyama-san to provide some additional remarks. Thank you.
Keita Kajiyama: This is Kajiyama from Investor Relations. Thank you for participating. I will now explain our performance by segment for the third quarter of the fiscal year ending March 2025. I will explain using the consolidated financial results earnings announcement posted on our website today. Please refer to it if you have it with you. Before I go over the performance by segment, as written in the notes on Page 3, foreign exchange impact is calculated by applying the average rate for each currency for the period under review as the base rate and comparing it to the previous year. Mr. Draper, our CFO, explained about our revised guidance, and the assumed exchange rate for the revised guidance can be confirmed on this page. As for currency sensitivity, one yen depreciation against the US dollar has an impact of approximately positive ¥2.4 billion on revenue and positive ¥350 million on core operating income, while against the euro, impact of about ¥1.9 billion on revenue and ¥350 million on core OI. I will now go over our performance, but since the overview of our consolidated Q3 performance was already given by Mr. Draper, I will explain the Q3 situation by segment. First, Japan, on Page 14. In the gas business, which accounts for approximately 60% of revenue, we continued price management initiatives, and although sales of electronic material gas was flat year-on-year, shipment volume of air separation gas, our core product, declined, and also impacted by the deconsolidation of residential LP gas subsidiary, revenue decreased. On the other hand, in equipment and installation, since large equipment and installation projects progressed smoothly, performance was favorable. Continuous productivity efforts, price management, and favorable performance continuing in equipment installation contributed to an increase in segment income year-on-year. As a result, revenue was ¥100.8 billion, a year-on-year decrease of ¥2.5 billion, or 2.4%. Segment income was ¥12.2 billion, a year-on-year increase of ¥300 million, or 2.9%. There was negligible foreign exchange impact on revenue and segment income. Next, Q3 performance of the US business, on Page 15. In the US business, shipment volume of core product, air separation gas, declined slightly. And for other gases, including semiconductor, material gas, acetylene, packaged gas such as dry ice and hard goods, shipment was soft. In equipment and installation, sales of both industrial gas and electronics, was soft. We continued effective price management initiatives, and in terms of cost, continued to promote productivity improvement programs. As a result, revenue was ¥90.5 billion, a year-on-year increase of ¥2.9 billion, or 3.3%. Exceeding ForEx impact of positive ¥4.8 billion, revenue declined by ¥1.9 billion, or 2.1%. Segment income was ¥13.5 billion, a year-on-year increase of ¥1.1 billion, or 9.3%. Exceeding ForEx impact of a positive ¥700 million, segment income increased by ¥400 million, or 3.4%. Next, performance of the European business, on Page 16. In the European business, shipment volume of air separation gas was strong, but sales of some gases such as helium was weak. Equipment and installation was strong, mainly for medical device. We continued price management and productivity initiatives, but there was an increase in some purchasing cost and electricity cost. As a result, revenue in Europe was ¥83.3 billion, a year-on-year increase of ¥7.6 billion, or 10.0%. Exceeding ForEx impact of positive ¥2.1 billion, revenue increased by ¥5.5 billion, or 6.9%. Segment income was ¥15.4 billion, a year-on-year increase of ¥2.2 billion, or 16.4%. Exceeding ForEx impact of positive ¥400 million, segment income increased by ¥1.8 billion, or 13.2%. Next, Asia & Oceania business, on Page 17. Shipments of air separation gases remained strong year-on-year in Asia & Oceania. In Australia's LPG business, both unit prices and sales volumes rose. In the electronic businesses, which make up about 40% of revenue, gas and equipment sales also grew. However, some regions faced higher electricity and labor costs, along with a decline in certain gas prices. As a result, revenue was ¥45.2 billion, up ¥3.9 billion, or 9.4% year-on-year. The impact of ForEx was positive ¥1.3 billion, excluding this, revenue increased by ¥2.6 billion, or positive 6%. Segment profit, ¥4.0 billion, slightly down by 1.7% year-on-year. The impact of ForEx was ¥0.1 billion. Excluding this, segment profit decreased by ¥0.2 billion, or negative 4.3% year-on-year. Next, Thermos business, on Page 18. In the Thermos business, the sales of portable vacuum-insulated bottles remained strong in Japan. Revenue from Asian production plants fell slightly, while overseas equity method affiliates' sales stayed weak. To offset yen-driven cost increases, new products with updated designs and features proved effective. As a result, revenue ¥8.0 billion, up ¥0.2 billion or a positive 3.3% year-on-year. The impact of ForEx was minimal, excluding this, revenue increased by 3%. Segment profit was ¥1.6 billion, up ¥0.2 billion, or a positive 11.8% year-on-year. ForEx impact was minimal, excluding this, the profit increased by 8.4%. This concludes my explanation of each business segment. As CFO Alan Draper mentioned earlier, I would like to talk about full-year earnings forecast on Page 27. So let me talk about the revision. We decided to revise our earnings forecast from the announcement on May 13. The main reasons are the significant yen depreciation compared to the initial plan, and continued implementation of price management and productivity improvements across regions. Despite weak demand in some gas businesses, core operating income in Japan, the US and Europe is expected to exceed the previous forecast. For our updated forecast, revenue remains unchanged at ¥1.3 trillion. Core operating income is expected to be ¥185 billion, an increase of ¥8 billion or plus 4.5% from our previous forecast with the same ForEx assumption. Regarding non-recurring items, Q2 impairment loss was recorded, but gains from selling real estate in Japan are expected this fiscal year. Operating income is projected at ¥178 billion, up ¥1 billion or positive 0.6% from the previous forecast. Financial income and expenses should improve with higher interest income, raising pre-tax income to ¥156.5 billion, with increased corporate tax from higher pre-tax income, and exchange rate adjustment, net income is forecast at ¥110 billion, with ¥107 billion attributable to the parent company. Since our business model is based on local production and local sales, exchange rate fluctuations and impact financial statements when consolidating overseas subsidiaries, please refer to Page 3 for exchange rate sensitivity analysis. Regarding segment-specific forecasts, we refrain from disclosing due to competitive concerns, as these figures directly reflect our business strategies. I thank you for your kind understanding. Finally, in the appendix, you will find key financial indicators. Please refer to on Page 30 are summary cash flow statements and summary balance sheet for your reference. This concludes my explanation of the financial results for the third quarter of FYE 2025. Thank you very much.
Operator: Thank you very much for your presentation, Hamada-san, Draper-san, and Kajiyama-san. From now, we will start the Q&A session. [Operator Instructions] That is all the information I have for you. We will now take your questions on a first-come, first-served basis until the scheduled closing time. Mizuho Securities, Mr. Yamada.
Mikiya Yamada: Thank you for your explanation. This is Yamada from Mizuho Securities. First question, the other day, Mitsubishi Chemical Group, your parent company, announced their new management policy, and their mid-term plan has a different time period as you. And the groom company cash out is to be about ¥1 trillion, they mentioned, and mainly concerning the NSHD Group, according to Mitsubishi Chemical. And we take a look at NSHD's current financial situation, target net debt-to-equity, you're very close to achieving this target, and because of that, it seems as though you're able to repay your hybrid loan, switching over to clean bank loan, and 0.5% decrease in interest payment. And my question is about the next mid-term plan. It may be difficult for you to respond, but Mitsubishi Chemical Group's presentation, in order to be aligned with them, growth investment and CapEx, will they be accelerated? Is that the correct understanding? And if that is the case, I take a look at your backlog by customer industry. What kind of CapEx projects do you expect an increase or acceleration in, if you could respond to the extent possible? Thank you very much.
Toshihiko Hamada: Mr. Yamada, thank you very much, as usual, for your questions. About your questions, as we've been saying from before, it's true that the majority owner, Mitsubishi Chemicals, our parent company, we try to be aligned with them as much as possible in our data. However, we have our growth strategy, and we need facility and equipment where there is a market. And in new geographies, we want to invest through M&A. And that kind of investment is indispensable for our growth. And as I mentioned, in order for us to generate a profit in a sustainable manner, in order for us to grow, investment is indispensable. From that perspective, our corporate planning division people are always coordinating and discussing about numbers, etc., with Mitsubishi Chemicals. But bearing that in mind, NSHD has its own investment strategy. And that, we think and hope, will enable us to contribute to the growth of Mitsubishi Chemicals Group as well. We are not necessarily aware of the full details of Mitsubishi Chemicals' situation. I cannot respond to how aligned we are, but as I just mentioned, in order for NSHD to continue to grow, and as I may have mentioned before, we are not just pursuing sales or revenue growth. If you take a look at our business globally, we want to be ranked higher. For that, M&A investment as well as capital investment are indispensable. Therefore, a D/E ratio, we want to be able to control that, and we want to continue to proactively invest. And we have explained the stance of ours to Mitsubishi Chemical. I wonder if Alan Draper has any more detailed information or any supplementary information to share with you.
Alan Draper : Thank you for the question. I think overall, as Hamada-san said, we have our investment strategies and guidance. We obviously make sure that Mitsubishi is aware of those situations that we have going forward. But for the most part, we're trying to make our decisions to make sure that we're growing for the benefit of all shareholders. That's Mitsubishi as well as all of our investors. So that's our focus, to grow profitably, to grow on a continuous basis, and that's our goal and target. Thank you.
Mikiya Yamada: May I speak in English? I changed the translation things. Anyway, thanks very much for the elaborations, and if I understand it correctly, the major three gas companies globally are spending approximately 12% to 18% of the capital expenditure as opposed to sales revenue. So in order for you to catch it up and in order for you to improve the ranking from current number four to maybe number three, then I think you need to invest wisely and also more than what they are doing. And if I understand correctly, that's what the companies in the long term aiming to. Is that correct?
Alan Draper : Yes, that's correct.
Mikiya Yamada: Thank you very much for the elaboration confirmation. That's it. Thanks very much indeed.
Alan Draper : Thank you.
Operator: Mr. Yamada, thank you very much. BofA Securities, Mr. Enomoto, please.
Takashi Enomoto: BofA, Enomoto, thank you. Two points, one, you announced two acquisitions in Australia and Spain. Upon completion of the acquisition, how much profit contribution would you expect? That's something I would like to hear. And two projects combined, then I think the total payment for acquisition will be ¥100 billion. So for next year, the financial strength target may not be achievable. So after adjustment, the D/E 0.7 time may be difficult to be achieved. That's my concern. So now could you comment on that? That's the question number one. Thank you.
Toshihiko Hamada: Details to be responded by Alan Draper later on. But for those two projects, how much revenue and appropriate contribution to be derived within next fiscal year, as mentioned earlier in my remark, probably that will start from mid next year but it hasn't been finalized yet. So it's difficult to give you concrete figures at this point in time. And as for D/E ratio, indeed, our initial target, maybe we may not necessarily achieve the targeted level. But thinking about the cash-in situation, we don't think that there is a need that we have to revise our plan but for more practical explanation to be provided by Draper.
Alan Draper : Thank you, Hamada-san. So overall, we're not going to disclose the profit levels of the businesses that we're acquiring. However, the Australian business will increase the presence in Australia, our sales presence by about 50%. So our presence in Australia, our portion will go up by 50%. And that'll take our business from 30% of the Asia-Oceania segment. Our sales in Australia will go up to 40% of our own Asia & Oceania segment. So overall, it's a pretty sizable acquisition. The acquisition in Europe is relatively small, even though it's a key acquisition. It's less than 3% of revenue. So it's relatively immaterial on the total of the NSHD Group. When it comes to D/E ratio, our target has been 0.7. But I know I've mentioned to any investor I've spoken to, when an opportunistic acquisition comes along where we can improve our market position, we'll have to make decisions that sometimes will deviate from our goals and targets where we think it's better for the interests of our shareholders. And this is one of those interests. So we'll probably have a tough time hitting our D/E ratio because of this acquisition. But we think in the shareholder interest, it's a much better opportunity to get this acquisition than focusing solely on debt-to-equity. Thank you very much.
Toshihiko Hamada: Second question?
Takashi Enomoto: Backlog or so the CapEx increased by ¥10 billion to ¥170 billion. So what are the concrete projects that are having an increase by geography and by segment? And Vertex Energy loss was announced last time. Fortunately, Vertex Energy was out of Chapter 11. So the recovery portion is included as part of ¥170 billion. If not included, can we expect a recovery from Vertex?
Toshihiko Hamada: Thank you for the question. Vertex, as you say, it's out. It seems to be getting out now from Chapter 11. Since then, we suspended the project which is still suspending the construction in progress. Are we able to move on? The detailed plan hasn't been informed to us yet. As for the future, to the judge, if the Vertex the project we decided to make a significant investment because the business activities are meaningful. But under the new ownership, if the project is agreed, then we will need facilities which has been currently suspended for its construction activities. If it is going to be commenced, then those and the figures will be back. And the new investment details, and I can't share with you in details, but it has been communicated. In Asia, nitrogen generation equipment or air separation unit, those are quite -- we have been receiving quite active inquiries for those. So if we include them, this is the estimated amount. And, of course, there are some FX impact. That is true. The amount being increased this time, as you guessed, is slightly less than ¥10 billion. But, this is not derived by a single large-sized project, so the large project in the US or large, the separation unit project, mostly completed in Japan. So it does not mean that there is one single bigger project exceeding ¥10 billion. But there are the number of project increase primarily in Asia. That is all from me. Thank you.
Takashi Enomoto: Well understood. Thank you very much.
Operator: [Foreign Language].
Hiroki Watanabe: [Foreign Language] And economic indicators are improving. And if you take a look by product, where are we seeing improvement and profitability by product, if you could please add as well. And, Mexico, Canada tariff, there's about a one-month delay. And will there be some indirect impact of them on your performance? That's my first question.
Toshihiko Hamada: Thank you for your question. Not only the US, but, unfortunately, globally, this seems to be the trend. Industrial gas volume, how many cubic meters or how many kiloliters, that seems to be important. And that seems to be an indicator showing the situation of the infrastructure. That is, I think, the strength of industrial gas used as infrastructure. And in that sense, in the United States, we take a look from the first quarter. And in terms of gas volume, although gradually there's a decline, that is a fact. In particular, a significant trend is, and if you write a graph, I think it's clear, cylinder gas and packaged gas and various equipments, hard goods, the sales volume here is increasing. And in line with that, there's a decline in amount monetarily. And bulk gas, also a slight decline. But if you take a look at the overall numbers, we are making cost reduction efforts, and we want to maintain price hike by taking these actions in terms of sales amount. In monetary terms, we try to maximize our performance. That is the situation in the United States. Besides packaged gas, helium is in a difficult situation. And CO2 gas, performing quite favorably, but still, not only the US but for other regions as well in the case of CO2 gas, the source is very unstable because of various energy issues. CO2 source, ammonia and various chemical plant utilization rate is declining. In that sense there's less source for CO2 gas. So it's becoming difficult to aggregate them and sell them. That is the situation in the United States. However, we have on-site business that is connected by piping, although the share is not so large, mainly for oxygen, and there's also nitrogen. We have that business as well in the US which is quite robust. You referred to US tariffs to be imposed on Mexico and Canada. As we briefly mentioned, we are manufacturing and selling in each geographic region, and Canada to the US, or Mexico to US, that kind of industrial gas, we do not have so much. Therefore, we will not be impacted so much by tariffs. However, as I mentioned at the outset, there are a number of industries, particularly the automobile industry, made in Canada exported to the US, and these parts and components for automotive industry might be impacted. And Canada and Mexico, if the factory utilization rate declines in those countries, then that might have a slight impact on our gas business. However, the rest is unclear. There are parts and components that are indispensable, and those are the kinds of parts and components that are made in various countries. Even if there is tariff, and even if that has impact on volume, we don't think their manufacturing will become zero. And ultimately, industrial gas will not be reduced to zero. We are not expecting that sharp a decline. Therefore, local production and local consumption, that's the basic nature of our business, and we don't think that nature of our business will be impacted immediately.
Hiroki Watanabe: My second question is, I want a similar comment about Japan, Q3, the increase in profit and decrease in revenue year-on-year? And there is a decline in revenue and what part of the Japan business is contributing to profit? Thank you.
Toshihiko Hamada: In the case of Japan, there's decline in revenue, and from last fiscal year, there was one subsidiary that was deconsolidated, and there is no revenue from that company contributing to a great performance, and that's the main reason for decline in revenue in Japan. Excluding that, in essence, that is not something that happened suddenly. We were viewing up for the year and we decided to make that decision. We were expecting this to happen, and excluding this, revenue is slightly growing, rather. Why is there a growth in revenue? Going back to gas volume, in terms of volume, gas volume is not necessarily growing. The same in Europe, US, as well as Japan. There is no increase in the benefit of cost reduction as well as price hike contributing significantly in our Japan businesses, well, as a result, there's an increase in profit. And in Japan, people have been saying from before that industries in Japan will no longer grow, but customers have been making desperate effort, and we have been as well, and we explained about price hike, and we appreciate that the customers accepted price hike. And in order to contribute as much as possible to our customers, we are making cost reduction efforts. That, I think, is reflected in our performance in Japan.
Hiroki Watanabe: One additional question. Q2 to Q3, revenue increased. There's an increase in profit as well. Was this a seasonal factor for LPG, or was it because of price hike?
Alan Draper : Thank you. This is Alan. And regarding to the sequential walk, the Japan business right now has a lot of sale of equipment, and that's done under percentage of completion accounting. So under percent completion, they had more activity in Q3, which also drove up the profitability and also the sales, and also the side of profitability and the margin performance. So a decent amount of sales of equipment occurred with the rapidest project. Thank you.
Hiroki Watanabe: And just thank you.
Toshihiko Hamada: Mr. Watanabe, thank you very much.
Operator: Next, Mr. Cho from CLSA, please.
Unidentified Analyst: Hello. My name is Cho from CLSA. Can you hear me?
Operator: Yes, we can.
Unidentified Analyst: I have one simple question. But where is March? There were some, on the memory, the production decrease. So what is the possible impact in Q4? The profit level is as high as Q3, and Asia segment, the profit level has gone down slightly. So what is the likely impact of the production decrease of memory and Asian business prospect? Thank you.
Toshihiko Hamada: Thank you for your question. As you said, in Asia, pricing action is not so big. And we are asking for the price hike, but it is not significant. But the raw material gas now for semiconductor has been recovered quite a bit. That has been the situation in Q2. But as has been reported, including memory, those are not growing so much. That is the current situation. But our observation, the large size of memory may not increase significantly, but for AI logic, it is quite strong. And of course, memory requires a higher volume of gas. So whether it is going to be growing or not, it is the key. No major decrease is anticipated. Production adjustment may take place, but the logic circuit or power circuit increase will continue steadily, that’s our assumption. Therefore, in Q4, not much difference is expected in Q4.
Unidentified Analyst: Thank you. And one follow-up question if I may. Hydrogen prospect, IRA related in North America and the future, there may be a risk emerging. And I know you can't disclose but the North American ratio or outside of North America, what are the likely level of possible impairment. If you can comment on that, that will be appreciated.
Toshihiko Hamada: Hydrogen. You're asking about hydrogen?
Unidentified Analyst: Yes.
Toshihiko Hamada: It's a quite sharp pinpoint question. But the impact of IRA on environment business and hydrogen related business now may be impacted. So now what is the likely overall impact derived by IRA? I would like to hand over to Aaron Draper to respond.
Alan Draper : Thank you, Hamada-san. And thank you, Cho-san. So in regard to this question, as we mentioned after the Vertex issue that we had last quarter, we basically looked through all of our portfolio. And the largest projects that we have that we've disclosed is NRL in India, that's a hydrogen project. It's a quasi government project in a regular refinery. And we have this, the low risk related to any type of impairment. So everything is on track. And the government is a part owner in the entity, and it also is going to help provide diesel into the eastern part of India. Besides that, we only have one other large project that kind of falls under the sustainability umbrella. It's not hydrogen. It's an ASU in southern Texas that we announced with 1PointFive. That project we also deem extremely low risk from an impairment perspective because we have a parent guarantee from the parent Oxy Petroleum. So we don't consider any of our projects that have any major risk, any projects that are over the threshold that we report out. I don't see any major risks on. So the Inflation Reduction Act may have changes going forward, but I don't think it's going to have impact on the projects we've already put into the backlog and are working on. Thank you very much.
Unidentified Analyst: Thank you for your response. Thank you very much.
Operator: Mr. Cho, thank you very much. Next, Mizuho Securities, Yamada-san.
Mikiya Yamada: Hello. Thanks very much for giving me the second opportunity. I'd like to ask you one question regarding the growth opportunities in the States as well. In my understanding, the American construction cost is hiking quite a lot, thanks to the relatively cheap energy as well as sufficient water and very efficient market as well as good technology existing, which is basically -- which makes the America as a kind of premier location for manufacturing. Having said that, it causes the big inflation in the construction and in the long run, are you confident to control the project CapEx as well as construction costs for which the many workers as well as service providers seem to be rejecting a kind of lump sum contracts, etc.?
Toshihiko Hamada: Thank you for the question. We have no choice but to consider the concern we have, and we'd like to call upon Mr. Alan Draper to respond.
Alan Draper : Thank you for the question Yamada-san. So overall, we review all of our projects, all of our material projects every month, and we get updates on the performance versus our original budget. Where we're noticing some higher costs is really on the civil engineering costs. For the most part, we try to get firm quotations on a lot of the work ahead of time. Our goal is to get 70% quotations on typical projects in that range. So there might be some exposure on the civil work, which causes some higher costs, but for the most part, we're trying to maintain and manage the budget that we provide and improve the project and we continue to go from there. So there's probably some risk on the civil because that can't be done until the end of the process, but overall, I feel like we have a pretty good grasp of it and we shouldn't have any material issues from a cost perspective. Thank you.
Mikiya Yamada: Thanks very much for the elaboration. So may I understand that approximately 70% of the total cost is fixed and the rest of the 30% is still floating, yet you have good insight as well as you have good controlling processes and checkpoints, so we do not need to be overly cautious about it.
Alan Draper : Yes, that's our overall general target. I'm sure there's some projects that have 65% or 60% firm quote, some are 80%. I know of a project that was at 90% that we approved, so there's varying degrees, but I'm saying on average it's probably roughly two-thirds of the project should have some firm commitments in general, but maybe a little higher, some are a little bit lower as well. But yes, we think we have good control around projects. Thank you.
Mikiya Yamada: I guess it's quite remarkable under the current situation, so we do expect decent control. Thank you very much for the elaboration.
Alan Draper : Thank you.
Operator: Mr. Yamada, thank you very much. There seems to be no more questions, so we would like to conclude Q&A session. For any questions we couldn't address today due to time constraints, we will respond individually at a later date. This concludes the Q3 FYE 2025 earnings call. Now, a content of today’s call will be published on our corporate website on IR page at a later date. Thank you for attending today’s conference and for your many questions. Thank you.