NSK Stock

Good afternoon, everyone. This is Akitoshi Ichii, President and CEO of NSK. First of all, I would like to announce that following a resolution passed at yesterday's Board of Directors meeting, we signed a memorandum of understanding this afternoon regarding business integration with NTN Corporation. Please note that this integration has not been factored into the business forecast or Medium-term Management Plan 2028, which I will be presenting to you today. Moving on to the next page, we have today's outline. I will explain the fiscal 2025 results, the fiscal 2026 forecast and Medium-term Management Plan 2028. On Page 5, we have the key points of our fiscal 2025 consolidated results. Sales was JPY 911.6 billion, a JPY 115 billion increase year-on-year, and operating income was JPY 38.8 billion, a JPY 10.4 billion increase year-on-year.

As for the figures for the steering business, as shown on the far right, steering sales contributed JPY 100.6 billion and JPY 6.3 billion of operating income. For the fiscal 2026 full year forecast, we project sales of JPY 1 trillion and operating income of JPY 42 billion, an increase of JPY 88.4 billion in sales and JPY 3.2 billion in operating income year-on-year. Regarding the steering business forecast, year-on-year, we project a JPY 69.4 billion increase in sales and a JPY 3.7 billion decline in operating income. Fiscal 2026 is also the first year of our new medium-term management plan. We intend to embark on further structural reforms and continue improving our fundamentals. Regarding shareholder returns, we plan to maintain an annual dividend of JPY 34 per share in 2026 and the same dividend payout ratio under the same dividend policy as in fiscal 2025.

Next, Page 6 shows the fiscal 2025 summary and contains similar information as the previous page with additional details. To reiterate, sales was JPY 911.6 billion and operating income was JPY 38.8 billion, ending the period slightly higher than the forecast announced in February. The main factors contributing to this deviation from our forecast include the front-loading of approximately JPY 3 billion in structural reform expenses, positive results in the steering business and favorable exchange rates. As a result, we were able to secure slightly higher sales and profit compared to our February forecast.

Next, on Page 7, we have the factors behind change in operating income from fiscal 2024 to fiscal 2025. In fiscal 2024, operating income was JPY 28.5 billion, as shown on the left. For fiscal 2025, operating income was JPY 38.8 billion, representing an increase of JPY 10.4 billion. Excluding the steering business, the increase was JPY 4 billion. Breaking down the details, starting from the left, exchange rate fluctuations contributed JPY 4.1 billion and volume and mix came in negative at minus JPY 2.3 billion. By offsetting the effects of inflation and other factors through structural reforms and operational improvements, the net improvement to bottom line profitability amounts to JPY 6.5 billion. For structural reforms, we incurred onetime costs of JPY 4.3 billion and reacquisition of the steering business contributed JPY 6.3 billion.

This brings us to our fiscal 2025 total operating income of JPY 38.8 billion. Next, on Page 8, we have highlighted some key points for the Industrial Machinery business. For fiscal 2025, sales increased by 3.6%, excluding ForEx impact. Regarding industrial machinery bearings, we achieved sales growth in China, primarily driven by sales in the machine tool sector. For Precision Machinery products, sales increased for machine tools, again, primarily in China and for semiconductor manufacturing equipment, particularly in the U.S. market. The operating income for the fourth quarter appears to have stagnated slightly at 3.8% against sales of JPY 102.1 billion. However, when we adjust for onetime expenses, operating income stands at 7.3%. We are on the path to recovery, albeit gradually.

Regarding total sales and profit, as shown in the figures on the far left, sales was JPY 377.5 billion, and operating income was JPY 12.6 billion. Excluding onetime costs, operating income was JPY 17.2 billion. Next, on Page 9, we have the automotive business. Looking at fiscal 2025 by quarter, sales have remained largely flat. For the full year, sales decreased slightly, excluding exchange rate impact. By region, sales in Europe declined due to structural reforms, but sales in Asia, excluding Japan, increased slightly as our sales expansion efforts took effect.

Regarding operating income in the fourth quarter, we have also factored in onetime costs of JPY 1.9 billion. Excluding onetime costs, operating income stands at 6.5%, and we believe that improvements in profitability driven by new product sales and other factors are gradually taking effect. For the full year, against sales of JPY 403.3 billion, operating income was JPY 17.4 billion. And in terms of baseline profitability, excluding onetime costs, operating income is JPY 21.5 billion. Next, on Page 10, we have sales by customer region. In Europe, as I mentioned earlier, conditions remain challenging. In China, while automotive sales stagnated, sales increased in the industrial machinery business, particularly in the machine tool sector. In the Americas, excluding the impact of tariffs on selling prices, sales were flat, but the market appears to be holding up well.

In Japan, while there are signs of a slight recovery in the industrial machinery sector, the automotive sector remained flat at around JPY 160 billion. Next, I would like to move on to the full year forecast for fiscal 2026. On Page 12, we outline the assumptions underlying our full year forecast. For exchange rates, we assume JPY 150 to the U.S. dollar, JPY 180 to the euro and JPY 21 to the Chinese yuan. Regarding the business environment, our key assumptions are that the strong momentum for the second half of fiscal 2025 in the semiconductor and machine tool sectors will continue while the aftermarket is expected to finally enter a gradual recovery. Regarding the automotive sector, although there are risks related to supply chain and other factors, we anticipate global vehicle production volume to be on par with fiscal 2025.

Additionally, regarding the impact of the situation in the Middle East, for the first half, we estimate that it will impact sales by approximately JPY 4 billion, and we have reflected this in our sales forecast. For the second quarter and beyond, we expect cost inflation to gradually take effect, and we anticipate that this will amount to approximately JPY 2 billion in increased costs. Regarding the impact of inflation and other factors, we basically operate on the assumption that we will pass these costs on to sales prices. Furthermore, we are continuing our policy of reflecting cost fluctuations resulting from U.S. tariffs, including the IEEPA in our sales prices.

We plan to continue the structural reforms we began in the latter half of the previous medium-term management plan, focusing on Europe and to pursue reforms in Japan. On Page 13, we have the figures for the fiscal 2026 forecast. As mentioned earlier, our full year forecast is for sales of JPY 1 trillion and operating income of JPY 42 billion. Year-on-year, this represents a JPY 88.4 billion increase in sales and a JPY 3.2 billion increase in operating income. This figure includes JPY 9 billion in restructuring costs. To reiterate, we plan to pay an interim dividend of JPY 17 and an annual dividend of JPY 34. Regarding the year-on-year change in operating income, I will explain using the V chart on Page 14.

Operating income for fiscal 2025 was JPY 38.8 billion, and the forecast for fiscal 2026, the current fiscal year is JPY 42 billion. While operating income is up JPY 3.2 billion when including the steering business, operating income in the steering business itself is projected to decline JPY 3.7 billion year-on-year. Therefore, excluding the steering business, the increase is JPY 6.9 billion. Looking at the columns from the left, the impact of exchange rate fluctuation is minus JPY 1.5 billion. Volume and mix is projecting to improve by JPY 3.5 billion, assuming a slight recovery of volume in the Industrial Machinery segment. And then for the profitability columns, this is the first year of our new medium-term plan. We are focusing on improving our business fundamentals.

We will offset the impact of inflation and rising costs through profitability improvements such as higher prices, cost reductions and productivity gains while implementing structural reforms. Altogether, this is projected to result in a JPY 4.5 billion improvement in profitability, which we aim to carry forward into the next fiscal year and beyond. In fiscal 2025, we incurred JPY 9.4 billion in onetime costs. In fiscal 2026, we project JPY 9 billion in onetime costs for structural reforms, resulting in a difference of JPY 0.4 billion. As for the steering business, to reiterate, operating income is projected to decline JPY 3.7 billion year-on-year, bringing our full year operating income forecast to JPY 42 billion.

Moving on to Page 15, we have the forecast broken down by business segment. Sales for the Industrial Machinery business are projected to be JPY 400 billion. Breaking this down into Barings and Precision Machinery Products, we project JPY 335 billion for Barings, a 4.7% increase year-on-year and JPY 65 billion for Precision Machinery Products, a 12.7% increase. Operating income is projected at JPY 22 billion or 5.5%. Excluding onetime costs, operating income would be JPY 29 billion or 7.3%. We are continuing structural reforms in fiscal 2026 and 7.3% represents an improvement of approximately 2% year-on-year. On the other hand, the automotive business is expected to remain largely flat. We project sales of JPY 400 billion, a decrease of JPY 3.3 billion from the previous fiscal year.

Regarding operating income, as the benefits of our structural reforms are expected to materialize over the fiscal year, operating income is projected to be similar to that of the previous fiscal year. This concludes my explanation of the fiscal 2025 business results and fiscal 2026 full year forecast. In the next section, I will cover our Medium-term Management Plan 2028 or MTP2028, which lays out our initiatives for the next 3 years. Before that, please turn to Page 18. Here, we have outlined our midterm vision, NSK Vision 2026, that is the direction that NSK aims to take over the next 10 years. In the first 3-year phase of our medium-term plan, we will work towards achieving this vision. Our approach for each period will involve setting our sights on our 10-year vision, announcing our strategic initiatives in 3-year increments and tracking our progress together with all of you.

First, let me present our vision for 2036. We've articulated the vision as follows: creating ideal motion with Tribology solutions. To elaborate further, NSK has experienced steady growth over the years, supported by the expansion of railways, the evolution of automobiles and the advancement of machine tools, which naturally included growth in demand. However, I believe our future growth is entering a new phase. In addition to existing markets maturing, we anticipate that demands on mechanical components will become significantly more stringent due to the emergence of robots, physical AI and software-defined design. While our focus has traditionally been on reducing friction, the future will require mechanical components to effectively control friction.

Consequently, we intend to gradually shift our focus toward providing comprehensive solutions to our customers, encompassing both individual components and systems that incorporate these advanced component technologies. Next, Page 19 illustrates how we intend to transform our business portfolio based on what I just mentioned. The top section outlines our business pillars. Currently, our automotive business and industrial machinery business each account for roughly half of our operations. We aim to establish a new business pillar in the robotics market, which is expected to grow significantly in the future. Our strengths in this area include: first, the supply of component parts such as ball screws and bearings.

Second, by combining these bearings and ball screws, we can create actuators. This is development that is well within our capabilities. As part of our partnerships and collaboration initiatives, we also aim to make robot engineering and design services and technical support a pillar of our business. The bottom section breaks this down further by product category. While our strength naturally lies in rotation, we have a cultivated technology for control and actuation of motion. As mentioned earlier regarding robots, we have real strength in actuation. Furthermore, as we have been discussing, we are moving to expand our solution-based PLM business. Combining these efforts, our major medium-term strategy is to pursue transformation of our business and product axis. Looking at Page 20, even within this context, it is clear what we must tackle over the next 3 years.

Looking at our business forecast for fiscal 2026, unfortunately, the figure for operating income stands at JPY 42 billion, which falls short of the JPY 75 billion we had originally anticipated. Looking at the details, while we can say that structural reforms have progressed as planned over the past 3 years, the demand we had anticipated, particularly in the industrial machinery business based on growth expectations, market recovery and sales expansion has remained sluggish. Amid technological transformation and the rise of Chinese manufacturers, issues regarding price competitiveness as well as deteriorating profitability in Japan and Europe have become major challenges. Although we have temporarily reacquired the steering business, we fully recognize that maintaining profitability in this business and finding a strategic partner remains an ongoing challenge.

Based on this understanding, we intend to use this medium-term period. Based on this understanding, we intend to use this medium-term period as a stepping stone towards re attempting to achieve an 8% ROE and realizing Vision 2036. Next, on Page 21, to put it simply, what I want to convey is that in Midterm Management Plan 2028, we intend to address the challenges I mentioned earlier through a 3-pronged approach. The first is business portfolio transformation focused on expanding sales in key areas, aiming for 2028 while improving profitability. This also serves as a foundation for our Beyond strategy, which is towards the realization of our long-term vision. Second is continued structural reforms. We intend to complete our structural reforms in Europe and pursue reforms in Japan.

The third pillar is appropriate capital control. We have consistently advocated for stable shareholder returns and dividends and a dividend on equity of 2.5%, but we aim to raise this to 3.5% by 2028. At the same time, we plan to maintain a dividend payout ratio of 30% to 50% and ensure profitability within this range. Of course, in terms of capital control, we also anticipate flexible share buybacks. Through these 3 key initiatives, we intend to implement a PDCA cycle aimed at first achieving an 8% profit margin and then further improving profitability to double-digit levels by 2036. Next, Page 22 breaks down the numerical targets for the medium-term management goals I just mentioned. To reiterate regarding profitability, we are aiming for operating income of JPY 75 billion or 8% or higher.

In terms of capital efficiency, we aim for a return on equity of 8% and a return on invested capital of 6%. For financial stability, we will maintain a debt-to-equity ratio of less than 0.4. Additionally, regarding nonfinancial goals, we will continue our efforts towards carbon neutrality, aiming for 60% reduction compared to 2017 levels. In line with our commitment to maximizing the value of human capital, we will also disclose our employee engagement scores and work closely with stakeholders to ensure we stay on track. On Page 23, we briefly outline our road map for improving operating income to achieve the JPY 75 billion target. First, regarding the market assumptions underlying our medium-term management plan, we have assumed a very gradual recovery, approximately 1% on an annualized basis.

Our basic approach is to absorb inflation and rising costs through price increases and cost reductions. We aim to achieve our targets by combining these efforts with the promotion of operational improvements, structural reforms and portfolio transformation. As shown in the figure, operating income was JPY 38.8 billion in fiscal 2025 and excluding the steering business, JPY 31.1 billion. The current JPY 75 billion target does not include the steering business in the management targets. While we will, of course, continue our search for a strategic partner and strive to make the steering business profitable, our goal is to achieve JPY 75 billion in operating income or 8% and 8% ROE strictly without the steering business.

Approximately 2/3 of the JPY 44 billion improvement will come from the non-volume-dependent improvements I mentioned at the beginning. The remaining 1/3 will be achieved by capitalizing on market recovery and sales expansion to secure an increase in sales of approximately JPY 50 billion, thereby reaping the benefits of volume enhanced profitability. Moving on. Over the next 2 pages, I would like to break down the details of the improvement plan by segment, Industrial Machinery and Automotive. Looking at Page 24, starting with Industrial Machinery, as shown on the left, we project a profitability improvement of JPY 29.4 billion for the Industrial Machinery business. Our goal is to achieve a double-digit operating income margin of 10%, up from 3.3% in fiscal 2025. I will explain the details of this in 2 parts.

The first is portfolio transformation and sales expansion. We aim to generate JPY 13 billion or about half of the total from this initiative. We have already defined our priority areas in the previous medium-term plan, but we will focus on the aftermarket and consumer products as well as high-margin segments such as Precision Machinery. Although this represents a renewed challenge, we aim to increase the ratio of sales in these areas to 55%. Additionally, regarding operational improvements and structural reforms, we will rigorously advance structural reforms at our European and Japan-based production sites, review our sales structure to achieve the sales expansion outlined above and strengthen our local sales and TC support capabilities.

Next, on Page 25, we have the automotive business. In the Automotive business, we aim to increase profits by JPY 12.5 billion despite flat sales volume. As part of our portfolio transformation, we will further expand sales of key products. In the previous medium-term period, we expanded sales of hub units for heavy vehicles, ball bearings with anticorrosion measures for e-axles and ball screws for electric brakes. Although the impact of sales expansion is already showing results, we will increase the ratio of sales here to 35% Additionally, during this medium-term period, we plan to expand production capacity in North America and India. We anticipate JPY 6 billion in onetime costs related to structural and operational reforms, and we will reorganize our product lineup and production sites to accommodate the shift from fossil fuel vehicles to electric vehicles.

Furthermore, regarding the decline in selling prices due to competition from China and other regions, we plan to implement cost reforms to keep pace. We aim to accelerate our development through collaboration and shorten design lead times to establish a structure capable of competing globally. On the next page, Page 26, as I mentioned earlier, I would like to summarize and discuss the progress of structural reforms and the measures of the medium-term management plan. The figures in the upper section represent structural reform costs. The figures in the lower section represent the results. We will continue structural reforms we began in 2023 through 2028, specifically regarding our structural reforms in Europe, we announced last fiscal year our withdrawal from production operations in the U.K., including the closure of our facilities in the Peterlee and New York areas.

As these decisions involve approvals from our customers, we will proceed over the course of about 1 year and close our U.K. production operations within this fiscal year. In Japan, as part of our medium-term initiatives, we plan to reorganize our production bases. This includes relocating industrial machinery production centered in Fujisawa and downsizing the Otsu plant. We will also streamline our sales structure in Japan and incorporate business transformation initiatives leveraging digital technology. Accordingly, we will incur onetime costs of JPY 9 billion, JPY 12.5 billion and JPY 2.5 billion in 2026, 2027 and 2028, respectively.

In terms of benefits, we anticipate a peak of JPY 17.5 billion in 2028. As we move forward with our medium-term management plan and beyond, we believe it is essential to build a business structure capable of continuously implementing structural reforms. Amid rapidly accelerating technological and market changes, our commitment within this medium-term plan is to build a business structure capable of absorbing a certain degree of structural reform costs annually. Page 27 explains our cash allocation strategy. As illustrated, we intend to allocate the cash we generate not only to investments for sustainable growth and dividends, but also to strategic investments and share buybacks. Regarding policy shares or cross shareholdings, we will continue our policy of selling them, and we will aim to reduce them to 0 during the medium-term period.

Naturally, we will also utilize our cash on hand and interest-bearing debt, leveraging our assets. Furthermore, regarding the net debt-to-equity ratio, as I mentioned earlier, we are targeting a level of less than 0.4. To achieve these goals, we will implement initiatives outlined in our medium-term management plan. On the right side of the chart, we see cash outflows. Our fundamental focus is on shareholder returns, and we aim to steadily improve our ROE to 3.5% by fiscal 2028. We will allocate JPY 170 billion to growth investment. Furthermore, since our cash outflows remain well within the margin of our cash inflows, we plan to consider additional investment in growth areas as well as share buybacks to improve capital efficiency.

Next, on Page 2028. Here, we have a summary of the content discussed so far regarding our medium-term management plan. Under Medium-term Management Plan 2028, we will first focus on steadily implementing measures aimed at achieving an 8% ROE by 2036. At the same time, we intend to advance initiatives to drive growth, and we will differentiate our products and expand sales in our key focus areas to transform our business portfolio. Here, we will also accelerate our entry into the robotics market by actively leveraging partnerships with companies such as RTI and Delta Electronics. Regarding structural reform and efficiency improvements, we will first complete our structural reforms in Europe, followed by structural reforms in Japan.

For promoting business reforms using digital technology, we have formed a partnership with Accenture. Regarding capital control, and I repeat this point, we aim to balance financial stability with growth investment while also striving for stable shareholder returns and flexible share buybacks. This concludes my presentation. Thank you.