Pilot Stock

We will now begin the financial results briefing for the second quarter of the fiscal year ending December 31, 2026 for Pilot Corporation. First, I'd like to introduce today's attendees from our company: President and Representative Director, Fumio Fujisaki.

I'm Fumio Fujisaki. Thank you.

Director, Toshiyuki Kikawa.

I'm Toshiyuki Kikawa. Thank you.

Mr. Fujisaki, please start the presentation.

Good day, everyone. I am Fumio Fujisaki, President and Representative Director of Pilot Corporation. Thank you for taking the time to join us today. I would also like to express my sincere appreciation for your continued support and interest in our company. Today, I will present our financial results for the first half of the fiscal year ending December 31, 2026 and provide an update on our business performance and outlook.

Let me begin with an overview of today's presentation. First, I will discuss our financial results for the first half of fiscal 2026. Net sales and operating profit both exceeded our internal targets and increased year-on-year, supported by solid demand during the back-to-school sales season in overseas markets.

Second, I will explain our full year outlook for fiscal 2026. Reflecting the estimated impact of U.S. tariff refunds, we have revised upward our forecast for operating profit, ordinary profit and net profit. I will provide details later in the presentation.

Third, I will explain shareholder returns. We had initially planned to increase both the interim and year-end dividends by JPY 3 per share compared with the previous fiscal year. Following the upward revision of our earnings forecast, we have decided to further increase the year-end dividend, bringing the total increase to JPY 12 per share year-on-year. On a post-stock split basis, this corresponds to an increase of JPY 4 per share. Including the acquisition of treasury shares completed in February, our total payout ratio for fiscal 2026 is expected to be 99.9%, above our target level of 70% or higher.

Finally, in the Topics section, I will introduce several recent developments in both our Japanese and overseas businesses. Through 5 slides, I will provide an update on key initiatives and activities across our major markets.

For a review of our financial results, I will hand this over to Mr. Kikawa, who is Head of both Investor Relations and Finance.

Good day, everyone. My name is Kikawa, and I am responsible for finance. I will now explain our financial results for the first half of fiscal 2026. Please turn to Slide 5.

Let me begin with net sales. Net sales increased year-on-year, driven by higher sales of our flagship G-2 in the U.S. and increased sales of the FRIXION series and other key products in Japan. The weaker yen also contributed to sales growth.

Turning to operating profit. Profit increased year-on-year. Although SG&A expenses, particularly personnel expenses, increased mainly due to the weaker yen, the increase in gross profit resulting from higher sales more than offset those costs. Ordinary profit also increased year-on-year, mainly reflecting the impact of foreign exchange gains in this first half and losses in the same period last fiscal year. In addition, profit attributable to owners of parent increased, supported by extraordinary income.

Detailed sales results by geographic segment and business category for both the first half and the second quarter are presented on this slide and the next slide. I will provide further details on the factors behind sales growth on Slide 9, where we analyze changes in net sales by region.

This slide provides a breakdown of sales by geographic segment and was first introduced in our first quarter results presentation. For the Japan segment, sales are broken down by business category. For the overseas segments, sales are broken down by local subsidiaries within each region.

This chart shows sales growth by region on a local currency basis, with the impact of foreign exchange translation presented separately. In the Japan segment, sales increased as our priority products continued to perform strongly. These included the FRIXION series, the Juice series and the KIRE-NA highlighter in the writing instruments market in Japan.

In the Americas segment, sales increased, driven by continued strong sales of our flagship G-2 gel ink pen and the FRIXION series, which has been supported by ongoing promotional activities in the U.S. market. In the Europe segment, G-2, a secondary flagship product, continued to achieve steady unit sales growth. However, the flagship FRIXION series faced difficult comparisons with the strong sales of products introduced in the previous fiscal year. As a result, overall sales declined. In the Asia segment, economic conditions remained weak in China, where sales increased as the flagship Juice series and fountain pens performed well. As a result, overall sales grew for this segment.

Operating profit by geographic segment for both the first half and the second quarter is presented on this slide and the next slide. I will explain the key drivers behind changes in operating profit in more detail on Slide 12, which provides an analysis of changes in operating profit.

Let me now explain the analysis of changes in operating profit. As with the sales analysis, the impact of foreign exchange translation is presented separately in this chart. First, net sales increased, driven by higher sales of G-2 in the U.S. and increased sales of the FRIXION series and the Juice series in Japan. Next, cost of sales increased, mainly due to a rise in unrealized gain on inventories.

Turning to SG&A expenses. Personnel expenses increased year-on-year. However, total SG&A expenses remained largely unchanged from the same period of the previous year. As a result, operating profit increased year-on-year.

These 4 slides have been disclosed since our first quarter results presentation this year. In addition to year-on-year comparisons, we have added commentary on quarter-on-quarter changes in net sales and operating profit for each geographic segment. We hope this provides a clear view of recent business trends and performance by region.

Let me now move on to Slide 17 and explain the changes in unrealized gain on inventories. This slide shows inventory levels at our three major overseas locations on a local currency basis, together with the exchange rates at the end of the previous fiscal year as well as the 6-month average exchange rates used at the end of the first and second quarters of fiscal 2026.

Inventory levels declined during the second quarter as sales increased during the sales season in overseas markets. However, the yen was somewhat weaker against major currencies than at the end of the previous fiscal year. As a result, unrealized gain on inventories increased slightly, which had a modest negative impact on operating profit. This slide shows the quarterly trends in net sales and operating profit margin by geographic segment.

Next, I will explain the balance sheet. Total assets increased by JPY 5,616 million from the end of the previous fiscal year, reaching JPY 185,522 million. This increase was mainly driven by higher trade receivables associated with sales growth, as well as the translation of foreign currency-denominated assets at weaker yen exchange rates.

Total net assets decreased by JPY 287 million from the end of the previous fiscal year to JPY 145,791 million. Despite the accumulation of profits, retained earnings declined due to the acquisition of treasury shares and dividend payments. As a result, the equity ratio stood at 78.3%.

Next, I will explain the cash flow statement. Cash flow from operating activities was an inflow of JPY 7,284 million. Cash flow used in investing activities was an outflow of JPY 1,858 million. This was mainly due to the purchase of property, plant and equipment. As a result, free cash flow was positive at JPY 5,425 million.

Cash flow from financing activities was an outflow of JPY 11,594 million. This primarily reflected the acquisition of treasury shares and dividend payments. As a result, cash and cash equivalents at the end of the period stood at JPY 33,167 million, down JPY 2,592 million from the end of the same period of the previous fiscal year.

This slide was also introduced starting with our first quarter results presentation. For fiscal 2026, we monitor progress on a quarterly basis with the aim of maintaining the SG&A ratio at no more than 37%. In the first half, SG&A expenses increased, primarily at our overseas operations, due to the weaker yen. However, the expenses remained below our internal targets, and the SG&A ratio declined compared with the same period of the previous year. We will continue to control overall costs while making the necessary investments for growth.

This concludes my review of our financial results for the first half of fiscal 2026.

I, Fujisaki, will resume the presentation and explain the full year outlook for fiscal 2026. While our net sales forecast remains unchanged from the initial forecast announced in February 2026, we have revised upward our forecast for operating profit, ordinary profit and profit attributable to owners of parent. This revision reflects the expected U.S. tariff refunds of approximately JPY 1.5 billion, which we anticipate receiving during the current fiscal year.

As shown on this slide, we aim to achieve our full year net sales target by continuing to execute our sales initiatives across all regions throughout the second half of the year. For operating profit, as in the first half, we will focus on achieving our sales targets while maintaining disciplined control of SG&A expenses, with the goal of delivering our revised full year profit forecast.

Next, I would like to explain our progress against the full year forecast as of the end of the first half. Net sales are progressing broadly in line with plan. Historically, sales in the first half tend to be higher than in the second half, and our current progress rate is consistent with that seasonal pattern.

Operating profit is progressing very favorably. Both SG&A expenses and the SG&A ratio remain below our internal targets, and the first half progress rate was higher than in previous years. In addition, even against our revised operating profit forecast, which reflects the estimated impact of U.S. tariff refunds, the current progress rate remains strong. We believe the revised full year target is achievable. Capital expenditures and depreciation and amortization are also progressing largely in line with the initial plan.

Next, I will explain shareholder returns. The interim dividend for fiscal 2026 was JPY 63 per share, in line with our original forecast and up JPY 3 from the previous fiscal year. We have also revised the year-end dividend upward following the increase in our earnings forecast. The year-end dividend is now expected to be JPY 72 per share, a significant increase of JPY 12 from the previous fiscal year. Following the 3-for-1 stock split effective July 1, this is equivalent to JPY 24 per share on a post-stock split basis or an increase of JPY 4 year-on-year.

We have adopted a progressive dividend policy, and this increase will mark our 11th consecutive year of dividend growth. In addition, including the acquisition of treasury shares completed in February, our total payout ratio for fiscal 2026 is expected to be 99.9%, well above our target level of 70% or higher.

Finally, I would like to highlight five key topics that provide an update on our recent business initiatives and market developments. First, I would like to explain the price revisions implemented in the Japanese market. For many years, both Pilot and the writing instruments industry were unable to raise prices. However, raw material prices, energy costs and other expenses have continued to rise to a level that can no longer be fully absorbed through internal cost reduction efforts.

To maintain profitability while continuing to develop and deliver high value-added products and services, we concluded that appropriate price adjustments were necessary. Accordingly, we have implemented a series of price revisions since January 2024. These price revisions have not been applied uniformly across all products. Instead, we have taken a phased approach, carefully considering market conditions and product characteristics across categories ranging from premium writing instruments to everyday stationery products. Details of the products covered and the respective price increase rates are shown on this slide. Looking ahead, we will continue to deliver value that meets customer expectations while maintaining a balance with profitability. We will also continue to review our pricing strategy as needed.

Next, I would like to explain promotional activities in our key markets. This slide highlights major marketing and sales promotion initiatives across the United States, Europe, China and Japan. In overseas markets, the academic year typically begins in September. As a result, the back-to-school sales season, particularly in North America and Europe, represents the largest sales opportunity of the year. To capture this demand, we are conducting a wide range of promotional activities tailored to each market.

In Japan, we have also launched various marketing initiatives to increase awareness of the FRIXION BALL SWITCH, the ballpoint pen that combines permanent and erasable ink, which was introduced in March of this year. These initiatives include promotional campaigns at major transportation hubs such as Tokyo Station and Osaka Station, helping us expand consumer awareness and drive trial of the product.

Next, I would like to highlight a product that has been generating strong interest in the Japanese market. Launched in March this year, the ILMILY Nature Palette has been very well received by consumers. It features a newly developed low-viscosity gel ink that creates rich variations and shading, delivering a writing experience reminiscent of a fountain pen. Another distinctive feature is its lineup of six colors inspired by natural landscapes, offering users a new way to enjoy self-expression through writing. If you have the opportunity, I encourage you to try the product for yourself.

Let me now turn to two initiatives that are driving growth in the U.S. market. First, I would like to explain our efforts to further expand the market share of G-2 in the U.S. G-2 already holds a leading position in the U.S. gel ink pen market, and sales continue to perform strongly. At the same time, we are continuing to invest in initiatives to strengthen the brand and drive further market share expansion.

Specifically, we are broadening our appeal to a wider range of consumers through initiatives such as the G-2 Boost Collection, which offers themed color combinations and various design-focused G-2 products tailored to diverse user preferences. In addition, this year, we launched the new G-2 EDGE Metallic, further expanding the G-2 lineup and enhancing consumer choice. Through these initiatives, we aim to encourage repeat purchases among existing users while attracting new consumers to the brand, supporting the continued growth of G-2 in the U.S. market.

Finally, I would like to discuss our initiatives to expand FRIXION sales in the U.S., a market that offers significant growth potential. One of the key challenges in the U.S. has been limited consumer awareness of FRIXION's unique erasable technology and its practical benefits.

To address this, during the back-to-school sales season, we have secured prominent shelf space in many retail stores by merchandising FRIXION alongside G-2, making the product more visible and accessible to consumers. In addition, we are including a complementary FRIXION pen with selected G-2 packs, allowing G-2 users to experience FRIXION's unique features firsthand.

By encouraging consumers to try the product and experience its convenience, we aim to attract new users to the FRIXION brand. We are also expanding the FRIXION Vibes Collection, which features themed color assortments while increasing brand awareness through influencer-led social media campaigns. These initiatives highlight both the appeal of the product and its various use cases. By combining in-store merchandising with digital marketing activities, we aim to increase brand awareness, encourage product trials and expand the FRIXION user base in the U.S. market.

This concludes today's presentation. While the global business environment remains uncertain, we will continue to respond flexibly to changes in market conditions and closely monitor our performance against internal targets. By working together across the group, we remain committed to achieving our full year financial forecast.

Thank you for your continued support and interest in Pilot. We appreciate your time today. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]