SMC CORPORATION (6273) Q1 2027 Earnings Call Transcript

SMC Corporation Financial Results Briefing for the 1st Quarter Fiscal Year Ending March 2027 August 7, 2026

Event Summary [Company Name]

SMC Corporation

[Company ID]

6273-QCODE

[Event Language]

JPN

[Event Type]

Earnings Announcement

[Event Name]

Financial Results Briefing for the 1st Quarter Fiscal Year Ending March 2027

[Fiscal Period]

FY2026 Q1

[Date]

August 7, 2026

[Number of Pages]

24

[Time]

15:00 - 16:03 (Total: 63 minutes, Presentation: 25 minutes, Q&A: 38 minutes)

[Venue]

Webcast

[Venue Size] [Participants] [Number of Speakers]

[Analyst Names]*

1 Kyoichi Miyazaki

Yuichiro Isayama Hirosuke Tai Kenjin Hotta Kentaro Maekawa Takeshi Kitaura

Director and Executive Officer, Senior General Manager of Administration Headquarters, General Manager of Finance and Accounting Division Goldman Sachs Daiwa Securities Kenjin Hotta Nomura Securities Morgan Stanley MUFG Securities

*Analysts that SCRIPTS Asia was able to identify from the audio who spoke during Q&A or whose questions were read by moderator/company representatives.

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Presentation Moderator: We will now begin the financial results briefing for Q1 of the fiscal year ending March 2027 for SMC Corporation. Thank you very much for taking the time to attend today's event in such large numbers despite your busy schedules. The materials were uploaded to the Tokyo Stock Exchange's TDnet at 3:00 PM today. Today, Kyoichi Miyazaki, Director and Executive Officer, Senior General Manager of Administration Headquarters, General Manager of Finance and Accounting Division will present an overview of our Q1 financial results, followed by a question-and-answer session. Please note that we will select approximately five people from among those who have submitted requests to speak in advance. The event is scheduled to end at 4:00 PM Now, Director Miyazaki, please begin. Miyazaki: Well then, this is Miyazaki. At the shareholders' meeting this past June, I was appointed to serve as General Manager of the Administration Division and, concurrently as General Manager of the Accounting Division. Thank you for joining us today. I look forward to engaging in various discussions with all of you in this way going forward. I imagine the recent market volatility, driven by various macroeconomic and geopolitical factors, has been quite challenging for everyone. As we announced our earnings summary at 2:00 PM, which I'm sure most of you are already seen , the materials I'll be explaining were disclosed at 3:00 PM, so I'd like to proceed with my presentation based on those materials.

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Since you've all been participating for a while, I'm sure you're familiar with this format: the left side shows a comparison with the same quarter of the previous fiscal year, and the right side shows a comparison with the previous quarter. As for Q1 sales, they totaled JPY270.9 billion, representing a 35.4% increase compared to the same period last year. Operating income was JPY73.9 billion, representing a 66.4% increase. The operating profit margin has improved to 27.3%. Compared to the previous quarter, January to March, we saw a significant increase in both revenue and profit, and we were able to set a new all-time high for quarterly results in our company's history. As for exchange rates, there have been various fluctuations recently, but the yen has continued to weaken, and we used an exchange rate of JPY159.56 per US dollar for this quarter. One point worth noting in particular, which I'll discuss further on the next page and elsewhere, is that depreciation expenses have increased significantly compared to the same period last year. This figure, JPY9.4 to 13.1 billion, represents an increase of JPY3.7 billion. As you all know, the breakdown is as follows: the Kashiwanoha Research Center(JTC), which we have been working on for some time, began operations last fiscal year and has therefore been classified as a depreciable asset. The same applies to the Tono Supplier Park. The figures shown here reflect the increase resulting from that additional amount, as well as the increase in research and development expenses due to the commencement of JTC operations.

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From a management accounting perspective, we'd like to compare this to the same period last year, so I'll explain it using the waterfall chart we use every time. As I mentioned earlier, net sales increased by JPY70.8 billion compared to the same period last year. Among these factors, the volume effect is certainly a major one, accounting for JPY44.8 billion. The next major factor is exchange rate fluctuations, which are largely reflected here: our three major currencies, the US dollar, the euro, and the Chinese yuan, have each depreciated against the yen by more than 10%. That means the effect amounts to JPY25.7 billion. Also, regarding the sales price, it's listed here as JPY300 million, I believe it was last year, around May or June of last year, we raised prices in Japan and Europe. We raised prices by about 5-10%, but in our case, it's taking quite a while for that increase to take effect. Unlike consumer goods, we can't just raise the price of potato chips by 10% starting May 1, for example; we have to carefully explain the situation to each customer individually. In that context, it's been quite difficult this term, and by this term, I mean last year. As of last year, by the time we proposed the price increase, the budget of customers had already been finalized, so while they couldn't implement it this fiscal year, we were told it would be possible to start next fiscal year or later. We've been hearing this kind of feedback since around April of this year, but I suspect this message isn't fully known yet. As for Europe, we did raise prices there, but as you know, the competitive environment in Europe is quite fierce. In order to gain market share, even though we've raised prices, we're in a situation where we have to offer special discounts to win market share, so the impact on sales prices hasn't been that significant.

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Moving on to operating income, item two below, the breakdown of the JPY29.5 billion increase is, as you might expect, JPY19.8 billion from sales volume, which had a significant impact, followed by foreign exchange fluctuations.

This is Q1 that just ended, and next up is Q4, and Q1 as well. Sales here also increased by JPY38.3 billion, and the breakdown is exactly the same: JPY35.3 billion was due to an increase in unit sales, and JPY4 billion was due to exchange rate fluctuations. As for the sales price, the figure of JPY1 billion is shown here. While it's technically within the margin of error, due to special sales and other factors, the sales price hasn't really increased much. Regarding operating income, the breakdown of the JPY20.9 billion increase is as follows: sales volume, and foreign exchange fluctuations. The processing and material costs line shows a positive JPY6.8 billion but let me explain this briefly: there is a technical factor at play here. We typically conduct an inventory count once every six months, but we did not conduct one at the end of June. When conducting an inventory count, there's a process of reconciling the difference between the actual inventory and the book records, but since that hasn't been done, this discrepancy is showing up as this increase. So rather than simply listing the figures here, we've presented them in a way that explains the differences; I believe this will become clear when you compare them with the next quarter's figures.

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Sales trends by region for this quarter. This bar chart shows how each of these figures has grown quarter by quarter starting from Q1 of FY2025. In terms of region, growth is being driven by Greater China and the rest of Asia. When we talk about the Greater China region, we're referring to China, Taiwan. When we talk about other Asia, we’re referring to South Korea, etc. Next, if you look at the sales breakdown by industry, and this is also immediately obvious, you'll see that the semiconductor and electronics sectors are driving the growth in sales across the board. While the automotive sector has remained somewhat flat, as you are all aware from news reports, automakers in Europe, particularly in Germany, are facing somewhat challenging conditions. As shown here, among Japan, North America, Europe, Greater China, and the rest of Asia, Europe was the only region where this quarter's results fell short of the previous quarters. As for the automotive sector, while it's hard to tell for sure since we're in a lull right now, I do get the sense that it may have bottomed out, but I don't think we can be overly optimistic about that just yet. At the very bottom of the current table, under foreign exchange sensitivity, as you know, over 80% of our sales are overseas, we do not engage in foreign exchange hedging but instead convert to yen on a case-bycase basis as needed. The 1% foreign exchange sensitivity figure we're citing here refers to the change in our operating profit resulting from a 1% fluctuation in the major currencies mentioned earlier, the US dollar, the euro, and the Chinese yuan, by 1%, our operating profit would change by JPY4.67 billion. The largest portion is in Chinese yuan, totaling JPY1.74 billion. Overall, sales in the Greater China region have been increasing significantly, and as I'll explain later, we're promoting local production for local consumption in the Greater China region. Since we're still producing a large portion of our products in Japan and shipping them overseas, I think how we address this issue within our BCP will be a major challenge.

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So, the question is, what happened to B/S? Regarding the question that everyone is very interested in, namely, how much liquid assets we have, there hasn't been much change between the end of FY2025 and Q1. While there was an increase in cash, on the other hand, there were various cash outflows, such as tax payments and share buybacks, and as a result, the figure remained virtually unchanged. As for the increase in cash, let's also look at inventory. How does that look? It remained virtually unchanged between the end of FY2025 and Q1 of FY2026, at around JPY500 billion. Breaking this down, finished goods totaled just under JPY200 billion, semi-finished goods and work-in-progress at JPY33 billion, and raw materials at JPY284.5 billion. This area hasn't really changed. However, while the text below mentions the monthly sales multiple, when you look at the actual cost level, it works out to be about a year's worth of inventory. We believe that, particularly with regard to raw materials and inventory, including strategic inventory, since we procure some of these in advance, this will likely have a positive impact on our price competitiveness going forward in this inflationary environment. Also, regarding the very last item here, which I'm sure everyone is interested in, the ROE for FY2025 is 8.3%. If we simply annualize Q1, that comes out to 12.8% on an annualized basis. A major factor here is that the operating profit margin has improved from 22% to around 27%. That's due to the factor of quantity I mentioned earlier. Also, in some respects, factors such as price increases played a role, and the fact that this situation has improved is extremely significant.

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Regarding the progress of capital expenditures, we have planned JPY100 billion for this fiscal year. Previously, we made very large capital investments in the Kashiwanoha Research Center (JTC), the Tono Supplier Park, and our factory in Vietnam; while we will continue to invest in these areas, the major phase of those investments has now largely come to an end. We have set aside JPY100 billion for this purpose, including equipment upgrades and other expenses. Although we have not yet reached that target, having spent JPY18.8 billion in Q1, our cumulative forecast projected spending of approximately JPY18.6 billion for the April to June quarter, so this is essentially in line with our expectations.

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I imagine this is something a lot of you are curious about, so when it comes to the question of, what's going to happen going forward? we'll look at the current trends in orders. Looking at our typical annual business cycle, and this is especially true in Greater China, we usually see a strong start in April through June, followed by a slight decline starting around July, but this year we're seeing almost no sign of that trend. Semiconductors, in particular. As for semiconductors, this trend is not currently evident. Given this situation, with orders on the rise like this, I think it's only natural that discussions will arise about whether we can actually secure all of them, and so on. During the previous COVID-19 outbreak, the supply chain was in such disarray that it was difficult to keep track of actual orders amid duplicate orders and other issues, so we found ourselves groping in the dark as we carried out production. In this instance, both we and our clients have identified various areas for improvement, so since around January of FY2026, we've been exchanging detailed forecasts with one another. Even so, when comparing the forecast from January to the forecasts from April and May, the numbers for April and May were indeed higher. Our customers, too, have their own customers, and the supply chain continues on and on, but the question is, how far should we take this into account? In addition, one major challenge is determining just how far we should go with this. Especially since it involves semiconductors and electronics. As for other sectors, while there has been a slight increase in the automotive sector. Although our order book suggests that the sector may have bottomed out, to be honest, it's hard to say for sure. As for the regional outlook, as mentioned here, while it seems the semiconductor market in Japan has leveled off somewhat, demand in North America remain high. This means it requires significant investment. The same applies to China; it's safe to say that semiconductors play a major role there. Specifically, regarding China,

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while most of their production has traditionally been in the front-end processes, their technology has advanced, and I think one thing we can say is that demand for our components in the back-end processes has also increased significantly.

This is a line graph showing the trend in orders received. This is similar to what I explained earlier, the semiconductor and electronics sectors, which have been growing, and as I mentioned, they continued to grow in July and last month as well. As for how long this trend will last, our sales team is conducting quite detailed interviews with our customers. It's not just a matter of the next quarter or anything like that; there's a strong consensus that this trend will continue through FY2027 or around FY2030, and at the same time, the order backlog is also growing steadily. So to put it another way, I don't think it's very likely that this demand itself will dry up anytime soon; rather, I believe our sales will be influenced by how well the supply chain, including us, can absorb this demand and adjust lead times to ensure timely delivery. Of course, within that context, if not only we but also our suppliers are unable to keep up with these changes, we won't be able to supply our goods or products. Therefore, in terms of our supply chain management, which extends not only to Japan but also to China, Vietnam, and other overseas suppliers, we are continuously working to develop new partnerships.

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I also looked at this by region, and while this largely overlaps with what I explained earlier, for the Greater China region, it's semiconductors. That applies not only to the front-end processes I mentioned earlier, but also to the back-end processes, right? As for North America, the situation is similar in the semiconductor sector, and we believe the outlook for the automotive industry is probably better than in Europe. As for Europe, as I mentioned earlier, its mainstay industries are manufacturing, particularly the automotive sector, among others. This is because other countries, including Germany, which, incidentally, has no nuclear power plants and is unable to purchase cheap fuel, such as oil, from Russia, are strongly opposed to this. Meanwhile, one of our major competitors in Europe, particularly in Germany, is announcing measures such as workforce reductions. Although our numbers here have dipped slightly, we are conducting sales activities with the goal of increasing our order volume. That is all.

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Here is the monthly order status. This ties in with what we discussed earlier, but regarding July, I think most of you probably anticipated to some extent that the April to June quarter would get off to a strong start. The reality is that demand in July has actually exceeded expectations, so while it may drop slightly in August, we believe this trend will likely continue from September onward through the end of this fiscal year. As I mentioned earlier, we believe the key challenge for us will be determining how much we can increase our supply capacity.

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This is asking what we did from April through June. As the president mentioned before, or was it the last time, or the time before that, the President has expressed a desire to step up our M&A activities. While this particular deal isn't a major one, we've now made our former distributor a wholly owned subsidiary. Since we've made the agency a subsidiary, the revenue itself won't have any impact due to consolidation offsetting, but by consolidating its profits and placing it 100% under our control, we intend to use this as a driver to fuel future sales growth. I presented this as an example, specifically, an example of M&A, and while it's related to how cash is used, I'm approaching M&A from two different perspectives. One example is a company that has excellent technology but has had a hard time expanding its sales channels globally. A company that, even though it's expanding its sales channels globally, seems to be relying on a trading company or similar firm. In that regard, we have a sales network in over 80 countries, and based on the company name of SMC, we can distribute our products through our network. We'd also like to target companies with that kind of technical expertise. This is true not only in Japan but everywhere in the world. Another approach, which is similar to acquiring a distributor, is to acquire sales agents or trading companies in areas where our market share is particularly weak. This also amounts to buying time, and I'm considering that as a second perspective. That is all from me.

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Question & Answer Moderator [M]: We will now begin the question-and-answer session. First, Mr. Isayama from Goldman Sachs. Isayama [Q]: Thank you. I am Isayama from Goldman Sachs. Let me begin. First, regarding fundamentals, I'd like to hear your thoughts on top-line trends and the outlook going forward. Based on Mr. Miyazaki's explanation, I'm wondering if this strong top-line growth will continue. For example, regarding the order index you provided, which combines semiconductors and electrical equipment, does this indicate that strong top-line growth will continue, primarily driven by semiconductors? Along with that, I'm curious about the retail price, I wonder if that information will be released soon. This may be something you'll continue to address, but I felt that given the top-line figures, the details provided were somewhat limited. Therefore, I'd like to ask whether we can expect these selling prices to start in the second quarter, or if this is simply part of your strategy to focus on market share as well. Also, regarding whether that top-line growth will continue going forward, while I don't think it will be an issue for your company, issues related to raw materials, specific core systems, and so on do arise at other companies as well. I'd like to ask if there are any potential bottlenecks for your company, if any. What do you think? Please explain it. Miyazaki [A]: First, regarding the first point, we've grouped this under semiconductors/electronics, but as you've almost entirely pointed out, it essentially falls under semiconductors. There are many different types of semiconductors, from front-end to back-end processes, and whether they're memory chips or processors, but these distinctions are becoming increasingly blurred, so I imagine you're all well aware of that. As for the investment amounts in areas such as AI and data centers, which are said to range from several hundred trillion yen to JPY500 trillion, among other figures, I believe with a high degree of certainty that while these investments are already starting to translate into orders for us, this trend will continue for some time to come. Therefore, in that sense, we really need to expand our supply capacity, which is what I've been saying all along. First of all, in terms of what we can do immediately, since increasing production capacity depends on people, materials, and equipment, as far as personnel are concerned, we've been operating on a single shift, but we're now considering whether to switch to two or three shifts. Since we can implement this fairly quickly, we're already working on this. As for where the bottleneck lies, one factor is our manufacturing capacity. One issue is whether we can secure a stable supply from our suppliers, particularly with regard to raw materials and the like. There are various factors, such as geopolitical risks, that make procurement difficult, but in this regard, we believe we have no choice but to diversify our supply chain. I can't specify which parts exactly, but one of our suppliers has already told us they can no longer supply certain components, so we're now taking steps to urgently find alternatives. Whether we can successfully maintain the supply chain in this area will determine whether we can meet our delivery deadlines.

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It's true that lead times, or rather, demand and supply, have become very tight. There are already some players in the market who are openly stating that delivery will be delayed, but for us, the key issue moving forward, along with the selling price mentioned earlier, is how we're going to handle that lead time. As for selling prices, we are not currently planning to implement a blanket price increase, especially this year. We just launched it last year, and it's finally starting to gain traction, even among major users. At the same time, as we seek to expand our market share, we already hold a fairly large share in Japan, at over 60 percent, we also want to gain market share in various non-pneumatic sectors. So, we plan to compete in those areas without raising our selling prices. As for selling prices in each country, they depend in part on market share and the competitive environment in each market, so while there are places where we can raise prices, there are also places where we'll have to hold back. In Europe, we plan to hold back while still aiming to gain market share. Isayama [Q]: Mr. Miyazaki, thank you very much for the detailed explanation. Well, just one quick note, regarding Asia, or rather, China. The revenue growth rate in the Greater China region looks quite high, perhaps just under 10 percentage points higher than that of Taiwan AirTAC. Given that the company is particularly strong in the semiconductor sector, I'm wondering if the competition with AirTAC remains fierce, resulting in similar growth rates, or if the current product launches, localization, and so on, giving you the impression that you're outperforming them? Could you please elaborate on this? Miyazaki [A]: We're not falling short in that area. If anything, our European competitors are seeing a slight decline in China, while we and AirTAC are seeing a slight increase. I think I probably explained this last time as well, but just to be clear, even in China, including AirTAC, customers initially shifted to local competitors and cheaper options, but due to issues with product quality and other factors, we're now seeing some of them returning to us. That said, when it comes to the Chinese market, I think that beyond the competitors we can currently see, such as FESTO and AirTAC, the local players that are just starting to emerge might turn out to be formidable competitors, even though we haven't really noticed them yet. Isayama [Q]: Thank you. My second question is for Mr. Miyazaki. Now that you've assumed this position, we look forward to engaging in dialogue with you. As you know, there have been various announcements made around the time of the fiscal year-end financial results, and I believe everyone is paying close attention to how your company will engage in dialogue with us, and with the capital markets, moving forward. May I ask you once again about your current thoughts, Mr. Miyazaki, and how you plan to go about communicating with us? Since you touched on topics like ROE earlier today and also had a thorough discussion about the balance sheet, including cash and other items, I'd really like to ask you about this, I'm hoping you might have some message for us, such as encouraging us to focus more on these areas. Please let us know. Miyazaki [A]: Our top priority is business continuity planning (BCP). From that perspective, I'd like to consider how to allocate this excess cash, or rather, how exactly should it be allocated? One thing I feel is that I don't want to end up in a situation where I'm shorting event risk. More than that, rather than not wanting to be in that position, I'd actually like to structure things so that I can take a long position on event risk or at least be in a position to do so. So as for what the appropriate amount would be, there isn't just one right answer, I think everyone has their own opinion on that. First, when we talk about cash to hedge against event risks, for example, in the event of a massive geopolitical risk or a natural disaster, if the question is whether you could survive for about two years without any income,

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you'd obviously need about JPY200 billion. In that case, the remaining portion would be used to take a long position on event risk. When we go long on event risk, we're effectively paying a carry, so naturally, the return on that portion is below the cost of capital. However, I view that as the cost of going long on event risk. On another note, if we take a very long-term view, our average ROE over the past 15 years stands at 10.8%, so to achieve that ROE, one standard deviation, 1.8%, is required. What this tells us is that the Company has consistently delivered double-digit ROE. If we consider this standard deviation as a measure of risk, the ratio obtained by dividing ROE by the standard deviation is significantly higher than that of other firms in the FA industry. What this means is that, as I mentioned earlier, our focus on BCP isn't something new; we've been investing in BCP continuously. The same is true for Vietnam. So to be honest, even when it comes to factories, for example, we'd actually prefer to keep them running at around 80% capacity rather than 100% all the time. One more thing: regarding BCP, while we've mostly got a handle on the infrastructure-related aspects, my current thinking is that investing in our people will be absolutely essential if we are to successfully hand over this SMC to the next generation as part of our BCP efforts. Isayama [Q]: Thank you. Now that you've explained all that, if we were to revisit the question of the cost of capital, would you be looking at around 10%? My last question. Miyazaki [A]: In that regard, I believe that if our operating profit margin recovers, ROE recovers, to the 12% to 13% range, which is in line with historical figures, it is entirely possible to achieve that level even under our current capital allocation strategy. Of course, if we look at this from a very short-term perspective, there's certainly the argument that simply adjusting the denominator would immediately boost ROE significantly. However, from a BCP perspective, while I wouldn't rule it out as a last resort, my view is that this isn't something we should be focusing on right now. Isayama [M]: I understand very well. I'm looking forward to your growth. Thank you very much. Miyazaki [M]: Thank you. Moderator [M]: Thank you very much. Now, let's continue. Mr. Hotta from BofA Securities, please. Hotta [Q]: I am Hotta from BofA Securities. I have two questions. First, regarding inventory: this time, product inventory remained flat or declined slightly, so I think a fair number of sales came from existing inventory. As a result, the line item for inventory write-downs showed a positive figure. On the other hand, I believe the full-year forecast for this fiscal year was zero, so when considering this, if sales continue to rise rapidly like this, the positive impact from the inventory write-down will essentially be a rebound. So far, is it okay to think of it this way? Miyazaki [A]: As for the inventory write-down itself, it's already being handled according to certain accounting standards. Since that money will naturally come back as sales increase, this creates a cycle where the more sales go up, the more money comes back. Hotta [Q]: I see. I understand. Thank you very much. This is a follow-up to what Mr. Isayama just said, but I believe you mentioned that achieving an ROE of 12% to 13% could be accomplished quickly given your current capital allocation strategy. Just to confirm, is my understanding correct that, from Mr. Miyazaki's perspective, you'll be satisfied, though "satisfied" might not be the exact right word, with an ROE of 12% to 13% for the time being?

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On the other hand, as you mentioned earlier regarding cost capital, interest rates are also rising, so the historical peak was probably 13%. However, since costs have been rising during that time, one of my goals is to see them go a little higher, so what are your thoughts on that? Miyazaki [A]: I think whether we can consistently maintain our ROE at 12% to 13% , as we have been doing recently, depends to a very large extent on our competitive environment and in turn, on how well we can control our gross margin. Therefore, since the annualized rate for this period would be 12.8% based on these figures, whether we can maintain this level depends on whether our earlier forecast is realized exactly as projected and whether we can fully incorporate all of those results. However, given the top-line performance, I'm starting to think that ROE may have bottomed out to some extent within the downward trend we've seen so far. As I mentioned earlier, our figures have generally fluctuated within the economic cycle, with 13% being the highest and 8% the lowest so far. As you say, when risk-free rates such as the interest rate on government bonds rise, is it acceptable to maintain the same ROE? The answer, of course, is yes. On that point, if we assume the spread remains unchanged, the cost of capital will naturally rise as well, and the target ROE will also increase, so we'll have to monitor the market environment as we go. On the other hand, we have not yet considered taking this approach to the point of increasing ROE while exposing our BCP to a certain degree of risk. Hotta [M]: I see. I understand. Thank you for the detailed explanation. That is all from me. Thank you very much. Moderator [M]: Thank you very much. Next, Mr. Maekawa from Nomura Securities. Maekawa [Q]: I am Maekawa from Nomura Securities. Thank you for your explanation. I have two questions. First, regarding the order on page 10. Thank you for disclosing the figures here as well, including the monthly numbers. So I'd like to ask: While the Greater China region tends to bottom out around the August to September, quarter every quarter, this time it suddenly spiked in July, was there perhaps a major semiconductor-related deal involved? Earlier, there was some discussion about what might happen in August, but is it fair to say that the Greater China region has already bottomed out? I'd like to know how things are going this July. As for other regions, I heard that North America is seeing growth in the semiconductor sector, but it remains to be seen whether this trend will continue beyond August. It looks like other regions have peaked a bit, but will this hit bottom again in August or September? I'd like you to explain again what the general trends are by region, and since there's been significant activity in Greater China and North America this July, could you confirm whether there were any specific projects involved? Please. Miyazaki [A]: As you say, regarding the Greater China region and North America, we can't really disclose the July forecast here yet, but we have received reports indicating that actual sales and other figures are showing significant growth. Normally, in the Greater China region, this figure is usually around July to September and based on past trends, it would typically drop by now. However, in April, May, June, up to July, rather than viewing this as a single major project coming in, I think it's better to consider it as a continuous stream of projects that has been ongoing for some time. This applies to North America as well; the reason for the growth in both Greater China and North America is exactly the same: semiconductors. Looking at this, it seems that China and the US are engaged in a sort of semiconductor competition, the same is true in North America, and in the Greater China region, the government itself is leading major investments. So I think this situation will likely continue to escalate to the

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point where a clear winner and loser emerge. As for the rest of Asia, while the figures are down slightly based on this trend alone, if we look specifically at semiconductors, given the presence of countries like South Korea, I believe it remains likely that this region will return to an upward trend. As for Japan as well, although the line graph here shows a slight dip, there are still no signs of a slowdown in semiconductor investment, including in data centers, so I think this trend will likely reverse here as well. As for Europe, as I mentioned earlier, the key question is how their major industries will turn things around. Based on our observations, it appears that the losses in their respective manufacturing sectors are nearing an end, and we are now seeing signs of a turnaround. That is all. Maekawa [Q]: I see. Thank you. Regarding the second point, I'd like to ask about the Company's financial performance and trends in profit growth or decline. It seems that the impact of tariff refunds was partially factored into Q1's results this time. I'm sorry, but I apologize if I missed this, but I'd like to know if that was included. Also, regarding the increase in SG&A expenses, I noticed that the negative impact doesn't seem to be as significant as expected compared to the full-year plan, so I'm wondering about the impact of US tariffs included in processing and material costs. It's possible that operational factors are having a significant impact, and there might be some YoY improvement, so we'll look into that as well. Also, regarding the progress of this factor contributing to the decline in profit, SG&A expenses, the annual plan projects that the impact will be slightly greater, and since the full-year plan has been left unchanged, I'd like to ask whether the burden of fixed costs is expected to increase somewhat starting in Q2 or later. Please. Miyazaki [A]: I didn't mention this earlier regarding the impact of US tariffs, but there are refunds on the amounts paid. Based on our full-year forecast for FY2026, for example, we expect to pay JPY8.5 billion, with refunds totaling approximately JPY4.7 billion.. So regarding SG&A expenses, while we had originally anticipated that these costs would be a bit higher, or rather, that they were expected to increase, when we first issued our guidance, looking back now, it's true, as some have pointed out, that we were perhaps a bit too conservative not in terms of revenue but in terms of profit margins. However, regarding SG&A expenses at that time, the Company's policy was to increase our sales force. To put it simply, that's why we're having a hard time getting people to come. So since SG&A expenses haven't increased by that amount, in other words, on a YoY basis, they're at this level. There are various reasons for that, but from our perspective, we want to increase our headcount and turn that into revenue. This is particularly the case in places like Europe, but since it's quite difficult to suddenly hire several thousand people, I think we'll need to take a steady, step-by-step approach, increasing sales and market share as we go, so I expect our selling, general, and administrative expenses to continue to rise slightly in that regard. Maekawa [Q]: Thank you. I have just one question. You mentioned that you're projecting a full-year impact from tax refunds of JPY4.7 billion. Was this already factored into your initial plan for the fiscal year? Also, can we assume that the majority of this JPY4.7 billion has already been recognized in Q1? I'm sorry to ask about this specific point, but I'd appreciate your clarification. Miyazaki [A]: JPY3.5 billion out of JPY4.7 billion in Q1. As for the remaining JPY1.2 billion, we expect it to be refunded sometime between the end of August and the end of September. Maekawa [Q]: Is this already factored into the projected figures? I mean JPY4.7 billion . I guess these are the figures that haven't been factored in.

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Miyazaki [M]: Do you mean this quarter? Maekawa [M]: In your full-year plan. Miyazaki [M]: In the full fiscal year, we included it in the full-year figures, right? Yamashita [A]: I am Yamashita from the investor relations department. At the time of the initial plan announced in May, the refund amount was not yet known, so it was not factored into the plan. Maekawa [M]: I see. Thank you. Moderator [M]: Thank you very much. Next, Mr. Kitaura from Morgan Stanley MUFG Securities Kitaura [Q]: I am Kitaura from Morgan Stanley MUFG Securities. Thank you. I have two questions as well. First, regarding semiconductors, and you touched on the supply chain a moment ago, when looking at the sales figures, while exchange rates may be a factor, performance in Greater China appears to be stronger, while growth rates in the rest of Asia are somewhat more modest. Even though the figures are conservative, they're still very high. Given that situation, I've been seeing reports that growth is particularly strong in areas like South Korea's memory chip investments, so I'm wondering where exactly that difference is coming from. Also, in the supply chain segment, regarding chillers. I imagine that other pneumatic equipment manufacturers typically maintain substantial inventory, including finished products, but since I suspect there may be some differences in the product lineup here, production for this fiscal year is projected to be around JPY73 billion. Since it's possible that actual demand might be a bit higher, would it be okay if I also asked about your ability to keep up with that demand? Miyazaki [A]: As for chillers, while we manufacture and sell chillers that are quite well-suited for the semiconductor industry, we haven't yet been able to make a significant inroad into the data center market or similar sectors, so how we go about breaking into that market is a major point of focus for us. As for semiconductor chillers, I suspect market expectations in this area are quite high. As you may know from news reports, . This is evident from recent acquisition deals as well. That growth rate, which, of course, would include data centers and everything else, might end up exceeding our expectations. So from our perspective, we're currently aiming at around JPY73 billion, but we're aiming to reach JPY100 billion as soon as possible. In that regard, when it comes to the supply chain and procurement, and this isn't just about chillers, we need to diversify. When it comes to supply chains, which, within Japan, are categorized into Tier 1, Tier 2, and Tier 3, I think we've reached a point where we need to start treating their supply chain BCP, business continuity plans, as our own responsibility. In that context, what we can do, of course, diversifying and decentralizing the supply chain is one thing, but we also need to focus on what we can produce in-house. As part of our overall BCP project, we are working to incorporate in-house production for those items that can be handled internally without significantly compromising profit margins. Kitaura [Q]: I understand. Thank you very much. Is it correct to understand that, as things stand, there are no major obstacles preventing you from moving forward? Miyazaki [M]: Are you referring to the supply chain? Kitaura [Q]: I am.

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Miyazaki [A]: I'm not saying there's absolutely no problem with that, but this is the case at every company. That's why It's turning into a sort of scramble for the supply chain. How will they supply us with what we need in that situation? On an ongoing basis. Regarding that, while it's been said that since April of this year, when the Subcontracting Act was replaced by the Appropriate Treatment of Subcontractors Act, we're required to provide various forms of legal protection, the reality is that if we don't pay even more attention to this issue, we'll end up in trouble ourselves. Since this is a very important issue, we have an executive in charge of supply chain management who is handling it. Kitaura [Q]: I understand. Thank you very much. Another point is that, as mentioned earlier, about the need to increase capacity or adjust staffing levels to handle shifts from one to two, I believe there has been significant capital investment in Vietnam and other countries over the past few years, and similar efforts have been underway domestically as well. Given your current capacity, how does the current demand level, for example, in Q1, compare to your production capacity, and for example, if semiconductors account for about 30% or so, and demand is expected to grow gradually over the next few years, at what point do you anticipate you'll need to make capital investments? I'd appreciate it if you could share your general outlook on this, I realize this is a rather broad question. Miyazaki [A]: That's a major challenge for us, specifically, what approach to take regarding our capital expenditure targets. As I mentioned earlier, this involves people, materials, and equipment. One point of discussion is whether to build a new factory, but within our current manufacturing processes, we're looking to increase not just volume, but also density and speed. This is more of a manufacturing technique, really. One major challenge is how to implement manufacturing technologies to improve our productivity. That's exactly what physical AI is, the topic that's been making headlines in newspapers lately and causing quite a stir. We have formed a dedicated project team to address the question of how we can implement this into our production line. We are also paying close attention to how physical AI will transform our customers' production lines, and we are actively addressing this. Since this is a particularly good example, I'll mention it here. Take automobiles, for instance. Due to the influence of physical AI and other factors, the sheet metal fabrication process, which used to rely on welding to build the body, is now being done in one go using a process called "Giga Cast." What I mean is, that would result in fewer weld spots. That would mean sales of SMC's products used for welding would decline. However, current trends suggest that technologies like physical AI in that area are becoming a paradigm shift for manufacturing lines. Implementing this for our customers and on our factory production lines, and figuring out how to boost productivity there, will be a challenge for us over the next few years, and if we fail in that regard, we might end up losing out to the competition. Kitaura [Q]: I understand. Thank you very much. When it comes to physical AI, since factory processes are changing, there are areas that pose risks as well as areas that present opportunities, so is it correct to understand that you need to carefully monitor these developments and adjust our approach accordingly? Miyazaki [A]: That is right. Kitaura [M]: I understand. Thank you very much. That is all from me. Moderator [M]: Thank you very much. Now, Mr. Tai from Daiwa Securities, please go ahead. Tai [Q]: I am Tai from Daiwa Securities. I have two questions.

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First, I apologize if I missed this earlier, but when you were discussing pricing, I believe you mentioned that there is competition in Europe and that market share is a priority. What is the current situation regarding pricing in China? I think that over the past few years in Europe, the price cuts in China have been the topic of more discussion, so I'd like to know what the situation was like there. Just one more thing, and this is a bit off topic, but I don't think you've made any changes to your annual guidance this time. Especially regarding profits, even excluding the refund you mentioned earlier, you posted a profit of JPY70 billion in Q1, so it looks like you're off to a pretty strong start. Even so, the decision was left as is. Is this because you have concerns about capacity as you've been mentioning, or is there some other specific reason? Could you please address that as your first point? Miyazaki [A]: As for the Chinese market, price competition is fierce. It's just now becoming polarized. There's a two-way split: on the one hand, some companies are fine with the cheap and good approach, while on the other hand, multinational corporations and other companies that operate overseas consistently use SMC worldwide, even if it costs more. As I briefly mentioned earlier, even customers who initially switched to cheaper options have experienced production line stoppages due to poor quality, and only then do they return to SMC or start using SMC, creating a cycle. However, that doesn't mean price competition isn't fierce; in fact, this price competition is likely spreading somewhat beyond China to neighboring parts of Asia and Eastern Europe as well. So in that regard, and this applies to both Chinese and Japanese manufacturing, the key question is how much we can improve productivity. I think the key lies in how fully we can utilize manufacturing technology to improve production processes, as I mentioned earlier. As for revising the guidance, since it's only been three months, I do feel that if this trend continues for another six months, we'll need to consider it at that point. However, for now, I don't have any specific reason why we didn't revise the guidance at this time. As for capacity, as I mentioned earlier, it's becoming very tight. A question we often get is, can you handle 100% of the demand? We have to handle it, but there's slight uncertainty regarding whether our suppliers, as I mentioned earlier, will be able to keep up. Even if we were to say, let's handle that by shifting to in-house production, we can't just switch to in-house production starting tomorrow, it requires a lead time of about six months, so for the next three to six months, we'll still be heavily dependent on our suppliers' supply capabilities. We really need to address that issue, but the problem is that it's hard to read. Tai [Q]: I understand. I just have one quick follow-up question regarding pricing. In Q1, regarding the negative 9 impact on prices from overseas markets shown on the screen right now, does that figure include a significant portion from China? Miyazaki [A]: Yes. It's there. Overseas minus 9 includes China. Tai [Q]: Does China seem bigger than Europe? Miyazaki [A]: In terms of volume, it's definitely huge, so it has a major impact on that ratio. Tai [Q]: I understand. Just one more thing. This is a totally different, weird question, but since I, at least, don't know a single thing about you, Mr. Miyazaki, I was wondering if you could introduce yourself. Regardless of your background, and this isn't the typical executive skills matrix, if you have areas of strength and areas where you're not as strong, it's perfectly fine to mention those as well. Since this is your debut appearance, I'd love it if you could say a few words and introduce yourself. What do you think?

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Miyazaki [A]: It's all listed in the About Me in the Shareholders' Meeting sections, but if I had to say what I'm good at, I'd say it's financial engineering, I suppose. That's why I enjoy analyzing various aspects from a numerical perspective. In that sense, things like inventory and our gross margin, which I didn't understand when I was serving as an outside director, are now part of my daily work here at the Company. It's a constant battle with reality, but I actually find it quite enjoyable. Tai [M]: I understand. Thank you very much. That is all from me. Thank you very much. Moderator [M]: Thank you very much. Since we have gone past the scheduled end time, we will now conclude today's financial results briefing. Thank you very much for joining us. [END]

Document Notes 1. 2. 3. 4.

Portions of the document where the audio is unclear are marked with [inaudible]. Portions of the document where the audio is obscured by technical difficulty are marked with [TD]. Speaker speech is classified based on whether it [Q] asks a question to the Company, [A] provides an answer from the Company, or [M] neither asks nor answers a question. This document has been translated by SCRIPTS Asia.

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