It is now time to begin the Nippon Sanso Holdings Corporation earnings call for FY 2027 Q2. Thank you very much for taking time out of your busy schedule to join us today. My name is Hiromasa Ishimoto from the IR Department of the Group Finance and Accounting Office. I will emcee this event. Before we begin, I would like to make some housekeeping announcements. First, today's conference materials are the summary of financial results, Tanshin, and the earnings call reference materials, which were released earlier today. We would like to kindly ask all participants to have them ready at hand. Next, we would like to introduce our two main speakers today: Tadaharu Watanabe, President, CEO, and Koichiro Kubo, Executive Officer, Group Finance and Accounting Office, and CFO.
Also in attendance are Takeshi Miki, Senior Executive Officer and CSO, Group Sustainability Management Office, Teiichiro Sawa, Executive Officer, Group Business Management Office, Takashi Yoshida, General Manager of Accounting, and Keita Kajiyama, General Manager of IR. As for today's program, we would like to invite Watanabe, President and CEO, followed by Kubo, CFO, to present the Q2 financial results using the presentation materials. We then open floor for questions. Today's session will be held bilingually in Japanese and English using the Zoom simultaneous interpretation function. Please select your preferred language in the Zoom control panel. If you would like to participate in the Q&A session in English, please select the Zoom's Language Interpretation to English. Now we would like to invite Watanabe-san. The floor is yours.
Hello, everyone. This is Watanabe from Nippon Sanso Holdings. Thank you for joining our second quarter earnings conference call today despite your busy schedules. Let me briefly walk you through the key points summarized on this slide regarding our business performance. Following my overview, our CFO, Mr. Kubo, will provide a detailed explanation of our financial results. First, let me summarize our results for the second quarter. Both revenue and profit increased year-on-year in both the second quarter alone and the first half, even excluding foreign exchange effects. In the first half, both revenue and core operating income exceeded the plan announced in May this year, including foreign exchange effects, and were in line with the plan excluding these effects. Overall, I regard this as a solid set of results. Next, let me explain the business environment and our response that underlie these results.
In the second quarter, costs rose in many regions, particularly electricity costs, as well as logistics and other costs, partly due to the situation in the Middle East. We are responding to these cost increases through price management and productivity improvement initiatives. However, there have been delays in passing on higher costs in some areas, and we are pursuing customer negotiations and additional measures. On the demand side, weakness persisted in some areas, including packaged gases in the U.S. and Europe. Meanwhile, on-site gases in the U.S. and electronic material gases for electronics customers across regions remained solid. Bulk demand also varied by region and remained resilient, although a strong recovery has yet to materialize overall. Overall, higher sales volumes contributed to our results. Next is performance highlights.
Our CFO, Mr. Kubo, will explain the details of each segment later. I will focus on Asia and Oceania, which performed well, and Thermos, which faced challenging results. In the Asia and Oceania segment, revenue and profit increased, supported by price management and higher sales volumes, mainly in Oceania. Productivity improvement initiatives and one-off factors also boosted profit in Q2, with the core operating income margin improving from 9.8% in the same period of the previous fiscal year to 12.6%. Meanwhile, in the Thermos segment, sales were weak due to unfavorable weather in Japan, resulting in lower revenue and profit. Looking ahead to the second half, we will expand sales of new autumn and winter products and growth categories such as cookware, while strengthening online sales and customer engagement through digital channels. Next is on investment.
On our investment activities, capital expenditures in the first half totaled JPY 62.6 billion, an increase compared with the same period of the previous fiscal year. Amid ongoing uncertainty, we are steadily executing our capital investments while carefully consulting with our customers about their production and investment plans. In addition to growth investments, we also place importance on maintenance and renewal investments that support the stable operation of our existing facilities. Our fundamental approach remains unchanged to capture growth opportunities and drive business expansion through proactive investments while strictly managing investment risk. I will discuss our backlog, which represents planned future capital investments, later in the presentation. Next, let me touch on a few highlights. First, we have opened a new semiconductor material gas site in South Korea. Nippon Sanso Matheson Korea built a [ new site] - The September 28, we published our Integrated Report 2026.
This year's report represents a growth story focusing on the priority strategies of our medium-term management plan. Next point is the opening of a new semiconductor material gas site in South Korea. Nippon Sanso Matheson Korea built a new site in the Inju district of Asan City, held an opening ceremony on September 3rd, and commenced operations. I also attended the ceremony. Working in coordination with the existing Ubon plant, we will strengthen our supply capabilities for semiconductor material gases, including diborane, as well as new electronic materials products to meet the growing demand of semiconductor manufacturers in Korea. The third, we will hold our IR Day 2026 on December 8 to present our group's medium- to long-term growth strategies and initiatives.
Focusing on the priority strategies of Next Innovation 2030, we plan to cover our electronics business, the creation of future growth drivers, sustainability, and our financial strategy and capital policy, among other topics. We look forward to your participation. Next, I would like to talk about our full-year outlook and key points to watch going forward. Regarding our full-year earnings forecast, we have maintained our initial forecast. Looking ahead to the second half, there are two points I am focusing on. The first is the situation in the Middle East and energy price trends. We will continue to closely monitor the impact on electricity, logistics, and other costs, and support our second-half performance through price management that appropriately reflects cost increase and rigorous cost control. The second is the growth of our electronics business.
We will capture robust demand by strengthening our supply capabilities, including through our new site in Korea. We will also pursue equipment and installation projects, primarily in Japan. While we expect the uncertain environment to continue for some time, we will work together across the group to achieve our full-year targets. Next, let me explain our backlog, which represents our plans for the future capital investment on page six. As before, this chart shows the breakdown of planned capital investments by customer industry segment. As of the end of September 2026, our backlog stood at approximately JPY 150 billion, remaining at roughly the same level as at the end of the first quarter, although we had multiple project exits and new entrants. Now, I will turn to Mr. Kubo to cover the financial performance.
Thank you very much, President Watanabe. This is Kubo speaking, the CFO. Thank you very much for your participation today. Now I'd like to explain the business conditions for the second quarter of the financial results, a financial year ended March 2027. Please look at page eight. For the second quarter covering July to September 2026, revenue was JPY 375.3 billion, an 11.7% increase year-on-year, or a 5.8% increase excluding the effects of foreign exchange. The factors contributing to the change in revenue are shown on the right-hand side of the slide. In addition to a 5.6% impact from foreign currency translation, our efforts in price management remained steady, while pass-through surcharges were generally at the same level as in the previous period. Including air-separated gases, sales volume increased. Electronics material gases in the electronics field remained firm, mainly in Japan and Asia, which contributed to 1.3%.
In addition to the Spanish home care business acquired in the previous fiscal year, the engineering business in Italy, in which we made additional investment this year, also contributed to the increase in revenue. As a result of continued price management and productivity efforts, core operating profit was JPY 54.2 billion, an increase of JPY 5.6 billion, or 11.5%, compared with the same period of the previous year. Excluding the impact of forex, profits still increased by 5.4%. The core operating profit margin was 14.4%, roughly in line with the previous period. As indicated in the lower right of this page, we have recorded JPY 300 million in non-recurring items, consisting of expenses related to the rebranding and gains from the sale of land.
In addition, our full-year forecast for the current fiscal year is shown on page 24, with the progress as of the second quarter relative to the full-year forecast provided on the right-hand side. We have not revised the earnings forecast announced on May 11th. Although the outlook remains difficult to predict, taking into account the prospects for each region, we believe that we should be able to achieve this earnings forecast. Next, I will explain the cash flow information on page 38. Cash flow from operating activities decreased by 5.5% from the previous fiscal year to JPY 113.2 billion. This is mainly affected by the decrease of trade payable and an increase in inventories and gains on the sale of the head office land, among other factors that more than offset the increased profit before income tax and depreciation and amortization.
Although capital expenditure increased year-on-year, cash flow from investing activities decreased significantly compared with last year when we made an acquisition in Oceania. As a result, free cash flow increased by JPY 63.8 billion to JPY 66.3 billion. We announced our financial results today. In light of our dividend payout policy and our solid first-half profit and cash flow performance, we set the interim dividend at JPY 33 per share, as previously forecast. We intend to continue providing stable dividends while giving due consideration to maintaining financial soundness and balancing investments aimed at growth, using a dividend payout ratio of 20%-30% as a guideline. Next, please kindly return to page nine. Here we have provided a list of all the segments for your reference. From the following page, I will explain the results for each segment. First, Japan. Please refer to page 10.
Japan's revenue for the second quarter was JPY 100.8 billion, an increase of JPY 3.6 billion, or 3.7% year-on-year. Revenue increased due to higher shipment volumes of electronic material gases, as well as the effects of price management. For equipment and construction or installation, the combined figures for industrial gases-related and electronics-related business were flat. In addition, the impact of forex was minimal. Segment profit declined slightly year-on-year to JPY 12.9 billion due to the impact of rising costs. The impact of forex on segment profit was also minimal. The EBITDA margin decreased by 30 basis points to 18.1%. Next, please turn to page 11 for the United States results. U.S. revenue for the second quarter was JPY 100.6 billion, an increase of JPY 12.1 billion, or 13.6% year-on-year. This was due to an increase in the shipment volume of products compared with the same period of the previous year.
We continued active promotion of price management and increased the sales of equipment and installation work in both the industrial gases and electronics-related businesses. Those were the factors behind the change. Forex had a positive impact of JPY 6.9 billion on revenue. Even excluding this effect, the revenue increased by JPY 5.4 billion, or 5.7%. Segment profit was JPY 13.4 billion, an increase of JPY 1.8 billion, or 15.7% year-on-year. Excluding the approximately JPY 0.9 billion positive impact of foreign exchange, profit increased by JPY 0.9 billion, or 7.6%. In addition to the effects of initiatives to improve productivity and price management, profits increased due to higher shipment volumes of products. EBITDA margin decreased by 30 basis points to 25.9%. Please turn to page 12 for Europe. European revenue for the second quarter was JPY 101.6 billion, an increase of JPY 16.1 billion, or 18.8% year-on-year.
There was a JPY 5.3 billion impact from foreign exchange rates. Excluding this, revenue increased by JPY 10.7 billion, or 11.8%. Gas shipment volume increased, and in addition to the impact of forex, the effects of price management, revenue from the Spanish home care business acquired in the previous fiscal year, and the Italian engineering business, which we consolidated this fiscal year, contributed to the increase in revenue. [European] segment profit was JPY 19.0 billion, an increase of JPY 2.4 billion, or 14.3%. Of this increase in profit, JPY 1.2 billion was attributable to forex. Excluding this impact, profit increased by JPY 1.3 billion, or 7.4%. This was mainly attributable to the initiatives to manage prices and improve productivity, as well as an increase in shipment volumes. The EBITDA margin decreased by 70 basis points to 31.5%. Next, regarding Asia and Oceania, which are described on page 13.
In the second quarter, revenue in Asia-Oceania was JPY 64.6 billion, an increase of JPY 8.4 billion, or 15% year-on-year. The impact of forex was JPY 6.6 billion. Excluding this, revenue increased by JPY 1.5 billion, or 2.9%. Revenue in the gas business increased due to the effect of price management, as well as an increase in shipment volume due to solid growth from both Australian LP gas business and industrial gases business from acquired Coregas. In the equipment and the installation business, both electronics-related and industrial gases-related revenue decreased, excluding currency effect. Revenue increased because electronic materials gases remained strong and as a result of the effect of price management. Segment profit was JPY 8.1 billion, an increase of JPY 2.6 billion, or 48.2%, compared with the same period of the previous year. The impact of forex was JPY 700 million, and even excluding this, profit increased by JPY 1.9 billion, or 30.5%.
This increase in profit was driven by the increase in shipment volumes, in addition to the effects of our efforts in price management and productivity improvement. The EBITDA margin improved by 290 basis points to 19.3%. Next, moving on to Thermos, which is described on page 14. Revenue was JPY 7.6 billion, a year-on-year decrease of JPY 800 million, or 9.5%. The impact of forex was estimated to be JPY 100 million. Excluding this, revenue decreased by JPY 900 million, or 11%. Although sales in Korea were strong online, unfavorable weather patterns in Japan from July to September affected results, and overall revenue declined. Segment profit was JPY 800 million, a year-on-year decrease of JPY 900 million, or 52.2%. The impact of forex was approximately JPY 100 million. Excluding this, segment profit decreased by JPY 1 billion, or 55.7%. This decline in profit was mainly due to the decrease in revenue in Japan.
Additionally, the detailed results for the first half are provided on page 16 through 22 of the material, but I will skip the explanation today. Finally, on page 20, we introduced the Integrated Report 2026 , which Watanabe-san referred to earlier. In addition to introducing the key strategies of our MTP, Medium-term Management Plan, and our initiatives for the company's sustainable growth, the report includes a corporate value calculation formula that explains the relationship in terms of how our group strategies and initiative are linked to the enhancement of corporate value. This is for your perusal. That concludes my report on the second quarter results, as well as our outlook for the full-year forecast. Thank you very much for your kind attention.
Thank you very much, Mr. Watanabe and Mr. Kubo. We will move on to the Q&A session. Before we begin, please note the following points. As mentioned at the beginning of the call, if you would like to communicate in English during the Q&A, please join via the English audio line in Zoom. Simultaneous interpretation is provided. We would appreciate it if you could speak at a moderate pace and keep your questions concise. Next, I would like to explain the procedure for today's Q&A session. First, please press the Raise Hand button on the control panel at the bottom of the Zoom screen. Then click the Q&A button and enter your company name and your name. There is no need to enter your question. Once we call on you, please ask your question starting with your company name and your name.
We kindly ask that you ask one question at a time. If you wish to withdraw your question, please press the Raise Hand button again to lower your hand. Please note that the Q&A session will be made available on our corporate website as audio data together with the presentation for a limited period. That concludes my housekeeping notes. We will now take your questions in the order received until the scheduled end time. Enomoto-san of BofA Securities, please.
Thank you. This is Enomoto of BofA Securities. I have two questions. First is on the U.S. business. The profit margin, 15.1%, was the first quarter, and 13.4% was the second quarter. It deteriorated. What is the background? Was it due to cost increase and the delay of cost pass-through? Does it apply to the U.S. market? Also, the recovery measures towards the second half. That is my first question.
Thank you for the question. In the case of the U.S., as was commented previously, the cost increase happened due to cost inflation. The price management is not fully catching up with that. Also, the decline of the profit margin. There are strong business and weaker business, and the product mix impact is also affecting slightly. Kubo-san, CFO, would you like to add?
Let me add my comment. This is Kubo. Compared to the first quarter, in the second quarter, profit margin declined. The reason is, as explained by Watanabe just now, cost increase burden is reflected in the profit margin. That is one factor. Another is the impact of product mix. Roughly speaking, in the U.S., gas and equipment business, we operate two business. When we just look at the second quarter, the equipment business sales increased. On the other hand, gas sales were slower.
The product mix gap generated the sales mix gap. That is the additional comment from myself. Towards the second half, any measures to improve the profitability? Towards the second half, the measures to recover, right now, we are working on price management, and we have the program introduced. That part would be the biggest measure. Also, on product mix, it's rather difficult to control by ourselves. However, the cost is increasing, and against that, we believe we can catch up to a certain extent. As I have said, through price management, how much we can recover, that would be the key. That is all.
My second question is electronics-related inquiry. The demand, what is the demand environment? The demand trend compared to the first quarter, how is it trending in the second quarter?
The project inquiry, this time, the backlog is not increasing, but in terms of the inquiry in the area of electronics, is it strengthening? Is the prospect improving towards the future, or is the situation the same? When you compare first and second quarter, the shipment volume and also the investment project, can you acquire those deals? Overall picture of gases continue to be strong. In the first and second quarter, to what extent do we are seeing increases?
The future prospect, it's rather difficult to say. This year, in the second half, we do not expect a major decline. That is the current forecast. This is on the materials, including gas. Equipment and investment project inquiries, this is more intuitive, but compared to the first half, including the third quarter, the slight increase in inquiry is expected, and how many projects can we actually win?
That is one factor. Also, the size of the projects, in terms of the investment amount, it is rather difficult to comment. Kubo-san, do you have anything to add?
The status of the inquiries, the demand, the size of the project itself, setting that aside, the number of inquiries we are receiving related to electronics is very strong. This time, the backlog number itself is unchanged, but the number of project inquiry on electronics is included, and there are inquiries that are not included yet. There are promising projects with high probability of winning. So, electronics project inquiry continues to be very strong. That is our perception.
Understood. Thank you very much.
Thank you very much for the questions, Mr. Enomoto. Next, Yamada-san from Mizuho Securities.
This is Yamada speaking from Mizuho Securities. Nice to speak to you all. My first question pertains to just a quick confirmation of our previous question. Regarding backlog, the total amounted to JPY 150 billion, and electronics 3% decline was observed. So, about JPY 5 billion log, there is a backlog reduction. However, this is one-off, and we shouldn't be concerned of. That is my first question. In Japan, for the entire equipment and installation, it was flat overall. But electronics and industrial gases, what is the breakdown? Regarding electronics level of inquiries, I'd like to delve into this matter. Thank you.
Thank you for the questions. So, regarding electronics, the inquiry status.
It is very hard to explain the current situation, but in terms of the market conditions, if we looked at it from the global perspective, from the current MTP, electronics and installation, which used to be centered around Japan, but now we will be more active in undertaking overseas installation projects. Whether it be Europe or Asia, there were elements which weren't captured until now. So including these, we have very robust inquiries. In terms of the individual projects, the scale of a project must be different from overseas versus that of Japan. So I'd like to actually provide a careful explanation. In Japan, in terms of equipment and installation, if we actually differentiate electronics and non-electronics, in the non-electronics segment, in wide-ranging areas, there is a strong demand or inquiries for the equipment and installation projects.
For the electronics sector, because the projects tend to be bigger, but the backlog significantly sways even if with one project or two. So in terms of inquiries, compared to the first half, the level is not declining or not lower. That is my comment. I hope that answers your question.
Thank you very much. You earlier stated that your projects will be based in Europe. Traditionally, you didn't have any projects in Europe. That was the situation. But globally, under the slogan of Nippon Sanso As One, or Total Nippon Sanso, that is, you used to conduct sales activities. You started this. These efforts are bearing fruits, is that right?
We hope so, in conducting this activity. It doesn't mean that the products or fruits will be generated soon after we implement this.
But in terms of the level of inquiries, there are projects we are now able to access which weren't previously available to us. I have high hopes for that.
My second question pertains to the expected rise of power rate in Japan. In Japan, I have an impression that the price management is exerting effect, unlike the U.S. That means profitability in Japan is not deteriorating so significantly. Towards the second half, regarding the fuel prices, how are you going to progress with the cost pass-through of the increased fuel and other costs increase?
Regarding the power rate increase, how are we managing the price in Japan? Well, in Japan and the U.S., as well as Europe, we actually adopt the same price management policy across the regions.
But the level of speed or the speed of our measures through our customer negotiations, maybe the timing of price management differs from each region. There will be a difference from country to country. Then, for example, on-site projects as well as bulk projects, where on-site can apply the cost pass-through. Speaking of cost pass-through, usually it depends on customer contracts, but in terms of price management, we can actually manage it properly to offset the increase, but profitability will suffer. There are many other factors to consider here, the customer base as well as the business mix. I cannot provide a consistent answer here, but to address the increasing power rate or electricity cost increase, we will be able to appropriately manage the price in Japan.
Just to clarify, so in Europe, you've been able to increase price without any delay.
In the United States, even though there was some delays, but towards the second half, you will be able to actually catch up with the delay. But in Japan, it's going to take more time, and that is a risk that we need to be aware of? Yes. Whether you see this as a risk or just a timing issue. Yes, the timing of price management, Japan won't be the fastest market to actually reflect this price increase.
Thank you very much for the clarification. My last question, regarding Thermos, due to unfavorable weather patterns, the profit suffered. The impact of unfavorable weather, that is very difficult to quantify, but towards the third quarter, do you see signs of improvements? I'm just asking this question whether there's any structural change.
Thank you very much for the question.
Weather-related aspects, businesses, sports bottles, sports-related bottles are heavily impacted by the rainy weather or low-temperature conditions. Sales tend to decline under these circumstances. But towards the second half, if the weather patterns reaches to the normal level, then we will see, we project that the sales is going to be normalized. Kubo-san, would you like to add?
We are to launch new products for the autumn and winter season. Of these new products, compared to the products that were launched in summer, are weather-resistant, so not heavily impacted by the weather patterns. Having said that, though, will we be able to drastically improve the sales condition or profitability situation? We need to be carefully monitoring the situation. However, on the cost side, raw material costs as well as the production costs, and in the case of Thermos, we are heavily impacted by forex exchange rate.
Speaking of the new product launches, the price needs to reflect the value-added items to be launched in autumn and winter. Industrial gases, this is going to be equivalent of pricing for the industrial gases business. The pricing strategy as well as cost management, those were the two important pillars that we'd like to focus on in order to catch up for the Thermos business towards the second half. I hope that answers your question.
I expect your recovery in the second half.
Thank you, Yamada-san. Next, Shintani-san from SMBC Nikko Securities, please.
This is Shintani speaking from SMBC Nikko Securities. My first question is on Europe. The profit margin in the second quarter was maintained at the high level. Currently, natural gas prices are rising, and the power cost is also rising. Is it reflected in the second quarter margin? Also, price management on net basis, what are the impact? If you are not fully passing through right now, at what point do you expect normalization? Next is on demand. The manufacturing industry in Europe, there's a natural gas price increase, and there may be some structural difficulties. How shall we perceive the future demand?
Thank you for the question. First, the European power cost increase, whether price management is catching up with that trend, and also related to the profit margin.
As was explained in the beginning, compared to the past, we are seeing delays. That is pushing down the profit margin. We briefly explained on the product mix. On-site business versus the price increase, the increased cost can be covered, but that is the only part that can be covered, and we cannot avoid the decline of profit margin. That is one reason for the lowering profit margin in Europe. There's also volume-related factors in Europe. Although minor, the volume is increasing under this environment, under inflation. When we try to expand the volume, the price management that is different from the past needs to be done in order to develop new customers. We are doing that proactively in Europe, and that is also a factor related to the decline of the profitability. What was your second question?
The demand outlook.
Energy cost is impacting the competitive advantage of the manufacturing industry of whole Europe. From the perspective of the demand forecast in Europe on relative terms compared to the U.S. and Asia, we cannot be very optimistic. The second half overall will likely be more difficult. That is the impression we have right now. The energy cost, power cost increase is causing inflation, and there are various investment projects. The sentiment in the market is rather suppressive compared to other countries. So, compared to the previous period, the second half in terms of the demand may be a little bit difficult.
This is Kubo. I would like to add some more comments. In Europe, when we look at the economy, it tends to be very tough. In that environment in Europe, we have healthcare business. We are focusing on this business.
Last year, in March of this year in Spain, we acquired a home care business in Spain, medical and home care business. In the second half, the environment is very tough, but we expect that the business will expand. As Watanabe said previously, right now in Europe, the weight of electronics is not that high, but in electronics, there are promising projects in the second half. The heavy large industry, that kind of industry, we may struggle. That may be the trend. But there are unique European business areas where we expect to expand our business.
Thank you very much. My second question is related to Asia and Oceania. Electronics and Australian LP gas are the topic of my question. Electronics, Korea was higher than the expectation, and cumulatively in the first half, including Taiwan, region by region, how did you perform versus the plan?
Other than volume, how pricing is impacting the increase of top line? In Australia, LP gas business in the first quarter was strong, thanks to energy prices. In the second half, how did prices and margin trend? The third quarter, the price is also rising, so what kind of change do you expect in the second half?
Thank you for the question. On electronics, I will answer your question, and Australia LP, Kubo, will address the question later. First, the electronics in Asia, volume and price. Well, price, it's customer by customer, so it's not a uniform trend, but the volume is clearly increasing, and this is contributing to the increase of the top line. The revenue is rising accordingly. Country by country, details are not disclosed, but Korea is performing well. Southeast Asia and other regions are also performing well. Kubo-san, can you refer to Australia?
Regarding Oceania, the performance has been quite strong. LP gas procurement unit price increased, and also, this is the industrial gases business of Coregas. The power cost, logistics cost, inflation, overall in Oceania, there are impact from those prices, but price management and productivity improvement are being done and offsetting them. Volume itself is trending very strongly, and that trend is continuing in the first half, especially in the second quarter. The acquisition of Coregas from the second quarter of last period, it has been counted. So this time, we can compare apple to apple, and now we are experiencing both top line and bottom line increase. So, this is contributing to the overall Asia and Oceania business results. The outlook towards the second half, LP business tend to skew towards the first half.
There is such seasonality in the second half compared to first half, whether LP gas will grow, I think that would be rather difficult. There are seasonalities, so we are taking a conservative view. That was my comment.
Understood. LP gas will decline slightly due to seasonality, and that will be the drag for the margin. But otherwise, price pass-through is progressing steadily, so high level can be maintained, t he factors other than seasonalit y.
Your understanding is correct.
Thank you for the details. That is all.
Thank you very much for the questions, Mr. Shintani. Next, Ryoichi Watanabe-san from Morgan Stanley MUFG.
Sorry, I was on mute. This is Ryoichi Watanabe speaking. I would like to ask two questions. First is to do with the margin. Could you please expound on the margin from Q2 to Q3 for each region? What is your margin outlook? Is it going to increase or decrease for each region? Could you please comment? If it is easier for you to compare the first half versus the second half, I would like to know the regionality of your margin.
Thank you very much for the question. I would like to appoint Kubo-san, our CFO, to address that question.
In the second half, broadly speaking, let's set aside the second quarter and the third quarter, but if we compare the first half versus the second half, usually we have a large project, CapEx-related sales are generated on the sales side. So overall, first half and the second half will be on par with each other in terms of margin. In Europe, environment-related business may be able to catch up some elements. So the margin level will be on par for the second half compared to the first half. Kubo-san, would you like to add anything?
If we compare first half versus the second half, there are some elements to be considered. First is the forex, because the JPY is trending on the stronger side, appreciating. So there is an absolute value impact. Also for the propane and the seasonally impacted products are to be considered here.
Outside that, volume-wise, profitability composition against the cost increase, whether or not we can set the price to absorb the cost increase, organically how much volume increase we can register, those are the two items for us to consider. Regarding the pricing, we are struggling during the first half, as was presented by Watanabe-san. To address that situation, even if there is a time lag, we would like to rectify the situation. So there won't be a significant difference between the second half and first half volume-wise. Compared to the first half, obviously, if we take a quarterly basis for the volume, the volume shows an increasing propensity, but the momentum is not so strong. So this is a source of concern. From Q1 to Q2, generally speaking, the volume is recovering. So overall, the margin level, marginal profit will be exerting a positive effect.
By region, I cannot comment on the margin outlook by region. But in terms of the difference between the first half and second half, that was my comment. Thank you.
Thank you very much. My second question pertains to Japanese segment, domestic segment. I just would like you to comment more. Regarding the energy cost that is rising, I understand. But outside this electricity cost, some logistic costs are influencing the performance. You haven't announced any across-the-board increase outside helium, but what is the speed of cost pass-through? Will you be able to make a catch-up by the end of this year, calendar year, or will it go into the next calendar year?
Thank you very much for the question. Regarding the logistics and cost pass-through, will we be able to perform a cost pass-through, including the logistic cost increase? It will be entirely up for the market conditions.
At this point in time, I cannot comment on our exact plan, specific plan. Having said that, though, for the entire Japan market, including second half, compared to last year, as we have indicated earlier, electronics-related business, large equipment-related projects will be absent from this year. Outside that, however, the performance is in line with our initial expectation. That is the current assessment. For the first half, things were in line with the expectation. As far as we understand right now, there won't be a significant negative impacts or elements that will take effect in the second half. That is our assumption.
Thank you very much.
Thank you very much, Watanabe-san. Next, Omura-san from UBS Securities, please.
This is Omura of UBS Securities. I would like to ask about region-by-region trend in more details. First, on Japan, the overall sales in the first half is unchanged. Industry-by-industry pie chart, if I calculate based on this pie chart, the revenue size remains flat industry by industry. When it comes to profit, is there any trend or any changes of the trend on profit in Japan?
Thank you for the question. This is similar to what I have commented previously. In Japan, from last year-
Electronics-related installation projects, excluding electronics area, there's no major change. Profit-wise, if we exclude electronics, there's almost no change. This is the same comment as our previous comment. Kubo-san, anything?
Exactly as Watanabe-san said, the sales portfolio and profit portfolio are more or less the same.
Understood. Thank you. Next question is on the U.S. The sales trend, looking at them, chemicals and energy has risen by JPY 9.5 billion on year-on-year basis, but the other segments, it's within the range of forex fluctuation. So anything added under chemicals and energy? Also, you commented on the margin trend. In which industry the price management is relatively successful, and what industry you are yet to succeed? Any comment on that?
Thank you for the question. In which industry our price management is successful or not? That is rather difficult to answer.
Our company has ASU base or site, and it is impacted by the share and our competitors' price management. Large competitors are implementing various measures, so it is up to such measures. Rather than industry, the region and the relationship with the competitors are to be taken into consideration. It is rather difficult to comment individually. On the first question, Kubo-san will address. On chemicals and energy, as you understood correctly, the U.S. was very positive. The biggest factor is India's HyCO for NRL. This started to operate from a current fiscal year. QoQ, this kind of business has been contributing positively. That is the major factor.
I understand now. For HyCO, the profit margin is higher than average. Is that the correct understanding?
Right.
Thank you. Next is on Europe. I would like to ask the same question on Europe.
The chemicals and energy segment is quite large. You said that large and heavy industry is experiencing difficulty, but when we look at the sales numbers, I do not feel that. So, is that kind of impact expected in the future? First point is chemicals and energy, and food-related is quite large, and also heavy industry segment sales. Do you have any concerns?
Thank you for the question. Chemicals and energy, there are many sub-segments. As you say, food-related, especially the fish farming tend to be relatively robust. Chemical-related, there are Middle East situation impacting. By monitoring that status, we will look at customers' investment and operation status. The region with the biggest impact is Europe. It is rather difficult to provide further comment. On another point, the heavy industry. When we say heavy industry, major customers will be the chemical companies and steel companies.
Our rough impression is that steel customers, they are coming back slightly. That is the impression we have. Chemical customers, a little bit weaker. Among heavy industries, there are some differences. That is the impression we have. Overall, food and beverage, this is resilience business, one of the representative resilience business, and the demand here is very robust.
Understood. Thank you. Chemicals and energy . In terms of the sales, when you calculate, it is JPY 42 billion. Last period, it was JPY 30 billion, so I thought it is a major jump up. Any project that stands out?
What I said right now is on on-site piping. The trend on on-site piping, when we look at the overall picture, there may be some different trend than what we talked about.
Understood. Thank you. Thank you very much. That is all.
Thank you very much, Omura-san, for the questions. Next, Kono-san from Nomura Securities.
This is Kono from Nomura Securities. Regarding electronics and the semiconductor business, especially in Asia as well as Japan. The gas supply for these markets during the first half, how was the revenue growth? What is the expected growth range towards the second half? Will it be flattish or increase or decrease? Also, in South Korea, you opened a new plant in September. Diborane and the semiconductor-related gas will be manufactured from this new plant. The production capacity for each gas, how is it going to increase? How long does it take for you to reach the full capacity for this new plant?
Thank you very much for the questions.
First of all, regarding the electronics first half and second half growth rates, in terms of the percentage, it is very hard to quantify it, but including the first half, electronics gas demand is very brisk. So during the second half, the level will be on par with the first half level, or maybe a slight increase compared to the second half. It will be entirely up to the customer's utilization rate. However, within the electronics industry, as you are aware, there will be a timing issue, and if there is a time lag, the consumption tends to lower. But at this point in time, we do not see the situation will be like that. In South Korea, yes, we opened a new plant, and it is already operational. However, within that new plant, the production lines will not be complete in one go.
As was commented, for diborane, speaking of South Korean production capacity, it has doubled. However, in our case, we have a global footprint or production locations. So it is hard for us to comment on how much the production increase or capacity increase we can achieve with this particular new plant. But gas for semiconductor industry manufactured in South Korea, will you be actually sales as sold elsewhere? In the case of diborane, we are monitoring the global demand level, and not entirely, but of course, our basic principle is to actually manufacture in South Korea and sell it in South Korea. But in the case of diborane, depending on global demand level, which is in short supply currently, so considering the demand and supply balance, if there is any excess amount, then which can be sold elsewhere. That is a basic plan. Thank you.
In South Korea, diborane's production capacity will double because of this new plant. How long does it take for you to reach the full production level? Generally speaking, unlike general bulk gas, yes, the production capacity is there, but we are waiting for customers' qualification, and we need to win in this bidding process. So depending on the market condition, it is very hard for us to predict the timing of full operational capacity, but it usually takes two to four years for us to reach a full capacity, unless the demand declines. That is our assumption.
Thank you very much for the clarification. That is all.
Thank you, Mr. Kono. Next, Umebayashi-san from Daiwa Securities, please.
I am Umebayashi of Daiwa Securities. I have one question. Effective tax rate is my question. In the first and second quarter, in the first half, it was roughly 25%. Last year, the same period last year and full- year last year, and the prior year, it has been below 30%, nearly 30%. So it seems like your effective tax rate is declining due to the profit weight. Japan's weight has declined, and Asia's weight is increasing where the tax rate is lower. Is that the case? I think the impact is minor. But non-recurring P&L or one-off due to M&A. My point is, on full-year basis, will the effective tax rate be 25%, or is it going to be nearly 30% as in usual years?
Thank you for the question.
Kubo, the CFO, will address your question.
The effective tax rate, as you say, is declining. That is because in part of the region, we benefited from the preferential tax treatment, and that led to decline of tax expenses. There is also a technical factor. Overseas subsidiaries' net asset. Actually, when we consolidate our financial report, we translate them into JPY. The net asset of the overseas subsidiaries in the future, we will receive them in the form of dividend. For that portion, the expected tax burden, right now, the FX rate is trending in the stronger JPY direction. So, when we reflect that in the effective tax rate, then it is on a declining trend. Compared to the first half, in the second half, the tax rate itself will come back. In other words, it is going to go up. That is the simulation. That is all from me.
Thank you very much. Just one point to confirm. The preferential tax treatment, that is one-off?
That is correct.
The tax rate is pushed down thanks to that?
Yes, that is the correct understanding.
Understood. Thank you very much. That is all.
With that, we would like to conclude our earnings call session. Today's materials will be presented on our IR website. We would like to make some housekeeping announcements to close the session. On December 8, we expect to hold the first-ever IR Day. As this is going to be an inaugural IR Day, we are going to present our business and mid-to-long-term value creation. The details were distributed by email, so please kindly refer to that email, and we truly look forward to your participation. If you have any questions and require any further information, please feel free to contact the IR department. Thank you very much for taking the time out of your busy schedule to join us today. We truly appreciate your continued support.