BESTERRA CO.,LTD Q2 FY2026 earnings call

• Corporate Strategic Direction

  • The company aims to become the leading company in the demolition industry, not just in terms of sales scale, but also in decarbonization efforts, regulatory response, and personnel reform, contributing to a circular economy.
  • The 5-year Medium-Term Management Plan 2030 targets 30 billion yen in sales, a 10%+ operating margin, and 20%+ ROE.

• Key Strategic Initiatives

  1. Strengthen competitiveness through decarbonization demolition method development and AI utilization: Formalize unwritten demolition know-how by feeding oral expert data directly into AI for future use in construction method proposals; introduce AI camera monitoring for unsafe behavior on-site; improve accuracy of material quantity calculation (including scrap classification); establish an intellectual property department and push for transparent quantification of decarbonization demolition outcomes; advance circular economy and recycling efforts to cut CO2 emissions.
  2. Accelerate growth via expanding bases in concentrated plant regions: This is identified as the most critical initiative to hit the 30 billion yen sales target. The company currently has weak coverage in the Chukyo region (including Nagoya), Osaka, Shikoku, Kyushu, and northern Japan, with no sales offices in Osaka and Chukyo; it will prioritize new base development in these underserved areas, as well as expand coverage in growth areas like Yamaguchi Prefecture in the Seto Inland Sea region. Expanding geographically will also require growing the network of partner companies including demolition contractors, industrial waste handlers, and scrap operators.
  3. Prepare the foundation for future overseas market expansion: Explore opportunities starting with Singapore and South Korea, gather market intelligence to understand how overseas demolition is conducted to inform domestic operations, and build relationships with local contractors and heavy equipment operators.

• Recent Operational Updates

  • Gross margin improved to 18.2% from 16.7% year-over-year; excluding low-margin carryover projects and unprofitable group company operations, core general demolition profit margin recovered to ~20%, the target range.
  • Selling, general and administrative (SG&A) expenses decreased: R&D spending fell after completion of the Shinrail crane rail measurement robot development and shutdown of group company system development; goodwill amortization decreased after last year's impairment of Oda Corporation goodwill.
  • Hiring remains on track: The company targets 15 new hires this term, with 10 already hired (mostly mid-career hires), and maintains a low 5.2% employee turnover rate. The main challenge going forward is optimizing deployment of new construction supervisors across the business.
  • The balance sheet is very healthy, with a 62.1% equity ratio and more cash on hand than interest-bearing debt (resulting in a negative EBITDA interest-bearing debt multiple). Ending order backlog was 6.447 billion yen, flat year-over-year, with steel-related projects accounting for the largest share of the backlog.
  • The company has entered into a basic agreement to transfer two unprofitable group companies (scheduled for final contract November 28), with the sale considered a positive step for employees as the buyer is Suiyo Kiko, a listed company part of the Toray Group.
  • Bestela and Mitani Sangyo jointly filed a patent for surface treatment of spherical gas holders related to PCB coating removal work.
  • Financial strategy: Allocate after-tax operating cash flow to core business investment and shareholder returns; continue the progressive dividend policy and aim to further improve ROE.

For the reported 2nd quarter (half-year period):

1. Overall completed construction revenue: 5.1 billion yen, representing a 666 million yen decrease year-over-year. The total half-year operating profit came to 226 million yen, a slight year-over-year increase, but 100+ million yen lower than the prior Q1 forecast.
2. By industry segment:

• Steel manufacturing: Revenue share increased sharply (driven by the industry shift from blast furnaces to electric furnaces, which generated large volumes of construction work at Nippon Steel and JFE). Bestela typically operates as a first-tier subcontractor (not prime contractor) for this segment, so the rising share of steel work reduced the overall proportion of prime contractor projects in total revenue.
• Power: Accounts for 15% of total completed construction revenue. Demand has not declined, and new wind power demolition work is seeing very strong growth, leveraging Bestela's specialized falling construction methods for large turbines.
• Chemical and electric power segments: Bestela continues to prioritize prime contractor projects in these areas, targeting a 30% gross margin for prime work and 20% for subcontract work.

• Full year 2026 January term guidance was sharply downward revised from the original target of 13 billion yen in sales and 1.2 billion yen in operating profit, to a new target of 12 billion yen in sales and 700 million yen in operating profit. For Q3, the company expects 8.246 billion yen in sales and 365 million yen in operating profit.
• The previous medium-term plan "Decarbonization Action Plan 2025" achieved its sales target ahead of schedule, but profit did not grow in line with sales, so the new 5-year Medium-Term Management Plan 2030 sets clear targets of 30 billion yen in sales, 10%+ operating margin, and 20%+ ROE, with growth expected from expanding bases, AI/tech improvements, and falling SG&A ratio as scale grows. M&A will be considered for further growth beyond the base plan.

• Increased competition: General demolition companies focused on residential and building demolition are increasingly entering the plant demolition market, driven by the goal of accessing scrap materials, increasing competitive pressure.
• Tokyo Stock Exchange Prime Market maintenance: The current estimated required share price to meet maintenance requirements is 1,620 yen, which is a large gap from the current price; multiple options to address this are under review, but no details can be disclosed yet due to insider trading rules.
• Internal operational issues: The newly established Construction Department, created to improve profit through stricter bid review and selective order taking (rejecting low-margin projects), has not yet fully integrated standard construction estimation methods with the unique estimation processes required for demolition work; sub-optimal human resource allocation is the top internal issue, and the CEO has taken greater responsibility for improving business division operations. The company previously retained an unwritten norm that field requests for headcount were not questioned, which has led to overstaffing in some cases. Overly conservative cost accounting (front-loading additional unexpected costs) has also pulled down current reported profit.
• The lower full-year guidance was driven by a 1 billion yen profit hit from a large interrupted construction project (with compensation expected in the future, but not yet recognized), a 30 million yen profit hit from delays in the unprofitable group company rationalization, and lower sales from lost orders due to the company's new policy of rejecting low-margin bids amid industry price competition.

Q: You mentioned removing internal sacred areas as part of your reform. What specific areas had these sacred areas, and what problems have they created that were previously unaddressed? / A: The main sacred area was the long-held unchallenged assumption that field requests for construction supervisor headcount should always be fully met out of safety concerns. While safety is non-negotiable, the company had a practice of deploying more full-time in-house supervisors than actually needed for many projects, including providing extra supervisors to clients. The company is now looking to optimize headcount by using more dispatched labor and partner company personnel, while maintaining full safety standards, as part of its reform. This is a core example of the change needed.

Q: What changed in the 3 months since your last forecast that led to this downward revision, and what unforeseen events occurred? / A: The biggest factor was an unforeseen interruption to a large construction project that created 1 billion yen in unplanned standby costs. Second, unanticipated additional costs emerged on another project from regulatory-related issues that were not forecast, and the company chose to conservatively recognize these costs upfront. There is also a cultural tendency for field teams to pad budgets to create a buffer, which leads to overly conservative cost recognition that hits current reported earnings. Finally, the monthly losses from the two unprofitable group companies slated for sale were larger and more persistent than the company had forecast, even after initial restructuring steps, which created an additional 30 million yen negative impact.

Q: Why has profitability declined as sales have grown, is the core issue that larger sales scale forces you to accept more low-margin projects? / A: That macro view is largely correct. The current dynamic is a choice: if we accept price competition and cut bids to win work, we can maintain higher sales but lower margins. If we stick to our new policy of rejecting low-margin work, we lose some orders and sales come in lower, but margins improve. That is exactly the tradeoff the company is navigating right now as it implements its new selective order-taking strategy.

Q: Investors have lost trust in guidance after repeated downward revisions, what is your approach to IR going forward? / A: I fully acknowledge this criticism and apologize. IR's role is not to pump up the stock price, it is to help the market reach a fair valuation, and we have failed at that. The entire management team is committed to providing more accurate, honest outlooks going forward. We recognize that losing the trust of shareholders, who are the most important stakeholders, is a very serious issue, and the only fix is consistent, transparent, and honest communication going forward to rebuild that trust.