DAI-ICHI CUTTER KOGYO K.K. Q2 FY2025 earnings call

• Purpose and Strategic Positioning

  • Carries forward the corporate purpose of "protecting the safety of social infrastructure in daily life and at all times, supporting a stable society", and aims to be the first-choice provider for social infrastructure renovation work for roads, waterworks, buildings, railways and other assets.
  • The 2025-2027 medium-term management plan builds on the competitive advantages and foundational improvements from the prior plan, focusing on further strengthening competitive advantages and building an environment that enables new challenges, to prepare for additional growth initiatives in the 2028+ plan period.
  • The plan targets long-term growth by investing aggressively to expand existing businesses and pursue new areas, laying the foundation to hit a 2036 June term long-term target of 51 billion yen in revenue and 8.65 billion yen in operating profit.

• Investment and Strategy Priorities

  • Total planned business investment of 8.5 billion yen over the 3-year plan period: 3.5 billion yen for equipment, R&D and technology development; 1 billion yen for human resources and system investment; 4 billion yen for site expansion and M&A investment.
  • Business strategy dual focus: strengthen existing business advantages via technology succession, hiring, training and R&D; expand existing businesses via new geographic market entry; develop new value-added construction methods for new businesses and explore entirely new markets, with M&A considered as a tool for all these growth areas.
  • Organizational strategy focus: build systems, structures and culture that support ongoing innovation even as the company scales; expand career challenge opportunities for all employees across specialized, management, and new business development tracks to support capability development; strengthen group synergy across all subsidiaries to expand the scope of value delivery.
  • M&A strategy: actively target new group companies or partners to strengthen existing business advantages, expand priority regions/segments, and support the launch of new businesses and new construction methods.
  • Human resources strategy: build a supportive work environment with clear promotion standards, revised evaluation systems, expanded benefits, and diverse career paths (specialist, generalist, innovator) to improve employee retention and growth.

• Interim Period Operational Performance

  • The core cutting and drilling business maintained solid performance with continued strong demand for highway renewal projects. The balance sheet remains stable, with cash and deposits increasing and no major changes to overall balance sheet structure.

1. Cutting and Drilling Construction Business: Increased revenue (driven by steady orders for highway renewal projects and increased public investment-related orders) but decreased profit, due to rising construction costs from higher expenses. This is the company's core, majority segment, accounting for the vast majority of total group revenue. Public sector revenue for this segment increased in the reporting period, driven primarily by bridge-related construction work.
2. Building Maintenance Business: Achieved both revenue and profit growth, supported by steady orders and execution of projects from major developers.
3. Reuse and Recycling Business: Excluded from reporting segments in this interim period following the partial share transfer of Movable Trade Networks, which operated this business. This exclusion led to an overall decrease in consolidated revenue and profit for the period.

• Medium-term (2025-2027 plan): Target 24.5 billion yen in group revenue, 2.45 billion yen in group operating profit, and a 10.0% operating profit margin for the 2027 June term final year. The temporary projected decline in margin from 2024 June term levels is intentional, driven by aggressive growth investment to accelerate long-term growth.
• Full-year 2025 June term: Revenue is projected to increase year-over-year, supported by continued steady orders for highway renewal and public sector projects. Operating profit is projected to increase alongside revenue, but ordinary profit and net profit are projected to decrease due to an expected decline in non-operating income.
• Shareholder returns: The 2025 June term projected payout ratio is 25.8%. The medium-term plan targets a payout ratio of 30% or higher starting from the 2026 June term, with 1.5 billion yen or more allocated for dividends over the plan period. Management will continue to prioritize stable dividends while gradually increasing the payout ratio. The company will maintain ROE of 10% or higher, pursue an optimal capital structure, and consider share buybacks if excess capital remains after completing growth investment and shareholder returns.
• Highway renewal project pipeline: Strong project demand is expected to continue through at least the 2030s, with some project delays potentially pushing demand further out.

• Rising construction costs and operating expenses are putting downward pressure on profit margins for the core cutting and drilling business.
  • Ongoing industry-wide labor shortages create hiring and retention challenges, even though the company has achieved low turnover to date.
  • Large-scale aggressive growth investment (including M&A, geographic expansion, and R&D for new businesses) carries execution risk and will lead to a temporary intentional decline in profit margins over the medium-term plan period.
  • Social infrastructure project timelines can be delayed, which shifts revenue recognition and impacts near-term financial performance.

Q: The medium-term plan states a 30%+ payout ratio. Is 30% a hard target floor, or do you see higher levels like 40% or 50% as possible?

A: 30% is explicitly a minimum floor, not a hard cap target. Management is open to increasing the payout ratio further over time, and investors should understand that higher payout levels are part of the long-term plan.

Q: How is the company responding to rising demand for infrastructure repair after recent high-profile road sinkhole accidents?

A: The company is already supporting recovery efforts for the recent Saitama road sinkhole, and has received requests for road cutting work for site investigations. The company recognizes that widespread aging of social infrastructure (including over-50-year-old sewer pipes, bridges, ports and tunnels) will drive sustained demand for repair and maintenance work, and plans to continue proactively engaging in this segment.

Q: What is your sales forecast for the Western Japan region in the current term, as you work to strengthen this area?

A: The company projects around 1 billion yen in sales for Western Japan in the 2025 June term, with around 400 million yen achieved in the first half. The company will continue evaluating additional site expansion and establishment in the region going forward.

Q: What share of current sales comes from highway renewal projects, and how long will strong demand last?

A: Highway renewal projects account for approximately 30% of total group sales. Management expects strong demand to continue through around 2030, with some delays to originally planned projects pushing some demand further out, so the boom may last longer than initially projected.