TEKKEN CORPORATION Q4 FY2025 earnings call

Financial Performance Summary

• Total net sales increased 1.5 billion yen year-over-year to 185.1 billion yen, driven by progress in the Construction segment's backlog that offset lower overseas Civil Engineering volume.
• Operating income rose 261.1% year-over-year to 3.4 billion yen, exceeding the original plan by 1.7 billion yen, supported by improved Construction segment profitability, design change gains, cost compression, and reduced selling, general and administrative (SG&A) expenses from personnel and overhead cuts.
• Net income attributable to parent shareholders fell 0.8 billion yen year-over-year to 3.4 billion yen due to the absence of the prior year's large fixed asset sale gain, foreign exchange losses, increased interest expenses, and higher impairment losses on holdings.
• Backlog of uncompleted projects reached 278.2 billion yen, the highest level in 10 years, despite a 8 billion yen year-over-year decline in total new orders. The company increased its full-year dividend from the original 110 yen per share to 122 yen per share.

Strategic Business Updates

• Portfolio and Order Strategy: The company is targeting 200 billion yen in total sales by fiscal 2028 (ending March 2028). It prioritizes core railway civil engineering, highway civil engineering, government/ public sector construction, and real estate. In fiscal 2024, highway orders hit 20% of total civil engineering orders (targeting 25% by the end of the mid-term plan), and public sector construction orders reached 26% of total construction orders (targeting a sustained 20% over the plan period).
• Construction Profit Recovery: The share of construction sales exposed to high commodity price inflation fell to 30.2% in fiscal 2024, and is projected to drop to 10.6% in fiscal 2025, with nearly all unprofitable high-inflation projects eliminated by fiscal 2027. The segment's gross profit margin is targeted to reach 7% by fiscal 2028.
• Core Competitive Advantage: Railway construction accounts for 34.2% of total sales and 44.8% of total gross profit, with 830 specialized technical engineers (half of all qualified employees). The company holds key large-scale projects including the Haneda Access Line and Shinjuku Station area redevelopment, and leverages its long-term strong partnership with JR East to co-develop technology that is extended to other clients and adjacent business areas.
• Mid-Term Plan Cash Allocation & ESG: A cumulative 13 billion yen is allocated for growth investment including real estate and M&A. In fiscal 2024, subsidiary J-Tec completed an acquisition of a specialized deep foundation pile company to expand core technical capabilities. Scope 1 and 2 emissions reduction targets for 2028 are on track to be achieved, and the company earned an A-list rating from CDP for climate action.
• Governance and Capital Efficiency: The company targets reducing cross-held policy shares to less than 20% of net assets by fiscal 2026, with a planned 10 billion yen total cumulative sales of policy holdings over five years. The company will cut executive roles from 38 to 20 by the end of the mid-term plan (to 30 by fiscal 2025) to slim management. A 3 billion yen share buyback was completed, with 695,000 treasury shares (over 4% of outstanding shares) canceled in March 2025. The company maintains a progressive dividend policy targeting a 50% payout ratio, and is considering introducing a DOE (Dividend on Equity) framework for more stable returns.

For the 2025 March year (fiscal 2024), total consolidated net sales reached 185.1 billion yen, with three operating segments:

1. Civil Engineering Segment: Net sales of 89 billion yen, a 2.9 billion yen decrease year-over-year driven by lower overseas project volume. The segment recorded 9.2 billion yen in gross profit, with a gross profit margin of 10.4%, accounting for ~62% of total company gross profit.
2. Construction Segment: Net sales of 90.8 billion yen, an increase driven by steady progress on beginning-of-period backlog projects. Gross profit hit 4.2 billion yen, a 2.5 billion yen year-over-year increase, with a gross profit margin of 4.7%, accounting for ~28% of total company gross profit.
3. Real Estate and Other Segment: Net sales of 5.2 billion yen, an increase year-over-year, with 1.3 billion yen in gross profit, accounting for ~9% of total company gross profit.

By revenue contribution percentage, the Civil Engineering and Construction segments each account for roughly 50% of total net sales, making them near-equal in revenue weight.

For fiscal 2025 (ending March 2026):

• Total net sales are projected to decline 7.1 billion yen year-over-year to 178 billion yen, due to accelerated project completions pulled into fiscal 2024 and a large volume of public sector projects still in the design phase that will not contribute to revenue in the current fiscal year.
• Operating income is guided to remain flat year-over-year at 3.4 billion yen, as improved profit margins from design change gains in civil engineering and higher order profitability and cost compression in construction will offset the impact of lower sales.
• Net income is projected to increase year-over-year, as the company expects to realize gains from planned policy share sales.
• A full-year dividend of 130 yen per share is planned.
• For the mid-term plan ending fiscal 2028, the company's targets of 200 billion yen in sales, 8 billion yen in operating income, and ROE of 8% or higher remain on track as of the first year of the plan.
• The policy share reduction target of 20% of net assets or lower by fiscal 2026 is on track to be achieved, with planned sales of 4 billion yen in fiscal 2025 and 5 billion yen in fiscal 2026.

• The company's PBR has remained well below 1x for multiple years, with ROE and PER both below the average of mid-tier general contractors, and current ROE remains below the estimated 6% cost of equity, requiring further profitability improvements to lift enterprise value.
• Total assets grew 13.8 billion yen year-over-year driven by higher unpaid completion receivables, and the equity ratio fell to 31%, while interest-bearing debt increased 21.7 billion yen year-over-year to 55.9 billion yen driven by higher advance project funding needs from delayed receivable collection and shorter payment terms. Operating cash flow turned sharply negative in fiscal 2024, requiring funding via new borrowing.
• Scope 3 emissions targets are still under review and have not been finalized, requiring further work to meet disclosure and reduction goals.
• Initial employee engagement surveys identified issues with improper staffing levels and insufficient support for diverse work arrangements, requiring ongoing intervention to improve scores.
• Unprofitable projects from prior periods of high commodity price inflation still weigh on construction segment profitability, and will not be fully eliminated until after fiscal 2026.

Q: What is Tekken Construction's outlook for hitting its 2026 and 2028 mid-term plan targets, given that 2026 targets look challenging after the first year of the plan? / A: The company confirms that the 2025 fiscal year performance (the plan's second year) remains aligned with the original mid-term plan trajectory. The elimination of high-inflation unprofitable construction projects is progressing faster than initially projected, and core railway and highway project pipelines are solid. Management reaffirms that the 2028 final targets of 200 billion yen sales, 8 billion yen operating income, and 8%+ ROE remain achievable on the current schedule.

Q: What is driving the shortening of payment terms, and what impact is this having on operations? / A: The shortening of payment terms to suppliers is driven by recent industry-wide policy changes pushed by Japanese regulators to improve supply chain cash flow. While this has created near-term pressure on working capital, requiring increased short-term borrowing to cover funding gaps, management views the change as a long-term industry standardization that aligns with broader corporate social responsibility goals, and does not expect persistent negative impact after the initial transition.

Q: What is the outlook for future labor cost inflation, and how will the company offset higher labor expenses? / A: Management expects moderate labor cost inflation to continue in line with broader Japanese labor market trends. The company is addressing this through two primary channels: stricter selective ordering that only accepts projects meeting minimum profitability thresholds, and ongoing cost management including design optimizations and more efficient construction scheduling to offset higher unit labor costs. No material impact on full year profitability is currently projected.

Q: What is the company's approach to future M&A, and what types of targets are being considered? / A: The company maintains a flexible, strategic approach to M&A, focused on targets that can strengthen its core technical capabilities in railway and civil engineering, or expand its addressable market adjacencies. Recent M&A focused on deep foundation construction expertise to complement the company's existing railway near-construction capabilities, and future deals will follow this same pattern of adding complementary strengths rather than pursuing large-scale diversification. The company has sufficient balance sheet capacity to pursue opportunistic deals that meet its return thresholds.

Q: What is the policy for selling cross-held policy shares, and is the company on track to hit its reduction targets? / A: The company remains fully committed to its target of reducing policy holdings to below 20% of net assets by fiscal 2026, with a planned 10 billion yen in total cumulative sales over five years. Sales are progressing ahead of the initial pace: 2.7 billion yen was sold in fiscal 2024, 4 billion yen is planned for fiscal 2025, and 5 billion yen for fiscal 2026. Management confirms the target will be met, and will explore additional sales beyond the target after 2026 to further improve capital efficiency.