OKUMURA CORPORATION Q4 FY2025 earnings call

2025 March Fiscal Year Full Year Financial Overview

• Core construction business (civil engineering and architectural) performed solidly. Consolidated total revenue increased year-over-year, but all profit levels declined year-over-year due to major negative impacts from the Ishikari Bioenergy incident. Consolidated operating profit decreased 3.9 billion yen year-over-year to 9.7 billion yen; ordinary profit decreased 5.9 billion yen to 8.9 billion yen; net income attributable to parent shareholders decreased 9.7 billion yen to 2.7 billion yen, with ROE falling 5.4 percentage points to 1.5%.
• Annual dividend per share maintained the previously announced 216 yen despite the large decline in consolidated profit, supported by solid individual business performance of core construction operations, resulting in a consolidated payout ratio of 292.1%.

Ishikari Bioenergy Impairment Details

• A July 2024 explosion at Ishikari Bioenergy's power generation facility forced a shutdown of commercial operations. The incident reduced Ishikari Bioenergy's revenue by 5.9 billion yen and pushed down the group's operating profit by 3.8 billion yen. After accounting for hedge accounting termination, 0.7 billion yen in foreign exchange forward valuation loss was booked in non-operating expenses, and a 12.9 billion yen impairment loss on fixed assets was booked as special loss. On Okumura's individual balance sheet, an additional 5.0 billion yen special loss related to affiliate business losses was booked, bringing the total pre-tax profit impact from the incident to 17.4 billion yen.
• Higher-than-expected prevention work costs, more severe-than-expected high-temperature chlorine corrosion of boiler piping requiring full material replacement, and delayed restart timelines reduced projected future cash flows enough to trigger mandatory impairment recognition under accounting standards. Ishikari Bioenergy is targeting restart within FY2026 March fiscal year; management expects long-term profitability of the project, with reduced depreciation expenses after impairment expected to provide an annual operating profit uplift roughly equal to the impairment amount post-restart.

Previous Mid-Term Plan (2022-2024) Review

• Sales target achievement: The 280.0 billion yen sales target was exceeded with actual sales of 298.2 billion yen, supported by solid order intake. However, operating profit, ordinary profit, and ROE targets of 19.0 billion yen, 20.0 billion yen, and 8% were missed at 9.7 billion yen, 8.9 billion yen, and 1.5% respectively, due to the large civil engineering project loss and Ishikari Bioenergy shutdown.
• Non-financial target achievement: The renewable energy power generation target was not met due to the Ishikari Bioenergy shutdown. Total planned investment of 50.0 billion yen was 67% executed, with underperformance driven by delayed real estate investments that could not meet profitability thresholds amid elevated property prices.
• Shareholder return policy was maintained as targeted, with a 70%+ consolidated payout ratio and share repurchases executed in 2024. The target to reduce cross-held shares to below 20% of consolidated net assets was achieved.

New Mid-Term Plan (2025-2027) Strategic Framework

This plan is the third step toward achieving the 2030 Vision, with the core theme of "Strengthening Management Base for Sustained Growth", structured around three core strategic priorities:

• Corporate Value Improvement: Focus on improving profitability and technical capabilities of the core construction business
  • Civil engineering: Prioritize productivity improvement and talent recruitment/retention to address technical staff shortages. Focus on maintaining technical advantage in core competitive areas (shield tunneling, construction near railways), strengthen project selection to ensure profitability, and expand overseas operations (with strong recent order growth in Taiwan for subway and semiconductor-related cable tunnel projects).
  • Architectural construction: Address capacity constraints after years of growth, prioritize system improvements to maintain safety and quality, implement planned order intake to match available construction capacity, and strengthen talent development to support future growth.
• Business Area Expansion: Build a stable revenue base not dependent on core construction
  • Prioritize restarting and stabilizing Ishikari Bioenergy operations. For real estate, promote a circular reinvestment model of acquiring, developing, and selling high potential properties to build stable revenue. For new businesses, focus on public-private partnership projects including comprehensive sewerage management contracts.
• Human Resource Utilization: Secure and develop talent, build an environment where diverse employees can maximize their capabilities
  • Priority target to reduce new graduate 3-year turnover rate to below 10% to address the industry-wide technical talent shortage.

Capital and Sustainability Strategy

• Shareholder return: Maintain the existing policy of 70%+ consolidated payout ratio; exclude transitory foreign exchange forward valuation gains/losses from payout ratio calculation to avoid dividend volatility. For FY2026 March fiscal year, a 4 yen increase to 220 yen annual dividend is planned, with 110 yen for both interim and final dividends.
• Cross-held share reduction: Continue to progressively sell eligible cross-held shares to reduce the share of cross-held equity in net assets, with sale proceeds used for growth investment and shareholder returns.
• Sustainability: Set non-financial targets including CO2 emission reductions at construction sites and offices, improved workplace safety, increased female representation in management, and reduced new graduate turnover.
• **Three-year total investment plan of 70.0 billion yen: 13.0 billion yen allocated to technology development and DX to improve construction productivity through labor saving, 41.0 billion yen allocated to real estate and new business growth investment, all investments will be evaluated strictly for profitability and risk.

Capital Cost and Share Price Conscious Management

Management estimates its cost of equity at 5-6%; Okumura's ROE has exceeded this cost in most years prior to FY2025, but its price-to-book ratio remains below 1. Management aims to sustainably achieve 8%+ ROE to maintain a sound financial base while improving capital efficiency, and will expand information disclosure and investor communications to reduce cost of equity.

• Civil Engineering (土木事業): FY2025 March fiscal year actual revenue was 99.0 billion yen, gross profit was 11.9 billion yen, accounting for approximately 33.2% of total consolidated revenue. Revenue decreased year-over-year due to no large completed projects matching the prior year's level and a large loss booked on one specific domestic large-scale civil project; excluding this project, the profit margin remained at a solid 15% level. The 2027 FY target is 120.0 billion yen in revenue and 19.0 billion yen in gross profit.
• Architectural Construction (建築事業): FY2025 March fiscal year actual revenue was 185.5 billion yen, gross profit was 19.2 billion yen, accounting for approximately 62.2% of total consolidated revenue. Performance improved due to the completion of large-scale projects and ongoing cost reduction efforts on carry-over projects from the prior year. The 2027 FY target is 185.0 billion yen in revenue and 18.5 billion yen in gross profit.
• Investment & Development Business and Other (投資開発事業等): FY2025 March fiscal year actual revenue was 13.6 billion yen, gross profit was 0.4 billion yen, accounting for approximately 4.6% of total consolidated revenue. The real estate sub-segment saw a gross profit decline from increased costs for large-scale property repairs. The new energy sub-segment experienced a sharp drop in revenue and profit due to the poor performance of Ishikari Bioenergy. The 2027 FY target is 22.0 billion yen in revenue and 5.5 billion yen in gross profit, excluding planned future uncommitted growth investments.

• FY2026 March Fiscal Year Full Year Guidance: Consolidated revenue is projected to increase 0.2 billion yen year-over-year to 298.5 billion yen; gross profit is projected to increase 1.3 billion yen to 33.0 billion yen, with gross margin up 0.5 percentage points to 11.1%. Operating profit is projected to increase 1.1 billion yen year-over-year to 10.8 billion yen; ordinary profit is projected to increase 3.7 billion yen to 12.7 billion yen; net income attributable to parent shareholders is projected to increase 8.5 billion yen to 11.3 billion yen, with ROE projected at approximately 7%.
• Civil engineering: Revenue is projected to increase on the back of high carry-over order backlog, with gross profit increasing as there is no repeat of the prior year's large project loss.
• Architectural construction: Revenue and gross profit are projected to decline as the prior year's large project completion boost will not repeat, despite a continued high level of carry-over orders.
• Investment & Development: Ishikari Bioenergy revenue is projected to decline as only 1.5 months of operation are assumed for FY2026, but gross profit is projected to increase due to lower depreciation after impairment.
• 2027 FY Mid-Term Plan Targets: Set a group-wide target of 330.0 billion yen in total revenue, 20.0 billion yen in operating profit, and 8%+ ROE.

• Operational risk from Ishikari Bioenergy: The July 2024 explosion caused a full shutdown, large impairment charges, and dragged down full year FY2025 profit significantly. Restart is targeted for FY2026, but there is risk of further delays or additional cost increases.
• Industry-wide talent shortage: Both civil engineering and architectural construction face tight labor supply, particularly for technical staff, and some skilled trade categories also face shortages. Limited labor capacity constrains business growth and increases risk of safety or quality incidents if capacity is overstretched.
• Intense competition in core civil engineering: High-margin public infrastructure projects face concentrated bidding competition from multiple firms, creating pressure on project profitability.
• Real estate investment risk: Elevated real estate prices have made it harder to find projects that meet profitability thresholds, leading to slower than planned investment execution in the prior mid-term plan period.
• Foreign exchange risk for Ishikari Bioenergy: The project relies on imported fuel with long-term foreign exchange forward contracts; after hedge accounting termination, valuation changes on the contracts create large transitory volatility in non-operating profits.

No Q&A section was included in the provided transcript.