YURTEC CORPORATION Q4 FY2025 earnings call

Overall Financial Performance

• Consolidated revenue and all profit metrics grew year-over-year, driven by progress on large projects at the parent company and overseas subsidiaries, plus improved project profitability.
• Backlog remains at historically high levels.
• Total assets hit 233.554 billion yen, a 2.075 billion yen increase year-over-year; ending cash and cash equivalents reached 47.688 billion yen, a 2.282 billion yen increase year-over-year.

Strategic Focus: Four Key Growth Segments

Management has designated four high-growth, high-synergy priority segments beyond the core Tohoku/Niigata market, with clear 2028 revenue targets:

• Outside Tohoku/Niigata: Focus on expanding in the high-demand Kanto region, targeting data center and district heating projects, and evaluating expansion into other non-core regions.
• Overseas Business: Expand orders for large commercial and renewable energy projects in Vietnam via local subsidiary Sigma, and actively pursue ODA infrastructure projects in South Asia and Africa (currently has ongoing transmission projects in Sri Lanka and distribution projects in Kenya).
• Renewable Energy Related Construction:
  • Established the Renewable Energy Business Headquarters in July 2023 to strengthen responsiveness to growing offshore wind development in the Tohoku region.
  • Leverages local advantages including local land expertise and existing relationships with local contractors to deliver full engineering services from substation construction to cable laying for grid upgrade projects supporting renewable energy expansion, with an estimated ~10 billion yen in near-term revenue from planned grid expansion projects in Tohoku.
  • Plans to enter energy storage-related construction, anticipating accelerated adoption to address renewable energy intermittency.
• Renovation Construction: Built a time-based database of past project sites to proactively propose appropriate renovation timing and upgrades, capitalizing on growing national demand for renovation of aging buildings built around the Bubble era.

Enabling Strategic Initiatives

• Digital Transformation (DX): Continue DX efforts to streamline on-site operations, digitize back-office (accounting, contracting) work, and introduce learning management systems to improve competitiveness and profitability.
• Human Capital Strategy: Launched the Yourtec Human Capital Strategy in October 2024 focused on four pillars: talent acquisition, talent development, working environment, and employee engagement. Key initiatives include: a scholarship repayment assistance program, relaxed rehire terms for former employees, raised retirement age from 60 to 65 with extended rehire up to age 70, and a new Construction System Strengthening Committee to address industry-wide labor shortages. Maintains a dedicated training center for skills development and a safety awareness center for all employees and partner firm staff.
• Sustainability: Prioritizes sustainability as a core management issue, published the Yourtec Integrated Report 2024 covering strategic goals, financial and human capital strategy, and stakeholder engagement.

Regional Segments (Consolidated):

1. Tohoku and Niigata: Revenue increased 11.912 billion yen year-over-year, driven by steady progress on aging equipment countermeasure projects. This segment is the company's core historical operating area.
2. Outside Tohoku and Niigata: Revenue decreased 5.28 billion yen year-over-year, due to a pullback after multiple large projects were completed in the prior year. 2024 full-year revenue was 17.9 billion yen, with a 2028 target of 26.4 billion yen.
3. Overseas: Revenue increased 7.4 billion yen year-over-year, driven by solid progress on large mixed-use building, factory, and infrastructure projects in Vietnam. 2024 full-year revenue was 17.2 billion yen, with a 2028 target of 29.1 billion yen.

Individual (Non-Consolidated) Work Type Segments:

1. Indoor Wiring: Orders decreased year-over-year due to a pullback after large factory orders in the prior year.
2. Distribution Line Construction: Orders increased 8.748 billion yen year-over-year, and revenue also increased, driven by growing demand for aging equipment upgrades. Revenue from Tohoku Electric Power Group for this segment also rose.
3. Air Conditioning Pipe Construction: Revenue decreased year-over-year due to a pullback after large projects were concentrated in the prior year. A 20% year-over-year revenue increase is projected for FY2026, driven by planned completion of multiple large projects.
4. Transmission/Substation, Civil Construction: Revenue increased year-over-year (driven by progress on underground burial pipeline projects), though orders saw a pullback after large wind-related orders in the prior year.
5. Renewable Energy Related Construction: 2024 full-year revenue was 10.9 billion yen, with a 2028 target of 27.7 billion yen.
6. Renovation Construction: 2024 full-year revenue was 35.5 billion yen, with a 2028 target of 42.3 billion yen.
7. Information and Communications Construction: A 30% year-over-year revenue increase is projected for FY2026, driven by growing demand from data center and government projects, plus associated work with indoor wiring and air conditioning projects.

Consolidated Profit:

Operating profit increased 5.661 billion yen year-over-year (+53.5% YoY), driven by higher gross profit on individual projects and improved project profitability.

• The company has already hit its medium-term management plan target for operating profit and ROE one year ahead of schedule, and is currently evaluating an upward revision to the medium-term numerical targets.
• For the full fiscal year ending March 2026 (FY2026), management targets revenue growth, with a projected 20% YoY increase for air conditioning pipe construction and 30% YoY increase for information and communications construction.
• Annual dividend per share is planned to increase from 68 yen in FY2025 to 72 yen in FY2026, maintaining a 40% payout ratio target.
• The company plans to continue share repurchases during the remaining medium-term plan period, and will evaluate purchases from both general market shareholders and former parent Tohoku Electric Power.
• All four priority growth segments are on track to hit their 2028 medium-term revenue targets, with management focused on accelerating investment and growth in these areas.

• Rising construction costs driven by labor and material price increases, though the company reports cost increases are now being appropriately reflected in contract pricing.
• Intensifying competition for large wind power project orders in the Tohoku region.
• Delays to renewable energy project starts driven by material cost inflation and new regulatory requirements for embankments, leading to lower projected revenue for FY2025 in the renewable segment, though long-term demand remains strong.
• Industry-wide labor shortage in the construction sector, which the company is addressing through targeted policy changes and workforce initiatives.

Q: Will the recent improvement in profit margins be sustainable? / A: Management confirms that ongoing improvements to cost estimation at project bidding, strict cost control during construction, and the ability to pass through higher material and labor costs to contract prices have driven sustainable margin gains. These practices are now embedded in standard operational processes. The company will continue focusing on higher-margin priority growth segments to maintain improved profitability going forward.

Q: What is the outlook for core grid upgrade construction for renewable energy? / A: Total planned investment for Tohoku region grid expansion is ~650 billion yen, with an additional ~200 billion yen for interconnection between Tohoku and Tokyo. The company already holds multiple project contracts, with near-term expected revenue of ~10 billion yen. Long-term demand will grow steadily as renewable energy adoption accelerates, and the company is well positioned to expand orders via its local market advantages.

Q: How is the company adjusting its shareholder return policy? / A: After completing a 4.5 billion yen share repurchase and subsequent full cancellation of repurchased shares, Tohoku Electric Power is no longer the parent company. The company will maintain stable dividends, target a 40% payout ratio, and continue planned share repurchases over the medium-term plan period, including potential purchases from the open market.

Q: What is the outlook for renewable energy project growth? / A: While near-term (FY2025) revenue will dip due to project start delays from cost inflation and new embankment regulations, long-term project inquiry and planning activity remains strong. Japan has set a target of 5.9-9 GW of offshore wind capacity in Tohoku by 2040, and the company will leverage its local position to capture growing project opportunities, including new energy storage construction. The 2028 medium-term revenue target of 27.7 billion yen remains unchanged.