Ultrafabrics Holdings Co.,Ltd. Q4 FY2024 earnings call

• Overall 2024 Financial Performance • Full year consolidated results came in roughly in line with the revised downward forecast released in the first half; all segments except aerospace missed the original starting forecast. Sustained yen depreciation provided a tailwind to overall results. • Total revenue reached 20.296 billion yen, operating profit was 2.799 billion yen, net profit was 1.64 billion yen, and EBITDA was 4.536 billion yen. This represented over 20% YoY decline in revenue and profit, with net profit falling more sharply than operating profit due to a favorable one-off tax adjustment in 2023. • Gross margin improved 0.8 percentage points YoY due to the yen depreciation tailwind, offsetting raw material and logistics cost increases. Operating margin fell to 13.8%, missing the 15% target. • Operating cash flow increased 0.713 billion yen to 3.642 billion yen, driven by lower tax payments from 2023's low effective tax rate. Investment cash flow had an outflow of 2.873 billion yen, primarily for the completed Chiyoda Factory project. Total net cash flow was negative 0.721 billion yen, and the net D/E ratio held steady at 0.8x. The company kept dividends unchanged at 39 yen per common share, resulting in a 44.1% payout ratio.
• Long-Term Strategic Vision • The company targets becoming a global leading premium polyurethane leather manufacturer, with 10% annual long-term growth centered on high value-added, functional, sustainable, design-forward products. • It will expand from its current North America-focused base to a three-polar structure (North America, Europe, Asia), lower North America revenue concentration, increase global brand awareness outside North America, and maintain a target of 15% operating margin and 25% EBITDA margin. • It will expand outsourcing to domestic partners and add JV-based overseas production to free up domestic capacity for high value-added products.
• 2025-2027 Mid-Term Key Priorities • 1. JV-facilitated business expansion: A 50/50 JV with Mexico's Simil Cuero Plymouth will launch production in 2026, targeting operating profit by 2027, to serve cost-sensitive North American customers by combining high-touch Japanese-made components with lower-cost Mexican production for other parts. A 45% minority JV with India's leading automotive fabric supplier BMD Private Limited will target a full launch decision in 2025, production start in 2026, and operating profit by 2028, to access the fast-growing Indian automotive market and enable future Asian expansion with lower production costs. • 2. Sustainability advancement: The new sustainable Chiyoda Factory was completed in December 2024, featuring leading low-carbon technologies (hydrogen boilers, 60% water recycling, solar power, waste heat utilization) with 1.6 billion yen in total investment. The company targets a 42% reduction in GHG emissions by 2030 (vs 2021 levels), and will pass higher sustainability investment costs through to product prices. • 3. Profitability improvement: The company will cut unit manufacturing costs and actively pass through cost increases from sustainability investments. It will expand outsourcing to free up domestic capacity for high-margin products. • 4. European strategy development and execution: 2024 European brand expansion efforts underperformed, so the company will revise and restart this initiative.
• Capital and Shareholder Strategy • The company recognizes it currently trades below book value, with ROE below the estimated 11-12% cost of equity. It targets ROE of 15% or higher, and will improve profitability, accelerate asset turnover via asset-light JV/outsourcing models, improve the ratio of net income to operating profit via JV profitability, lower cost of equity via sustainability focus and better investor communication, and boost expected growth via geographic/customer expansion to improve valuations.

1. Furniture segment: Achieved 13.3% YoY growth on a yen basis (driven by 7.8% yen depreciation, also grew in dollar terms) as new hospitality/residential segments grew strongly, while traditional office/healthcare segments slowly recovered from weakness. It was the largest segment by revenue.
2. Automotive segment: Revenue decreased to 86.9% of the prior year level on a yen basis, due to launch delays for a major customer's model change, but landed in line with revised forecasts.
3. Aerospace segment: Revenue grew to 131.3% of the prior year level, with strong new customer gains for commercial and business jets. It made up 15.6% of total revenue in 2024, and management expects this share to continue increasing.
4. Other segments (including recreational vehicles, yachts, trucks, apparel): Revenue decreased to 77.5% of the prior year level, as high interest rates suppressed RV/yacht demand and weak European macro conditions hurt apparel segment demand.

• 2025 (first year of the new mid-term plan) guidance: Revenue of 22.5 billion yen, operating profit of 2.9 billion yen (small operating profit increase), net profit of 1.5 billion yen (net profit decrease due to starting JV equity method losses and higher effective tax rate). Gross margin is expected to fall 4 percentage points to 49.3% due to outsourcing costs and new depreciation from the Chiyoda Factory.
• Mid-term 2025-2027 forecasts: Furniture is expected to return to trend growth for traditional office/healthcare, with faster growth driven by expanding residential/wholesale channels. Automotive guidance has been revised downward to reflect slower-than-expected EV growth outside China and launch delays for new EV programs, but the company still targets long-term growth via customer diversification and new program wins. Aerospace is expected to continue growing, with upside risk to the current forecast due to strong new customer momentum. Other segments are expected to recover from 2024's weak performance and return to trend growth after recovery.
• By 2027, the company targets EBITDA exceeding the 2023 peak of ~5.2 billion yen, net profit of 2.6 billion yen, and ROE of 12.5% which will exceed the estimated cost of capital.
• Cash flow guidance: 2025 will maintain balanced cash inflow/outflow without increased borrowing. From 2026 onward, capital spending will fall, debt repayment will proceed, the net D/E ratio will improve materially, and free cash flow will grow. If performance meets plan, the company will consider increasing the payout ratio and launching share buybacks to strengthen shareholder returns.
• The prior mid-term plan has been revised to reflect a 10 yen weaker yen forecast and pushed back sales volumes for EV-focused automotive programs, so 2027 volumes will not reach the prior plan's original 2027 targets.

• Slowdown in global EV demand outside China: EV sales growth fell to +9% in North America and -3% in Europe in 2024, which has forced the company to push back automotive revenue projections and increased reliance on the slow recovery of traditional auto programs.
• High interest rate and macro weakness: Persistent high interest rates suppressed demand for office furniture, RVs, and yachts in 2024, and the U.S. office vacancy rate remains near 20% with no clear signs of improvement, continuing to pressure traditional furniture segment results.
• Near-term profitability pressure: The new Chiyoda Factory and JV initiatives will lead to higher depreciation, startup costs, and outsourcing costs in 2025, resulting in a material drop in gross margin and a difficult earnings year for 2025, with returns on these investments only expected to materialize in 2026-2027.
• Geographic and customer concentration: The company is currently heavily reliant on North America for sales and Japan for production, with low brand recognition outside North America, creating revenue volatility risk from regional macro shocks.
• Valuation and capital cost pressure: The company currently trades below book value, with ROE below the cost of equity, and has a high beta that increases the cost of equity due to lower expected growth from recent underperformance.

Q: When will new European automotive programs launch, what is their size, and will automotive sales remain flat until these programs start? / A: There are multiple new programs, with staggered launches starting in 2025 and continuing through 2026 and 2027. OEM sales volume forecasts have been repeatedly revised downward across the industry, so the company has already discounted its internal sales projections for these programs. Management expects these new programs to meaningfully contribute to sales starting in 2026, especially from 2027 onward. Existing automotive business is expected to see a slight rebound in 2025 once 2024's one-off headwinds subside, even before new programs ramp.