Ultrafabrics Holdings Co.,Ltd. Q2 FY2025 earnings call

External Environment & Geographical Diversification

• The second Trump administration has created broad policy uncertainty, particularly around US tariff policy, leading to a wait-and-see posture among customers that delayed investment decisions and slowed production across both automotive and furniture industries, which have cross-border supply chains.
• Mutually reciprocal tariffs on US-Japan trade reached 10% in April 2025 and increased to 15% in August 2025, though the final structure of tariffs remains unconfirmed, and the company is still evaluating response strategies.
• The multi-year trend of yen depreciation reversed in 2025, with a brief move above 140 yen to the dollar in April before returning to around 147 yen; the period of one-sided yen depreciation is over.
• EV industry headwinds are broad-based, driven by the elimination of EV tax credits under the Trump administration and backlash against political activity by some EV manufacturers, affecting the entire industry not just individual customers.
• High interest rates continue to pressure interest-sensitive business segments, and the office market remains depressed.
• The company continues to execute its strategy of diversifying its automotive customer and geographic base, and is developing new production joint ventures in Mexico and India.
• Around half of the company's total revenue comes from the US market, and almost all automotive products are shipped via US Free Trade Zones to third countries (primarily Mexico), so the company currently faces no direct tariff impact, though it is monitoring potential future rule changes. The company has passed through tariff costs to customers via surcharges, with no significant customer churn or order volume reduction to date. The company is relatively competitive versus peers, as most competing textile suppliers are based in China/Asia and face higher tariffs than the company.

Mid-Term Management Plan Initiatives (2025-2027)

• Automotive growth: The company already holds IATF16949 certification required for most North American/European automakers, and is currently working to achieve compliance with the VDA6.3 standard required for German automaker contracts, with frontline employees holding weekly study sessions to earn auditor qualifications while also improving daily quality and operational performance.
• Furniture segment growth: The company exhibited for the first time at the Atlanta Casual Show residential furniture exhibition in July 2025. While residential furniture sales are still a small share of total revenue, the segment is growing quickly, and the market is as large or larger than the office furniture market; the company aims to grow this segment into a core business pillar.
• Profitability improvement: Higher-than-planned defect rates in the first half increased production costs and compressed gross margins. The company over 1,000 SKUs, which makes defect reduction more complex. It has launched a new PDCA focused problem-solving initiative targeting the most common defects, including fiber contamination, with targeted changes such as laying adhesive sheets to capture stray fibers and introducing new work uniforms. These efforts have already delivered meaningful defect rate reductions for some products, and the company is continuing to scale these efforts alongside VDA6.3 compliance work.

R&D Site Restructuring

• The new Chiyoda Factory was completed and launched commercial operations in July 2025. The company is restructuring its R&D footprint by placing development centers within the Chiyoda, Gunma, and Gyoda factories to speed up development and improve quality. This expansion resolves the R&D headcount bottleneck at the existing Hachioji Research Institute, which will close at the end of October 2025.
• Testing equipment previously spread across three locations is being consolidated at Chiyoda Factory to improve testing capacity. The Gyoda Factory office building is being renovated to add new R&D equipment, with upgraded exhaust capacity to improve working conditions.

Total first half 2025 sales revenue came to 10.092 billion yen. On a dollar basis, overall sales were flat year-over-year, as automotive and other segment declines were offset by growth in the aerospace segment. On a yen basis, overall sales reached 96.9% of the prior year level, with 97.6% of the decline explained by unfavorable yen-based exchange rate movement (average 148.60 yen/USD in H1 2025 vs 152.30 yen/USD in H1 2024).

• Automotive: 94.9% of prior year yen-based sales. This segment was hit hardest by supply chain chaos and industry-wide headwinds in EVs, with growth from new customer programs falling short of expectations, resulting in a net sales decline.
• Aerospace: 110% of prior year yen-based sales, with nearly 15% dollar-based growth. Growth was driven by strong new customer orders (including an unexpected pull-forward of some orders) plus increased continued orders from existing customers. Business jet demand recovered in Q2 after a weak Q1, leaving H1 performance solid overall.
• Furniture/Residential: 97.9% of prior year yen-based sales, with almost all decline explained by exchange rate movement. Weak performance in the legacy healthcare business was offset by sales growth in office, dealer, and residential categories.
• Other: 88.2% of prior year yen-based sales. The recreational vehicle and cruiser segments are heavily impacted by high interest rates, leading to industry-wide low activity, though strong performance in the truck segment partially offset this decline.

Management issued a full-year downward guidance revision, citing that the headwinds that hurt first half performance are not expected to improve in the second half. The new full year guidance is 20.9 billion yen in revenue, 9.2 billion yen in gross profit, 1.5 billion yen in operating profit, and 0.6 billion yen in net profit.

• Furniture: Full year sales guidance cut by 0.4 billion yen, as first half misses will not be offset by a recovery in the second half (second half guidance maintained at original planned levels).
• Automotive: Full year sales guidance cut by 1.5 billion yen, due to lower-than-expected small parts performance and changed production plans from key customers for the second half.
• Aerospace: Full year sales guidance raised by 0.3 billion yen, driven by unexpected new orders from existing customers that were not included in the original forecast.
• Other: Full year sales guidance cut by 0.5 billion yen, as the high interest rate environment is not expected to change in the near term.
• Surcharges for tariff costs are expected to add 0.4 billion yen to full year revenue, as all tariff costs are passed through to customers, which the company then pays as tariff duties.
• The company maintains its original dividend guidance of 39 yen per share, matching the prior year. The company will review the dividend once next year's business outlook, capital expenditure plans, and cash flow forecasts are finalized, and will announce any changes if needed. Large cash outflows for the Chiyoda Factory construction, Gyoda Factory renovation, and Mexico/India JVs are expected to end or slow substantially starting next year, leading to a large improvement in free cash flow, and the company will carefully consider dividend policy based on this improved outlook.

• Uncertainty over US tariff policy remains high, with the final tariff structure and implementation rules still unconfirmed, creating uncertainty for supply chain planning and profitability.
• Ongoing industry-wide headwinds in the EV and automotive sectors have led to slower-than-expected growth in new programs, and key customers have adjusted production plans to shift output away from vehicle models that use the company's materials.
• High defect rates in the first half increased production costs and compressed gross margins, and profitability improvement efforts will take time to deliver full results.
• Interest-sensitive segments (recreational vehicles, cruisers) continue to face headwinds from persistent high interest rates, with no near-term expectation of improvement.
• The office real estate market remains depressed, weighing on office furniture segment demand.
• Exchange rate volatility has created yen-based sales headwinds and increased foreign exchange losses, contributing to lower first half net income.
• Existing new EV programs in Europe have been pushed back due to slow EV sales growth, leading to delayed revenue growth from these programs.

Q: Why did management cut the full-year automotive segment outlook, specifically how do vehicle model changes drive the reduction? / A: The cut is driven by key customer plans to increase production of vehicle models that do not use the company's materials, rather than a general reduction in total vehicle production volumes. Management bases its demand forecast on customer production plans that map the use of the company's materials to specific models, so this model mix shift directly reduces expected demand for the company's products. This aligns with broader industry weakness in EV demand that has shifted automaker production plans.

Q: What does the 0.4 billion yen full-year surcharge increase mean, and is the implied 5% price increase on North American sales a reasonable estimate? / A: Tariff increases do not apply to all sales from the start of the year, as impact depends on when US tariff rules apply to specific shipments, and the company rolled out surcharges gradually rather than applying them universally from April. The 0.4 billion yen figure is a full-year estimate calculated based on multiple assumptions because the exact final tariff level and implementation rules are still unclear, with official guidance from US and Japanese authorities still pending. The surcharge is set to leave the company's profit neutral, so a rough estimate of ~5% average price increase is reasonable, and the full cost is passed through to customers. Tariffs apply to the export value of products shipped from Japan, which matches the question's framing.

Q: What plans does management have to improve profitability next year and beyond, after this year's significant margin decline, will the Chiyoda Factory and outsourcing changes help? / A: The company had to agree to minimum volume commitments for outsourced products, so as volume grows overall, the gross margin pressure from outsourcing will ease starting next year. The best scenario for margin improvement is overall volume growth, especially for the aerospace segment which has inherently higher gross margins due to its high functional requirements, so a higher mix of aerospace sales will lift overall margins. Management will also continue internal efforts to cut production costs by reducing defects and waste, with new structured problem-solving approaches rather than legacy methods. Combined volume growth, product mix shift, and production cost cutting are expected to lift gross margins starting next year.

Q: Why are sales growing outside North America, especially in Europe, and what is the outlook for this region? / A: Sales growth in Europe comes from both North American and European automakers, as the company sees significant long-term potential in both automotive and furniture markets in Europe, and is actively developing strategy to expand in both segments. The growth so far is still from a small base, and new EV programs that have already been awarded to the company are being pushed back because customer EV sales are growing much slower than expected, so revenue growth from these new programs is delayed. The company is still evaluating expansion options for the European furniture business, and will announce any major decisions once they are finalized.