Daiki Axis Co.,Ltd. Q4 FY2025 earnings call

Consolidated Overall Performance

• Consolidated sales hit an all-time high of 48.321 billion yen, up 3.2% year-over-year, achieving 5 consecutive years of revenue growth, driven by large project progress in environmental equipment and strong growth in refrigeration/air conditioning engineering in housing equipment.
• Gross profit was 10.712 billion yen, up 4.9% year-over-year; gross margin improved from 21.8% to 22.2% year-over-year, driven by successful pass-through of rising raw material and outsourcing costs to selling prices and growth of high-margin solution businesses.
• Operating margin improved from 2.2% to 2.6% year-over-year; even with increased investment for future growth, profitability is steadily improving.
• The consolidated corporate tax burden rate reached 61.4%, an unusually high level, caused by not recognizing deferred tax assets for overseas subsidiary net operating losses, as overseas subsidiaries continue upfront investment for expansion and some regions are undergoing business strategy review.

2025 Investment for Future Growth

• Investment in advertising, brand building, regional contribution, and marketing including overseas septic tank promotion and company brand awareness building.
• Digital transformation investment to improve operational efficiency through IT and AI utilization.
• Increased human capital investment including base salary increases and expanded hiring-related expenses.

Mid-term Management Plan Progress

• Environmental Equipment Related Business (Domestic): 2025 sales significantly exceeded plan, driven by prior period backlog; new maintenance contracts grew steadily, and DCM Holdings store expansion for comprehensive building management progressed faster than plan, successfully strengthening the stock business base. Daiki Axis is currently building a national expansion structure for inorganic wastewater treatment (complementing its core organic wastewater treatment technology), with sales activities starting in 2026 targeting project awards from 2027 onward. The Japanese government launched a subsidy program in 2025 for switching from sewer systems to septic tanks in depopulating areas, with a 2026 legal amendment to further promote this shift, expected to increase domestic septic tank new installation demand.
• Environmental Equipment Related Business (Overseas): 2025 underperformance in India and Indonesia; in India, extended monsoon season caused unplanned project delays, and production capacity establishment took longer than expected, limiting sales expansion. In Indonesia, the market prioritizes price over quality, creating market entry barriers. Bangladesh projects are delayed due to political instability, but product inquiries are growing amid tightening wastewater regulations, so Daiki Axis is exploring expansion opportunities.
• Housing Equipment Related Business: 2025 engineering business performed strongly, with successful proposal-based sales from the design stage leading to strong air conditioning engineering growth; the wood structure business is now capable of winning large projects, with sales growth expected for 2026. Daiki Axis will further strengthen cross-business synergy, such as expanding engineering sales to existing environmental equipment customers. The housing sales and distribution segment will continue focusing on improving profit margin and operational efficiency amid a tough market environment.
• Renewable Energy Related Business: Solar power installation projects are declining and affected by rising material prices, but a green data center within the segment has started operation and is on track to generate profit. The biodiesel business expects improved utilization of the 2024 newly built Eastern Japan plant, and there is visibility for commercial hydrothermal treatment equipment sales, so the overall segment expects revenue growth.

Corporate Transformation for Global Expansion

• A corporate transformation project is currently led directly by the CEO to advance the mid-term management plan, with overall on-track progress despite segment-specific challenges.
• Daiki Axis will advance governance reform to support timely management decision-making including investment, exit, and business portfolio restructuring, while increasing cross-business synergy.
• Daiki Axis is reviewing management, operational, and talent development processes to prepare for globalization, and building systems to attract top global talent amid intensifying competition for skilled workers.

1. Environmental Equipment Related Business: Total segment sales reached 24.681 billion yen, up 4.4% year-over-year, marking a record high and 5 consecutive years of revenue growth; operating profit was 1.898 billion yen, down 6.5% year-over-year (increase in revenue, decrease in profit). Revenue contribution to total consolidated sales is approximately 51.1%. Domestic sub-segment performance:

• Septic tanks / wastewater treatment systems (excluding maintenance): +730 million yen in revenue year-over-year, driven by progress on large industrial wastewater treatment projects.
• Maintenance business: +200 million yen in revenue year-over-year, supported by growing demand from stricter regulatory compliance and increasing new contracts.
• Groundwater potabilization business: -65 million yen in revenue year-over-year, a pullback after strong sales in 2024, though Esco contract volume continues to grow steadily.
• Comprehensive building management business: +360 million yen in revenue year-over-year, driven by new contracts from DCM Holdings store expansion and increasing spot projects. Overseas sub-segment performance (overall overseas: decrease in revenue and profit):
• India: Slight revenue increase, reduced deficit; sales were almost flat year-over-year due to fewer large projects, offset by accumulated medium-scale projects.
• Sri Lanka: Increase in revenue, decrease in profit; large project completion in H2 hit year-over-year sales target, but profit declined due to upfront investment in hiring and marketing.
• Indonesia: Sharp decrease in revenue and profit, turned to net deficit; driven by fewer large projects and lower septic tank shipment volume.
• China: Increase in revenue, turned to net profit; after 2024 business restructuring, sales grew from membrane product sales and large project awards, with selling, general and administrative expenses sharply reduced.

1. Housing Equipment Related Business: Total segment sales reached a record high, marking 6 consecutive years of revenue growth; operating profit hit a record high, up 58.4% year-over-year (increase in both revenue and profit). Revenue contribution to total consolidated sales is approximately 36.5% (calculated from total consolidated sales of 48.321 billion yen).

• Housing equipment sales and distribution: Decrease in revenue year-over-year, affected by falling new housing starts post-regulation change pullback and declining foot traffic at DCM Holdings home center stores.
• Construction and equipment engineering: Increase in revenue year-over-year, despite rising construction material costs and skilled labor shortages; sales and profit grew sharply for refrigeration and air conditioning engineering, driven by higher demand from summer heatwaves and expansion to DCM Holdings stores in Eastern Japan.

1. Renewable Energy Related Business: Overall decrease in both revenue and profit. Revenue contribution to total consolidated sales is approximately 12.4%.

• Solar power: Decrease in revenue year-over-year; FIT+PPA power sales grew steadily, but revenue declined from lower copper theft countermeasure construction and fewer large-scale installation projects.
• Wind power: Increase in revenue year-over-year, driven by full-year operation of new sites completed in H2 2024, with 35 operating sites currently in operation.
• Biodiesel fuel: Increase in revenue year-over-year, driven by new customer acquisition in Western Japan and the launch of a new refinery plant in Ibaraki Prefecture that started supply to Eastern Japan markets.
• Hydrothermal treatment: Decrease in revenue year-over-year.

• For the 2026 December full fiscal year, Daiki Axis guides consolidated sales of 50 billion yen and consolidated operating profit of 1.45 billion yen.
• All three core business segments are expected to achieve revenue growth in 2026.
• Operating profit is expected to decline in the Housing Equipment Related Business segment, while the other two core segments are expected to achieve profit growth, leading to an overall consolidated profit increase.
• For the mid-term, Daiki Axis expects increased domestic demand for septic tanks driven by new government policy, targets 2027+ project awards from the new inorganic wastewater treatment business, and expects improved utilization and profit growth from the new biodiesel plant in Eastern Japan.

• Domestic: The domestic septic tank market is contracting amid declining new housing starts; construction material, outsourcing, and transportation costs continue to rise, pressuring profitability even with ongoing price pass-through efforts. The housing equipment sales and distribution market faces a tough operating environment, with falling new housing starts and declining foot traffic at key partner home center locations, plus ongoing skilled labor shortages for construction projects.
• Overseas: In India, cultural differences in business practices and extended monsoon seasons lead to frequent project delays, limiting revenue recognition; production capacity expansion is still in progress, creating near-term profit pressure. In Indonesia, the market prioritizes low prices over quality, creating competitive challenges, and 2025 results turned to deficit. In Bangladesh, political instability causes project delays. Overall, all overseas subsidiaries are in the upfront investment phase, leading to accumulated net operating losses that increase the consolidated effective tax rate and reduce reported net profit.
• Renewable energy: Solar power installation projects are declining in size and number, and the segment continues to face pressure from rising material prices.
• Consolidated cash flow: Operating cash flow was positive in 2025, but free cash flow turned negative due to capital expenditure in renewable energy and venture capital investment.

Q: Overseas business overall saw a decrease in revenue and profit. Can you update on the current business environment for Indonesia and India specifically, and outline your turnaround and profitability strategies going forward?

A: For Indonesia: 2025 saw a sharp revenue decline and a shift into net deficit, which was a pullback after large project wins in 2024. We are currently rebuilding our organizational structure (including talent allocation) to support industrial wastewater treatment orders, and revising our product lineup to comply with newly updated local water quality regulations to improve product competitiveness. We are also reviewing our manufacturing processes and improving product quality, and working with the local government and relevant industry bodies to establish standardized evaluation criteria and rules for septic tanks in the local market, to eliminate underperforming low-quality products from the market. We are also strengthening our local distributor network and advancing operations centered on local human resources to drive septic tank sales. For India: Government and private sector demand for septic tanks is very strong, and order intake is currently good. However, as previously mentioned, project and delivery delays remain common due to local business culture, so product shipment and delivery have not progressed as quickly as planned, which has limited near-term revenue recognition. In 2025, we achieved flat year-over-year sales by accumulating medium-scale projects, and also successfully narrowed our deficit. On the production side, we are currently advancing R&D and upfront capital expenditure to improve production efficiency, including testing manufacturing methods not commonly used in Japan. We are transitioning to a production system that balances high quality, mass production capability, and reduced reliance on manual labor through improved technology and process design. Through this work, we are advancing base building to narrow the deficit and achieve profitability by improving cost management and reducing lead times, which is finally starting to deliver tangible results. Beyond India and Indonesia, we are also advancing global branding and awareness building for our septic tanks and company in markets like Sri Lanka and Bangladesh, for example developing DX maintenance applications, and we aim to further improve the quality of our overseas business base across all our international markets.