SANEI LTD. Q3 FY2025 earnings call

Core Financial Performance

• Year-over-year: Increased revenue, decreased profit. Revenue grew from penetration of price revisions and expanded sales of high-function, high-value-added products. Profit declined due to higher-than-expected raw material/input cost inflation and temporary higher SG&A for the 70th anniversary of the company's founding. Excluding one-time anniversary costs, operating profit increased year-over-year.
• Third quarter standalone operating profit: 678 million yen. The full-year earnings forecast progress rate recovered significantly from 32.5% at the end of the second quarter to 65.8% at the end of the third quarter, recovering most of the prior progress delay.
• A 51 million yen special loss was recorded for demolition costs of the old Gifu Factory building for the factory reconstruction project.
• Total consolidated assets: 23.854 billion yen, a decrease of 363 million yen from the end of fiscal 2024. Equity ratio improved from 54.2% to 57.7%.

Quarterly Operational Highlights

• Exhibited at major industry trade shows (Japan Home Show & Building Show, Plumbing and Equipment Exhibition) to promote the SANEI brand, highlighting new design-forward products including the PrePashu+ pre-rinse faucet and SUTTO series kitchen single mixer faucet, which received positive market feedback.
• Published the "Partnership Construction Declaration" to strengthen collaboration, co-prosperity and sound transaction practices with supply chain partners, to advance contributions to a sustainable society.
• Drove employee stock ownership plan enrollment as part of human capital management and engagement improvement, increasing participation rate to 55% to align employee and shareholder interests for better corporate value growth.

Long-Term Strategic Priorities

Corporate value improvement is built on two core pillars: (1) Growing revenue and profitability via business expansion, (2) Continuous improvement of shareholder value. The core strategic directions for business expansion are:

• Continue elevating the "Designing Water" SANEI brand, pursuing premium manufacturing that delivers beautiful user experiences across water flow, sound, texture, design and finish quality.
• Expand into full installation solutions for entire water-related living spaces, evolving from selling individual faucet products ("point" focus) to covering entire water supply lines ("line" focus) and full water-connected living spaces ("area" focus). As part of this strategy, the company operates WAILEA showroom/retail locations in Omotesando Tokyo and Midosuji Osaka.
• Expand market share in the non-residential market (accommodation, food service, nursing/medical, public facilities) to offset expected long-term declines in domestic housing starts caused by population decline, by expanding the product lineup for non-residential applications.

Capital Structure and PBR Improvement Targets

• As of end-December, PBR was 0.60x. The company will continue working to improve undervalued PER and target a PBR above 1.0x. The company will maintain ROE above 10% while continuing to pursue business expansion and profitability improvement.

SANEI operates through 4 core sales routes (segments), with the following performance for the third quarter:

1. Retail Route: Revenue contribution share increased year-over-year. Sales grew strongly driven by higher sales of high-value high-function products (led by Ultra Fine Bubble products) and increased inbound demand.
2. Manufacturer Route: Revenue contribution share increased year-over-year. Sales performed strongly, with steady growth centered on standard adoption products for housing equipment manufacturers, plus additional growth from new standard adoptions.
3. Pipe & Plumbing Materials Route: Only a slight year-over-year revenue increase. While Ultra Fine Bubble-related products performed well, the segment was negatively impacted by reduced demand from the housing market slowdown. Revenue contribution share decreased slightly year-over-year.
4. Overseas Route: Already established but still accounts for a low share of total revenue as of the third quarter.

• Full-year earnings: The strong Q3 performance allowed the company to significantly recover the progress delay that existed through the first half, bringing cumulative progress against the full-year forecast to 65.8%. No explicit downward/upward revision to the full-year top-line or bottom-line forecast was provided.
• Dividend: The company upgraded its full-year dividend guidance. It previously planned a 27.5 yen per share ordinary dividend for the full year end, and increased this by 2.5 yen to 30 yen per share end-of-year dividend. Including the 30 yen per share interim dividend (which included a 70th anniversary special dividend), this marks the 9th consecutive year of dividend increases, consistent with the newly introduced progressive dividend policy.
• Long-term growth guidance: The company expects continued muted growth in new housing starts due to demographic decline, and targets sustained long-term growth via business area expansion into non-residential markets and full water space solutions.

• Raw material cost risk: Copper prices (the company's key raw material) have remained elevated at higher-than-expected levels, leading to increased procurement and manufacturing costs that pressured profitability in the quarter.
• Housing market demand risk: The ongoing slowdown in the Japanese housing market reduced demand in the pipe and plumbing materials segment, limiting revenue growth in that segment.
• Valuation risk: The company's current stock valuation is depressed, with PBR trading well below the 1.0x target.

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