ISEKI & CO.,LTD. Q4 FY2024 earnings call

Project Z Strategic Framework

• Project Z is a two-year (2024-2025) short-term focused initiative combining fundamental structural reform and parallel growth strategy, with 2027 targets of: consolidated operating margin ≥5%, ROE ≥8%, DOE ≥2% (translating to 60-65 yen annual dividend), and achieving PBR ≥1x.
• Structural reform benefits will begin to appear in H2 2025, with full materialization in 2026 and beyond.

Fundamental Structural Reform Progress

• Production optimization: Consolidation of final assembly operations to the Matsuyama facility is progressing on schedule, with relocation of combine production from Kumamoto proceeding without major disruption. Total planned capital expenditure for this initiative was revised downward from 46.0 billion yen to 38.0 billion yen to cut unnecessary investment while improving production efficiency.
• Development optimization: Product profitability improvement initiatives are experiencing minor delays, so additional human resources are being added to get back on schedule. Model/type consolidation for development efficiency is proceeding as planned and moving to the implementation phase.
• Domestic sales deepening: ISEKI Japan was established in January 2025, integrating domestic sales operations into a single entity to enable faster decision-making and concentrated resource allocation.
• Cross-cutting initiatives: Target personnel cost reduction targets were achieved after revising the group-wide headcount plan even though voluntary retirement applications were below the initial target. The company targets a 20% improvement in labor productivity via headcount efficiency. Cost cutting is experiencing minor delays, which will be recovered via fundamental business process reevaluation.

Growth Strategy

• Overseas growth: The UK-based sales company Premium Turf Care (PTC) was consolidated in January 2025, establishing a 3-country core structure (France, Germany, UK) for European growth. A 400 million yen annual profit increase is expected starting 2025. Future plans include expanding sales territory to Central/Eastern Europe, Turkey, Middle East and North Africa, expanding product lines, implementing unified inventory management for efficiency, and driving innovation via talent exchange.
• Domestic growth:
  • A Large-scale Planning Office was established within ISEKI Japan to combine regional sales expertise with in-house R&D capabilities for advanced agricultural technology, expanding into B2B business for new corporate entrants to agriculture.
  • The Upland Field and Dairy Promotion Group will expand national distribution of imported implements, leveraging existing Hokkaido brand strength to capitalize on growing demand driven by agricultural policy shifting to upland field cultivation across Honshu.
  • The Solutions Promotion Group will market ICT/robot agricultural machinery and environmentally friendly products (such as the Aigamo Robo), expanding the company's variable fertilization and organic farming expertise to deliver value-added solutions for growth segments.

Asset Efficiency Improvement

• Target inventory turnover of ≥2.4x, with 5.9 billion yen of inventory compression achieved in 2024. The SCM Promotion Office was established to drive cross-functional end-to-end supply chain reform enabled by single assembly and single sales entity consolidation.
• Fixed asset rotation will be stabilized by shifting to hurdle rate-compliant high-return investments and selling surplus assets.
• Leverage: Interest-bearing debt will increase temporarily during the investment phase, but will be compressed by 2030 via controlled investment pacing, while net equity will grow alongside enhanced shareholder returns.

Capital Cost and PBR Improvement Initiatives

• Current status: PBR was 0.3x at end-2024, with ROE below the 8% target and PER below 10x (except 2023). Profitability improvement and asset efficiency are the core priorities for lifting PBR to 1x.
• Initiatives include expanding IR disclosure (responding to investor demand for regional profitability data), strengthening governance (reducing executive headcount, adding two female outside directors), expanding personal investor and overseas IR engagement, and improving ESG disclosure to lower capital cost and lift PER.

2024 December full year consolidated net sales decreased 1.4 billion yen year-over-year, with domestic sales flat and overseas sales decreasing 1.4 billion yen. The overseas sales contribution percentage was 32.9%, a slight decrease from the prior period.

Domestic segments:

• Agricultural machinery products: 800 million yen decrease in sales, dragged by an earlier 1-month price revision in Q1 that pulled forward demand, though demand recovered in the second half of the year on the back of rising rice prices.
• Implements: Increased sales.
• Parts and repair/maintenance revenue: Continued consistent sales growth, aligned with the company's 10-year structural profit improvement strategy.
• Facility construction: 1.3 billion yen decrease in sales due to the absence of large orders.

Overseas segments by region:

• Europe: Maintained strong high growth, supported by solid demand for existing products, yen depreciation benefits, and special demand for sourced electric machinery.
• North America: Decreased sales, due to continued weakness in the compact tractor market.
• Asia: Decreased sales, primarily due to ongoing inventory adjustment in Korea.

Profit performance:

• Operating profit: 1.9 billion yen, a 300 million yen decrease year-over-year. A 1.9 billion yen decrease in gross profit from lower sales/production was partially offset by 1.8 billion yen in cumulative price revision effects, leading to a net 1.7 billion yen positive impact, though a 900 million yen negative exchange impact (from higher selling, general and administrative costs) and other factors led to the net profit decrease.
• Recurring profit: 1.5 billion yen, a 500 million yen decrease year-over-year.
• Net profit attributable to parent shareholders: A net loss of 3.0 billion yen, due to the recording of 2.9 billion yen in special losses tied to Project Z structural reform costs and impairment losses.
• Cash flow: Operating cash flow turned to an 8.8 billion yen surplus after two consecutive years of deficits, driven by large inventory compression, leading to a 2.9 billion yen free cash flow surplus.

• 2025 December full year guidance calls for 2.0 billion yen year-over-year net sales growth to over 170.0 billion yen, with both domestic and overseas sales expected to increase.
• Domestic sales are expected to grow 400 million yen, with agricultural machinery products growing 300 million yen as recovering purchasing power offsets continued structural demand decline.
• Overseas sales are expected to grow 1.6 billion yen: North America is expected to return to growth as the compact tractor market bottoms out, Asia will grow as Korean inventory adjustment concludes, and Europe will see a slight decline after the 2024 special demand for electric machinery, while maintaining high overall output levels.
• Operating profit is expected to be 2.6 billion yen, a 600 million yen year-over-year increase. Price revision effects will offset raw material cost inflation, and Project Z will deliver a total 1.5 billion yen positive profit impact. However, 800 million yen in one-time costs for domestic sales company integration and Kumamoto-to-Matsuyama production relocation will limit the profit increase.
• Net profit is expected to be 1.3 billion yen, a 4.3 billion yen year-over-year improvement as 2024's large special loss does not recur.
• Cumulative operating cash flow is expected to total 50.0 billion yen from 2024 to 2027, and 52.0 billion yen from 2028 to 2030, with the majority allocated to structural reform/growth investment through 2027, followed by increased shareholder returns and leverage reduction after 2028.

• Long-term structural risk: Declining number of farm households and agricultural workers creates ongoing downward pressure on core domestic agricultural machinery demand, even near-term improvements from higher rice prices do not reverse this trend.
• Uncertainty over external conditions: Rice price levels are volatile, and farmers remain uncertain about whether current high prices will persist, limiting aggressive investment. Unexpected policy changes such as additional reserve rice releases could cap rice price gains.
• Exchange rate risk: Current yen depreciation against the euro has delivered positive profit effects, but sharp currency volatility could create unexpected impacts on earnings.
• North American trade risk: Potential changes to US import tariff policy under a new presidential administration could create new costs for current production and export arrangements.
• Project Z execution risk: Some development optimization and cost cutting initiatives are currently behind schedule, requiring corrective action in 2025 to get back on plan for 2027 target achievement.

Q: How is the current rice price increase impacting domestic agricultural machinery demand, and is a sharp demand increase expected? / A: Management notes that long-term structural decline in farm numbers cannot be reversed, so demand is not viewed optimistically. After the post-COVID rice price drop and rising input costs pushed demand sharply lower, current higher rice prices have helped demand stabilize at the bottom, moving to a flat trend. While conditions have improved modestly, the 2025 domestic sales guidance does not assume a large demand surge, reflecting the cautious outlook.

Q: What is the 2026 operating profit target for Project Z, and how confident is management in meeting Project Z goals? / A: The 2027 target is for operating profit to approach 10 billion yen. With 2025 profit expected to hit 2.6 billion yen, 2026 profit is expected to land roughly halfway between 2025 and 2027 levels, matching the trend shown in the published forecast graph. Management states that core Project Z initiatives are generally progressing as planned, and the minor delays seen so far are well within the scope of recovery in 2025, so the overall plan remains on track.

Q: How have business environment assumptions changed since the original mid-term plan, and what are the key growth opportunities the company is targeting now? / A: Originally, rice prices were assumed to be flat, but current levels are much higher than initially planned, and reserve rice releases are not expected to change this meaningfully. The company did not forecast the current extent of yen depreciation or the potential for a second Trump administration term, but the global push for electrification and sustainable agriculture remains on track regardless of policy changes. The revised Project Z plan already incorporates updated, more realistic assumptions and cuts planned investment to reflect higher risk. The key opportunities are large-scale farming, advanced ICT agricultural technology, upland field crops driven by new food security policy, and environmentally friendly agriculture, all of which align with the company's existing strengths and strategic direction.

Q: What is the company's strategy to address potential changes to US import tariffs for North American shipments? / A: Currently, engines and powertrains are produced in the company's Matsuyama (Japan) facility, with 80% of final assembly done in Indonesia and 20% in Japan. Both current import routes face zero tariffs, but policy changes could end this. Management is currently in discussions with partner AGCO to shift more final assembly and sourcing to North America to mitigate potential new tariff costs, as part of plans for future North American growth.