HEPHAIST CO.,LTD. Q4 FY2025 earnings call

• Corporate Strategy Update

  • Retained the long-standing management principle of "Fuhiki Ryuko" (upholding core values while adapting to change) and added "persist" as a new guiding principle, emphasizing persistent effort toward goals despite slow progress or challenges.
  • Shifted strategic focus from preparing for a single large incoming demand wave to a "scrap and build" approach for profit improvement: discontinued unprofitable large straight-size linear bush models, which generated ~60 million yen in annual revenue but also ~60 million yen in annual losses, and reallocated resources to higher-margin, high-growth products.
  • Maintains the long-term vision of becoming Asia's No.1 linear bush for automation and labor-saving mechanical components, after three years of capacity-expanding capex that left the firm with excess production capacity for flange-type products.

• Business Environment & Segment Status

  • Linear motion equipment remains in a correction phase: broad semiconductor demand recovery is not expected until late 2025, and automotive demand recovery is projected for late 2026.
  • Precision parts processing for Honda is expected to become busy starting in the second half of 2025, aligned with new racing regulation part development.
  • Unit products are currently the strongest-performing segment: HEPHAIST's industry-unique ball-type spherical bearing SRJ has seen 30% annual growth in the Chinese market since 2017, with growing demand for advanced semiconductor packaging applications.

• Operational Milestones

  • Successfully met the Tokyo Stock Exchange (TSE) listing maintenance requirement for tradable market capitalization: reached 1.53 billion yen (against the 1 billion yen requirement) as of March 31, 2025, after launching a shareholder preferential program that grew shareholder count from ~2,000 to over 20,000.
  • Launched new market expansion for unit products: entered a partnership with local firm MIRAI to target semiconductor manufacturing facilities in Malaysia, as the first step in building a Southeast Asian sales network, and exhibited at the OPIE '25 optical industry trade show to target optical positioning applications for spherical bearings.
  • Changed depreciation accounting method from declining-balance to straight-line, which reduced general administrative expenses.
  • Registered as an SDGs Partner with the prefectural governments of Saitama and Akita, where its facilities are located.

1. Linear motion equipment (centered on linear bushes for THK): Revenue of 1.365 billion yen, 14.2% year-over-year decrease, accounting for 60.8% of total consolidated revenue. The decline was driven by sustained delays in industrial machinery demand recovery and stagnant orders in the Chinese market.
2. Precision parts processing for Honda: Revenue of 680 million yen, 28.5% year-over-year increase, accounting for 30.3% of total consolidated revenue. Growth came from increased sales of racing components.
3. Unit products (centered on positioning stages and spherical bearings): Revenue of 198 million yen, 5.2% year-over-year increase, accounting for 8.8% of total consolidated revenue. Growth was supported by domestic semiconductor manufacturing equipment and automotive production expansion projects, plus initial inquiries and shipments of spherical bearings for Chinese medical devices.

• Overall fiscal 2026 (ending March 2026) guidance: total consolidated revenue of 2.486 billion yen, 10.8% year-over-year increase, with a target of 68 million yen in operating profit, returning to profitability after two years of losses.
• Segment-specific revenue guidance: linear motion equipment is projected at 1.607 billion yen (17.7% YoY growth), precision parts processing at 600 million yen (11.8% YoY decrease), unit products at 278 million yen (40% YoY growth). Management expects demand recovery to start in the second half of the fiscal year, with stronger performance in H2 vs H1.
• Profit drivers: Management expects profit growth from increased sales volume of linear motion products, expanded sales of value-added rust-treated linear bushes, gradual price adjustment effects, and profit margin improvement from exiting unprofitable large-size models, partially offset by higher expected selling, general and administrative expenses due to rising personnel costs.
• Dividend guidance: plans a 2 yen per share dividend for fiscal 2026, targeting a 30%+ payout ratio, after maintaining a 1 yen per share dividend in the prior profitable fiscal year despite a full-year net loss.
• Medium-term plan: downward revised the original fiscal 2027 (ending March 2027) revenue target from 3 billion yen to 2.863 billion yen, pushed back the target achievement timeline due to prior misses against original plans.

• Demand volatility: The global market for industrial machinery and linear motion components has shifted from large, predictable demand waves to scattered, random demand spikes across regions and sectors, making capacity planning and forecasting less reliable.
• Profit pressure: Sustained high energy and raw material prices have compressed margins across product lines, making it unsustainable to retain low-margin, unprofitable SKUs.
• Listing sustainability: While the firm met current TSE listing requirements, continued changes to TSE rules require sustained profit growth and market capitalization expansion, which are not fully within management's control, requiring backup contingency planning.
• Cash flow pressure: Shortening payment terms for trade payables (from 120 days to 60 days per regulatory要求) led to early cash outflows, reducing cash on hand during a period of weak profitability.
• Customer strategic shift: Major customer THK shifted its strategic priority from top-line revenue growth to early achievement of >10% ROE, which could change its procurement volumes and terms for HEPHAIST's components.

Q: What are the main negative factors driving the negative operating cash flow for the fiscal year?

A: The largest driver is the regulatory requirement to shorten supplier payment terms from 120 days to 60 days, which led to an earlier payout of accounts payable, reducing ending trade payables by 312 million yen and pulling down operating cash flow by an equivalent amount. A secondary factor is the large unexpected provision for shareholder preferential benefits: the original shareholder count was less than 2,000, but it grew 10x to over 20,000 by the end of the fiscal year, requiring a 60 million yen provision that did not result in immediate cash outflow but reduced net income, which flows through to operating cash flow. The decline in top-line revenue from linear motion equipment also contributed to weaker cash generation.