HODEN SEIMITSU KAKO KENKYUSHO CO.,LTD. Q2 FY2026 earnings call

• Interim Financial Results Overview:

  • Consolidated interim revenue is 7.101 billion yen, up 19.3% year-over-year. Operating profit is 616 million yen, 3.7x higher year-over-year. Net profit attributable to parent shareholders is 343 million yen. Growth was driven by higher revenue from the Electric Discharge Machining & Surface Treatment and Machinery & Equipment segments, plus positive impacts from price adjustments and fixed cost control.
  • Results beat the prior published plan on both revenue and profit, driven by higher revenue from Electric Discharge Machining & Surface Treatment, and lower manufacturing fixed and SG&A expenses from delayed timing of planned spending for gas turbine and defense equipment production line buildout.

• Mid-Term Management Plan (Medium-Term Management Plan 2027) Direction:

  • The 3-year plan is defined as a period to lay the foundation for future growth. In the current second year, activities focus on three priorities: (1) expanding production capacity for high-growth gas turbine parts and defense equipment; (2) capturing synergies from the capital and business alliance with Mitsubishi Heavy Industries (MHI), which has improved sales information and supported response to growing production demand in growth segments; (3) strengthening profit generation systems through company-wide operational standardization and production automation to improve efficiency and stability.
  • Strategic business positioning: Prioritize growing gas turbine parts, aircraft engine parts, and defense equipment into core business pillars in the high-growth aerospace and environmental/energy segments; push efficiency for aluminum extrusion molds for housing to maintain stable profit contribution; pursue new market expansion and improved competitiveness for automotive exhaust purification molds and press machine businesses to drive re-growth.
  • Growth initiative progress: After receiving increased production requests from MHI amid recovering air travel demand and rising power/defense demand, the 2 billion yen capital raised from the alliance has been allocated: 700 million yen to improve financial health, 1.3 billion yen for pre-production expansion investment. For gas turbine parts, existing Okayama facility equipment is being transferred to the Nagoya facility, with new equipment being installed at the vacated Okayama space; new line production is scheduled to start after certification by the end of the current term. For defense equipment, the company is building out a demand-aligned production management system via hiring/training of specialized talent and strengthening partner relationships. While there were minor delays in hiring and technical equipment setup in the first half, management expects to recover progress in the second half, with the medium-term roadmap on track and full investment recovery expected in the second half of the third year of the plan.
  • Aerospace & defense market outlook: Rising air passenger demand is driving growing new and replacement demand for aircraft, and Japanese defense policy has allocated ~43 trillion yen over 5 years starting 2023, which is expanding the defense equipment budget the company participates in. Growth for this segment is currently 1 year ahead of the original plan, with defense equipment driving overall growth and aircraft engine parts growing steadily, and price optimization and long-term contracts already improving profitability.
  • Environmental & energy (gas turbine parts) market outlook: Growing demand for natural gas-fired gas turbines is driven by data center expansion (from AI adoption) and replacement of aging power plants. The 2027 February term sales target is 1.3x the 2024 February term level. Current term sees a temporary drop in operating margin from higher fixed costs (personnel and equipment for pre-investment), with profit recovery starting from next term.
  • Stable business optimization: For the housing mold business, which faces limited near-term growth, the company is pushing digital manufacturing process reform, with a pilot line launching in the second half to test new production methods, aiming to improve efficiency, maintain stable supply, and preserve profit contribution.
  • New growth application development: Existing ceramic honeycomb extrusion mold technology is being developed for new carbon neutrality applications including CO2 capture and hydrogen separation from natural gas, with joint technical verification ongoing with customers. The company's digital servo press is being tested for fuel cell manufacturing, expanding application beyond metal to composite materials. The company is also advancing mixed melting technology for recycling plastic and unused resources, and has supplied mixed algae and bio-based plastic materials for a 3D printed furniture product at the Osaka-Kansai World Expo, and is participating in bioeconomy promotion initiatives to advance development of a circular resource economy.

1. 放電加工・表面処理 (Electric Discharge Machining & Surface Treatment): The largest segment, accounting for 68% of total revenue. For the 2Q cumulative interim period, it achieved year-over-year and plan-beating growth in both revenue and operating profit. Revenue grew driven by increased production of aircraft engine parts, higher demand for defense equipment, growing demand for automotive-related surface treatment parts, earlier shipments of gas turbine parts, and rising demand for centrifugal compressors for oil and gas refining/transport. Profit grew from higher revenue, partial product price adjustments, and delayed timing of hiring and repair expenses for gas turbine part investments that reduced near-term costs. For the full year, the segment expects year-over-year revenue growth but a year-over-year profit decline due to temporary increased investment-related expenses. 2. 金型 (Molds): This segment saw year-over-year revenue and profit decline, and plan-based revenue decline but plan-based profit growth. Domestic aluminum extrusion molds for housing saw a revenue drop from the pullback after the pre-demand surge for energy conservation regulation compliance, offset partially by growing demand at overseas subsidiaries that brought results in line with the prior year. Large ceramic honeycomb extrusion molds for transport saw a year-over-year revenue drop, but beat plans on earlier order receipts. Profit declined year-over-year due to lower revenue despite prior year fixed cost cuts from overseas early retirements, but beat plans on delayed repair expenses. For the full year, the segment expects year-over-year revenue growth but year-over-year profit decline due to product mix changes. 3. 機械装置等 (Machinery & Equipment): This segment achieved year-over-year revenue and profit growth, and plan-based revenue decline but plan-based profit growth. Revenue grew year-over-year from sales of press and auxiliary equipment that were delayed from the prior year end, and price adjustments for automotive-related press parts. It missed plan revenue due to underperformance of MF mixed melting device sales. Profit grew year-over-year from higher sales, price adjustments, and fixed cost cuts from consolidating Yokohama plant to the Yamato facility, and grew against plan despite lower revenue from continued fixed cost compression. For the full year, the segment expects year-over-year revenue decline but year-over-year profit growth from continued fixed cost optimization efforts.

• Full-year 2026 February term consolidated guidance was revised on October 2: revenue is now 14.101 billion yen (down from the prior 14.4 billion yen guidance), operating profit is raised to 800 million yen (up from the prior 710 million yen), representing a 0.7 percentage point increase in expected operating margin, driven by price adjustment effects and company-wide cost cutting. Expected ordinary profit is 708 million yen, and expected net profit attributable to parent shareholders is 427 million yen.
• The 2027 February term final year targets of the Medium-Term Management Plan 2027 are maintained: 14.7 billion yen revenue and 6.1% operating margin.
• Full-year segment guidance: For Electric Discharge Machining & Surface Treatment, revenue is expected to grow year-over-year, but profit is expected to decline year-over-year due to temporary increased investment-related expenses. For Molds, revenue is expected to grow year-over-year, but profit is expected to decline year-over-year due to product mix changes. For Machinery & Equipment, revenue is expected to decline year-over-year, but profit is expected to grow year-over-year from fixed cost optimization. The full-year dividend is forecast to be 15 yen per share, a 3 yen increase from the prior year.
• Second half segment outlooks: Aerospace/defense and automotive surface treatment for transport expect revenue growth compared to the first half. Environmental/energy expects a revenue and profit decline compared to the first half due to pullback after high-margin gas turbine maintenance and centrifugal compressor orders concentrated in the first half, plus the impact of delayed investment expenses shifting to the second half. Molds expects second half revenue growth over the first half on recovering high value-added ceramic honeycomb mold orders, but lower profit on recognizing deferred repair expenses. Machinery & Equipment expects second half revenue and profit decline over the first half, based on current servo press order trends.

• Production capacity expansion for high-priority gas turbine parts and defense equipment has experienced delays due to slower-than-expected hiring of specialized production and management personnel; as of the interim report, the company is still 10 people short of its full-year 42-person hiring target, though management expects to complete hiring by the end of the term.
• Supply chain disruptions in the upstream aerospace industry are expected to have a minor negative impact on production for the Airbus A350 large aircraft program the company participates in.
• The mold and machinery segments continue to face an environment where significant demand recovery is unlikely. The housing mold segment will see ongoing negative impact from the pullback after the pre-regulation demand surge for energy efficiency standards, and hybrid vehicle demand remains at low levels in the transport segment.
• Temporary profit pressure in the current and next term from increased investment-related fixed costs for capacity expansion in gas turbine and defense equipment businesses, which will delay profit margin recovery.
• Uncertainty remains in the ramp-up of new capacity for growth businesses, with near-term profit volatility possible before full-scale production is achieved.

Q: Why is full-year operating profit guidance lower than the strong first half result, with a sharp decline expected in the second half, and can cost cutting improve this outcome?

A: The company is in an important investment phase for sustained growth, so the guidance is set conservatively to account for temporary cost increases. The main drivers of the second half decline are that high-margin gas turbine and centrifugal compressor orders were concentrated in the first half, and planned personnel and equipment expenses from the first half were shifted to the second half, so the first half did effectively front-load profit. The company will continue to pursue cost reduction initiatives in the second half.

Q: What share of aerospace segment orders come from defense equipment, and what is their profit contribution?

A: Detailed breakdowns are not disclosed, but defense equipment currently accounts for roughly 30% of aerospace segment orders, and this share is expected to grow going forward. Profit-wise, scale benefits from increased production have moved the business from deficit to surplus, and further profit contribution is expected in the future. Upper-half defense equipment orders grew ~76% year-over-year in the first half.

Q: When will the delayed capacity expansion ramp-up be recovered, and what is the hiring progress?

A: The delay is driven by slow replenishment of indirect manufacturing staff like production engineering and management personnel. The company targets to hire 42 new staff for defense and gas turbine businesses this term, and while it is currently 10 people short, management expects to complete all hiring and recover the delayed ramp-up by the end of the current term.

Q: What are the key management challenges for sustained growth, and what preparations are underway?

A: The top challenge for a manufacturing firm like this is securing and developing skilled talent, not just increasing headcount. The company is currently implementing various initiatives to improve hiring outcomes and expand in-house training. The second key challenge is the adoption of DX and AI. Since the company also manufactures and sells equipment, it is pushing forward automation in its operations to address industry-wide labor challenges.

Q: What is the medium-term target for profitability of the Electric Discharge Machining & Surface Treatment segment, and can it reach 20%+ operating margin?

A: Management believes reaching 20% operating margin in the current and next term (while the capacity ramp-up is ongoing) is very difficult. If the capacity ramp-up proceeds smoothly after that, achieving 20% margin in the next mid-term plan is considered feasible.