OPTEX GROUP Company,Limited Q2 FY2025 earnings call

Overall Financial Performance

• Consolidated sales declined 0.6% YoY, driven by lower IA automation equipment sales and yen appreciation impacts; excluding foreign exchange impacts, sales grew 0.3% YoY.
• Operating profit grew 16.2% YoY, supported by strong growth of high value-added SS products and an improved overall cost ratio from the lower share of high-cost IA automation equipment sales. The overall cost ratio fell 3.3 percentage points YoY.
• Both sales (101% of plan) and operating profit (116% of plan) exceeded management's initial half-year targets.

SS Segment Strategic Developments

• Optex has expanded direct marketing targeting key decision-makers for large critical infrastructure facilities, driving growing sales of high-margin products such as laser scan sensors to data centers and infrastructure sites. Large critical facility sales as a share of SS security revenue is expected to reach nearly 30% in full year 2025.
• Automatic door sensors are targeting further share growth in Europe via new local operations and new product launches.

IA Segment Operational Updates

• Industrial PC operations are pursuing synergies with SS security operations via co-development of tracking cameras for large critical facilities, targeting long-term sales growth.
• Automation equipment for secondary batteries has a confirmed backlog of orders, with 3.5 billion to 4.0 billion yen in revenue scheduled for recognition in the second half of 2025. Inquiries and orders for delivery in 2026 and 2027 are already increasing.

Capital Return

• Management maintains a dividend policy targeting a 30% payout ratio and 3% or higher DOE. The full year 2025 dividend is planned at 50 yen per share, a 10 yen increase from the prior year and a 5 yen increase from the initial February 2025 forecast.

Overall consolidated net sales for the first half of 2025 were 30.3 billion yen, with operating profit of 3.6 billion yen (operating margin 12.0%).

1. SS (Sensing Solutions) Segment:

   • Overall net sales increased 5.6% year-over-year, operating profit increased 29.8% year-over-year, contributing 1 billion yen in net sales growth year-over-year. The segment accounted for the majority of consolidated profit growth in the period.
   • Security sub-segment: Net sales +2% YoY; European sales saw temporary decline from post-price-hike pullback after pre-hike rush demand, while North American data center sales were strong.
   • Automatic door sub-segment: Net sales +4% YoY; overseas sales were weak due to US tariff impacts and European low business sentiment, while domestic sales grew steadily from customer counting system renewal demand. Optex holds ~50% domestic market share for automatic door sensors.
   • Social & Environment sub-segment: Net sales +29% YoY; vehicle detection sensors for parking systems saw strong growth in both domestic Japan (driven by hourly parking renewal demand) and North America (driven by gate operation demand).

2. IA (Industrial Automation) Segment:

   • Overall net sales decreased 700 million yen YoY, resulting in a net decline that drove the overall 0.6% YoY consolidated sales decrease. Excluding the automation equipment sub-segment, the segment achieved growth in both sales and profit.
   • FA-related sub-segment: Net sales +7% YoY; domestic demand was stagnant due to cautious capex from US tariff impacts, while European (Germany) inventory adjustments finished and Chinese capex demand recovered moderately, driving solid overseas growth.
   • Inspection Lighting sub-segment (formerly MVL): Net sales flat YoY; domestic demand was soft due to delayed capex decisions, while overseas sales to the logistics industry in Europe and North America were solid.
   • Industrial PC sub-segment (formerly IPC): Net sales -4% YoY; orders for semiconductor manufacturing equipment applications were temporarily reduced by excess inventory, which impacted first half results.
   • Automation Equipment sub-segment (formerly MECT): Net sales -46% YoY; the large decline occurred because secondary battery manufacturing equipment ordered for second half delivery is still in production, so revenue was not recognized in the first half.

• Full year 2025 consolidated guidance is maintained at the levels announced in February: 66.0 billion yen in net sales and 7.4 billion yen in operating profit. The full year plan is unchanged despite better-than-planned first half results.
• SS security is expected to see continued stable demand from large critical infrastructure and data center projects across Europe and North America for the second half.
• SS automatic door operations expect continued US tariff impacts in the second half, with stable domestic demand from remote management compatible products. SS social/environment vehicle detection sensors are expected to continue expanding sales globally.
• IA FA operations expect a gradual recovery in domestic semiconductor and electronic component capex, with delayed large projects potentially restarting as tariff uncertainty eases; Europe and China are expected to gradually recover capex demand.
• IA inspection lighting expects continued pressure from tariffs on the automotive industry, but continued strong demand from advanced semiconductor segments; management will strengthen proposal activities via in-house trade shows to drive growth.
• IA industrial PCs and automation equipment are expected to remain weak overall in the second half due to lingering inventory adjustment impacts, but automation equipment will recognize ~4.0 billion yen in booked second half revenue from in-progress projects.
• Management expects that selling price adjustments and supply chain optimization will mitigate potential negative impacts from US tariff policy on full year results.

• US tariff policy poses continued downside risk to sales and profit for SS products (security sensors, automatic door sensors, vehicle detection sensors) and IA inspection lighting, with the full six months of tariff impacts set to hit the second half of 2025.
• Yen appreciation created a 300 million yen negative impact on first half sales and a 120 million yen negative impact on operating profit, and continued yen strength could pressure full year results.
• The FA market faces continued uncertainty, with large capex projects in automotive and semiconductor segments delayed or frozen due to indirect tariff impacts.
• Semiconductor manufacturing equipment demand remains weak, and excess inventory adjustment is expected to continue suppressing industrial PC demand through the second half of 2025.
• IA automation equipment sales have high quarterly volatility, creating continued uncertainty around revenue recognition timelines.

Q: With first half results beating plan and management noting strong underlying demand, why is the full year plan unchanged? / A: First half sales were almost exactly on plan at 101% of target, so full year sales projections remain aligned with the initial forecast. Operating profit was 116% over plan due to temporary factors: a confluence of large project wins in Q1 and pre-price-hike rush demand that pulled forward sales and improved the product mix temporarily. Profit margins have normalized starting in Q2, and management is accounting for the full impact of US tariffs hitting the entire second half. For these reasons, management chose to leave the full year plan unchanged.

Q: Is demand for security sensors from US data centers temporary, or is it sustainable over the medium term? / A: The current strong demand started in North America, but Optex's key data center customers are now expanding into Europe and Asia, and inquiries from these regions are already growing. While data center construction is projected to grow globally, Optex sells peripheral security equipment rather than core infrastructure, so growth will not be perfectly proportional to construction growth, but will grow steadily alongside it. Management expects this demand to be sustained over the medium to long term, not just a temporary spike.

Q: What is the revenue share of large critical infrastructure facilities in SS security, and what is the outlook for this segment? / A: The share of large critical facilities (including data centers and power infrastructure) in SS security sales has grown steadily, and is projected to reach nearly 30% for full year 2025. Management is strategically expanding direct marketing targeting this segment, and expects the share of sales from large critical facilities to continue increasing in coming years.

Q: What is Optex's strategy for M&A to improve ROE, given the company's strong balance sheet? / A: Optex released a capital allocation plan earlier in 2025 that prioritizes allocating capital to M&A, partnerships and growth investments to drive higher growth. Optex has a history of growing via M&A that creates synergy with its existing business. Management will focus on targets that complement the existing SS and IA business segments, rather than building an unrelated third business line. M&A targets must also have sustainable profitability and growth prospects to be considered.