SERENDIP HOLDINGS Co.,Ltd. Q3 FY2025 earnings call

• Core Business Model: The company operates as a total solution company for business succession in Japanese manufacturing, built on three core platforms: M&A execution, post-acquisition management, and manufacturing improvement. It develops internal management talent to place at acquired companies and provides shared back-office functions to standardize and improve operations after acquisition. It also uses the Serendip Improvement Standard (SKS) to boost productivity, quality, and automation at acquired manufacturing facilities.
• Midterm Growth Target: The "Serendip Challenge 500" 3-year midterm plan targets reaching 50 billion yen in consolidated net sales by the March 2027 fiscal year, up from under 20 billion yen in March 2024, and ultimately aims for listing on the Prime Market. The five core growth pillars are: 1) Accelerate business succession-focused M&A, 2) Expand overseas to access new growth outside mature domestic markets, 3) Develop high value-added product areas including EV and decarbonization-related automotive components, 4) Advance the Future Factory initiative to automate production and boost productivity via robotics and IoT, 5) Strengthen holding company planning and capabilities to generate greater cross-company synergies.
• M&A Investment Strategy: The company follows the Serendip Investment Portfolio (SIP) framework with a 70% defensive / 30% offensive allocation: 70% of invested capital goes to stable, globally competitive sectors like automotive components, medical devices, and construction machinery, which deliver steady but moderate margins; 20% goes to high-margin, high value-added areas including automation and product development firms; 10% goes to IT solutions and human resources-related areas.
• Strategic Shift to Roll-Up M&A: In 2024, the company completed three acquisitions (Iwai, Excel, Trysis) and shifted strategy to focus on strategic roll-up M&A, acquiring same-industry companies to deliver immediate synergies with existing portfolio holdings. For example, Iwai has high synergy with existing Satoh Kogyo, Excel with existing Mitsuiya Kogyo, and Trysis with existing Apex. The company will continue to pursue bolt-on acquisitions to build larger, more synergistic business clusters, and use existing overseas bases of acquired companies as footholds for further international expansion.
• 2024 Acquisition Progress: In the first year of the midterm plan, the company completed 18.4 billion yen in aggregate acquisition value, putting the Challenge 500 target well ahead of schedule. Acquired companies will be consolidated from Q4 of the current fiscal year, with full-year revenue and profit contribution starting in fiscal 2025.

The company reports that segment results show mixed performance across individual portfolio companies, with high volatility in higher value-added development-focused manufacturing segments. Specific examples include a large decline at Tenryu Seiki and strong growth at Apex. Overall organic growth across the entire segment portfolio remains on track. For the full third quarter, consolidated net sales reached 15.458 billion yen, up 4.4% year-over-year; operating income was 488 million yen, down slightly year-over-year; and net income was 2.544 billion yen, 4.6x higher year-over-year driven by negative goodwill from M&A transactions. M&A-related costs of 230 million yen pressured operating income in the quarter. Professional Solution business consulting grew sharply, and newly consolidated companies from 2023 M&A also contributed to revenue growth.

• The company announced a double-digit upward revision to full-year 2025 March fiscal year guidance, raising consolidated net sales to 24.9 billion yen, an increase of 14.2% from prior guidance, with operating income projected to increase 1.9% year-over-year. Net income is projected to rise sharply due to non-recurring negative goodwill from recent M&A.
• Management confirmed that the 50 billion yen sales target for the 2027 March fiscal year remains on track, and currently views an accelerated (front-loaded) completion of the target as highly likely, with 2025 fiscal year achievement almost certain based on current acquisition pipeline. The company maintains a conservative approach and does not commit to a specific accelerated timeline, but is actively pursuing front-loaded completion.
• The M&A pipeline remains strong, with a large number of motivated sellers among aging Baby Boomer generation business owners, and no expected shrinkage in the addressable market. Management will continue to avoid overpaying for assets and will only complete acquisitions that meet its strict pricing and quality criteria.
• The company maintains its investment policy of keeping its equity ratio in the high 20% to low 30% range. It allows temporary drops to the low 20% after large M&A and will gradually rebuild the ratio over time through retained earnings, balancing leverage-driven growth with balance sheet stability.

• M&A fraud and misinformation risk: Management acknowledges that fraudulent M&A transactions are a growing industry concern, but mitigates this risk by only working with established major advisors and megabanks for deal sourcing, not working with unvetted individual or boutique intermediaries, and conducting rigorous in-house due diligence across financial, tax, legal, IT, HR, and business dimensions, making it extremely unlikely for fraud to evade review.
• Trade policy risk: A potential Trump administration tariff policy is not expected to have material near-term impact, as 99% of the company's business is domestic Japanese transactions. While new acquisition Excel has production bases in Thailand and the US, any required shifts in production can be absorbed by moving output to the existing US base, and the company's smart factory automation expertise will keep labor cost increases minimal even with higher US production.
• Balance sheet risk: The company intentionally allows borrowing and leverage to increase temporarily after M&A, and actively reduces debt over time via cash flow management. It maintains a target equity ratio range and does not expect excessive leverage risk from its M&A strategy.
• Market volatility risk: High value-added and development-focused segments show higher revenue and profit volatility, and cyclical sectors like semiconductor-related equipment are exposed to customer capital expenditure cycles.

Q: What is the expected production capacity increase from Mitsuiya Kogyo's Tohoku plant expansion, and how will Excel's US factory expansion progress? / A: Mitsuiya Kogyo's expansion expects a 15% to 20% initial production capacity increase, with additional incremental capacity available if demand grows. The expansion is being done stepwise, starting with one new production line in the new building, with room for additional lines later. The new plant is being built as an experimental smart/unmanned factory that aims to operate with 1/3 to 1/2 the staff of a conventional factory, aligning with the company's Future Factory initiative. Excel's US expansion is still being evaluated, but the company's smart factory expertise will offset higher US labor costs if production is shifted to the US from overseas locations.

Q: Why is Ladybird's revenue and profit much lower than guidance after acquisition, and is the acquisition performing as expected? / A: Ladybird's core market (beauty industry) has undergone major upheaval this year, with large salon bankruptcies that cut revenue from major salon clients (which previously made up 60% of sales) sharply. The company is currently shifting its customer base to independent salons, new entrants from other industries, and the fast-growing male beauty market, with SNS marketing driving rapid growth in the new customer segment. The apparent drop in profit is almost entirely due to amortization of positive goodwill from the acquisition; underlying operating profit is actually flat compared to historical levels, and the company expects the portfolio shift to deliver stable profit going forward.

Q: Has Serendip had any failed M&A, and is there any plan to divest underperforming companies? / A: To date, all of the company's acquisitions have been successful, with no underperforming companies that require divestment. The company does not do M&A with a goal of reselling; it acquires companies to grow them long-term as part of its group, and has the scale to support temporary downturns at individual companies while continuing R&D investment to drive future recovery and growth. While persistent long-term underperformance could lead to exiting an investment, there are no such cases at present.

Q: What is the progress of the in-vehicle HMI PoC projects at Apex? / A: Demand for in-vehicle HMI development is growing rapidly as vehicles become more software-driven and digital. The 2024 acquisition of Trysis was done specifically to gain ex-game industry engineers to fill a critical shortage of HMI development talent, and the team is being transitioned to automotive HMI work. The company is now handling a growing volume of projects from standard prototypes to concept show car displays for multiple OEMs, and expects order volume to increase further once the team transition and knowledge buildout is complete.