AeroEdge Co.,Ltd Q2 FY2025 earnings call

• Core Market Environment
  • A320neo family and 737MAX maintain very high backlog levels, with over 13 years of backlog for A320neo and over 10 years for 737MAX even after adjusting for production disruptions. Comac C919 has also grown its backlog to nearly 1,000 units, and all three models are the top three most backlogged narrowbody aircraft globally, driven by post-pandemic demand growth. Both Airbus and Boeing target production expansion long-term, but post-pandemic labor shortages and supply chain damage continue to delay near-term production growth.
  • 737MAX is facing additional delays from prior quality issues and the 2024 Boeing strike, with monthly average deliveries falling to 22 units in 2024 from 32 units in 2023. Recovery to pre-quality issue production levels is expected to take time.
• Key Operational Milestones
  • Extended the existing titanium aluminide blade long-term contract by 7 years, and expanded global market share.
  • Secured a new long-term contract with a major global aerospace manufacturer outside of SAFRAN, a critical step to reduce single-customer dependency and drive future growth.
  • Was selected for up to 2 billion yen in government subsidies from the Ministry of Economy, Trade and Industry, a large amount relative to the company's current profit level.
  • Completed 3.3 billion yen in refinancing via a syndicated loan, securing sufficient capital for future growth. As of 2Q, cash and deposits reached 2.04 billion yen, with a net debt-to-equity ratio of 0.5x, indicating a strong balance sheet.
• New Business Progress
  • Aviation engine part A: Originally targeted end-of-2024 mass production, but delayed to mid-2025 due to customer-side engine testing and certification audit delays (a 6-month delay caused by the customer, all other progress is on track). This part uses AeroEdge's proprietary cutting-only processing technology (replacing traditional electrical and chemical processing), which has received high customer praise for its environmental and quality advantages. It will be produced at the new factory completed in June 2024.
  • Aviation engine part B: Targeting mass production start in H2 2026 June fiscal year, has completed equipment selection and is working on mass production technology development. Total planned investment is 1.7 billion yen, with around half covered by government subsidies. AeroEdge expects the revenue scale of this project to be larger than part A.
  • In-house titanium aluminide material mass production development: Technology development is progressing steadily, and the company is currently evaluating mass production scalability. This project addresses the current global single-supplier situation for blade raw materials, and is highly valued by customers as a medium-long term growth priority.

1. Titanium aluminide blade (core business): Revenue contribution is approximately 100% of total revenue. 2Q revenue reached 1.694 billion yen, a 16.4% increase year-over-year. 310 blade-equipped engines were sold, a 16.1% increase year-over-year, with global market share of 40%. For full year 2025 June fiscal year, total blade-equipped engine base is projected at 635 units, an 10.8% increase from the prior year.
2. Aviation engine part A: Pre-mass production, investment of 1.9 billion yen (mostly completed), projected mass production start mid-2025, no revenue contribution yet.
3. Aviation engine part B: In development, total investment planned at 1.7 billion yen, projected mass production start in H2 2026 June fiscal year, no revenue contribution yet.
4. New material for titanium aluminide blade: In R&D phase, no revenue contribution yet.

• 2025 June full fiscal year: Revenue guidance was downward revised from 3.76 billion yen to 3.55 billion yen, a 5.6% reduction from the original forecast, to account for the Boeing strike impact. All profit forecasts (500 million yen operating profit, 435 million yen ordinary profit, 450 million yen net profit) are maintained at original levels, driven by better-than-expected 2Q profit, ongoing yen depreciation, and delayed depreciation expense from the part A production delay. The Boeing strike impact has been fully incorporated into the current guidance.
  • 2026 June fiscal year: Titanium aluminide blade sales growth is projected at 10% to 15% compared to 2025 June fiscal year, with growth somewhat constrained by lingering 737MAX quality issues.
  • 2027 June fiscal year: Titanium aluminide blade sales are projected to grow 40% to 50% compared to 2025 June fiscal year, driven by A320neo production expansion and 737MAX production recovery. The two new aviation engine part projects are expected to contribute 300 million to 500 million yen in combined operating profit starting in 2027 June fiscal year, driving large overall profit growth for the company.

• Persistent post-pandemic industry-wide labor shortages and supply chain chain damage continue to delay aircraft and engine production expansion, which directly impacts AeroEdge's sales growth timeline.
  • Boeing 737MAX ongoing quality issues and the 2024 strike have created near-term production disruptions, leading to lower near-term sales. While the impact is expected to be mostly limited to 2025 fiscal year, minor lingering impacts on 2026 fiscal year cannot be ruled out.
  • New aviation engine parts require customer certification and approval, which are processes outside of AeroEdge's direct control, and can lead to additional delays beyond current projections.
  • The company is pursuing aggressive hiring for new business expansion, and hiring in the Tochigi location is more challenging than in major metro areas, which could delay new project ramp-up.
  • Raw material for titanium aluminide blades is currently supplied by a single global supplier, creating supply concentration risk that the in-house material development project is working to address over the long term.

Q: What is the timeline for 737MAX production recovery, and how does that affect AeroEdge? / A: Monthly 737MAX production fell to the mid-20s in early 2025, down from 38 units before the quality issues. Boeing targets returning to 38 units per month by the end of 2025, which requires FAA approval. AeroEdge expects 737MAX production to recover to 38+ units per month only after 2026. Once production recovers, steady expansion will resume thanks to the huge existing backlog.

Q: How will the Comac C919 impact AeroEdge's business? / A: The C919 is a narrowbody aircraft competing directly with the A320neo and 737MAX, and it uses the LEAP-1C engine, which requires AeroEdge's titanium aluminide blade just like the other LEAP variants. It currently produces a few units per month, but targets 30 units per year in 2025, and has a backlog of nearly 1,000 units. This represents pure upside growth for AeroEdge as C919 production scales.

Q: What is the total investment and profitability timeline for the new non-core projects? / A: Total planned investment is 1.9 billion yen for aviation engine part A (mostly completed) and 1.7 billion yen for aviation engine part B (future investment). Both projects are expected to begin contributing full-year operating profit of 300 million to 500 million yen combined starting in 2027 June fiscal year. The in-house material project is targeting full-year profit contribution by 2029 June fiscal year, with investment size still under evaluation.

Q: What advantages does AeroEdge's cutting-only processing technology for new engine parts provide? / A: Traditional electrical and chemical processing generates large amounts of industrial waste and harmful byproducts, while cutting-only only produces recyclable metal swarf, giving it major environmental advantages. It also provides much higher dimensional stability and repeatability than non-contact processing, which is critical for high-precision engine parts, and has faster processing speeds. These advantages have made the technology very attractive to customers, with high potential for broader adoption beyond the current part A project.