7409.T

• Market Environment

  • Demand for Airbus A320neo family and Boeing 737MAX aircraft (which use AeroEdge's core titanium aluminum blades) has grown sharply post-COVID, with backlogs remaining at very high levels: approximately 7,100 units for the A320neo family and 5,400 units for the 737MAX, equal to around 12 years of production backlog each. The FAA has lifted production caps on the 737MAX, and both airframers are in a production increasing trend, with LEAP engine deliveries (powering both aircraft) growing 44% year-over-year to 1,073 units in H2 2025.
  • Global aerospace supply chain challenges from the COVID era persist, but the industry is gradually recovering.

• Core Business Growth Progress

  • LEAP Titanium Aluminum Blade Expansion: The global market for titanium aluminum blades for LEAP engines has only two qualified suppliers including AeroEdge. AeroEdge currently holds 40% global market share, with a long-term supply contract locked in through 2034. Via contract renewal, the company's global market share will expand to the high 40% range starting in 2028, and the company has initiated 2.4 billion yen in capital expenditure to expand production capacity.
  • New Titanium Aluminum Material Mass Production Supply: Previously, titanium aluminum blade material was only supplied by one European firm, creating supply risk. AeroEdge has spent several years developing an alternative new material, secured a supply contract with SAFRAN, and is currently the only company in the world capable of integrated production from raw material to finished blade processing. The company is investing a total of 2.6 billion yen to build mass production labs and factories, plans to start small-lot production next fiscal year, shift to full mass production starting in 2028, and expects full revenue contribution starting in the 2029 June fiscal year.
  • New Mass Production Project Expansion: AeroEdge is launching two new non-LEAP aero engine component projects: (1) Aero Engine A Components: For a non-LEAP engine sold to a customer other than SAFRAN, with mass production originally expected to start earlier than currently scheduled, but delays have pushed launch to June-July 2026; (2) Aero Engine B Components: For a non-LEAP engine sold to a global aerospace manufacturer other than SAFRAN, which is the larger of the two projects by revenue scale, with mass production originally expected earlier, and delays pushing launch to April-May 2026. The combined two projects are still targeting 300 million to 500 million yen in additional operating profit for the 2027 June fiscal year, with no change to this target despite the delays.
  • MRO Business Entry: Remains in the technology development stage.

• Financial Performance (Second Quarter Cumulative 2026 June Fiscal Year)

  • Revenue: 2.47 billion yen, up 46.0% year-over-year, an all-time high for the second quarter.
  • Gross Profit: 1.25 billion yen, up 60.4% year-over-year.
  • Operating Profit: 730 million yen, up 166.0% year-over-year, an all-time high, with an operating margin of 29.8% up 13.4 percentage points year-over-year driven by high-margin contract development revenue.
  • Ordinary Profit: 710 million yen, up 199.6% year-over-year.
  • Net Income: 480 million yen, up 141.6% year-over-year, an all-time high despite higher corporate tax负担 from the prior year's one-off deferred tax asset recognition.
  • Balance Sheet and Cash Flow: Cash and cash equivalents increased 1.76 billion yen from the end of the prior period to 3.34 billion yen. Operating cash flow was +2.16 billion yen ( +900 million yen excluding subsidies), investment cash flow was -1.27 billion yen, financing cash flow was +870 million yen. The Net DE ratio is 0.2x, with significant remaining debt capacity.

• Capital Policy and Investor Relations

  • Completed an off-exchange block sale of shares by a legacy major shareholder, which added ~9% of outstanding shares to free float, improving liquidity. A 3-for-1 stock split was implemented effective January 1, 2026 to improve accessibility for retail investors; average monthly trading volume increased 6x after these measures.
  • Secured a total 2.8 billion yen in new loan facilities to fund 5 billion yen in total capital expenditure for capacity expansion and new material production; only 600 million yen has been drawn as of the end of the quarter, leaving 2.2 billion yen undrawn. Total available capital including cash and undrawn loans exceeds 5.5 billion yen, with sufficient capacity for planned growth investment.

• 2026 June Full Fiscal Year Guidance: All key metrics are revised upward from the original forecast, driven by stronger-than-expected core titanium aluminum blade sales, better-than-expected yen depreciation, offsetting delayed revenue contribution from the two new aero engine projects. Key revised guidance: (1) Revenue: 5.05 billion yen, up 120 million yen from the original forecast (up 40.2% year-over-year); (2) Operating Profit: 1.07 billion yen, up 260 million yen from the original forecast (up 63.3% year-over-year); (3) Ordinary Profit: 1.01 billion yen, up 280 million yen from the original forecast (up 78.7% year-over-year); (4) Net Income: 700 million yen, up 200 million yen from the original forecast (down 4.7% year-over-year due to higher corporate tax负担); (5) Expected full-year average exchange rate: 151 yen/USD, compared to the original 141 yen forecast. The increase in titanium aluminum blade revenue (+350 million yen from original forecast) and yen depreciation impact (+300 million yen) offset a 220 million yen reduction in other revenue from project delays.
• Titanium Aluminum Blade Sales Volume (Core KPI) Guidance: 2026 June fiscal year engine base unit growth is revised up from 27.5% to 31.9% compared to 2025. For the 2027 June fiscal year, engine base unit growth of 45% to 55% compared to 2025 is maintained, with no change to the prior forecast. The two new aero engine projects are expected to contribute full-year profit to the 2027 June fiscal year as previously planned.
• New Material Mass Production Timeline Guidance: Lab construction and certification planned for completion in the current 2026 June fiscal year, small-lot production starting in early Q1 of the 2027 June fiscal year, casting factory completion planned for end of 2026, full mass production starting in 2028, with full profit contribution starting in the 2029 June fiscal year.
• Market Share Guidance: 2028 global market share expansion to the high 40% range is contractually committed and confirmed, dependent on AeroEdge meeting its supply commitments.

AeroEdge operates four core business segments, with three active in the current reporting period: 1. LEAP Titanium Aluminum Blade Processing: This is AeroEdge's core main business. In the second quarter, titanium aluminum blade sales for LEAP engines reached 2.17 billion yen, accounting for 87.9% of total second quarter revenue, with sales volume increasing 30% year-over-year to 403 engine-equivalent units. 2. New Material Mass Production and Contract Development: The company recorded 300 million yen in high-margin contract development revenue related to new titanium aluminum blade material mass production in the second quarter, accounting for 12.1% of total second quarter revenue. 3. New Non-LEAP Mass Production Projects: Two new projects (Aero Engine A Components and Aero Engine B Components) are currently in pre-mass production preparation, and have not yet contributed revenue in the second quarter. 4. MRO Business: Still in the technology development stage, with no revenue contribution as of the second quarter.

• Global aerospace supply chain constraints continue to affect production ramp-up, and titanium raw material supply remains tight, limiting near-term production growth.
• Two new non-LEAP aero engine mass production projects have both experienced multi-month delays compared to original plans, pushing their revenue contribution later than initially expected, though the full year 2027 profit target remains unchanged.
• New titanium aluminum material mass production is a world-first initiative, with yield improvement remaining a key technical risk that will impact future profitability.
• The highly technical nature of AeroEdge's business creates persistent demand for specialized skilled talent, and talent retention/recruitment remains a key operational challenge.
• Current production facilities are expected to be at full capacity after completing planned expansion for existing projects, creating a need for new site selection for any future additional new projects.
• Stronger-than-expected demand for LEAP engines (driven by operational issues with competitor engines) has created capacity pressure, and while the company is working to meet demand, there is still risk of delivery delays.

• Q: Why is the 2027 June fiscal year titanium aluminum blade sales forecast not being revised upward despite stronger current demand?

A: While SAFRAN has indicated very strong demand, industry-wide supply chain constraints remain and titanium material supply is already tight supporting current growth. We are maintaining the 45% to 55% growth forecast versus 2025 for now, and will consider revising if conditions change. Once our new material mass production is stable, we will be able to control our own material supply and support higher growth.

• Q: What are the specific causes of delay for Aero Engine A Project?

A: Aero Engine A Project involves a component that was previously considered impossible to machine with conventional methods, so it is inherently high difficulty. The main causes of delay are: (1) Lab evaluation results required for mass production process certification took longer than expected, as Japanese domestic labs do not have the required customer accreditation, so we had to use overseas accredited labs which added 1-2 months of lead time; (2) The overall project timeline across the supply chain has also been pushed back. We are still on track to start mass production in June-July 2026. We are building a domestic SAFRAN-accredited lab in Japan for new material development, which will allow us to conduct future evaluations in-house and avoid similar delays going forward.

• Q: What are the specific causes of delay for Aero Engine B Project?

A: In the aerospace industry, any change to processing conditions requires several months of certification lead time, which cannot be changed easily after mass production starts. We could have rushed certification without changing processing conditions to meet the original mass production timeline, but we determined that it was better to implement processing improvements during the initial certification phase to support future efficiency gains and handle ramp-up after mass production, rather than fixing issues later. This process review caused the 3-4 month delay, but mass production will start shortly in April-May 2026, and the project will contribute full-year profit in 2027 as planned.

• Q: Can you confirm the detailed timeline for new material mass production?

A: The timeline is: lab construction and certification to be completed this fiscal year; small-lot production using existing development casting furnaces starts early next fiscal year; casting factory construction completes by the end of 2026; equipment installation follows; full mass production starts in 2028; full profit contribution is expected starting in the 2029 June fiscal year, matching our prior guidance.

• Q: What is the current progress on new material mass production development?

A: We have already passed all required technical tests to confirm the new material is suitable for use in LEAP engines. We are currently focused on improving mass production yield, which is the most critical factor for future profitability. As this is a world-first initiative, there are many improvements to be made, but we are on track to resolve all issues before full mass production in 2028.

• Q: Can this new material be used for other non-LEAP engines?

A: This specific new material is optimized and tuned specifically for LEAP engine titanium aluminum blades. Aero engine parts require custom design and certification for each engine application, so this material cannot be used directly for other engines. That said, we plan to apply our accumulated technology and process to develop custom materials for other engine programs in the future.

• Q: Is the 2028 high 40% market share target confirmed?

A: Yes, the market share increase from 2028 is explicitly written into our supply contract with SAFRAN, so it is confirmed. The final share will depend on our ability to meet the contracted supply volume, which we are planning for appropriately.

• Q: What is your future capital expenditure plan and funding approach?

A: All visible capital expenditure for the foreseeable future totals 5 billion yen: 2.5 billion yen for new material capacity and 2.5 billion yen for LEAP capacity expansion to support the 2028 market share increase. The A and B project capex is already complete. All 5 billion yen in funding has already been secured, and no additional large capex is planned at this time. We will evaluate any new large investment opportunities as they arise if they create value for the company.

• Q: Is equity financing planned in the near future?

A: We already have sufficient funding from debt financing for all planned investment, and we still have significant remaining debt capacity. As a manufacturing business, capital expenditure is primarily for tangible assets, so debt financing is more appropriate and lower cost than equity financing. We will use leverage within a sustainable range to avoid unnecessary share dilution, and do not plan for equity financing under current conditions.

• Q: Will contract development revenue continue in coming years?

A: Yes, new material development will continue through full mass production in 2028, so there will be opportunities for additional contract development revenue in coming years.

• Q: Have inquiries from institutional investors increased recently?

A: Yes, we have seen a very significant increase in inquiries from institutional investors, including increased interest from overseas investors, since early last year. We had over 90 registered attendees for this earnings call, and we will continue to engage sincerely with all investors that request meetings.

• Q: What is your hiring plan for coming years?

A: We targeted roughly 50 new hires in the current fiscal year, and as of the first half we have hired 20, with over 70% of the full-year target already committed including new graduates. We expect to hit our full-year hiring target, but some departments are still understaffed so we will continue hiring for those roles. Next fiscal year we expect to need a smaller but still meaningful number of new hires, and after that, large-scale hiring will only be required if we win additional major new projects once existing projects are stabilized.

• Q: What are your top challenges for continued growth?

A: The two highest-priority challenges are: (1) improving yield for the new titanium aluminum material, which is critical for profitability; (2) securing sufficient specialized technical talent to support multiple concurrent large projects. We also face upcoming capacity constraints: our current three sites (two operating factories, one under construction casting factory) will be full after existing projects are ramped up, so we will need to identify new sites for any future growth.

• Q: How does the Pratt & Whitney PW1100G engine shortage affect LEAP engine demand and AeroEdge?

A: Compared to the PW1100G, the LEAP engine has had relatively fewer operational issues, so it has higher satisfaction from airlines, leading to higher-than-expected demand for LEAP engines. This strong demand has led to tight material supply for LEAP, and while we are working hard to meet delivery targets, we cannot guarantee that delays will never occur. We are taking all possible steps to avoid delays and recover quickly if any issues arise.

• Q: How is AeroEdge accumulating technical knowledge across the value chain?

A: Material characteristics and cutting processing capability are deeply interconnected: you cannot optimize cutting without deep knowledge of the material. We have been analyzing and accumulating data on titanium aluminum alloy characteristics and cutting performance since we started this business, which gave us the foundation to develop our new material. We believe we have top-tier titanium aluminum know-how globally, and we are continuing to accumulate experience from the new A and B projects. We will continue to advance alloy development as future growth opportunities emerge.

• Q: Why is Aero Engine B Project considered an ideal project, and will it continue to grow after 2027?

A: It is considered ideal because it has high strategic alignment with our existing LEAP engine business, and we won the contract based on our proven LEAP performance, which reflects the improvement in our industry reputation. Yes, there is high potential for growth after 2027: our customer has already asked if we can increase volumes further, so growth depends on our ability to scale, which we are working to achieve.