ONOKEN CO.,LTD. Q4 FY2025 earnings call

• 2025 March Full Year Financial Summary: Aggregate revenue saw only a slight year-over-year decrease. Gross profit increased due to flat steel profit and improved construction segment margins, but operating profit fell 17.2% year-over-year (from 8.219 billion yen to 6.810 billion yen) driven by higher selling, general and administrative (SG&A) costs. Compared to the revised full-year plan, operating profit beat plan due to better-than-expected construction margins. SG&A increased the most from depreciation (up 34.2% year-over-year), driven by recent capital investments in new facilities including Saga, Yamaguchi and Shizuoka locations, plus higher freight and personnel costs. A 69 yen per share dividend was declared for 2025 March.
• Long-Term Vision 2035: The company set a long-term target of 500 billion yen in revenue, 24 billion yen in EBITDA, 20 billion yen in operating profit, 10% ROE, and 6% ROIC by the 2035 March fiscal year, with a core mission of contributing to national, urban and manufacturing development rooted in local communities.
• First Mid-Term Management Plan (covering the 3 years to 2028 March): This plan is the foundational phase for achieving the 2035 vision, focused on three core priorities: expanding existing business, launching the Onoken e-Place initiative, and pursuing non-contiguous M&A. Key focus areas include expanding human capital, growing construction contracting capacity, and strengthening IT/DX for business infrastructure.
• Core Business Strategies: For the steel segment, the company will grow in-stock immediate delivery inventory capacity, expand in-house processing to add value, cut customer lead time and logistics costs, and expand in-house last-mile logistics. For the construction segment, the company will grow design proposal capability, project coordination, and in-house construction management and execution capacity to expand the business. The company will deepen synergies between the two core segments to drive higher profitability.
• Investment Plan: Total 10-year investment to 2035 is budgeted at 70 billion yen, with 37 billion yen already invested in 2024-2025 in large-scale facilities such as the Shizuoka Steel Center, Saga and Yamaguchi new warehouses, and the upcoming Fukuyama Sales Office opening in June 2025. Over the 3-year mid-term plan, 5 billion yen out of a total 10 billion yen long-term IT/software investment will be allocated to human capital expansion and DX to leverage the completed hard infrastructure base; 60 billion yen of the total 10-year budget will go to M&A and additional hard investment.
• Financial Targets for 2028 March: 310 billion yen revenue, 12.5 billion yen EBITDA, 7.5 billion yen operating profit, and 6% ROE.
• Capital Allocation and Shareholder Return: 28 billion yen in operating cash flow is projected over the 3-year mid-term period, allocated to ~6 billion yen plus additional for shareholder returns, ~15 billion yen plus additional for growth investment, 5 billion yen for soft/IT investment, and 7 billion yen for long-term debt repayment. The company has a new policy of no dividend cuts from the prior period's actual result during the mid-term plan; the 2026 March dividend maintains a 69 yen per share floor, with 5 billion yen in share repurchases approved for 2026 March. Introduction of DOE is under consideration, delayed to monitor the impact of US trade policy. The company is actively working to improve its low PBR (currently below 0.5x) by raising ROE through higher profit margins, focusing on increasing in-house processed steel sales to 20% near-term and up to 50% long-term, expanding high-margin construction business, implementing ROIC-focused investment discipline, fully utilizing existing assets via the Onoken e-Place initiative, and leveraging leverage for growth and return.
• Non-Financial Initiatives: Management is prioritizing human capital development to build leadership talent for future expansion, increasing DE&I with a target of 20% foreign employees long-term, investing 5 billion yen in DX over 3 years (including CRM refresh, BI tool adoption, Onoken e-Place beta launch, and generative AI for operations improvement). The company is advancing ESG: cutting logistics-related GHG emissions, supporting local community and sports development, establishing a scholarship foundation, and improving governance by increasing female director representation and strengthening compliance.

1. Iron and Steel Products Sales: In 2025 March full year, weak demand and market conditions led to lower sales volume and selling prices, driving a year-over-year revenue decline. Profit remained at the same level as the prior fiscal year, with net negative contribution from combined price and volume factors to operating profit. No absolute revenue value or revenue contribution percentage was provided in the available transcript. 2. Construction and Contracting (including Construction Materials Sales): This segment performed solidly, driven by a large backlog of large-scale projects. It delivered a 0.987 billion yen positive contribution to operating profit year-over-year, with improved profit margins that offset the revenue decline from the steel segment. The segment has inherently high profit margins, and management targets to grow its share of total company revenue to 50% long-term.

• For 2026 March fiscal year: Management expects continued uncertain economic conditions, especially weak demand in regional markets, and plans for a slight revenue increase (driven by growing sales volume from new facilities) and lower operating profit year-over-year (labeled as "increase revenue, decrease profit"). Higher SG&A (personnel costs and depreciation) and lower margins from rising input costs for construction drive the projected decline in profit.
• Mid-term 3-year plan to 2028 March: This is explicitly an investment-led foundational period where profit growth will be muted ahead of faster expansion after this phase, in line with the stated 7.5 billion yen operating profit target for 2028 March.
• Long-term guidance to 2035 March is maintained at 500 billion yen revenue, 20 billion yen operating profit, 10% ROE, with Onoken e-Place beta launch targeted by 2028 March.

• Weak and stagnant steel demand and low market prices, particularly in regional markets, pressure steel segment sales and profitability.
• Persistently slow growth in small and medium-sized construction project orders, even as large project orders remain solid.
• Input cost inflation for construction is pressuring construction segment profit margins.
• SG&A costs are rising faster than expected, driven by depreciation from recent large investments, personnel cost increases, and other expansion-related expenses, leading to near-term downward pressure on profit.
• Some large existing construction projects are currently behind schedule, with potential completion delays pushing revenue recognition into the 2027 March fiscal year, though future large project backlog is secure.
• Market uncertainty related to US trade policy (the Trump administration's tariff policies) is delaying the adoption of a new dividend policy framework (DOE).
• The company's current PBR is below 0.5x, with ROE below the estimated 7% cost of equity, creating pressure to improve profitability and market valuation.

Q: The mid-term plan shows muted operating profit growth to 2028 March. Is this indeed a front-loaded investment period that will drive much faster profit growth from 2028 to 2035? / A: Yes, the 3-year mid-term period is explicitly structured as an investment-focused foundational stage. The company has already completed most of the large-scale hard capital investment for base infrastructure, and is now shifting to investing in digital and human capital to prepare for long-term growth. After this 3-year base-building phase, the combined effect of hard and soft investments will drive sharp profit and revenue growth toward the 2035 targets.

Q: What actions will you take for the Onoken e-Place initiative over the next 3 years? / A: The initiative aims to restructure the traditional multi-layered steel distribution industry to improve economic efficiency by combining the company's unique existing nationwide hard infrastructure with digital transformation. Over the next 3 years, the company will invest 5 billion yen to roll out core digital systems and launch a beta version of the platform by 2028, to unlock the full value of prior physical investments.

Q: How do you view synergies between steel and construction, and what is your strategy for growing the construction business? / A: Construction has much higher profit margins than commodity steel trading, so growing construction directly lifts overall company profitability. The core synergy comes from the company holding its own steel inventory and performing in-house processing, which lets it deliver more reliable lead times and flexible scheduling for steel construction projects compared to competitors that do not own and process steel directly. Growing construction also drives more steel sales, creating a self-reinforcing growth model that builds an unrivaled one-of-a-kind business model that delivers more value to customers, so management intends to aggressively expand the construction business.