LEOCLAN Co.,Ltd. Q2 FY2025 earnings call

Overall Financial Performance

• 2Q 2025 September fiscal year: Total revenue increased ~6% year-over-year to ~12.94 billion yen; operating profit increased ~39% year-over-year to 496 million yen, driven by recognition of large new construction/renovation projects in the core Medical Total Solution business.
• The quarter achieved record-high revenue and operating profit on a quarterly basis, with both year-over-year and quarter-over-quarter growth. Operating profit for the full year forecast has already been reached, which is broadly in line with initial expectations.
• Free cash flow was negative 210 million yen, driven by temporary working capital burdens leading to negative operating cash flow and capital deployed for equity investments and strategic partnerships.
• Total assets increased 51% quarter-over-quarter to ~5.5 billion yen, a temporary change from increased receivables and payables linked to large project revenue recognition, expected to return to previous levels after settlement.

Strategic Investments and Partnerships

• Leoclan took a 25% equity stake in TU Home Care Co., Ltd., a company providing management support for nursing care facilities, making it an equity-method affiliate. The investment aims to meet customer demand for nursing care facility support and expand business opportunities for the company's medical device sales and integrated maintenance services, with no material immediate direct profit impact.
• In the first quarter, the company entered into capital and business alliances with Misono Medical Co., Ltd. (medical device repair) and Asted Co., Ltd. (pre-owned medical device purchasing). The partnerships aim to expand opportunities for medical device sales and integrated maintenance services, the company's focus area.
• The core basic policy for future equity investments and partnerships is to target opportunities and partners that can generate synergies to expand business opportunities for the core Medical Total Solution business, aligned with the company's mission of meeting all needs of stakeholders in healthcare, welfare, and public health.

Capital and Shareholder-focused Management

• As of March 2025, the company's price-to-book ratio (PBR) is slightly above 1x, and management believes ROE improvement efforts are gradually gaining market recognition.
• No sufficient ROE improvement has been achieved to date; the company will continue to improve ROE by fully leveraging its existing tangible and intangible assets, while also working steadily to lower capital cost through enhanced IR activities and corporate governance.

1. Medical Total Solution Business: Revenue increased year-over-year driven by the recognition of large-scale new construction and renovation projects, reaching 12.94 billion yen in total consolidated revenue, with operating profit reaching 496 million yen, and achieved a high profit margin. As of the 2nd quarter, revenue from large new construction/renovation projects and revenue from focus areas (medical information systems, maintenance services) both reached the same level as full-year revenue of the previous year. 2. Remote Image Diagnosis Service Business: Showed steady performance with year-over-year growth in both revenue and profit. 3. Catering Business: Implemented profitability improvement measures such as price reviews, but experienced year-over-year decreases in both revenue and profit. This was due to revenue loss from facility contract terminations in the previous fiscal period, combined with rising material and labor costs.

• Full-year 2025 September fiscal year guidance is maintained at initial forecast levels. As of 2Q, revenue progress is just under 60% of the full-year target, and profit has already exceeded the full-year forecast, but this is due to the timing of large project revenue recognition. Management expects a decline in profit in the second half as new construction/renovation project volume decreases, so full-year results will converge to the initial forecast.
• For the Medical Total Solution business, full-year sales guidance for the new construction/renovation project segment is maintained at ~9 billion yen, with 5 billion yen recognized as of 2Q (just under 60% progress, in line with initial expectations).
• Management expects gross profit margin to remain at a high level in Q3 despite an expected decline in revenue, and continues to target sales and profit upside through ongoing execution.
• Full-year expected profit increase of 360 million yen is driven by revenue growth in the Medical Total Solution business, partially offset by a 50 million yen profit drag from a slight expected decline in gross margin. Selling, general and administrative expense increases (centered on personnel costs) will be controlled while considering investment efficiency and current operating conditions.

• Hospitals face a tough operating environment from the impacts of high commodity prices, labor shortages, medical fee revisions, and surging construction costs, which have led to some cases delaying new construction and renovation projects. This creates headwinds for growing order intake for the company's core project business.
• The core Medical Total Solution business is project-driven with high volatility of revenue across quarters due to variation in project size and number, leading to uneven performance between periods.
• The catering business faces ongoing pressure from rising material and labor costs that weigh on profitability.

Q: Investors are hoping for an upward revision to full-year guidance given the strong 2Q result, are there any signs that would support an upward revision, and what is the current order intake outlook?

A: The 2Q strong result comes from the timing of large project revenue recognition, which was already factored into the initial guidance. A decline in new construction/renovation project volume in the second half is still expected per original forecasts, so guidance is maintained. While near-term project delays from hospital cost pressures create headwinds, the company continues to pursue new order growth to build future revenue.

Q: What are the core goals and expected synergies from the capital tie-ups with Misono Medical and Asted?

A: The partnerships are targeted at expanding the company's core maintenance business. Misono Medical's repair capabilities and Asted's pre-owned medical device purchasing network will expand the service scope the company can offer to medical facility clients, supporting growth in the high-margin recurring maintenance segment aligned with the company's core strategy.

Q: What measures is the company taking to address large quarterly volatility in performance driven by project timing?

A: The company is actively growing recurring revenue segments including medical information systems and maintenance services, which provide more stable revenue and profit over time to offset project-driven volatility. The company also continues to build a steady pipeline of Total Pack System orders to smooth longer-term revenue flow, even though projects have multi-year lead times.