TOKYO KEIKI INC. Q4 FY2025 earnings call

2025 March Term Full Year Financial Results

• Overall net sales reached 57.65 billion yen, up 10.484 billion yen year-over-year; operating profit hit 4.856 billion yen, up 2.087 billion yen year-over-year, with operating profit updating an all-time high. Operating margin improved 2.6pp to 8.4%.
• Total orders and ending order backlog hit all-time highs across most segments, driven primarily by defense sector order growth. Defense-related products have a 1-3 year lead time from order to revenue recognition, so the accumulated backlog is expected to contribute to performance over the next three years.
• ROE improved 3.3pp to 9.8%, exceeding the 6.3% cost of equity and turning equity spread positive.
• Total assets increased significantly due to higher inventory for large defense orders and completion of the new defense management building; borrowing increased to fund these expenditures. Negative free cash flow narrowed as inventory growth stabilized, despite continued negative operating and investing cash flow from active capex.

Strategic and Capital Policies

• Growth investment is prioritized to achieve Tokyo Keiki Vision 2030, balanced with maintaining a stable financial base and optimal capital structure. The company commits to stable, continuous shareholder returns considering historical payout levels.
• For 2025 March term, the planned dividend is 35 yen per share (in line with initial guidance); for 2026 March term, a 5 yen increase to 40 yen per share is planned.
• 70% of 2026 March term capex is allocated to Defense and Communications Equipment, to add clean room space, expand production capacity, and upgrade aged equipment for newly won large defense orders.
• R&D investment for 2026 March term totals 2.879 billion yen, focused on new product development for growth drivers including space, hydrogen, edge AI, autonomous vessels, and new defense projects.

For the 2025 March full year (actual results):

1. Ship and Port Equipment Business: Increased revenue and increased profit. Growth was driven by replacement demand for aging vessels supporting newbuilding equipment deliveries, strong gyrocompass-centered maintenance services, and favorable yen depreciation exchange rate effects.
2. Hydraulic and Pneumatic Equipment Business: Decreased revenue and decreased profit. While overseas markets performed well and deliveries of custom hydraulic application test equipment increased, deliveries to industrial machinery (plastic processing, machine tools) and construction machinery markets were weak.
3. Fluid Equipment Business: Increased revenue and increased profit. Solid performance from government demand measuring instruments and new gas fire extinguishing equipment deliveries for multi-story parking facilities drove growth.
4. Defense and Communications Equipment Business: 33.988 billion yen in orders (up 6.422 billion yen year-over-year), with a 43.246 billion yen ending order backlog (up 9.595 billion yen year-over-year), both all-time records. It delivered strong revenue and profit growth driven by aircraft radar warning devices and aircraft parts. Segment operating profit margin improved 1.3pp to 6.7%, up from the low 2% range in prior periods, as revenue moved far above the break-even point, with additional benefit from Japan Ministry of Defense's new cost fluctuation adjustment policy. This segment accounts for approximately 59% of the total 2027 March term planned revenue increase after the upward revision.
5. Other Businesses (including Railway Equipment): Increased revenue and increased profit, driven by higher sales of the core ultrasonic rail flaw detection vehicle, plus a newly secured second overseas order (after the 2018 Thailand delivery) that boosted order backlog.

• 2026 March Term (mid-term plan Year 2): Net sales is guided to 59.6 billion yen (up 1.95 billion yen year-over-year), operating profit guided to 3.89 billion yen (down 0.966 billion yen year-over-year). The expected profit decline reflects planned increased human resource investment, 0.36 billion yen in operating costs for the planned head office relocation to Haneda Innovation City and Tokyo Ryutsu Center (plus an additional 0.89 billion yen planned special loss), and increased depreciation.
• 2027 March Term (mid-term plan final year, upward revised): The plan was revised upward to reflect large unplanned defense orders won in 2025 March term. Net sales is now guided to 68.3 billion yen (8 billion yen above the original plan), operating profit to 5.58 billion yen (0.77 billion yen above the original plan), with both revenue and operating profit expected to hit new all-time highs. Segment-level revisions: 1) Ship and Port Equipment: revised to higher revenue and profit; 2) Hydraulic and Pneumatic Equipment: revised to lower profit, with continued efforts to improve profitability via production restructuring; 3) Fluid Equipment: revised to lower profit as the company invests in expansion for long-term growth; 4) Defense and Communications Equipment: large upward revision to 32.1 billion yen in revenue (5.9 billion yen above original plan) and 3.21 billion yen in operating profit (1.27 billion yen above original plan), with ~half of 2027 planned revenue already secured via existing orders; 5) Other Businesses: revised to lower revenue and profit due to lower planned ultrasonic rail flaw detection vehicle sales, though the overseas order pipeline supports long-term growth.

• U.S. additional tariff policy: Direct exports to the U.S. only account for ~1% of total consolidated sales, so direct impact is very limited. Indirect impacts cannot be reasonably estimated at this stage and are not included in guidance; the company will pursue price adjustments and cost reduction to mitigate any potential impact.
• Longer lead times for defense projects (1-3 years) create extended uncertainty around execution and revenue recognition, though the large existing backlog provides more predictable medium-term performance.

Q: What is the large defense R&D order Tokyo Keiki recently won, and when will it contribute to revenue and profit?

A: The order is for development of the next-generation MEMS-HR Hemispherical Resonance Gyroscope (HRG), a follow-up to the company's current core inertial navigation ring laser gyro product. Unlike traditional gyros that require large size/weight to achieve high precision, HRG is a vibration gyro that can deliver high accuracy without large dimensions, which is not yet widely adopted globally. Revenue from this R&D project will be recognized in the 2027 March term. This is the first stage of a longer development pipeline: after R&D completes, the company will move to implementation/volume development, followed by product installation and ongoing maintenance demand, with the goal of making HRG a new core gyro product long-term.