7721.T

Core Q2 Performance Achievements

• Achieved significant YoY revenue and profit growth, and returned to operating profit in Q2 for the first time in 4 years. Historically, Q2 has typically recorded an operating loss for the company, as most government/defense projects have year-end delivery deadlines.
• The profit turnarounds was enabled by proactive sales leveling efforts via delivery date adjustments with customers in the defense segment, combined with strong underlying demand from increased Japanese defense budgets.
• Updated overall company order backlog reached a new all-time high for the second consecutive quarter, with broad-based order growth across most business segments.

Strategic and Operational Updates

• Launched the new integrated Tokyo Keiki Report 2025, replacing the prior sustainability report. The new report adds content on value creation, business model, business overview, and medium-long term strategic direction; Japanese version releases November 28, English version by end-December.
• Continued capacity expansion for the defense business: completed a new defense management building, added staffing via internal reallocation, extended senior employee contracts, and contracted temporary staff to meet growing order demand.
• Ongoing R&D investment in new growth areas: autonomous vessel technology in the marine segment, edge AI cameras in the hydraulic segment, and multiple drone-related products (portable radio wave detectors, anti-drone disabling devices, drone detection technology via a partnership with weather tech startup MetroWeather) in the defense segment.

• Full year 2026 March fiscal year guidance was revised upward for total company revenue and operating profit, based on strong first half results and current business outlooks. The upward revision was driven by on-track performance of the defense business and continued growing sales of new shipbuilding equipment in the marine segment.
• Updated the assumed second half USD/JPY exchange rate from the initial 140 yen to 150 yen, reflecting current market trends; every 1 yen of yen depreciation is expected to increase full year operating profit by approximately 90 million yen.
• Adjusted projected head office relocation cost impacts: the operating profit impact was revised from 360 million yen to 460 million yen, and special loss impact was revised from 890 million yen to 510 million yen, due to classification changes for fixture costs and reduced planned renovation costs for the current Kamata head office.
• Segment-specific guidance revisions:
  • Marine and Port Equipment Business: Full year revenue and operating profit revised upward from initial guidance, but still projects higher revenue and lower profit compared to the prior full year, due to ongoing future-focused R&D and human capital investment.
  • Hydraulic and Pneumatic Equipment Business: Full year revenue guidance maintained at initial levels (offsetting weak plastic processing machinery demand with growing demand from construction/special vehicle and overseas markets), but operating profit guidance revised downward due to higher expected cost rates from product mix changes.
  • Defense and Communications Equipment Business: Full year revenue revised upward from initial guidance (driven by sustained high defense sales and on-track delivery of prior-ordered mobile satellite communication antenna stabilizers), while operating profit guidance maintained at initial levels.
• Full year dividend guidance maintained: 40 yen per share, a 5 yen increase from the prior year, in line with initial plans. Management remains committed to stable, continued shareholder returns for long-term holders.

1. 船舶港湾機器事業 (Marine and Port Equipment Business): Increased revenue year-over-year (YoY), driven by sustained high demand for maintenance services and strong deliveries of equipment for new Chinese shipbuilding. Turned in lower operating profit YoY due to increased R&D spending for autonomous vessel development and yen appreciation effects. No absolute segment revenue/profit values or overall revenue contribution percentages were provided in the transcript.
2. 油空圧機器事業 (Hydraulic and Pneumatic Equipment Business): Increased revenue YoY, offsetting weak sales to the plastic processing machinery market (caused by stagnant automotive capital investment) with solid sales to the construction machinery and machine tool markets. Turned in lower operating profit YoY due to higher cost rates from a product mix shift (fewer high value-added hydraulic application units, more higher-cost overseas sales) and increased R&D spending for a new edge AI camera for visual inspection. No absolute values or contribution percentages provided.
3. 流体機器事業 (Fluid Equipment Business): Increased revenue YoY, driven by strong sales of newly launched consumer products: battery-driven flow meters and fire extinguishing systems for multi-story parking garages. Turned in lower operating profit YoY due to higher cost rates from a product mix shift (fewer lower-cost container valve inspections, more higher-cost new facility installations). No absolute values or contribution percentages provided.
4. 防衛・通信機器事業 (Defense and Communications Equipment Business): Significant revenue and operating profit growth YoY. Revenue growth was driven by increased Japanese defense budgets and strong sales of core aircraft-mounted and vessel-mounted equipment. Profit growth came from volume gains and improved cost rates, as more projects progressed on schedule compared to the prior year period. This was the key segment driving the company's Q2 profitability turnarounds. No absolute values or contribution percentages provided.
5. その他事業 (Other Business): Increased revenue YoY, driven by solid performance from the railway equipment segment. Turned in lower operating profit YoY due to increased R&D spending for new railway product development and product mix change effects. No absolute values or contribution percentages provided.

Overall company Q2 results: Total net sales of 24.425 billion yen (up 3.843 billion yen YoY), operating profit of 722 million yen (up 827 million yen YoY, the first operating profit in 4 years for Q2). Total company order backlog hit a new all-time high of 61.885 billion yen, exceeding the prior quarter's record of 58.487 billion yen.

• U.S. policy additional tariffs have already caused indirect negative impacts, including reduced sales to the plastic processing machinery market in the hydraulic and pneumatic equipment business; the company is continuing to push sales growth to other markets to offset this impact.
• Unfavorable yen appreciation movements would negatively impact export-focused segments, particularly the marine and hydraulic businesses; the company updated its exchange rate assumption to reflect current weaker yen trends, which is a net positive for full year results, but remains exposed to future volatility.
• Slowdown in the Chinese economy has impacted demand for domestic coastal vessels in China for the marine segment, but new shipbuilding demand across Japan, China, and South Korea remains solid, so current overall impacts are limited.
• Small incremental adjustments to head office relocation costs may still occur in the final stages of the project, though any additional changes are expected to be immaterial in size.
• Defense sector policy changes are still pending, with no concrete details released as of the call, so the timing and magnitude of future demand impacts from policy shifts remain uncertain.

Q: The defense and communications segment has a record high order backlog; is current production capacity sufficient, and will investment levels stay at the planned 3.6 billion yen level for 2027 and beyond? / A: Tokyo Keiki has gradually expanded capacity and personnel for the defense business, and completed a new defense building last year that resolved space constraints. Multiple staffing approaches (internal reallocations, extended senior contracts, temporary hires) have been used to add headcount, so current capacity is sufficient. Most base capacity investment was completed in advance of growing defense budget trends, with current investment focused on individual product/contract specific needs. Management declined to disclose 2027 and beyond investment plans at this time.

Q: Have the business environments for the marine (shipbuilding) and defense segments improved compared to when the mid-term plan was drafted, and is there upside to the mid-term plan targets? / A: For new shipbuilding equipment, Chinese shipyards that were previously idle have restarted operations faster than expected, increasing order volume and creating upside. For marine maintenance services, existing vessel counts have grown faster than forecast, as scrapping rates have been lower than expected, with overall demand stable relative to plan. For defense, upcoming Japanese security policy revisions (including 2% GDP defense spending target and relaxed defense export rules) are expected to be positive, but no concrete policies have been released. Longer term, these changes will impact orders (due to long lead times) but not current fiscal year sales, which remain on plan.

Q: The full year operating profit plan of 4 billion yen is lower than the prior year's 4.856 billion yen, even with strong first half results. Is there upside potential for full year profit? / A: Higher personnel costs, selling general and administrative costs, and head office relocation costs are driving the planned year-over-year decline, which is unavoidable. Management will work to expand sales and control SG&A in the second half to get profit as close to prior year levels as possible. Any material changes will be reflected in the full year guidance update after Q3 results are finalized in February.

Q: What is the product split and revenue ratio for aircraft vs. vessel mounted defense equipment, and will this be disclosed publicly going forward? / A: Core products are radar warning and countermeasure systems for aircraft, and inertial navigation systems and gyro compasses for vessels. Management does not disclose exact financial figures, but roughly the two categories each account for around 50% of defense segment revenue, with annual variation depending on project delivery timelines.