ITOKI CORPORATION Q4 FY2024 earnings call

Overall 2024 Performance

• Itoki posted all-time record high revenue (138.4 billion yen, +4.1% YoY) and operating profit (10 billion yen, +18.2% YoY), marking 3 consecutive years of revenue growth and 5 consecutive years of profit growth. Return on equity (ROE) reached 13.8%, and employee engagement score rose to 82.5%.
• Net profit hit 7.1 billion yen (+21.6% YoY), despite extraordinary losses for logistics cost adjustments, partially offset by extraordinary gains from asset sales. The negative operating cash flow (-1 billion yen) was a one-time effect from the elimination of bills payable and shorter payment terms, and will normalize in 2025.
• Itoki obtained a Single A- credit rating from R&I and abolished its takeover defense measures early, following the strengthening of its balance sheet.
• For shareholder returns, the full-year dividend is set at 55 yen per share (37.4% payout ratio), with a total return ratio of 247% including share repurchases. A 2025 full-year dividend of 65 yen per share (40% payout ratio, in line with the medium-term target) is forecast.

Strategic Development in Workplace Business

• The segment is shifting from low-margin "Office1.0" (pure furniture sales, ~60% of current segment revenue) to higher-value "Office2.0" (end-to-end office creation including design, construction, and bundled furniture sales, 41% of current segment revenue, with the share rising over 3 years). Profit margin improvements stem from: catalog price increases implemented in July 2024, the shift to higher-value Office2.0, and a focus on higher-margin office renovation projects (renewal projects have far higher margins than new construction, which only accounts for 14% of total workplace projects, so Itoki is largely insulated from construction industry disruptions).
• A growing market trend of office renovation driving recruitment outcomes has spread from the Tokyo metropolitan area to regional Japan, creating new untapped demand among small and medium-sized regional enterprises that face greater recruitment challenges. Case studies confirm that well-designed renovated offices have substantially increased applicant volumes for client firms.
• "Office3.0", Itoki's recurring stock business that provides post-handover data-driven office operation optimization to improve client productivity, exceeded its 2024 target with 60 orders received (vs. a 40 order target), and is on track to hit the medium-term target of 3 billion yen in revenue by 2026.

Governance and Organizational Updates

• The board of directors will be restructured to add two new independent outside directors, bringing the total to four, matching the number of internal directors. The new independent directors will bring expertise in capital-conscious management and compliance, to support the company's strategic priorities. The management team has been refreshed with an average age reduction of 6-7 years, with new leadership appointed to head the workplace business, facilities equipment business, corporate planning, and human resources to drive medium-term strategy.

2025 Priority Areas

• 1. Digital: Complete the rollout of Office3.0 services and complete the core cloud ERP migration.
• 1. Design: Continue expanding the in-house spatial designer team (grown from 130 to 180 in recent years) and explore new brand offerings.
• 1. Group: Improve performance of group companies Dalton and Itoki Market Space through refreshed management teams.
• 1. Compliance: Strengthen compliance across all operations and supply chains.

For the 2024 December fiscal year: 1. Workplace Segment: Achieved both revenue and profit growth, accounting for approximately 80% of total consolidated revenue. It drove overall company performance, offsetting declines in the other segment. 2. Facilities Equipment & Public Segment: Experienced year-on-year revenue and profit decline (down 6.2% in 2024) due to project delays and a post-prior-year pullback, accounting for approximately 20% of total consolidated revenue. For the 2025 December fiscal year forecast: 1. Workplace Segment: Expected to achieve 9.5% year-on-year revenue growth, maintaining 80% revenue contribution. 2. Facilities Equipment & Public Segment: Expected to decline 8.9% year-on-year due to continued project delays shifting deliveries to 2026, maintaining 20% revenue contribution.

• For the 2025 December fiscal year (second year of the 3-year medium-term plan "RISE TO GROWTH 2026"), management guides revenue of 145 billion yen (+4.7% YoY) and operating profit of 11.5 billion yen (+14.1% YoY). The operating profit guidance is 500 million yen lower than the original medium-term plan target of 12 billion yen, due to project delays in the facilities equipment segment and a 7-month delay to the core cloud ERP migration, which pushes back expected efficiency gains to 2026.
• The 3-year medium-term plan (ending 2026) remains on track overall, with unchanged final targets of: 150 billion yen revenue, 14 billion yen operating profit, 9% operating profit margin, 15% ROE, and 40% dividend payout ratio. The facilities equipment segment's 2026 medium-term operating profit target of 3 billion yen remains achievable, as delayed projects have shifted to 2026, leading to concentrated demand that year.
• As of the 2025 forecast, total outstanding orders are 112% of the level at the same point last year, with 114% for the first half and 109% for the second half, pointing to solid demand momentum.

• In November 2024, the Japan Fair Trade Commission issued a warning to Itoki over suspected antitrust law violations related to labor practices by 23 of its logistics delivery partners. Unpaid overtime wages and unpaid compensation for required additional work were identified. Itoki is currently implementing corrective actions including back payment of owed compensation to affected workers, and is working with delivery partners to revise pricing structures to pass through increased labor costs.
• The 2004-vintage core ERP system cloud migration, originally scheduled to launch in October 2024, has been delayed 8 months to June 2025 to avoid business disruption during peak season. The delay pushes expected operational efficiency gains from the project into the second half of 2025 and beyond, reducing 2025 expected profit.
• The Facilities Equipment & Public segment faces ongoing headwinds from construction industry labor shortages and rising material costs, which have caused widespread delays in client construction projects for display cases, automated sorting systems, and specialty nuclear power plant doors. Multiple large projects have shifted delivery from 2024 and 2025 to 2026, resulting in an expected 8.9% revenue decline for the segment in 2025.
• The workplace business's legacy Office1.0 pure furniture segment faces persistent risk of price competition, as product functionality is largely comparable across competitors with few differentiation options outside of price.

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