TACHIKAWA CORPORATION Q2 FY2025 earnings call

• Consolidated Half-Year Financial Performance
  • Consolidated revenue hit 20.771 billion yen, 103% of the prior year period. Increased sales from the indoor/outdoor decoration and reducer segments offset a slight decline in parking equipment revenue.
  • Selling, general and administrative costs increased by approximately 400 million yen due to elevated promotional spending for the core fabric product renewal, leading to a year-over-year decline in operating profit (96.3% YoY) and ordinary profit (95.7% YoY), though both metrics still exceeded initial planned amounts.
  • Net profit came in at 1.734 billion yen, 112.7% of the prior year period, far exceeding initial plans due to special gains from selling cross-held shares and unused real estate, plus lower-than-expected corporate tax expenses.
  • The company has reduced total assets by selling unused land (generating 18 million yen in proceeds), selling cross-held shares (generating 147 million yen in proceeds), and recording a 329 million yen impairment loss on a low-utilization employee dormitory, all to address the key balance sheet challenge of excessive total assets.
• Mid-Term Management Plan (2023-2025, "Tachikawa Vision 2025: Continuity and Evolution") Progress
  • Product Development: Completed a major well-being themed renewal of core roll screen and vertical blind products, added new functional fabrics (including a new water-wipeable fabric line), and implemented a 10% price increase to improve profitability. Expanded battery-powered electric product options for home use, launched an electric version of the popular Airre dimmable vertical blind under the Home Tacos brand, and added smartphone app control for connected products, with continued focus on electrification going forward.
  • Capital Investment: The 720 million yen technology research building started operations in October 2024, with top-tier BELS and ZEB Ready environmental certifications, and consolidated R&D testing equipment to improve R&D speed and quality. The 2.55 billion yen Sapporo Works relocation project is underway, targeting completion in June 2027 to expand production capacity for non-residential projects in Hokkaido and reduce logistics costs. The 580 million yen new molding building for subsidiary Tachikawa Kiko has been operational since April 2023, improving productivity and reducing costs via in-sourcing of parts. The 200 million yen acquisition of the servo motor business is on track, with a planned 1.1 billion yen in total revenue over 2024-2028 to capitalize on growing AGV and automation demand.
  • Capital Allocation: Total 3-year cumulative operating cash flow is projected to exceed 12 billion yen. Growth investment was increased from the initial 4.6 billion yen plan to 6 billion yen, covering the above projects plus new production facilities for growth product lines and exploration for alliances and M&A to expand the business domain. Shareholder returns were increased from 2.8 billion yen to 4.2 billion yen, with accelerated dividend increases and opportunistic share buybacks on the table.
  • Sustainability and Governance: Fully consolidated Fuji Hensokuki, established a nomination and compensation committee, completed annual board effectiveness evaluations, and is on track to cut greenhouse gas emissions 30% from 2021 levels by 2030, with steady annual progress via energy efficiency and renewable energy adoption at production sites.
  • Capital Efficiency and Share Price: The company has been focused on improving PBR and ROE since 2023. Recent PBR has risen above 0.6x from ~0.5x in the second half of last year, a gain management attributes to market appreciation of accelerated dividend increases. Key outstanding goals include hitting an ROE of 7% (up from 5.7% last year, just below the company's 6% cost of capital), improving PER by demonstrating growth potential to investors, and growing share price.

1. Indoor/Outdoor Decoration Related Business: Revenue was 103.3% of the prior year period. Gross margin increased 0.2 percentage points year-over-year due to sequential price hikes on core fabric products. Operating profit was 93.8% of the prior year period, a planned decline driven by one-time promotional and catalog/sample replacement costs for a major product renewal. Revenue and operating profit both exceeded initial full-year half plans. This is the company's highest sales contribution segment. 2. Parking Equipment Related Business (handled by consolidated subsidiary Fuji Hensokuki): Revenue was 96.1% of the prior year period, a slight decline due to the hangover effect of concentrated new construction project completions in the prior year second half. Higher-margin retrofitting and maintenance work for existing Puzzle Tower parking systems grew, pushing operating profit to 120.1% of the prior year period. 3. Reducer Related Business (also handled by Fuji Hensokuki): Revenue was 105.8% of the prior year period, driven by a gradual recovery in machine tool demand that lifted both general-purpose and custom ordered product sales. Battery-powered AC servo motors for industrial AGVs, launched last year, also outperformed initial sales plans. Operating profit grew to 142.8% of the prior year period.

• Full-year 2025 guidance: Operating profit is maintained at 4.4 billion yen, ordinary profit is maintained at 4.6 billion yen, while net profit is upwardly revised from the initial 2.9 billion yen to 3.1 billion yen, which is on track to be a record high net profit in company history.
• Full-year annual dividend is upwardly revised from 55 yen per share to 65 yen per share, pushing the projected payout ratio to 42.1%, getting closer to the company's 50% total return target. The cumulative progressive dividend policy will be maintained in the next mid-term management plan, and management expects to hit the 50% total return target in the near future.
• The company maintains its target of reaching a 7% ROE as soon as possible via continued asset sales and enhanced shareholder returns.

• The company's current ROE of 5.7% is still below its 6% cost of capital, and reaching the 8% ROE level typically expected of listed Japanese companies will take additional time. To meet the new TOPIX inclusion criteria, the company estimates its current floating market capitalization is ~160 billion yen, which makes it challenging to meet the higher expected threshold in the remaining ~1 year before the criteria take effect.
• The expected contraction in housing starts in coming years creates headwinds for future growth of the core indoor/outdoor decoration business.
• Excessive total assets and low total asset turnover are long-standing balance sheet challenges that will take time to resolve even with ongoing asset reduction efforts.
• The post-March 2025 reactionary decline in new housing starts following the rush to start projects before the amended Energy Saving Act for Buildings came into force is a key downside risk to full-year sales, though it has not impacted near-term results significantly yet.
• The parking and reducer segments are not expected to meet their full-year annual budgets, requiring the core indoor/outdoor decoration segment to offset this shortfall.

Q: With the company's current market capitalization of 370 billion yen and PBR of 0.67x, what is your self-assessment against the new TOPIX inclusion criteria? / A: Management confirms that recent share price gains have lifted PBR to 0.67x, but ROE remains low at 5.7% and reaching 8% will take time. The expected new TOPIX floating market capitalization threshold is likely higher than the initially estimated 230 billion yen, and the company's current estimated floating market capitalization is only ~160 billion yen. Management notes it will be difficult to reach the threshold in the remaining 1 year, but will continue efforts to improve share price and liquidity to maintain Prime Market listing.

Q: What drove the stronger-than-expected operating profit growth in the parking equipment business, and have synergies from the full acquisition of Fuji Hensokuki materialized? / A: The main driver of stronger profit is the strong performance of higher-margin retrofitting and maintenance work, rather than new construction. The company has increased regular information sharing and collaboration: Fuji Hensokuki can now participate in major trade shows hosted by the parent's trading company clients to expand reducer sales, and joint sales efforts targeting general contractors and developers for parking equipment projects are ongoing. While these efforts have not yet translated to immediate top-line gains, management will continue the collaboration to capture future benefits.

Q: Is there upside to the full-year sales and profit target, and what is the outlook for SG&A in the second half? / A: While a post-March reactionary decline in housing starts is a risk, it has not impacted near-term results, and a planned October price hike for commercial blinds will help support sales. The parking and reducer segments are expected to miss budget, but the indoor/outdoor segment is on track to offset this and allow the full-year sales target to be hit. Large one-time costs for the product renewal catalog and sample replacement were all completed in the first half. While second half SG&A will see increases from higher freight costs and wage inflation, no large one-time costs are expected.

Q: What is the background for the latest dividend increase, even though you only upgraded the net profit outlook and kept sales and operating profit guidance unchanged? / A: The net profit upgrade was driven by an unplanned 369 million yen capital gain from selling cross-held shares that were taken out in a TOB following the issuer's going-private transaction. With the full-year net profit upgraded to 3.1 billion yen, keeping the initial dividend guidance of 55 yen would have pushed the payout ratio down from 38% to 35%, missing progress toward the 50% total return target. Management increased the dividend by 10 yen to 65 yen, for a 42% payout ratio, to maintain progress toward the 50% total return target, which is expected to be achieved in the near future.

Q: What is the strategic direction for the next mid-term management plan? / A: The core focus will be expanding sales around existing core products, prioritizing growth from electric products, dimmable fabric products, and partition products, with additional large non-residential project sales expected in the Tokyo metropolitan area. Management will pursue profit growth via both top-line expansion and continued cross-held share reduction. Large investments will be made to build out production capacity for growth products, while R&D will be accelerated at the new technology research building. M&A and alliances will be explored to expand the business domain, including potential acquisitions of interior contractors to expand product offerings and alliances with housing equipment manufacturers to strengthen renovation business. Management will also prioritize DX investment (for manufacturing automation, optimized inventory management with AI) and human capital investment.