ZERO CO.,LTD. Q2 FY2025 earnings call

Core Financial Results for the Interim Period

• Total sales revenue reached 68.956 billion yen, up 7.1% year-over-year, and operating income hit 4.951 billion yen, up 113.9% year-over-year, with an operating margin of 7.2% that doubled from the prior year period. Net profit attributable to parent company shareholders was 3.505 billion yen, with interim dividend per share of 43 yen.
• Inventory increased by 4.6 billion yen from the end of FY2024, almost entirely from unsold purchased vehicles at World Windows held in inventory waiting for Malaysian import permits. The group's current equity ratio is 55%, up from 54% previously.

Key Growth Drivers

• 2024 Problem Preparation: Long-term investments in transport capacity expansion and driver hiring starting under prior management paid off, allowing the group to grow contracted volumes when competitors faced capacity constraints.
• M&A-led Portfolio Expansion: The group actively acquires companies to fill gaps in vehicle transport adjacent services, allowing the group's 100-person sales team to win work that was previously turned away, expanding overall revenue and profit. Most historical acquisitions were 1-yen acquisitions of distressed companies that have since turned around to become strong profit contributors.
• Profit-focused Operational Shift: The group shifted strategy from prioritizing top-line revenue growth to prioritizing profit growth, focusing on initiatives like securing return cargo to improve loading efficiency (each additional vehicle loaded on a car carrier increases profitability by 16.6%), pruning unprofitable orders, and implementing appropriate price increases.
• Driver Talent Pooling: Japan Japan Relief, the group's HR subsidiary, has approximately 30,000 registered drivers, and offers flexible employment arrangements (full-time, contract, part-time, seasonal work for farmers etc.) to attract talent. The group also offers clear career paths for drivers to advance from driving individual vehicles to operating full car carriers, creating a unique competitive advantage in talent retention.
• Recent Strategic Initiatives: Completed off-exchange block sales of 988,300 policy-held shares by trading partners in August and November 2024; entered a business partnership with Mercari in December 2024 to provide transport for private-party vehicle transactions; began publishing investor information on the IR STREET portal in January 2025 to improve IR outreach.

2024-2026 Mid-Term Management Plan

• The plan is structured around four core pillars of quality: sales quality, logistics quality, human quality, and financial quality, with 16 total initiatives. 16 initiatives, with work already started on key items, including direct customer visits by the CEO to gather feedback and identify new business opportunities. The target for FY2026 is 150 billion yen in revenue, 10 billion yen in operating profit, and ROE of 14% or higher.

1. Domestic Automotive-related Business: Accounts for 49% of total revenue (up from 45% at the end of the prior period), and posted the largest revenue increase among all segments. Growth was driven by strengthened transport capacity preparation for the 2024 logistics industry regulation change, contributions from newly consolidated subsidiaries Souing and Zero Plus IKEDA, and stronger partnerships with cooperating logistics firms. This segment was the largest contributor to the period's over 100% year-over-year operating profit growth, driven by improved operational efficiency and focus on gross profit. 2. Human Resource Business: Accounts for 17% of total revenue (up from 15% at the end of the prior period). Revenue grew due to changed recruitment methods that improved driver retention and hiring yield, increased driver dispatch volume, and growth in airport-related personnel dispatch. Operating profit grew on reduced driver turnover after targeted retention measures. 3. General Cargo Business: Revenue contribution percentage remained unchanged from the prior period end. Revenue decreased year-over-year due to reduced cargo volume from client scheduling delays and bad weather at port terminals, and lost orders from 2024 regulation-related capacity constraints. However, operating profit grew strongly due to operational efficiency improvements at port terminals, pruning of unprofitable business, and higher loading efficiency with limited transport capacity. 4. Overseas-related Business: Accounts for 30% of total revenue (down from 35% at the end of the prior period). Revenue decreased year-over-year due to delayed shipments of World Windows' used vehicle exports to Malaysia while waiting for new import permits, which pushed shipments to Q3. Operating profit was flat overall: World Windows saw profit growth from lean operations, but Riyou Logistics in China posted a small operating profit loss due to reduced return cargo volumes, offsetting some gains.

• Full-year (FY2025, ending June 2025) guidance is maintained at the originally announced levels, with revenue projected at 135 billion yen, a decrease from 140.7 billion yen in FY2024, reflecting the group's strategic shift to prioritize profit over unprofitable top-line growth. ROE is projected at 14% and PER at 8x for the full year.
• The dividend payout ratio was raised from 25% to 33% starting in FY2025. The projected full-year annual dividend is 107.4 yen per share, with 43 yen already paid as interim dividend, and 64.4 yen projected as final dividend. Dividend amounts will increase in line with higher profit if performance exceeds projections. If full-year guidance is upward revised, a corresponding dividend increase will be implemented.
• Management will review guidance based on second half performance, but currently maintains the original forecast due to uncertainty from the first peak busy season under the new 2024 logistics working time regulations, and ongoing market uncertainty around Nissan Motor.

• Industry-wide driver talent competition: Other sectors such as the taxi industry are also aggressively recruiting drivers, creating competition for talent that challenges the group's hiring and retention efforts.
• Market uncertainty: New vehicle sales declined in Q2 FY2025, and market visibility remains low due to ongoing industry developments among Japanese automakers, making demand forecasting difficult.
• Dependence on Nissan Motor: While the group has reduced sales dependence on Nissan to 8.8%, down from much higher levels historically, ongoing uncertainty around Nissan's business represents a potential headwind.
• Supply constraints for key assets: New car carriers have a 2-2.5 year lead time, high upfront costs, and require allocated production quotas, creating high barriers to capacity expansion that limit growth.
• Malaysian used vehicle import permit constraint: World Windows faced early exhaustion of annual import permits in 2024, leading to delayed shipments and inventory accumulation, though shipments are expected to rebound in early 2025 after new permits are issued.

Q: What is the target equity ratio for financial soundness, and how does the company balance financial strengthening with shareholder returns? / A: Management's baseline target for equity ratio is 50%, and plans to use leverage to fund acquisitions and growth since most peer logistics firms already maintain equity ratios well above 50%. The company will continue to allocate 1/3 of cash flow to financial strengthening, 1/3 to capital expenditure including facility improvements for frontline employees, and 1/3 to shareholder returns. The 33% dividend payout ratio will hold, and dividends will increase automatically as profit grows. Management is actively pursuing acquisitions of additional vehicle logistics adjacent businesses that fit the group's portfolio.

Q: What are the benefits of the Zero Plus Maintenance acquisition, and are there more maintenance firm acquisition plans? / A: The acquisition addresses the critical industry challenge of scarce mechanic talent, and helps the group maintain its own and partner car carriers, reducing downtime and opportunity cost from broken vehicles. The target firm is located close to the Nissan Tochigi plant, where the group has many assets, and will increase in-house maintenance share to control rising external maintenance and parts costs. The firm also holds specialized expertise in hydraulic modification for car carriers, which strengthens the group's overall transport network maintenance capacity. The primary goal is to stabilize existing operations rather than drive immediate large revenue growth.

Q: Why is the full-year revenue guidance lower than the prior year, and what drives the projected decline? / A: The projected decline is mostly tied to an expected slowdown in used vehicle exports to Malaysia, after two years of extremely strong growth that hit double the average volume of the prior decade, and a natural leveling off of demand was already incorporated into the original guidance. The planned decline is also a deliberate strategic choice to prioritize profit over unprofitable top-line growth: the company could grow revenue by taking on low-margin business, but has chosen to prune unprofitable work to improve overall margins.

Q: What sectors will the company target for future acquisitions? / A: The company will continue to focus on adjacent businesses around core vehicle transport, looking to acquire firms that fill gaps in the group's end-to-end service capabilities. The goal is to build a full-service offering where customers can outsource all vehicle-related logistics to Zero, filling gaps in the current service portfolio via acquisition like fitting together a puzzle. Management is currently pursuing multiple acquisition opportunities, and will only do deals that add meaningful profit and strategic value, rather than acquiring for the sake of growing top-line revenue.