GECOSS CORPORATION Q4 FY2025 earnings call

• Strategic Shift: The company completed a strategic shift from revenue-focused to profit-first business starting in FY2023. Low-margin projects are intentionally filtered out, with profitability evaluated over a medium-to-long term (accounting for follow-up project opportunities and project-specific risk) rather than just short-term surface-level margin. As a result of the shift, consolidated sales decreased 16.644 billion yen year-over-year in FY2025 March, but consolidated operating profit increased 0.606 billion yen year-over-year, with all profit metrics exceeding both prior year and initial forecast levels.
• Balance Sheet and Financial Health: The company holds an almost debt-free position with a D/E ratio of 0.01x, generates strong steady cash flow, and has a very healthy financial position. Management notes the key priority going forward is allocating abundant cash to growth sectors and shareholder returns.
• Mid-Term Management Plan (2025-2027): Targets for FY2028 March: +15% profit growth for Temporary Steel, +25% for Temporary Construction, +30% for Steel Structure Processing & Bridge, and a doubling of ordinary profit for the Construction Machinery segment. The plan targets consolidated profit of 8.5 billion yen, ROE of 8%+, payout ratio of ~40%, DOE of 2.5%+, and targets raising ROE to ~10% to achieve PBR of 1x. Labor productivity is targeted to rise 10% by FY2027 versus FY2024, with operational efficiency improvements freeing up resources for growth sectors.
• Growth Initiatives: (1) Overseas business: Currently holds 30% stake in Singapore-based FUCHI, targets increasing stake to 70% for majority control. FUCHI saw performance improvement in H2 FY2025, with large infrastructure projects providing strong demand growth, and no plans for expansion into other markets until FUCHI is stabilized. (2) Collaboration with Mizuho Lease: Three active joint initiatives: co-development of automated steel inspection technology to reduce labor, exploration of joint investment, and operation/management of Mizuho Lease-owned construction machinery at Gecos locations via a sub-leasing arrangement. A joint coordination committee has been established to advance collaboration. (3) Product and Market Expansion: The temporary bridge business has established a two-yard national operation, commercial development of the mobile emergency bridge is nearly complete, and sales have grown 265% since 2015 versus 2015. The company is also expanding into permanent small/medium bridge replacement for municipal governments. (4) Human Capital Investment: Implemented a 5% base pay increase for FY2026 March, the third consecutive year of base pay increases, and has earned external recognition for health and family-friendly workplace policies.

1. Heavy Temporary Construction Segment: Ordinary profit for FY2025 March was 6.63 billion yen, a 0.289 billion yen increase year-over-year, hitting a record high. Within the segment: (1) Temporary Steel Segment: Revenue decreased 17.871 billion yen year-over-year due to intentional suppression of low-margin distribution sales, though core steel rental revenue increased. Low-margin distribution sales as a share of segment revenue fell from 40% to 25%, and the adjustment of low-margin business is now largely complete. (2) Temporary Construction Segment: Revenue grew ~30% from 2.0 billion yen (FY2022-2023) to ~26.0 billion yen (FY2024-2026), with fully acquired Ohtowa Koei contributing ~10% of segment revenue, and further growth potential in civil engineering construction remains. (3) Steel Structure Processing & Bridge Segment: Revenue grew ~70% from 0.7 billion yen (FY2022-2023) to ~1.2 billion yen (FY2025-2026). The segment overall saw core operating profit margin (excluding distribution sales) improve by more than 1% year-over-year. 2. Construction Machinery Segment: Ordinary profit for FY2025 March decreased 0.097 billion yen year-over-year. The decline was caused by the completion of 3 years of asset portfolio restructuring, which reduced used asset sales, while core leasing asset profitability improved due to the portfolio adjustment.

• FY2026 March consolidated sales are forecast to see a minor 0.55 billion yen decrease year-over-year (almost flat), as low-margin distribution sales adjustment is complete.
• Consolidated operating profit is forecast at 6.7 billion yen, a minor 0.151 billion yen decrease year-over-year, due to the outsized FY2025 profit driven by an unusually high volume of large project completions at the end of FY2025 and a conservative forecast given macro uncertainty. The company notes upside to the forecast is possible during the fiscal year.
• Consolidated ordinary profit is forecast at 7.0 billion yen, a 0.106 billion yen increase year-over-year, driven by the elimination of transitory accounting headwinds from FUCHI and FUCHI's ongoing profit improvement.
• Both the Heavy Temporary Construction segment and Construction Machinery segment are forecast to deliver ordinary profit growth year-over-year.
• Shareholder dividend guidance for FY2026 March is 57 yen per share, a 3 yen increase year-over-year, aligned with the 40% payout ratio target in the mid-term plan. Management confirms further upside revisions to dividends are possible if earnings outperform forecast.
• As of the start of FY2026 March, 50% of planned upper half revenue is already secured as contracted orders, and an additional 30% has high booking probability, resulting in 80% of planned upper half revenue having high certainty, with strong ongoing demand.

• Sustained rising construction costs (for materials and labor) remain a core concern, even as the pace of increase has slowed.
• Industry-wide labor shortages create ongoing risk of project delivery delays.
• US trade tariff policy poses indirect downside risk: while Gecos has almost no direct import exposure and almost all business is domestic, a broader slowdown in the Japanese economy from tariff impacts could reduce national construction investment below current forecast levels.
• FUCHI had poor performance in the first half of FY2025 due to remaining low-margin pre-COVID contracts and rising costs, though performance improved in the second half and the risk is expected to resolve in FY2026.

Q: How does Gecos screen low-margin projects for its new profit-first strategy? / A: Gecos shifted to profit rate as the top order decision criteria in 2023. Management avoids judging projects solely by near-term surface margin, as project difficulty and timing can create unexpected cost overruns that hurt actual profitability. Instead, it evaluates projects over the medium term, accounting for future follow-up project opportunities. It will accept slightly lower margin on initial projects if they lead to higher-margin follow-on work that delivers positive overall long-term returns.

Q: What is the outlook and strategy for Singapore-based FUCHI? / A: FUCHI struggled in H1 FY2025 due to remaining low-margin pre-COVID contracts and cost increases, but saw significant improvement in H2 as price increases took effect and higher-margin Japanese general contractor project share rose. Singapore has a strong pipeline of large infrastructure projects including subway, airport, and seawall upgrades, so significant year-over-year profit growth is expected for FUCHI in FY2026. Gecos currently holds a 30% minority stake and plans to increase its stake to 70% to gain majority control and capture more profit.

Q: What is Gecos' plan to achieve PBR 1x, and would it consider raising the payout ratio above 40% to hit this goal faster? / A: Management believes PBR 1x is achievable by raising ROE through leveraged growth investment while maintaining financial strength, and boosting investor growth expectations via improved shareholder returns and expanded IR activity to lift PER. While management appreciates the suggestion of a 50% payout ratio, it prioritizes building sustainable long-term profit growth first, which supports sustained dividend increases over time. It will consider additional shareholder returns including share buybacks as it evaluates attractive growth investment opportunities.

Q: Is management committed to continuing the current reform momentum, and will the CEO remain in place to lead changes? / A: After 5 years in office, the reform culture of 'courage to change what needs changing' is now embedded in the company. The mid-term plan has 'continue challenging' as its official action principle, and the current CEO will remain in place to deliver on all plan commitments, with the goal of continuously increasing corporate value to meet shareholder expectations.