Earnings Call: Q2 2026

Oct 31, 2025

Summary

Record half-year sales and strong plant engineering orders supported higher full-year guidance and a JPY 236 dividend. An overseas receivables provision and incomplete logistics cost pass-through make governance and cost reforms key priorities.

Hello, my name is Moroh Fuji, as I was just introduced a moment ago. I would now like to take this opportunity to explain and provide a brief overview of the financial results for the second quarter. Thank you for your attention. First, let me present the summary of this financial report. For this half-year period, we have achieved a record-high sales revenue. Accordingly, we have revised our full-year earnings forecast upward, and we will be increasing this fiscal year's annual dividend to JPY 236. Additionally, this time our overseas subsidiaries have recorded a provision for doubtful accounts of JPY 830 million in the first half. I will explain this matter in more detail later. At the very bottom here, regarding the medium-term management plan 2026, which we announced a revision for this May, let me update you on its progress. In the logistics business, we are making progress in securing appropriate pricing and gaining customer understanding. However, we still believe that further accelerating cost control remains an urgent priority. As for the plant engineering business, while expanding our operations in the Middle East as a growth driver, we are also focusing on the domestic market. We will continue to promote the mobility of human resources and actively pursue M&A both in Japan and overseas. Lastly, by leveraging our strength in heavy cargo transportation, we also aim to expand into the energy sector. Now, I would like to explain the financial results for the half-year period. Regarding the results for the second quarter of the fiscal year ending March 2026, they are as stated here. In terms of actual performance, backed by the expansion of the plant engineering business, we have continued to achieve revenue growth for five consecutive quarters. However, we are not satisfied with these results and will strive for further improvement to meet the expectations of our investors. Now, let me provide an overview by segment. How about the logistics business? Although there has been some effect from partial price revisions, it has not been enough to fully absorb the increase in costs, so we believe that further negotiations, including contract revisions, are still necessary. On the other hand, in our overseas business, profitability has improved due to the withdrawal from unprofitable operations and other measures. In the plant engineering business, we achieved a record high in sales for the half-year period. However, due to the occurrence of allowance for doubtful accounts at our overseas subsidiaries, this has become a factor in the decline of our profit margin. Next, I will break down the logistics business segment. In international port segment, container handling volume has declined, along with related operations. However, costs have been passed on to major clients, partially improving profitability. As a result, the company recorded lower revenue with higher profit. As for 3PL general segment, similar to international port segment, profitability improved as well due to progress in price pass-through and an increase in spot projects. However, due to costs incurred from the ongoing structural reforms in our China business, the increase in profit was limited. For onsite segment, increased workload in the Middle East and the partial withdrawal from unprofitable operations, both domestically and overseas, have resulted in higher revenue and profit. Although, as a whole, the logistics segment has shown signs of improved profitability with an operating profit margin of 3.2%, we recognize that there are still issues that need to be addressed in order to ensure the achievement of our targets. Next, I will discuss the breakdown of plant engineering business segment. For maintenance segment, despite this fiscal year being a minor year for shutdown maintenance, we were able to increase revenue by securing many orders for planned external work and additional projects, but we did not reach the profit level of a major year. For facility work segment, there is the increase in renovation work due to aging facilities. The order has remained at a high level, and we experienced increased revenue but decreased profit due to the impact of provisions that occurred at overseas subsidiaries, which I will explain later. Although the overall plant engineering business saw increased revenue but decreased profit, in order to capture the favorable business environment, we recognize that in addition to further strengthening our mobilization capabilities, reinforcing our governance system is also an urgent issue. We will steadily move forward with these improvements. This concerns the occurrence of allowance for doubtful accounts at our overseas subsidiaries, which I mentioned earlier. This case pertains to our plant engineering business in Thailand, where due to the deterioration of the customer's business conditions and cash flow, since there are concerns about the recoverability of a portion of our receivables from this company, we recorded an allowance for doubtful accounts of JPY 830 million in the first half of the year. Furthermore, we plan to record an additional JPY 230 million in the second half. As for the cause of this incident, it stems from the deterioration of the customer's business conditions and cash flow, which led to delays in payments to our company. While payment delays had been ongoing, we regret that we did not properly manage the outstanding receivables. In response to this situation, our first priority is to secure the relevant receivables and make every effort for their prompt recovery. Additionally, we have promptly established an internal investigation committee to determine the cause and formulate measures to prevent recurrence. We will also move forward with implementing these measures in practice. As for the investigation committee, we are planning to form it mainly with outside directors. Going forward, based on the recommendations of the investigation committee, we will establish a reliable monitoring system, not only at the local subsidiaries, but also in cooperation with Sankyu Southeast Asia Holdings and the overseas business division, so that we can respond promptly by putting in place mechanisms for early action. Finally, regarding potential risks that may arise in the future, there is a possibility of an additional occurrence of up to approximately JPY 500 million in unsettled receivables and, in another local subsidiary, in this case Sankyu Malaysia, there is a possibility of up to approximately JPY 100 million in outstanding receivables arising with respect to its subsidiary. Following the provision for construction losses in Saudi Arabia the year before last, we deeply apologize for causing concern to everyone due to the occurrence of this situation. We take this situation very seriously and will once again thoroughly strengthen our governance system to prevent recurrence. We are committed to improving our group-wide risk management system so as not to cause any further concern to our shareholders. Based on the results for the first half of the year, we will revise our earnings forecast. As you can see, the revised figures are as follows. Net sales have been revised upward to JPY 6.5 billion and operating profit to JPY 1 billion. In addition, in line with the upward revision of our performance, we will base our dividend payout on the 40% payout ratio indicated in our medium-term management plan 2026. Regarding dividends, we will pay JPY 118 for both the first and second half, totaling JPY 236 for the full year. This represents an annual increase of JPY 4 per share in dividends. Going forward, we consider our shareholders to be important stakeholders, and we will continue striving to meet your expectations by enhancing shareholder returns. Next, I will explain the breakdown by segment. In the logistics business, sales have been revised downward by 2.3 points to JPY 7 billion. We will maintain our initial forecast for operating profit and steadily work to improve earnings. In the plant engineering business, sales are up by 4.7 points, reaching JPY 13.5 billion. Operating profit is up by 2.8 points to JPY 800 million. Reflecting a high level of orders across a wide range of fields, we have revised our forecast accordingly. Next, here is the breakdown of the logistics business segment. For international port segment, container handling volume in the first half decreased by 0.4 points, and we believe that a recovery cannot be expected at this time. In addition, for international port, we are consolidating locations and optimizing personnel allocation, and operating profit for the second half is forecast at JPY 1.4 billion. On the other hand, for 3PL general segment, although restructuring costs for the China business are expected, as in the first half, we are making progress in passing on price increases to some customers. Operating profit is forecast to increase by 9.5 points to JPY 2.1 billion. Furthermore, we will continue to carefully assess unprofitable projects and promote structural reforms within the division. Lastly, regarding the on-site segment, price pass-through has not been sufficient to absorb the increase in costs. As a result, operating profit has been revised downward by JPY 500 million. Next, I will explain the breakdown of the plant engineering segment. For maintenance segment, although the volume of shutdown maintenance work is expected to decrease, we anticipate an increase in additional work and other projects following the trend from the first half, resulting in an upward revision of operating profit by JPY 1 billion. Although we are planning to set aside provisions for overseas subsidiaries in facility work segment, as mentioned earlier, we expect to secure large-scale projects within on-site and in areas other than steel prices. We anticipate winning these projects, resulting in an upward revision of operating profit by JPY 900 million. This slide shows the status of price pass-through. In the logistics business, although customer understanding of price adjustments is gradually increasing, we have not yet been able to fully absorb this fiscal year's internal cost increases. We recognize that continued negotiations are necessary to achieve our target operating profit margin of 3.8% for this fiscal year. In the plant engineering business, although negotiations are ongoing for some ordinance-related work and small-scale projects, overall, price pass-through is progressing steadily. We will continue to maintain good relationships with our customers while promoting appropriate price pass-through. Our goal is to establish a stable earnings base. This slide shows the trends in order intake and order backlog for the plant engineering business. Order intake for the second quarter of 2025 was JPY 155.9 billion. The order backlog stood at JPY 95.3 billion. Although this is a minor year for shutdown maintenance, the order environment remains strong due to an increase in unplanned and additional construction work. This document shows the major projects by business segment in the plant engineering business. We have been able to secure stable orders in the steel and chemical sectors, including renewal projects, aging countermeasures, and carbon neutrality initiatives. In addition, including orders in the infrastructure and energy sectors, which we aim to expand, overall performance has remained steady. This document shows the outlook for orders by business segment in the plant engineering business. The steel and chemical sectors are expected to continue supporting our business foundation, and in addition, we will actively pursue projects in the infrastructure and environmental sectors going forward. By diversifying our order portfolio, we aim to achieve stable business operations and sustainable growth in the plant engineering business. Next, I will explain the status of capital investment. In the first half of this fiscal year, we made capital investments totaling JPY 12.4 billion. While renewal investments are the main focus, we are also including areas such as system development. We will continue to actively make necessary capital investments, carefully assessing them in line with the strategies of each business segment. In addition, during the first half of the year, we re-examined the investment details and revised our annual plan from the initially planned JPY 24.7 billion to JPY 20.4 billion. We will continue to actively make the necessary capital investments in line with our medium-term plan. That concludes my explanation. Next. President Nakamura will now explain the progress of the medium-term management plan. Yes, I am Nakamura, as just introduced. Now, I would like to explain the progress of our medium-term management plan 2026. First, I will explain the upcoming milestones related to the medium-term management plan. At our company, in the financial results for the fiscal year ending March 2025, which will be announced this May, we have updated our medium-term management plan with the fiscal year ending March 2027 as the final year. We have set the sustainability of a 10% ROE as a goal, divided our initiatives into business, financial, and non-financial strategies, and disclosed the medium-term management plan based on the business environment in which our company operates. In May 2026, we will review the current management plan that is underway. In May 2027, we are scheduled to announce Vision 2040, as well as a new medium-term management plan. Aiming to transform our company into a re-growth company, which is one of our key challenges, we will consider our future vision based on discussions about management transparency, improvements to our business portfolio, as well as feedback from investors during IR meetings and debates with TEVA. As we announced in the full year financial results for May 2025, one of the achievements of placing the IR department directly under the President has been an increase in the number of meetings with overseas investors. As you are aware, the increase in communication with overseas investors, who account for a large portion of trading value in Japanese stocks, is considered a result of this organizational change. Discussions with overseas investors often provide valuable opinions for candid and efficient management. We consider these kinds of discussions to be important activities going forward as well. We are also planning to upload an English version of our financial results briefing video created using AI to our website. Recently, our IR activities have also been featured in various media outlets. Especially regarding meetings with investors, we are not just waiting for requests for meetings to come through securities companies and other intermediaries. We have continued to strengthen direct contact, such as by proactively requesting meetings directly from our company. Going forward, we intend to further strengthen our IR marketing activities in the capital markets. This is an analysis of the overall trends in our meetings. In the past, we received many questions regarding our capital policy, but now the majority of inquiries concern the structural reforms in our logistics business and the growth strategy for our plant engineering business. This also makes us keenly aware of the expectations placed on our company. Going forward, we will continue to manage the company, including initiatives related to human capital. As I explained at the previous briefing, I would like to once again provide an overview of the Task Force on Enterprise Value Acceleration, which was established directly under the CSO as of June 1st. We believe that a true enhancement of enterprise value requires, above all, a firm commitment to increasing our enterprise value through our own efforts. Therefore, we have clarified the authority, roles, and responsibilities in management. In order to address any shortcomings, we felt the need for a cross-functional organization and thus established this task force called TEVA. We will divide our approach into business strategy, financial strategy, and non-financial strategy, clearly setting the objective of each department as the enhancement of enterprise value, and aim to create an organization that advances discussions and leads them to corporate actions. As for the current situation, the organization was officially launched in September. That's the stage we're at, so we are not yet in a position to present any concrete details. We do feel that there has been some delay in this regard, and we intend to proceed with a greater sense of urgency going forward. From here, I would like to explain the strategies for each business segment. First, let's talk about the logistics business. Regarding the logistics business, it has a high level of synergy with the plant engineering business. We are focusing on key industries such as steel, chemicals, and electrical electronics, as well as on-site related work and working to improve unprofitable businesses. We are working toward optimizing the entire business as a whole. However, when it comes to passing on price increases, we have not been able to fully reflect the increased costs. Due to the timing of contract renewals and delays in negotiations, some targets have not been met. In the second half of the year as well, we will continue to secure appropriate pricing for each business through individual price negotiations with customers. We will focus on receiving orders at fair prices, something that has not always been standard practice until now. If we are unable to achieve this, we will not hesitate to make decisions to scale down or withdraw from certain areas. In this way, we will proceed with restructuring our profit structure. Next, I would like to explain the challenges and initiatives for each business segment. Regarding the international ports business, we will continue negotiations to make up for delays in passing on costs through price adjustments. We will also begin reviewing and restructuring our international logistics system. From the next half year, in addition to price negotiations, we will also work on an early review of our organizational structure. In 3PL general business, we will identify unprofitable operations and make withdrawal decisions within this fiscal year, aiming to implement them in the next fiscal year. At the same time, we will begin structural reforms of overland transportation business and the consolidation and reduction of assets. In the on-site business, in addition to continuing negotiations for price pass-through, we will further accelerate the review of contract formats and the optimal allocation of personnel through reskilling with the aim of improving profitability. This fiscal year, increased costs could not be fully offset by price pass-through. As a result, profit improvement was limited to JPY 300 million. Next fiscal year, we will accelerate these measures and expect an improvement of JPY 2 billion. Although we anticipate that the challenging situation of price declines will continue, we will work to reduce costs through structural reforms while focusing on key industries that have strong synergies with our plant engineering business. We will promote the overall optimization of our business, focusing on on-site business and improving unprofitable businesses. As for our business in China, the Chinese economy is slowing down, and as a result, Japanese companies are continuing to scale back or withdraw. In reviewing our medium-term management plan 2026, we have carefully examined the streamlining of our China business. There are points that we are currently implementing, and in order to further enhance feasibility, there are also areas where deeper discussion is required. For items that we are unable to share with you today, we intend to provide updates as appropriate in the future. However, as for the reduction of warehouse space, we have achieved this a year ahead of schedule and are implementing fixed cost reductions. While we have successfully achieved our targets well ahead of the original plan, we firmly believe that further significant cost reductions will still be necessary in the future. Next, I would like to report on the progress of our strategy for the plant engineering business. The Saudi Arabia Maintenance Center, which was completed in April of this year, serves as a strategic base that integrates both human resource development and maintenance functions. We position this facility as the core base for our expansion in the Middle East. In addition to recruiting and developing local talent, we are also utilizing personnel from Southeast Asia to establish an autonomous management system for our local subsidiary. We will work to improve the quality of education based on globally unified standards. In our maintenance business, we have already launched a valve maintenance operation through strategic discussions with our Japanese manufacturing partners. We will leverage Sankyu's greatest strength, our advanced technical capabilities, on a global scale, aiming to secure large-scale turnaround contracts by fiscal year 2030. Next, I would like to report on the strategic utilization of overseas personnel. We are currently working to strengthen the recruitment of foreign talent. This fiscal year, we have utilized the intracompany transfer system to accept technical personnel from Sankyu Indonesia and Sankyu Malaysia into our domestic branches in Japan. In addition, regarding the mobility of local subsidiary employees, we are focusing our efforts on areas with high demand. Our main focus has been on the sites of our chemical business. In the first half of the year, we accepted 2 personnel from Sankyu Singapore. In the second half, we plan to accept 2 personnel from Sankyu Indonesia. By providing practical work experience in Japan, we aim to enhance the skills of our overseas technical staff. We will continue to focus on developing talent capable of thriving globally. Furthermore, following the M&A conducted last December, we have also made HINOKENSETU KOGYO a wholly owned subsidiary in the first half of this year, with the aim of business succession and functional enhancement. Through this acquisition, we aim to integrate our technologies and skills. We are considering entering public works projects, which we have not done before, and aim to expand into new business domains. By strategically deploying overseas personnel and actively pursuing M&A, we will further strengthen the competitiveness of our plant engineering business. Through the development of global talent and the expansion of our business domains, we will achieve sustainable growth. Finally, I would like to introduce our initiatives in the energy sector. In addition to our traditional steel and chemical sectors, we are actively engaging in the energy sector as a new growth business. This is a field where we can fully leverage the expertise we have cultivated in heavy cargo transportation and installation work. We have steadily built up a track record of achievements. In the wind power generation business, since entering the onshore wind sector in 1999, we have proudly completed the construction of 42 sites and 190 units. In the offshore wind sector, we made a full-scale entry in 2022 and are aiming to secure even more projects going forward. Additionally, in the nuclear power field, we have carried out numerous projects over many years, steadily building up our track record. Looking ahead, we regard the energy sector as an important market where significant future demand growth can be expected. At our company, while advancing strategic human resource development, we will actively work to secure new projects. In the update to our medium-term management plan announced this May, we disclosed our intention to maintain shareholders' equity at around JPY 270 billion by the end of fiscal year 2031. We have announced the securitization of accounts receivable and the sale of cross-held shares, keeping in mind the balance between growth investments and shareholder return. We are aiming to achieve the financial KPI of shareholders' equity ratio. Placing importance on these KPI will ensure the sustainability of the 10% ROE announced in May. We believe that this will help build a relationship of trust with the market. With the aim of enhancing enterprise value, we have placed emphasis on capital efficiency. As we pursue balance sheet management, we intend to become a company that achieves renewed growth. That concludes my explanation. Thank you for your attention