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Below are the key questions and answers from the financial results meeting for Q2 of FYE 3/'25, held on October 30, 2024.

Financial results for Q2 of FYE 3/'25 and full-year forecast for the FYE 3/'25

You said that, of the 200 billion yen in projected sales for FYE 3/'28 in the previous Mid-Term Business Plan, 160 billion yen is the forecast excluding M&A. You mentioned that, of the 200 billion yen in projected sales for the FYE 3/'28 in the Mid-Term Business Plan 2027, 190 billion yen is within reach. What has changed in the past few years? Please explain the factors behind this, including changes in the external environment.

The first factor is that projects that were undertaken by local governments have been outsourced to the private sector, resulting in larger projects. The second factor is that the decrease in the number of local government engineers has led to a trend of placing bulk orders for related construction projects, which has resulted in larger projects and contributed to increased sales. The external environment has been affected by the recent rise in prices, but I do not think there has been much change in the budgets of local governments.

Is the improvement in the gross profit margin shown on page 11 of the financial results briefing material expected to continue improving in the second half and beyond over the next few years? Is it correct to assume that the increase in selling, general and administrative expenses will continue in the same way?

Selling, general and administrative expenses will increase in the second half and beyond due to an increase in personnel expenses and depreciation expenses. Since the overseas business, especially in North America, is progressing well, gross profit margin is expected to continue increasing steadily. The full-year forecast for the first half remains unchanged since there are adjustments with the second half. In forecasting the full-year performance, we will assess the impact of foreign exchange rates and delays in civil engineering work on our company by the third quarter financial results.

It was mentioned that selling, general and administrative expenses will increase. How will it affect the business performance in the next fiscal year and beyond?

We will include depreciation expense and development costs in selling, general and administrative expenses. As sales are also steadily increasing, we expect to see solid results in FYE 3/'28. We will promote engineering reforms and overseas growth strategies toward FYE 3/'28.
In engineering reforms, we aim to design Engineering, Procurement and Construction that realizes optimal Operation and Maintenance, such as rationalization of design and on-site construction and unmanned operation at night. With the aim of optimizing Operation and Maintenance design, we have divided our business segments into environmental engineering, system solutions, operations, and overseas operations.
We will talk a little more about promoting our overseas growth strategy when we announce our financial results in April next year. Our aim is to expand our business by developing revolutionary sewage treatment systems. We expect that securing these orders will contribute to sales during the period of the Mid-Term Business Plan 2027 and, if successful, we may even achieve operating profit exceeding the target of 13 billion yen.

Could you tell us more about the improvement in the overseas gross profit margin?

Our U.S. subsidiary's strategy to differentiate its Cloth Media Filter business in Europe has led to strong sales and steady cost reductions. What we have been primarily focusing on until now is synergies between acquired companies and our company, but we are also putting effort into deepening cooperation among overseas subsidiaries.

Please explain the background to increasing the amount of order intake forecasted at the beginning of the period.

The number of local government engineers has been decreasing. As a result, our clients are increasingly placing orders for projects that include ancillary work, leading to large projects. The reason for raising the order forecast for the current fiscal year to 200 billion yen is that the Metawater Group has been able to receive orders for such projects.

The operating profit margin of your company immediately after going public was 7 to 8%, but the Mid-Term Business Plan 2027 forecasts a decrease to 6.5%. Is this due to the increase in fixed costs?

This is partly due to an increase in fixed costs, including personnel costs. In the past, our company expanded into high-profit businesses, with a focus on the Engineering, Procurement and Construction sectors. However, due to receiving additional orders for ancillary work, our business scope has expanded to include operations and maintenance, which has led to some deterioration in profitability, affecting the operating profit margin.

Please let me know if there are any recent updates on water Public-Private Partnerships.

I think local governments are making good progress toward commercialization. On the other hand, the waterworks concession project will probably take a bit more time. This will probably contribute to the sales in the next fiscal year's Mid-Term Business Plan period, not the sales for the current Mid-Term Business Plan 2027 period. We will once again focus on the most important issue, which is how to sustain water infrastructure, and continue to emphasize it. It does not mean that we will receive orders for all projects across all sectors. We would like to explain again if there are any new developments when we announce our financial results next April.