91福利

The following summary of key questions answers from the financial results briefing for the FYE 3/'25, held on April 24, 2025.

FYE 3/'25 Results

It was mentioned that cost recovery progressed better than initially expected. In reference to page 7 of the presentation, "Factors of increase/decrease in operating income: FYE 3/'24 vs. FYE 3/'25 ", did this contribute to the improvement in the gross margin?

That is correct. Although we initially assumed only partial recovery of cost increases amounting to several hundred million Yen, we were actually able to recover nearly the full amount. Thanks to guidance from the government and persistent negotiations by our sales department, local authorities responded flexibly.

The International Business continued to show a solid increase in profitability in FYE3/'25. Was this mainly driven by the Cloth Media Filter (CMF)? Going forward, will the focus shift to new sewerage technology (Nereda^?)?

CMF remains our mainstay. While competition does exist at present, our group maintains an advantage in experience and performance. However, we do not expect explosive growth in CMF moving forward. We anticipate that the share of Nereda^? will gradually increase and surpass CMF in four to five years.

What kind of customers does CMF sell to? You have also stated that your company is not affected by the US tariffs, but there are some views that there will be a recession and a major cut in capital investment. What would be the impact if the economy worsens?

Most sales are to major general contractors, and in some cases we deliver directly to end-users (sewerage operators). Based on the current order inquiries, we are not seeing a decline in water-related business by public agencies. Additionally, CMF is manufactured primarily in the US, so tariffs do not apply.

Which product has a higher profit margin: Nereda^? or CMF?

Currently, CMF has a higher profit margin since it is technically complete and standardized; however, the profit margin for Nereda^? will rise as the project experience enables standardized designs going forward.

FYE 3/'26 forecast

On page 14 of the presentation, "FYE 3/'26 Forecast by Segment (Consolidated)", the Environmental Engineering business is expected to see increased revenue and profit as well as the improved profitability, in contrast to the System Solutions and Operations segments. What explains this?

The Environmental Engineering business is regarded as returning to normal profitability, with an improvement in the operating margin from 4.5% to 6.2% reflected by the stable sales from the backlogs, the absence of the R&D cost burden that existed until the previous year (approx. 500 mn Yen), and a decrease in unprofitable projects.

In the operation business, you explained that depreciation and amortization costs will increase at K.K.Mizumusubi Management Miyagi. Since these costs will not decrease from next year onwards, should we expect that, other things being equal, the company's profitability will be considerably lower?

As you say, depreciation and amortization expenses will continue for some time, , but this is largely in line with our plans. We expect to secure the originally planned figures for both operating profit and margin in the end.

International Business

The FX assumption in the 3/'26 forecast for the International business is 150 JPY/USD. What would be the impact of FX rate fluctuations on sales and profits?

1 Yen appreciation would decrease sales by 300 mn Yen and profits by 30 mn yen. Since we may see increases in orders and revenue, we will consider revising the forecast in Q2 or Q3 if necessary.

What is the revenue and profit contribution of the newly acquired Schwing Bioset, Inc (SBI) as well as the rest of the subsidiaries?

SBI has annual sales of approximately 80 mn USD. Since the acquisition was effective April 1, about 60 mn USD (around 9 bn Yen), equivalent to nine months' worth will be included in FYE 3/'26 results. In terms of operating income, even after goodwill amortization, we expect SBI to remain profitable.
In the existing business, CMF is in a very strong position and shows strong growth in orders and revenue, while Nereda^? is expected to gradually increase from FYE 3/'25 and is expected to make significant contributions in FYE3/'26 and FYE3/'27.

How much is the goodwill for SBI, and what is its future contribution to the company's earnings?

As for goodwill, 20 mn USD will be amortised over 15 years. PPA (Purchase Price Allocation: identification and valuation of intangible assets included in goodwill) is still ongoing, but we estimate annual amortization at 1.5 mn USD (around 200 mn Yen). Regarding the operating income, we expect SBI to be profitable this year and an operating margin of around 3-4% next year, after amortization of goodwill.
The company had been unprofitable as it previously ventured into various areas beyond piston pumps. Post-acquisition, with the existing management team in place, we aim to streamline the business and focus on core strengths over the coming year.

SBI has a 90% market share in piston pumps, and this will strengthen your sales channels to customers. What is the overall business outlook for North America following the acquisition?

This acquisition brings the advantage of facilitating comprehensive proposals, including a sludge treatment system, in the series of sludge treatment of solid-liquid separation in wastewater treatment.
Additionally, the fertilizer business is growing in North America. Since piston pumps are essential in transferring and storing sludge for fertilizer production, we expect this differentiated product to help expand related businesses.

Mid-Term Business Plan 2027

What are your quantitative revenue and profit plans for the roll-out of Nereda^? in Japan?

In the U.S., Aqua Aerobic Systems, Inc. (AAS) signed an exclusive license agreement in 2016, and after pilot testing, orders grew with revenues materializing in FYE 3/'24. Because testing takes a certain number of years, regrettably we have not included quantitative plans for the Japanese market in the Mid-Term Business Plan 2027.

Does it take nearly a decade for Nereda^? technology to be adopted?

That's hard to be understood without the industry context. Biological reactions vary widely depending on climate and water quality, often yielding no tangible results. It took AAS seven years of testing to prove the technology. In Japan, proving its feasibility will also take effort. After validation and client approval, it takes 1-2 years to sign a formal contract and 3-4 more years to deliver, totaling a minimum of 7-8 years.

Others

TOPIX constituent replacements will start in 2026. While your float-adjusted market capitalization currently meets the requirements, rise in float-adjusted market capitalization at other companies could still affect your status as it is a relative basis. What are your countermeasures against this?

As you point out,　we are concerned about this. Last year, we cancelled 1.5 mn treasury shares to increase our floating ratio. Going forward, we aim to raise our stock price to increase float-adjusted market capitalization, and we plan to improve forecast accuracy.
Note that our threshold is 97%, and our current estimate suggests we are within 95%.