Ultrafabrics Holdings Co.,Ltd. (4235) Earnings Call Transcript & Summary

This is Noboru Yoshimura, President of Ultrafabrics Holdings. Today, I would like to report our result of second quarter 2025. The business condition during the first 6 months of this year was very unstable and uncertain. Trump administration started January this year, and there's been a lot of rumors and information with regard to tariff and so forth. That really affected the behavior of our customers, like many customers postponed their decisions, including investment decisions or supply chain management. And the reason is that a lot of our customers purchases materials from overseas, mainly in Asian countries, including China. And the tariff numbers are different among those countries and the number has been changing almost every day. So our customers cannot -- couldn't make decisions and kind of very manage -- well manage their business, which results in less investment, less inventory and less sales. In our case, 10% additional tariff was applied from April 1. But after the negotiation of both governments, Japanese and United States, they reached an agreement, but still, the details is not known. Also, foreign exchange rate, yen has been fairly weak during the last 3 years, but they converted to -- yen converted to appreciation against dollar this year and the yen dollar exchange rate hit below JPY 140 April this year. But now they are coming back to very close to JPY 150, but the foreign exchange rate remained in a very narrow range and the trend of yen depreciation is not occurring this year. On our business of our customer side, the biggest one is that there's a very headwind -- strong headwind to our customers in the EV industry. And as a result of birth of Trump administration, they are pretty much against the promotion of EV, reducing kind of their support for EV and there are other factors adversely affected EV business, which also affected our business. And our RV, especially our RV and marine business has been hit by high interest rate and the whole industry is severely hit, and that still continues. So given this kind of unstableness and uncertainties in our business condition, what we have been trying to do is that we try to diversify our business in North America in automotive area to other regions and other customers. Also, we have been building up our operation, especially in the production area, we are trying to expand our production capacity outside of Japan in the form of joint venture. So regarding tariff, almost 50% of our sales is to United States. But most of our business in automotive area, the product goes to a free trade zone in U.S. and to Mexico. So so far, that path has not been affected by tariff. And our basic strategy regarding tariff is to pass through tariff in the form of surcharge to our customers and -- which means that tariff is neutral to our profit no matter what the number may be. And after this surcharge -- after we apply this surcharge to our customers, there hasn't been significant moves on our customer side, like a shift from our product to our competitors' product, mainly because, again, a lot of customers have been deferring their decisions. That's one thing. The second thing is that most of our competitive -- most of the textile products competing to our products has been produced in Asian countries, including China, where the higher tariff is applied. So there are some cases that our customers shift from Chinese material to our products. So given the relatively stable relationship between Japan and the United States and given the relatively lower tariff, which is 15% right now, the tariff itself didn't strongly affect our business. I would like to talk about some progresses in our midterm business plan. As I mentioned, we are trying -- we have been trying to diversify our business portfolio with regard to regions, with regard to applications. And in the area of automotive, we are trying to expand our business to OEMs in Europe, especially German OEMs. To do business with German OEMs, our company needs to be VDA 6.3 compliant. And VDA 6.3 compliant requires internal auditors who understand the VDA requirements. So we started the project to train our operators to be internal auditors for VDA project and more than 20 employees at DKK is participating in this project. And we are doing this training of project, not just for the certification, but to find new ideas to improve our production process as well. The second thing we have done during the first 6 months of this year is an increase of application, which is a residential area. The picture is -- this is the first time we have a booth at Casual Show, which is basically a trade show for residential furniture in Atlanta this July. And the sales of this area is not that large yet, but the business is growing very fast and the market itself is as large as our contract furniture business. So we believe that there's a big potential in this application. The next one is improvement of our profitability through the improvement of production efficiency. We are facing various defects as we are producing so many products for so many applications. And there's many type of defects we have to deal with every day. So from this year, we are taking new approaches to these kind of defects or lower production or to improve our production efficiency. And this chart shows our new approach to our contamination issue and the result. Before the time of red line, the ratio of contamination was very volatile and very high. After the new approach, including introducing a new uniform, which caused less contamination and some other new -- other ideas, the defect ratio about on contamination became very low and very stable. So we continue to take new approaches to various production issues to improve our production efficiency for the rest of the year and in coming years. We also reorganized our production facility and product development engineering facility. It used to be that we have 3 -- 2 main production facility, Gyoda and Gunma. Construction of Chiyoda plant has been completed this year, and it is fully up and running from July. And we are moving our product development and engineering resources to these production facilities, and we are going to close our R&D center in Hachioji coming November. So this really make -- we can have a better synergy between production and product development. That's one thing, and we can make our testing process very efficient to deal with more tests. So these are the things that we have been working on during the first half of this year. And then I would like to talk about the numbers up to the second quarter of this year. The average foreign exchange rate last -- [ first year ] of last year 2024 was JPY 152.3 per dollar and that of this year is JPY 148.6 per dollar, which is 97.6% of the average foreign exchange rate last year. So that basically explains the difference between our sales number in yen last year and our sales number in yen this year. But -- so in other words, in dollar terms, the sales was almost the same during the first half of the year -- this year compared to last year. But the content is a little bit different. There is good business and not so good business. Our furniture, furniture is almost -- the sales of furniture is almost the same in 2025 from 2024. And actually, our health care business was not really good during the first 6 months of this year, but that is basically compensated by our new business, residential outdoor and [ jobbers ]. Automotive was most severely hit business segment for us because -- as a result of that, our customers -- the supply chain of our customers has been severely hit by the confusion coming from tariff issues. Aviation is really a bright spot for us, especially the commercial aviation. We got new customers, and we got a new program from -- programs from existing customers. So the sales number in yen is 110% this year compared to last year. But in dollar term, the sales has been -- has increased almost by 15%. And we believe this will continue throughout this year and coming years. Other applications, including RV and marine, those are the areas, as I mentioned, hardly hit by higher -- high interest rate. And as you can see, the sales in yen is down by more than 10%. And in dollar terms, it's about 10% down compared to 2024. And 2024 itself was not a good year. So the trend is still in a down trend. So these are the sales by segment. And overall sales is down by more than 3% compared to last year. But as a result of outsourcing production to our partners, our production costs went up. That reduced our gross profit margin by more than 10% compared to 2024. And as a result -- and we do our best to control and reduce our SG&A, but our operating profit is almost 40% of that of 2024 and net income is less than 20% compared to the first half of last year. So our sales -- our profit numbers have been hit harder by our sales number because we are trying to increase our production capacity by outsourcing our production to our partners. And that really -- as I mentioned, that pushed up our production cost. If the volume increases as we hoped, then the increase of production and sales will cover the increase of production cost. But as I mentioned, the volume itself remained fairly the same. So that is the reason why we have about 3% down in sales number, but down by more than 80% in net income. So to cure this issue, the only way that we can cure this issue is increase of sales. And that's what we are going to do in the future. Regarding the cash flow, there's some tax effect so that our cash flow from operation was just reduced by JPY 130 million compared to last year. Despite that, our profit has been going down largely. For the investment cash flow, we continue to spend money on Chiyoda and investment in joint venture. So it's about JPY 1.1 billion cash out. We continue to repay our debt as a result of merger and investment in our production line last several years. But -- and also our debt in dollars decreased by the appreciation of yen and the overall debt is down by JPY 442 million and net debt ratio remains at 0.8. So we revised down our projection for this year at the time of the release of our second quarter result. For our original budget, we are going to have a better second half compared to first half. And so we have been expecting some increase in sales and profit during second half. But we revised our numbers for -- full year numbers based on the assumption that various factors which adversely affected our numbers during the first half remain same during the second half. So we had to revise down our sales number and that happened throughout net income. So our revised number is for sales, JPY 20.9 billion, which is a slight increase from last year, but our gross profit is JPY 9.2 billion, which is 50% down from that of last year and operating profit of JPY 1.5 billion, which is almost half of that of last year and net income of JPY 600 million, which is less than 40% of what we achieved last year and 40% what we have -- what we had in our original budget. EBITDA will be JPY 2.9 billion. We continue to control our expense to maximize our profit. But again, the best way or the only way that we can improve this number is to increase our sales, and we can increase the sales number by, say, we have enough production capacity, and we have very strong people and organization to support much larger sales number. So we try to do our best to increase our sales. At the same time, we will continue to control our expense to maximize the profit for the rest of this year and in 2026 and beyond. This is it from me. Thank you very much.