Bridge Report:（1433）BESTERRA the second quarter of the fiscal year ending January 2023

President Akitatsu Yoshino	BESTERRA CO., LTD (1433)

Company Information

Stock Information

*The share price is the closing price on September 21. Share Outstanding, DPS and EPS are from the second quarter of the financial results for the FY23/1. ROE and BPS are actual results for the previous term.

Consolidated Earnings

* The forecasted values were provided by the company. Unit: million yen.

This Bridge Report introduces the earning results for the second quarter of the fiscal year ending January 2023 and other information of BESTERRA CO., LTD’s.

Table of Contents

Key Points
1. Company Overview
2. Second quarter of the Fiscal Year Ending January 2023 Earnings Results
3. Fiscal Year Ending January 2023 Earnings Forecasts
4. Conclusions
<Reference1: Medium-term Management Plan 2025>
<Reference2: Regarding Corporate Governance>

Key Points

• The sales in the second quarter of the term ending January 2023 stood at 2,533 million yen, up 8.5% year on year. Large-scale dismantlement projects, which were started in the previous term, are steadily progressing and the orders for environment-related work and the start thereof on redevelopment projects of Yazawa Co., Ltd., which became a group company, have also been favorable. Operating income declined 53.4% year on year to 75 million yen. While sales increased, some of the orders had a low profit ratio and gross profit remained at the same level as in the previous year, insufficient to offset the growth of SGA expenses brought about by continuous investments in the recruitment of human resources, research and development, marketing and advertising, etc. In terms of quarterly performance, sales and profit decreased for the second consecutive term from the previous term.

   

• The earnings forecast remains unchanged. For the term ending January 2023, the company forecasts a 12.3% year on year increase in sales to 6.7 billion yen and a 2.0% year on year increase in operating income to 620 million yen. The company expects the number of orders to remain firm. Due to the absence of equity in earnings of affiliates and exchange gains from business combinations recorded in the previous fiscal year, ordinary income and net income are expected to decrease. The company plans to pay an interim dividend of 10 yen/share, up 4 yen/share, and a term-end dividend of 10 yen/share, unchanged from the previous year, for a total of 20 yen/share. The payout ratio is expected to be 36.8%. 

   

• Sales increased and profit decreased in the second quarter of the term ending January 2023. The number of completed work reached a peak in the fourth quarter of the previous term (November to January) and declined in the first quarter (February to April) and the second quarter (May to July). However, there has been a growing trend in the amount of completed works in the second half of each term and the company is planning an increase in the second half of this term as well. Furthermore, as the company receives more orders for recurring works (receiving orders for work in a stable and continuous manner) as a result of their marketing strategy, profit ratio tends to drop as well. In the second quarter (May to July), it has been said that primary contract orders are favorable, although they have not been recorded in sales, and attention will be paid to results of the third quarter as the company works towards the achievement of the forecast for the whole term.

1.Company Overview

As a specialist in plant dismantlement, BESTERRA manages the dismantlement of plants (metal structures) for iron-making, power generation, gas, petroleum, etc. Its core competence is “the method and technology for dismantling plants,” and it has many patented methods including international patents. The company concentrates its managerial resources on engineering (proposal, design, and work planning) and management (supervision and work management), and outsources actual dismantlement work to its affiliates, and so it does not own heavy machinery or construction teams (the risk of owning assets can be avoided), and it is unnecessary to procure materials, etc. and make transactions for material production (the inventory risk can be avoided). The Group also has three consolidated subsidiaries, Hiro Engineering, which provides human resource services for design work, etc. and 3D Visual KK, which handles 3D scan modeling and design work, Yazawa Co., Ltd., which owns advanced technologies for removing asbestos.

ncepts."

Long-term vision (Ideal state of the company) 
・　Plant Demolition Leader in Japan
・　Proposing Plant Disassembly Technologies to the World 

1-1 Characteristics of the business

Plant dismantlement business

*Two standards for posting revenue and seasonality of revenue posting of the company
The standards for posting revenue from contracts can be classified into the completed contract method, in which revenue is posted when works are completed, and the percentage-of-completion method, in which revenue is posted according to the progress of works. The company basically applies the percentage-of-completion method to large-scale projects whose period exceeds 3 months from the term ending January 2023 due to the application of the standard for revenue recognition (the completed contract method is applied to projects that do not meet the aforementioned criteria). The timing of posting revenue (the completion of demolition work) from works for which the completed contract method is used is often affected by the capital investment plans of clients. In the case of BESTERRA, revenue tends to be posted in the first quarter (February to April) and the fourth quarter (November to January) (the seasonality of revenue posting). However, the variation in quarterly performance may mislead investors, so the company is expanding the scope of application of the percentage-of-completion method step by step, to equalize the timings of revenue posting. 

Others

1-2 Strengths: an excellent client base, efficient dismantlement management based on plenty of experience, and intellectual property, such as patented methods

Patented methods, etc.
“Apple peeling demolition method” and fusing robot “Ringo☆Star”
The “apple peeling demolition method” is a method of dismantling a large spherical tank, such as gas holders and oil tanks, by cutting it in spirals from the center of the ceiling of the enclosure part. The cut part spirals down to the ground gradually under the force of the earth’s gravity (natural energy). The method enjoys superiority in a work period, cost, and safety, and has considerable competitive advantages, realizing “greater promptness, higher cost efficiency, and added safety.” Furthermore, the company offers a robot for the fusing process, “Ringo☆Star,” which automates the “apple peeling demolition method.” (The company is also working to expand the range of applications for “Ringo☆Star” by developing a new attachment). 

Environment-related methods
The company has cultivated experiences and business results of a multitude of environment-related demolition works, using the “fireless methods” which do not require the use of fire. For example, although polychlorinated biphenyls (PCBs) are considered as a toxic substance and therefore totally abolished today, it had been used for many years in transformers and condensers because of its excellent thermal stability and chemical stability (electric insulation characteristics). In many cases, transformers and condensers are disposed of in conjunction with plant demolition works; however, because PCBs gasify when they are treated at the high temperature, posing a risk of inhaling the gas so generated, any firearms (such as gas cutting machines) cannot be used in demolition and withdrawal involving PCBs. The company is skillful at fireless and quasi-fireless methods using saber saws (which cut off objects with their saw blades moving in a reciprocating manner) that can cut off objects thicker than the thickness, which, in the industry, had been considered impossible to cut, through numerous devices, including measures against seizure of motors and recycling of blades. BESTERRA has applied for joint patents with Hitachi Plant Construction, Ltd. for a transformer dismantling method, a transformer dismantling jig, and a cutting device for dismantling a transformer. 

Windmill demolition works

Pursuit of the value of the 3D business

“Visualize” the dismantling process

Unique 3D measurement service

1-3 ROE analysis

The 42.4% in FY 1/22 was due to the recording of a 1.2 billion yen gain on exchange in the business combination. The company aims to achieve “an ROE of 13% in the term ending January 2026” in its “mid-term management plan 2025” (which will be described later). 

2. Second quarter of the Fiscal Year Ending January 2023 Earnings Results

2-1 Consolidated results

*Unit: million yen. Quarterly Net income is quarterly net income attributable to owners of the parent company.

Increase in income and profit
The sales in the second quarter of the term ending January 2023 stood at 2,533 million yen, up 8.5% year on year. Large-scale dismantlement projects, which were started in the previous term, are steadily progressing and the orders for environment-related work and the start thereof on redevelopment projects of Yazawa Co., Ltd., which became a group company, have also been favorable. Operating income declined 53.4% year on year to 75 million yen. While sales increased, some of the orders had a low profit ratio and gross profit remained at the same level as in the previous year, insufficient to offset the growth of SGA expenses brought about by continuous investments in recruitment of human resources, research and development, marketing and advertising, etc. In terms of quarterly performance, sales and profit decreased for the second consecutive term from the previous term.

The number of completed works (rough estimates) 

*Unit: million yen. Prepared by Investment Bridge Co., Ltd. based on company data.

The ratio of environment-oriented works to completed works has grown due to the expansion of demand for environment-related works such as the removal of asbestos and due to Yazawa Co., Ltd. becoming a group company.

There has been a growing trend in the number of completed works in the second half of the term and increase is planned in the second half of this term as well.
Furthermore, as the company receives more orders for recurring works (receiving orders for stable and continuous work) as a result of their marketing strategy, profit ratio tends to drop as well. Regarding the second quarter (May to July), the number of primary contract orders is favorable, although they have not been recorded in sales.

Breakdown of SG&A 

*Unit: million yen

While proactively using funds for marketing and advertisement in order to acquire prime contracts, the company promoted investment in the development of robots for crane rail inspection, etc., based on the mid-term management plan.

As a result of aggressive hiring activities based on the personnel strategy in the mid-term management plan, the number of demolition supervisors reached 48, up 4 from the beginning of the term.

2-2 Orders received and the backlog of orders

*Unit: million yen

Orders for recurring works (orders for stable and continuous work) increased as a result of strategies such as the expansion of local offices, and the number of orders received increased 26.4% year on year. Inquiries regarding orders for expected projects from the third quarter are favorable.

Orders received by sector (Amounts are approximate.)

*Unit: million yen 

The company has received orders for large-scale projects in the electric power and chemical industries as a result of the increase of continuous orders received for recurring works and proactive marketing activities.
The composition ratio of orders does not incline toward any particular industry.

2-3 Financial condition and cash flow（CF）

Financial condition 

*Unit: million yen. Trade receivables include notes and accounts receivable, accounts receivable from completed construction contracts, and contract assets.

Total assets stood at 8,341 million yen, down 678 million yen from the end of the previous term, due to a decrease in trade receivables.
Total liabilities decreased 1,218 million yen from the end of the previous term to 3,447 million yen, due to a decrease in trade payables.
Net assets grew 539 million yen from the end of the previous term to 4,894 million yen, due to increases in capital, capital surplus, etc. caused by exercising share acquisition rights.
Capital-to-asset ratio increased 10.4 points from the end of the previous term to 58.5%.  

Cash Flow（CF） 

*Unit: million yen

Operating cash flow and free cash flow turned negative, due to a decrease in accounts payable, etc.
The cash position improved.  

2-4 Topics

(1) Conclusion of a license agreement with Hitachi Power Solutions Co., Ltd. regarding the patented technology for dismantling onshore wind power generation facilities in Japan
In July 2022, an agreement was concluded with Hitachi Power Solutions Co., Ltd. for licensing BESTERRA’s patented technology of “dismantlement” used in dismantling onshore wind power generation facilities in Japan.
While reinforcing the system for cooperation in the business of dismantling wind power generation equipment, BESTERRA will provide safe, appropriate and efficient demolition work for the smooth replacement of wind power generation equipment by combining the technologies for dismantling equipment which they own and a variety of know-how on the construction and maintenance of wind power generation equipment which Hitachi Power Solutions has.

The company will work toward realizing carbon-free dismantlement and capturing the market for dismantling wind power generation equipment, with the advantages of work period shortening, reduction of CO2 emissions and a high level of safety.

(2) Conclusion of a capital and business alliance with Crassone Co., Ltd. regarding technologies for the DX (digital transformation) of dismantlement
In September 2022, the company concluded a basic agreement regarding capital and business alliance regarding technologies for the DX (digital transformation) of dismantlement with Crassone.

(Outline of Crassone Co., Ltd.)
Founded in April 2011. It operates “Crassone,” an online service for obtaining quotes from companies at the same time, matching about 1,600 specialized companies in Japan and their clients in the dismantlement work field.

The so-called “vacant home issue,” where private housing built in the period of high economic growth has deteriorated and been left unattended, has become apparent in the market for private housing dismantlement on which the company is focused. The number of such homes is rapidly growing and it is expected that this situation will go on to become even more serious as a social issue.
On the other hand, the asymmetry of information has been surfacing in the Japanese housing industry, as focus is placed only on construction and it is not known whom to contact for demolition. Crassone sets “bringing smiles to people through prosperous lifestyles” as its mission and develops a business of operating a digital platform for “solving the asymmetry of information through the digital transformation of the market for dismantling houses” and “solving characteristic challenges of the construction industry, which is said to be lacking in digitalization” to address social issues such as the vacant home issue, which is expected to grow more serious, with the vision of “cultivating a culture of restoring the cycle of each town.”
Concretely, they aim to contribute to solving the vacant home issue and “restoring the cycle of each town” set as its vision by directly connecting each client and company responsible for the work as well as supporting them so that the client can feel reassured in having the house dismantled, by offering digital matching platforms, represented by “Crassone” to address social issues such as the vacant home issue. Their business has garnered favorable reviews and they have formed partnership agreements for promoting the removal of vacant homes with 34 municipalities in Japan as of September 9, 2022.

(Background of the alliance)
By developing a system for mutual provision of their respective different strengths – the know-how for actual work and recycling waste BESTERRA has fostered in the long years of their dismantlement business, and IT and online expertise accumulated by Crassone in their matching platform business, it will be possible to cooperate to provide safe, appropriate and efficient services to the market for dismantling plants which have quite deteriorated and reached the time for demolition and renewal in Japan’s industrial structure as well as the market for dismantling private housing.
Moreover, the company has judged that aiming for the “best terra,” which also lies behind BESTERRA’s company name, and jointly promoting the management policy contributing to the achievement of sustainable development goals (SDGs) in the plant dismantlement business and Crassone’s management vision of “cultivating a culture of restoring the cycle of each town,” they will allow for the development of sustainable business and make a contribution to business expansion of both companies.

(Overview of the business alliance)
(1) Promotion of digital transformation
They aim to solve the asymmetry of information and characteristic challenges of the construction industry which is said to be lacking in digitalization and establish a competitive advantage by building a business model utilizing data and digital technologies in the market for dismantling plants and private housing and thus causing a reform in the business.

(2) Effects of the alliance in the dismantling works
The company aims to maximize value provided to clients by offering safe, appropriate and efficient quality dismantlement technologies to the market for dismantling plants and private housing, where expansion is forecasted.

(3) Recycling of buildings and resources as the industry standard
By combining BESTERRA’s carbon-free dismantlement and Crassone’s IT technologies, they will recycle scrap, etc. to the maximum and pursue dismantling work which significantly contributes to the environment with CO2 emissions kept as low as possible, and aim for making the recycling of buildings and resources the industry standard.

(Overview of the capital alliance)
BESTERRA will accept Crassone’s third-party allotment of shares and acquire about 670,000 Class-C preferred shares (it will own 12.50% of the total number of issued shares, acquired for about 500 million yen).
It is planned for BESTERRA to qualify as Crassone’s major shareholder as it will hold over 10% of Crassone’s voting rights.

(3) Investment for growth utilizing procured funds
The period for exercising the 9th share acquisition rights expired on August 5. The procured funds of about 850 million yen were used for acquiring the shares of Yazawa Co., Ltd. and in expenses for the research and development of the method for dismantling wind power generation equipment.
The company assumes that it will procure about 1 billion yen through the 10th share acquisition rights, which can be exercised until February 6, 2026.
The company will promote securing funds for growth and reinforcing its financial foundations for achieving the mid-term management plan.

(4) Change in the shareholder benefit system
The company changed (expanded) shareholder benefits in the term ending January 2023 and newly established a “BESTERRA Premium Benefit Club.”
Exchange for any product out of about 5,000 benefit products such as food products, high quality alcohol, electrical appliances or general goods, or exchange for shared shareholder benefit coins where benefit adding up points of other companies which have premium benefit clubs is possible on the “BESTERRA Premium Benefit Club” site.
Shareholders holding more than 5 lots (500 shares) listed in the shareholder register as of January 31 every year are eligible.

3. Fiscal Year Ending January 2023 Earnings Forecasts 

3-1 Full-year consolidated earnings forecast 

*Unit: million yen 

The earnings forecast remains unchanged. Sales and operating income are predicted to increase 
The earnings forecast remains unchanged. For the term ending January 2023, the company forecasts a 12.3% year on year increase in sales to 6.7 billion yen and a 2.0% year on year increase in operating income to 620 million yen. The company expects the number of orders to remain firm. Due to the absence of equity in earnings of affiliates and exchange gains from business combination recorded in the previous fiscal year, ordinary income and net income are expected to decrease. The company plans to pay an interim dividend of 10 yen/share, up 4 yen/share, and a term-end dividend of 10 yen/share, unchanged from the previous year, for a total of 20 yen/share. The payout ratio is expected to be 36.8%. 

4. Conclusions

Sales increased and profit decreased in the second quarter of the term ending January 2023. The number of completed work reached a peak in the fourth quarter of the previous term (November to January) and declined in the first quarter (February to April) and the second quarter (May to July). However, there has been a growing trend in the amount of completed works in the second half of each term and the company is planning an increase in the second half of this term as well. Furthermore, as the company receives more orders for recurring works (receiving orders for work in a stable and continuous manner) as a result of their marketing strategy, profit ratio tends to drop as well. In the second quarter (May to July), it has been said that primary contract orders are favorable, although they have not been recorded in sales, and attention will be paid to results of the third quarter as the company works towards the achievement of the forecast for the whole term.

<Reference1: Medium-term Management Plan 2025>

① Ideal state and long-term vision

② Besterra ESG management and SDGs
◎ Besterra ESG management
Under the corporate ethos: “to contribute to the earth environment with flexible thinking and creativity and technological capacity based on them,” the company aims to contribute to social sustainability and achieve beneficial growth. This is “Besterra ESG management,” and its unique business model for gaining competitive advantages.

◎ SDGs of Besterra 
For contributing to the earth environment, the company set a total of 17 goals related to SDGs and aims to attain them. 

1	To contribute to the earth environment by offering innovative dismantling technologies	①To offer innovative dismantling technologies for deteriorated infrastructure②To offer reliable, safe dismantling technologies for a low-carbon society and contribute to the earth environment③To offer advanced dismantling technologies as a professional in dismantlement by utilizing 3D technologies
2	To develop a working environment in which employees can feel that their jobs are worthwhile	①To become a company in which every employee can feel that their job is worthwhile and be proud of the future②To respect diversity and enrich the fair environment③To develop a fair educational environment where it is possible to exert abilities to the maximum
3-1	To realize an advanced recycling-oriented society and contribute to the establishment of a sustainable society	①To dispose harmful materials and pollutants appropriately and offer technologies for making them harmless②To develop a recycling business with high added value and improve productivity③To coexist with local communities and contribute to the improvement of local environments
3-2	To foster partnership for establishing a sustainable (advanced recycling) society	①To foster future-oriented partnership with lofty goals beyond all kinds of boundaries②To promote fair and equitable partnership between enterprises③To offer new technologies, knowledge, and findings to the advanced recycling society, to attain goals

③ Strategies

③-1 Technological patent strategy

https://www.besterra.co.jp/technology/movie.html 

(Source: The company) 

③-2 Sales strategy
In detail, the company will work on the “increase of orders received as a main contractor,” “enhancement of corporate brand development,” “cementing of cooperation,” and “upgrade of business bases.” 

◎ Increase of orders received as a main contractor

◎ Cementing of cooperation  

While the core business of Besterra is the dismantlement of plants, which is positioned between the arterial industries including “electric power, iron-making, and petroleum/petrochemical ones” and the venous industries including “scraps and industrial waste,” the core business of the TRE Holdings Group is the intermediate processing in the venous industries including “scraps and industrial waste.” 
While responding to the deterioration of infrastructure, whose market is expected to grow, the two companies will fulfill the role of linking the arterial and venous industries and establish an indispensable position in the advanced recycling society. 

◎ Upgrade of business bases

③-3 Strengthening of the dismantlement management system

③-4 Promotion of DX

③-5 Management strategy

・Income insurance: The company will fully bear the insurance premiums. 50% of monthly payments will be covered until the age of retirement (60 years old). It is one of the best income insurances in Japan.
・Retirement benefit system
・Employee shareholding association: The company bears 15% of the reserve for members.
・Retainable annual paid holidays: Paid holidays can be generally retained for 40 days as set forth in the Labor Standards Act, but in the company, it can be retained for up to 80 days in case an employee needs to recover from an injury or a disease. 

④ Fundraising

As mentioned above, the company has procured funds by issuing share acquisition rights for the purposes of securing funds for growth and fortifying its financial foundation for completing the Mid-term Management Plan. 

⑤Distribution of profits and return to shareholders

With regard to the distribution of net income, the company set the policies: (1) “investment for future growth,” (2) “internal reserve for strengthening the business base,” and (3) “return of profit to shareholders targeting a payout ratio of 40%.” 

<Reference2: Regarding Corporate Governance> 

◎ Organization type and the composition of directors and auditors  

It is also important to reform management systems for “achieving appropriate share price” and “increasing share price sustainably” to emphasize shareholders and strengthen the function to check business administration, to establish global-level corporate governance. The results of such efforts would win the trust of society, increase corporate value, and satisfy shareholders. 

＜Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)＞
The stated information is based on the Code revised in June 2021.

【Supplementary Principle 4-3-3】
We do not have a concrete plan regarding the successor of the CEO. As for the Board of Directors, the policy regarding the selection of successors is to take into consideration the personality, insight and accomplishments of each candidate and select a suitable person.
In case of formulating and conducting a plan regarding the successor, we shall ensure the fairness, transparency and objectivity of the decision process and appropriately proceed with the selection by involving the Nomination and Compensation Committee, an advisory institution to the Board of Directors where outside directors account for the majority, alongside proactive involvement of the Board of Directors.

【Supplementary Principle 4-3-3】
While we have not clearly established objective, timely and transparent proceedings for the dismissal of the President or CEO, we assess the effectiveness of the Board of Directors every year and shall progress with objective, timely and transparent proceedings through the involvement of the Nomination and Compensation Committee, where outside directors account for the majority, in regard to the nomination and compensation of directors.

＜Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)＞

【Supplementary Principle 2-4-1　Ensuring in-house diversity of core human resources and measurable goals】
Our company shall continue with its proactive recruitment activities not affected by sex, nationality, religion, social status, etc. and proactively promote excellent human resources including mid-career recruits, regardless of sex and age. Difficulties in ensuring excellent human resources are continuing in the construction industry, to which we belong, due to a chronic lack of personnel and the aging population. We are striving to enrich the mid-term management plan and disclosures on our website regarding the situation of the personnel recruitment plan, training policy and arrangement of our in-house environment.

【Supplementary Principle 3-1-2　Information disclosure in English】
Our company has been disclosing information in English since the brief financial report at the end of the term ended January 2022. Moreover, we have been disclosing the notice of the convocation of general shareholder meetings translated in English on the company website since the 49th regular shareholder meeting held in late April 2022. Having said that, we shall take into consideration the ratio of international investors and forge ahead with enriching the disclosure in regard to disclosure and provision of necessary information stated in other disclosure documents in English.

【Supplementary Principle 3-1-3】
Our company discloses initiatives concerning sustainability in the mid-term management plan and on our website. Moreover, in order to clarify initiatives for sustainability, we shall set up a Sustainability Committee as an advisory institution of the Board of Directors to control and manage the initiatives in addition to establishing the basic sustainability policy. Furthermore, we view the recruitment and education of human resources as an important challenge for improving our corporate value in the mid- to long-term and we shall create a system which will allow for independent building of career and build a free and lively corporate culture based on diversity to seek the reinforcement of human capital.
As for risks and opportunities for gaining income related to climate changes, we shall respond to the proposal by TCFD in expressing the endorsement of TCFD and participating in TCFD Consortium, and we shall proactively engage in enriching the quality and quantity of disclosures based on TCFD and equivalent frameworks and forge ahead with the enrichment of disclosure on our company website, etc.

【Supplementary Principle 4-11-1　Stance on the balance, diversity and scale of the Board of Directors and visualization of skills thereof】
The Board of Directors bears in mind the balance of the knowledge, experience, ability, etc. in regard to each business and strives to include members thought to be suitable with the number of directors at 9 or less and the number of auditors at 3 set out in the Articles of Incorporation. Our stance regarding the overall balance, diversity and scale lies in the consideration of knowledge, experience, ability, etc. necessary to promote the policies of the management philosophy, etc. when selecting director candidates. In order to further improve the effectiveness of the Board of Directors and visualize the composition balance, we shall consider skills necessary for members comprising the Board of Directors and create and disclose the skill matrix of all directors including independent outside directors in addition to evaluating the effectiveness of the Board of Directors every year and elevating the effectiveness of the Board of Directors. Moreover, we shall progress with appropriate selection of independent outside directors, including members who have management experience in other companies.

Regarding requests from shareholders for dialogue (interviews), our company believes that we should express a positive attitude within a reasonable scope in order to contribute to sustainable growth and medium- and long-term improvement of the corporate value of our company. Aiming to promote constructive dialogue with shareholders, with the planning department designated as a department in charge of IR activities, our company holds financial results briefings targeted at financial institutions and investors semiannually and discloses corporate information as needed on our website and through the system of optional disclosure offered by Tokyo Stock Exchange.