TOCALO Co.,Ltd. Q2 FY2026 earnings call

• Overall Financial Performance

  • 2026 March fiscal year first half: Total consolidated revenue is 28.3 billion yen, recurring profit is 6.756 billion yen (up 1.235 billion yen YoY), recurring profit margin is 23.9%. Both revenue and recurring profit hit an all-time high for the first half, beating initial forecasts.
  • The main drivers of profit growth are higher sales and lower variable cost ratios, partially offset by higher personnel expenses and negative foreign exchange impacts. A 283 million yen wage increase subsidy from the Ministry of Economy, Trade and Industry is included in other income.
  • As of the end of the second quarter, total assets are 84.3 billion yen, equity is 62.6 billion yen, equity ratio is 74.3%, up 0.1pp from the end of the prior fiscal year. Interest-bearing debt decreased 600 million yen to 3.1 billion yen. Operating cash flow is +4.4 billion yen, investing cash flow is -2.7 billion yen, free cash flow is +1.7 billion yen, ending cash balance is 16.1 billion yen, indicating a healthy financial position.

• Capacity Expansion Initiatives

  • Semiconductor/FPD capacity expansion: New factory buildings are under construction at Tokyo Plant and Kitakyushu Plant in Japan, scheduled to start operations in 2027. Overseas, a new factory has been completed at Taiwan subsidiary Han Thai International Electronics, and TOCALO USA-Arizona LLC was established in Arizona, USA, with factory construction ongoing and operations planned to start in 2027.
  • General industrial capacity expansion: A land purchase agreement was signed for a new Nagoya Plant in Chita, Aichi, to expand capacity for growing orders from aerospace, industrial machinery, and steel sectors, with completion and operations targeted for October 2027. Terada Kousakusho (joined the group last year) is building a new factory on its existing site for completion in April 2026, and TOCALO Surface Technology (Thailand) (fully acquired in June 2024) is building a factory to start operations in February 2026.

• Manufacturing Process and ESG Initiatives

  • A high-precision optical processing machine was introduced, enabling micro-processing with sub-1-micron accuracy. Combining this with the company's proprietary coating technology allows expansion into new applications such as high-precision semiconductor components and precision electronic component molds. Robotic automation of on-site thermal spraying for power plant boiler work was successfully completed, reducing worker burden, improving safety, and enabling consistent uniform coating.
  • Completed calculation of Scope 1/2/3 greenhouse gas emissions for the entire group (including non-consolidated entities), and disclosed 2024 full-year emissions. Tokalco standalone obtained third-party verification for GHG emissions, water use, and industrial waste output for transparency. Ongoing initiatives include waste plastic recycling, waste oil reduction in semiconductor polishing processes, and water reuse.
  • Obtained ISO/IEC27001:2022 certification for Nagoya Plant for aerospace part surface processing, and obtained the Platinum Kurumin certification (top-tier work-life balance certification from Japan's Ministry of Health, Labour and Welfare).

• Mid-term Management Plan Progress

  • The current 5-year mid-term plan ends in FY2026 March. The revenue target of 53.0 billion yen and recurring profit target of 12.0 billion yen were both achieved one year ahead of schedule. The final year full-year target is 57.0 billion yen revenue and 13.0 billion yen recurring profit, which will set new all-time highs. The next mid-term plan will be announced at the 2026 May earnings briefing.

1. Thermal spraying processing (standalone): Increased revenue (up 3.3% YoY) driven by solid performance in semiconductor/FPD and industrial machinery segments; decreased profit due to higher personnel and depreciation expenses. No absolute segment revenue/ profit figures were provided in the transcript.
2. Domestic subsidiaries: Overall increased revenue, decreased profit YoY. The addition of Terada Kousakusho (consolidated since August last year) was offset by sluggish automotive-related performance at Nippon Coating Center, leading to net lower profit.
3. Overseas subsidiaries: Increased revenue (up 45.2% YoY) and increased profit YoY, driven by strong performance across semiconductor and steel-related businesses.
4. Other surface treatment processing: Decreased revenue and decreased profit YoY, due to prolonged customer inventory adjustment for agricultural machinery parts that reduced order volumes.

• Full-year FY2026 March consolidated guidance is unchanged from the May 9, 2025 announcement: revenue of 57.0 billion yen, recurring profit of 13.0 billion yen, recurring profit margin of 22.8%, with revenue driven by the semiconductor segment to hit a new all-time high. Net income attributable to parent shareholders is projected at 8.3 billion yen (up 3.5% YoY), with ROE projected to be flat at 13.3%.
• First half progress vs full-year guidance: 49.7% for revenue, 52.0% for recurring profit. Semiconductor/FPD full-year revenue guidance is 25.1 billion yen (23.5 billion yen semiconductors, 1.5 billion yen FPD), with first half progress at 47.6%. Non-semiconductor/FPD full-year guidance is 31.6 billion yen (up 5.7% YoY), with first half progress at 51.4% driven by solid subsidiary growth.
• Full-year planned capital expenditure is 9.0 billion yen, with 5.1 billion yen (57.0% progress) spent in the first half, mainly for construction at Tokyo, Kobe, and Kitakyushu Plants (3.8 billion yen) and overseas subsidiary investment (700 million yen). Full-year R&D spending is budgeted at 1.7 billion yen (3.0% of revenue), with 780 million yen (45.9% progress) spent in the first half.
• Second half guidance projects higher revenue but lower profit compared to the first half. Semiconductor orders that adjusted in the second quarter are recovering, and industrial machinery and overseas subsidiaries are expected to remain solid. However, semiconductor revenue historically recovers with a lag after order recovery, so management takes a conservative stance on second half semiconductor revenue and profit, leaving room for potential upside upside earnings. Guidance will be updated promptly if needed based on new market information.
• Dividend guidance: Interim dividend was increased 3 yen from prior forecast to 37 yen per share. Full-year dividend is planned at 70 yen per share, maintaining a 50% payout ratio based on current earnings guidance.

• Semiconductor market demand has a delayed impact on the company's revenue, so even as orders recover, near-term revenue and profit may underperform market expectations, and management's conservative second half forecast introduces downside risk if recovery is slower than expected.
• Changes in semiconductor industry capital expenditure plans (e.g., the 2-year postponement of 2030 capacity expansion targets to 2032) create uncertainty for long-term capacity planning, requiring flexible adjustment of investment timelines.
• Modifying existing production processes to introduce higher productivity automated equipment in the semiconductor sector faces significant regulatory and technical barriers under the industry's Copy Exactly and Change Control requirements, which may delay productivity improvement gains.

Q: What benefits does the company expect from establishing the new Arizona subsidiary, beyond accessing local recoating demand and closer ties to US equipment makers?

A: The new Arizona operation is driven by strong customer requests from semiconductor equipment makers to strengthen local collaboration. The company's long-term plan calls for 200% production capacity expansion for the semiconductor equipment thermal spraying business by the 2032 timeframe, which cannot be met by the Kitakyushu plant alone. Maintaining Kitakyushu production while adding local US production will improve coordination with North American-based equipment customers. The project is specifically focused on serving the needs of major semiconductor equipment manufacturers.

Q: After hitting strong results and beating mid-term targets early, why did the share price drop sharply, and what is the company's strategy to improve market liquidity?

A: Management believes the share price drop is because market consensus estimates were much higher than the company's maintained full-year guidance, so the unchanged guidance after a strong first half was interpreted as a bearish signal for the second half. Regarding liquidity, trading volume has increased substantially over the past year, and the current shareholder base (30% individual investors, 30% overseas investors, 40% domestic institutional investors) has a balanced structure. The company will continue existing initiatives to grow shareholder count, and will consider stock splits if share prices rise significantly, as it has done in the past.

Q: Is the current round of capacity expansion wrapping up, or will more expansion be needed? What productivity gains come from higher automation in new facilities?

A: The company has already prepared capacity for a 30% production increase per the 2027 plan, but is continuing work to reach a 200% total production capacity increase target aligned with customer 2032 demand plans, even as major customers have pushed their targets back two years. Certified higher-efficiency production systems have boosted coating line productivity by ~30%, though overall factory productivity increases are around 10% due to slower gains in non-coating processes. The company builds facility capacity first, with 30-40% buffer against current demand, and adjusts equipment investment based on customer future demand forecasts. New facilities use higher productivity automated equipment that allows matching existing capacity with smaller facility footprints.

Q: What is the strategic direction for the next mid-term management plan, will it focus on volume growth or quality/ profitability?

A: The company has an internal baseline target of 80 billion yen total group revenue in the next 5-year period, and is currently evaluating whether to target 80 billion yen or a higher 90 billion yen, with plans to finalize and announce the plan in May 2026. The priority is on quality and profitability rather than just volume growth: management will focus on maintaining the company's current high profit margin while growing, rather than pursuing revenue growth at the cost of margin. The company has committed to achieving 4% annual wage increases and 7% annual growth, and is targeting outcomes above these baseline targets.