SUMINOE Co.,Ltd. Q2 FY2025 earnings call

• Corporate Rebranding: Changed name from Suminoe Textile Co., Ltd. (Kanji) to SUMINOE Co., Ltd. (Latin alphabet) in December 2024, reflecting the strategic focus on expanding non-fiber businesses (centered on synthetic leather) and accelerating global expansion centered on automotive interiors. Currently, 65% of revenue comes from fiber-based products, 35% from non-fiber, with the share of non-fiber planned to increase over time. PR for the rebrand includes newspaper ads, digital signage in train stations and major Tokyo intersections.
• Sustainability Initiatives:
  • SUMINOE's recycled polyester fiber Sumitron, made from PET bottles collected from Toyota's offices and factories, was supplied for the Toyota Land Cruiser 250, a world-first initiative in the automotive industry.
  • Launched closed-loop horizontal recycling for tile carpets, with commercial implementations at Ebisu Garden Place and Azabudai Hills Mori JP Tower, where SUMINOE delivered 230,000 square meters of tile carpet and will collect and recycle products at end-of-use.
• Global Automotive Interior Expansion:
  • Started synthetic leather production at the Mexico factory (delayed by six months) and is converting existing orders to local production, with plans for full-scale operation going forward. Secured a large volume order for floor carpets from a non-Japanese automaker, and will start deliveries at 500,000 to 600,000 square meters per month.
  • Plans to open a new laminating plant for automotive interiors at the Mexico factory of North American subsidiary Bondtex in April 2025, to expand North/Central American business centered on Mexico.
  • Partnered with France's TESCA Group to serve the European market, where SUMINOE has no local production base: TESCA handles local distribution for SUMINOE orders, and SUMINOE handles production for regions where TESCA has no bases.
  • Continues development of environmentally friendly products such as monomaterial seat cover materials.
• Capital Return & Shareholder Strategy: Maintained a planned 40 yen per share interim dividend. Announced a 1-for-2 stock split effective February 28, 2025, which cuts the per-share year-end dividend to 20 yen but leaves the total payout unchanged.
• Mid-Term STEP II Strategic Priorities: The three-year second phase of the mid-term plan targets 5% operating margin, 8% ROE, and 1x PBR (current PBR is ~0.5x) to improve corporate value. The first year is the 2025 May fiscal year, with targets of 105.3 billion yen full-year revenue, growing to 106.0 billion yen in 2026 and 109.0 billion yen in 2027, with a target of 5 billion yen operating profit (equivalent to ~4.6% operating margin) by 2027.

1. Automobile & Vehicle Interiors Segment: Revenue of 31.157 billion yen (down 376 million yen year-over-year), accounting for 61.5% of total consolidated revenue. Segment profit was 1.707 billion yen (down 422 million yen YoY). The decline was driven by lower global automobile production volumes: domestic production fell 7.6% YoY, cutting domestic automotive interior sales by 3% YoY, while overseas sales fell 2% YoY due to production adjustments and weakness at Japanese automakers in China/Thailand, partially offset by strong growth in carpet and mat sales in North/Central America. Railway/bus interior sales grew YoY from M&A synergies with Seki Orimono. 2. Interior Business Segment: Revenue of 17.679 billion yen (up 57 million yen YoY), accounting for 34.9% of total consolidated revenue. Segment profit was 74 million yen (down 120 million yen YoY). Sales grew on higher deliveries of the eco-friendly closed-loop recycled ECOS tile carpet to the commercial contract segment, but were dragged down by continued weak demand for residential products. Profit fell due to lower-margin residential product mix and persistently high raw material/energy costs, with December 2024 price hikes not yet reflected in the half-year results. 3. Functional Materials Segment: Revenue of 1.636 billion yen (down 431 million yen YoY), accounting for 3.2% of total consolidated revenue. Segment profit was a loss of 31 million yen (down 116 million yen YoY). Growth in deodorant/filter products and Sumitron recycled polyester fiber was more than offset by sharp order declines for fiber-based heating products due to continued warm winter trends. 4. Other Segments: Revenue of 225 million yen, segment profit of 36 million yen.

• Full-year 2025 May fiscal year guidance is maintained unchanged from prior announcements: 105.3 billion yen consolidated revenue, 3.3 billion yen consolidated operating profit, 3.4 billion yen consolidated ordinary profit, and 1.5 billion yen net income attributable to parent shareholders.
• Full-year segment guidance:
  • Automobile & Vehicle Interiors: 64.18 billion yen revenue (+1.379 billion yen YoY), 4.61 billion yen segment profit (+182 million yen YoY)
  • Interior Business: 38.04 billion yen revenue (+897 million yen YoY), 1.0 billion yen segment profit (+53 million yen YoY)
  • Functional Materials: 2.65 billion yen revenue (-477 million yen YoY), 180 million yen segment loss (-113 million yen YoY)
  • Other: 430 million yen revenue, 90 million yen segment profit
• Mid-term targets are unchanged, with all strategic and financial goals targeted for achievement by the 2027 May fiscal year. Benefits from current strategic investments are expected to increase incrementally through 2027.

• Reduced global production volume at Japanese automakers, particularly in China and Thailand, is negatively impacting automotive interior segment revenue and profit.
• Raw material and energy costs remain elevated, and price pass-through to customers has a time lag that creates near-term margin pressure.
• Proposed 25% tariffs on Mexican and Canadian goods by the second Trump administration have not been incorporated into guidance, and if implemented, could have a material negative impact on the company's Mexico-focused North American operations, though the magnitude of impact cannot currently be estimated.
• Functional materials segment has been heavily impacted by continued warm winter trends reducing demand for fiber-based heating products, leading to large operating losses in the segment.
• Persistent weakness in residential construction and demand for residential interior products is dragging on the interior business segment's profitability.

Q: When will the company's current strategic investments start producing visible results, and which business areas will drive that growth? / A: All targets are set for the final year of the mid-term plan, the 2027 May fiscal year, with growth expected to be incremental. The largest driver will be expanded sales and profit from North/Central American automotive operations, which swung to profit in the prior year after years of losses and is expected to grow steadily. Synthetic leather production in Mexico is slightly delayed but on track, with new customer acquisition progressing well, and will contribute to results by 2027. Large new orders from non-Japanese automakers already secured will add meaningful growth, and the company sees solid momentum for synthetic leather and decorative material sales to non-Japanese brands. For the interior business, the company will focus on building out the high-value, affluent-focused product line to lift margins. Functional materials will exit the large full-year 1.8 billion yen loss in the 2025 fiscal year to return to black ink in 2026, after restructuring including shifting half of Vietnam production capacity to automotive carpet/mat manufacturing.

Q: How does the company plan to grow the functional materials segment into a profitable contributor, and is there a reason not to divest it? / A: The business centers on OEM supply of specialty products leveraging SUMINOE's unique processing technology. It shrank as heating product demand fell, because the other half of the business failed to grow to offset the decline. The company is addressing this by expanding non-winter and year-round products, and has advanced development of water detection fiber that incorporates conductive threads to detect the presence/absence of water. This technology is near commercialization for applications in the nursing and construction industries, and will leverage the company's OEM capabilities. Management expects the segment, which has shrunk to ~2.6 billion yen revenue, can recover to 5 billion yen in revenue in the near term.

Q: What is the potential impact of automotive industry restructuring and EV shifts on SUMINOE over the next 5-10 years, and what is the risk of new US tariffs on Mexican goods? / A: The company expects continued weakness for Japanese automakers in China and Thailand, which will create headwinds, but SUMINOE has already been growing share and expanding into the non-Japanese automaker segment, which will offset declines and deliver overall growth. The proposal for 25% tariffs on Mexican goods has not been incorporated into the company's current mid-term plan at all. While most of the company's Mexican production serves the domestic Mexican market, some is exported to the US, so tariffs would have a phased negative impact if implemented, but the magnitude cannot currently be determined.

Q: What will drive earnings growth in the 2026 May fiscal year? / A: As expected, the main driver is expansion of North/Central American automotive operations: the large non-Japanese automaker carpet order will be a full year of contribution in 2026, adding tens of billions of yen in incremental revenue, and synthetic leather production will also add positive contribution. For the interior business, the company has already completed M&A activity, so earnings growth will come entirely from margin improvement initiatives.