TOYO DRILUBE CO.,LTD. Q2 FY2025 earnings call

• Company Overview Update

  • Total employee count decreased by 11 people to 503 from the prior period
  • In December 2024, subsidiary Oita Dry Lub acquired its second factory, adding this to the company's production assets
  • Core business is manufacturing functional dry lubricant coating products, which deliver lubrication performance in applications where wet oil/grease cannot be used, with 9 product groups covering lubrication, thermal management, electrical functions, chemical resistance, optical applications, and high-end appearance coatings

• Operational Improvement Initiatives

  • The company faced broad cost inflation across labor, electricity, and raw material inputs; productivity improvements combined with sales growth offset the impact of rising manufacturing costs
  • The company is currently integrating robotics and AI-powered image inspection into production facilities to boost productivity, quality, and revenue per employee
  • 70-80% of new product development is driven by customer-provided development themes, with the remainder developed independently by the company, centered on the firm's core competencies in chemical formulation and dispersion technology

• New Product and Global Expansion

  • The competitive rubber-compatible product LUBELAS is seeing rapidly growing market adoption; exothermic coating products are currently in large-scale trial testing
  • The company develops new products in compliance with global chemical substance regulations, and conducts joint development with university research laboratories
  • Existing global footprint includes 3 locations in China, 1 in Thailand, and 1 in Vietnam; all existing locations are scaling operations, and the company targets further expansion across Asia
  • In China, the business centers on automotive clients, with additional business from gaming, amusement, and smartphone sectors; some client production is shifting from China to Thailand and Vietnam; in Thailand, optical equipment orders account for over half of the location's revenue, followed by automotive and motorcycle business

For the 2025 June fiscal year second quarter, consolidated net sales reached 2.566 billion yen, a 9.0% year-over-year increase. By end-market segment: 1. Automotive: Generated 1.383 billion yen in revenue (an 86 million yen, 6.6% year-over-year increase), accounting for 53.9% of total consolidated revenue, down 1.2 percentage points from the prior year. While engine core segment sales declined sharply, increases in engine control components, drive components, and interior/exterior automotive parts drove overall segment growth. 2. Optical Equipment: Generated 557 million yen in revenue (a 69 million yen, 14.1% year-over-year increase), driven by strong production of camera bodies and interchangeable lenses. 3. Electronic Components: Declined 2.9% year-over-year (a 9 million yen decrease), due to weak demand for game console products and switches. Other segments were not broken out with specific absolute figures.

• Full-year 2025 June fiscal year guidance remains unchanged from the initial forecast
• Management forecasts full-year consolidated net sales of 4.9 billion yen, a slight year-over-year increase; sales are expected to be over 1.2 billion yen in both Q1 and Q2, with a slight decline forecast for Q4 due to lower orders for internal combustion engine peripheral equipment
• Management forecasts a slight year-over-year decrease in operating profit, driven by rising raw material, labor, and electricity costs, plus increased depreciation expenses from active capital investment; manufacturing fixed costs and variable manufacturing costs are each expected to increase by approximately 100 million yen
• Due to recovering performance at overseas affiliated companies, management forecasts a slight year-over-year increase in ordinary profit and net profit
• By segment, full-year forecasts call for automotive revenue of 2.657 billion yen (54.2% of total, slight increase), optical equipment revenue of 1.056 billion yen (increase), flat electronic component revenue, and growth in other segments from new orders; while engine-related automotive sales are expected to decline, drive components, safety components, and interior/exterior components are forecast to grow further
• Research and development expenses (mostly labor costs) are expected to see a slight increase; annual capital expenditure is expected to decline after peaking in the 2023 June fiscal year, though accumulated depreciation will continue to rise due to ongoing annual investment
• Full-year dividend guidance is 72 yen per share, which represents an increase from the prior period, and earnings per share is forecast at 472.77 yen

• Broad-based cost inflation across raw materials, labor, and electricity increases manufacturing costs, which pressures operating margins even with productivity offsetting measures
• Declining demand for internal combustion engine-related automotive products creates headwinds for the company's largest end-market segment, requiring growth from non-internal combustion automotive product lines to offset declines
• Some client production is shifting from China to other Asian markets, requiring the company to adjust its regional production footprint to align with client supply chain changes
• Adherence to evolving global chemical substance regulations adds complexity and cost to new product development

Q: What are the key differences between paid and free supply practices common across Toyo Dry Lub's end-market segments, and what are the business implications? / A: Industry business practices differ: automotive clients mostly use paid supply, while optical and electronic clients mostly use free supply. For paid supply, Toyo Dry Lub purchases client-provided components, processes them, and sells the finished components back; revenue is recorded net as only processing fee per accounting rules aligned with global standards. For free supply, Toyo Dry Lub only bills a processing fee for working on client-provided components. The key risk difference: with paid supply, Toyo Dry Lub bears yield loss risk and inventory management responsibility, while it does not bear this risk with free supply. Financially, paid supply creates more cash flow movement than free supply, which the firm monitors closely.