TOYO DRILUBE CO.,LTD. Q4 FY2025 earnings call

Core Business and Technology Overview

• Toyo Dry Lube develops multi-functional coatings by blending functional materials including molybdenum disulfide, tungsten disulfide, fluororesin, silicone resin, graphite and boron nitride into special binders, with products grouped into 10 categories covering lubricating coatings, thermal management coatings, electrical function coatings, protective coatings and automotive paints.
• Core competitive advantages are formulation design technology for developing new functional coatings and dispersion technology for hard-to-disperse materials such as metals.

Product Development Highlights

• The LUBELAS series, an elastic thin-film lubricating coating for rubber materials, has grown to become a current core product. The LUBICK series is also growing steadily and is expected to drive future growth.
• New product development combines customer-commissioned projects and independent in-house development. The company also conducts joint research with multiple university laboratories alongside internal independent research to accelerate new product development.

Production Improvement

• The company has introduced automation, robotics, image inspection and AI into coating processing to improve both production efficiency and product quality.

Sales and Global Expansion

• Sales activities focus on expanding sales in existing automotive and optical markets while actively expanding into new markets. Domestic and overseas sales departments collaborate to improve sales performance.
• The company operates 3 subsidiaries/affiliates in China and 2 in Southeast Asia. It already achieves good results serving local Japanese manufacturers through cross-regional collaboration, and is actively expanding sales to local manufacturers and other overseas manufacturers operating in the region.

Financial and Operational Updates

• Total headcount increased by 5 to 514 employees year-over-year, with a decrease in parent company headcount offset by an increase in subsidiary headcount.
• Despite significant increases in labor, energy and raw material costs, the company delivered double-digit revenue and profit growth driven by sales expansion, productivity gains from automation and controlled SG&A expenses. Gross margin decreased 0.4% due to cost inflation and higher depreciation from active capital investment, but operating margin increased 1.1% due to controlled SG&A growth.

1. Automotive industry: Revenue of 2.865 billion yen, accounting for 55.2% of total consolidated revenue, with a 10.7% increase year-over-year. Engine-related parts revenue decreased, but other automotive equipment segments performed well driven by new customer adoption. 2. Optical equipment: Revenue of 1.061 billion yen, a 6.5% increase year-over-year, driven by strong orders for camera body and interchangeable lens components. 3. Electronic components industry: Revenue remained flat year-over-year. 4. Total company consolidated revenue: 5.194 billion yen, a 10.5% increase year-over-year. Operating profit was 0.78 billion yen, a 19.2% increase year-over-year; ordinary profit was 0.976 billion yen, a 21.0% increase year-over-year; net profit attributable to parent company shareholders was 0.702 billion yen, a 13.9% increase year-over-year.

• The 2026 June full year consolidated revenue is expected to be 5.2 billion yen, broadly flat year-over-year, which factors in some expected impact from US tariff measures. The segment breakdown of expected revenue is: 2.862 billion yen from automotive, 1.084 billion yen from optical equipment, 0.574 billion yen from electronic components, and 0.68 billion yen from other segments.
• A year-over-year decrease in profit is forecast across all profit lines: operating profit is expected to decrease 158 million yen to 0.622 billion yen, driven by higher raw material, labor, energy costs, and increased depreciation from prior capital investment.
• Capital expenditure has remained around 0.9 billion yen per year since the 2023 June period, and depreciation is projected to rise to 0.438 billion yen for the 2026 June period.
• The company maintains its stable dividend policy, forecasting a full year dividend of 100 yen per share for the 2026 June period, and is targeting 453.41 yen in earnings per share.

• Persistent inflation in raw material costs, labor costs, and energy costs increases operational cost pressure and will weigh on 2026 fiscal year profitability.
• The 15% US tariff introduces uncertainty to export-oriented production: while the full magnitude of impact is not yet fully clear, some customers have cut production plans (with one major customer cutting output by half), and new planned orders have decreased, with negative impacts expected to materialize in the 2026 fiscal year.
• Ongoing large capital investment requirements for production capacity upgrading and expansion mean the company must maintain sufficient internal reserves to support stable operations, limiting near-term increases in payout ratios.

Q: What impact will the 15% US-Japan tariff have on the company's performance?

A: Management notes the full extent of the impact is still unclear at present. Customer production plans vary widely: one major US-bound production line has been cut in half, while other customers have not reduced output at all. While the company has not suffered large material impacts to date, it has seen a decrease in new planned orders, and some negative impact is expected to appear in the current 2026 fiscal year.

Q: Which industries outside of automotive is the company prioritizing for expansion?

A: Management states that the priority expansion areas outside automotive are communications equipment, semiconductors, and medical equipment. While these segments still make up a low percentage of total revenue, they have already started delivering moderate sales growth. The company expects communications equipment and semiconductors to grow further and become new core revenue pillars in the future.

Q: The current forecast 22% payout ratio is well below the listed company average after the recent large dividend increase. Is there any discussion of raising the payout ratio to 30% or 40%?

A: Management explains that as a manufacturing company with multiple factories, it requires frequent capital investment, and large unplanned investment projects can arise at any time. To maintain operational stability, the company judges it necessary to retain sufficient internal reserves. Therefore, the company will continue to prioritize stable continuous dividend payments while maintaining adequate internal reserves.