4976.T

Company Updates

• A new factory was established in Oita Dry Lube, adding 15 employees to bring total headcount to 518, with no other material operational changes from prior reporting.
• A 3-for-1 common stock split was implemented in January 2026, outside of the 2Q (Oct-Dec 2025) reporting period.

Product and R&D Highlights

• Toyo Dry Lube develops functional coatings using lubricating materials including molybdenum disulfide, graphite, and low-energy fluororesin, with 9 product groups covering lubricating, thermal, electrical, protective, optical, fast-drying lubricant, DLC, and high-end appearance coatings.
• Key growth trends across product lines:
  • Electrical functional coatings see growing inquiry volume centered on NEV (new energy vehicle) applications
  • Protective coatings have growing adoption in automotive applications
  • DLC high-hardness thin-film coatings are seeing gradual adoption growth
  • High-end exterior/interior appearance coatings are delivering steady performance growth
• The company is prioritizing new product development, with increased raw material analysis costs driving higher R&D spending. 70-80% of new product development is based on customer-provided development themes, with the remaining 20-30% developed independently.
• Key new product development initiatives include:
  • Expanding the applicable temperature range of exothermic coatings to very high-temperature domains
  • Developing elastic coatings for rubber applications (a high-growth area, with related capital investment ongoing)
  • Developing and expanding sales of PFAS-free, environmentally friendly coating products
  • Developing water-dispersed environmentally friendly products
  • Commercializing gas-barrier coatings that block hydrogen and oxygen permeation

Operational Improvements

• For processed products, the company is integrating robotization and AI-powered image inspection into factories to improve productivity and quality, with ongoing efforts to increase per-employee revenue.

Sales and Global Expansion

• The company is expanding sales in existing automotive and optical markets, while pursuing expansion into new markets including medical devices and semiconductors, with this market development extended to overseas locations.
• The company operates across Japan, East Asia, and Southeast Asia: 3 locations in China (2 affiliates, 1 subsidiary), 1 subsidiary in Thailand, 1 subsidiary in Vietnam, with no new planned expansions at this time. Regional performance:
  • China: Guangzhou subsidiary saw declining game machine adoption; Zhongshan affiliate saw declining production for Japanese automotive clients; Kunshan affiliate (near Shanghai) is steady and growing, with new market development progress in EV and semiconductor-related fields. The company sees sufficient long-term growth room in China despite near-term pressure from Japanese automaker headwinds.
  • Thailand: Optical-related orders are holding steady.
  • Vietnam: Profitability has improved dramatically, but the customer base is narrow and concentrated, leaving the business foundation weak. The company is strengthening sales activities to diversify the customer base.

Balance Sheet and Cash Flow Highlights

• Total assets: 12.916 billion yen, up 0.8% (98 million yen) from the prior period-end. Cash and deposits decreased by 348 million yen, while land increased by 320 million yen and investment securities increased by 264 million yen.
• Total liabilities: 2.43 billion yen, down 16 million yen from prior period-end, driven by a 26 million yen decrease in fixed liabilities from bank loan repayments. Total net assets increased 114 million yen to 10.486 billion yen.
• Cash flow:
  • Operating cash flow increased 121 million yen, primarily driven by 154 million yen in interest and dividend receipts.
  • Investing cash flow increased 304 million yen, driven by 423 million yen in time deposit withdrawals, offset by 300 million yen in new time deposit deposits and 236 million yen in expenditures for acquiring tangible fixed assets.
  • Financing cash flow increased 102 million yen. Ending cash and cash equivalents stood at 2.884 billion yen, with full-year 2026 free cash flow projected at negative 815 million yen.

• Full-year 2026 (June term) total revenue is projected to be 5.2 billion yen, flat year-over-year. A small impact from US tariff measures is already incorporated into the forecast, but visibility on further impacts remains low.
• Full-year operating income is projected to decline year-over-year, driven by rising raw material, labor, and utility costs, as well as higher depreciation expenses from active capital investment. Capital investment is progressing as planned, with minor schedule delays.
• Full-year ordinary income and net income are also projected to decline year-over-year, primarily due to rising cost of goods sold. Forecasted EPS is 151.14 yen, and forecasted full-year dividend per share is 33.36 yen.
• By segment full-year guidance:
  • Automotive segment: Projected revenue of 2.862 billion yen, flat year-over-year, with potential for a slight increase.
  • Optical equipment segment: Projected revenue of 1.084 billion yen, with expected year-over-year growth and potential for additional upside.
  • Electronic components segment: Projected revenue of 574 million yen, with expected slight year-over-year decline. Other segments are expected to see new order gains.
• Full-year operating profit projection anticipates 6 million yen in total revenue growth, 118 million yen increase in manufacturing fixed costs (including depreciation), and 34 million yen increase in manufacturing variable costs (including labor and utilities), leading to an overall projected year-over-year decline in operating profit.
• Full-year R&D spending is projected at 133 million yen (increased from prior periods to support raw material analysis for new development), and full-year capital expenditure is projected at 1.044 billion yen. Full-year depreciation is projected at 438 million yen, which is higher than the prior year.
• The company targets progressive, stable dividends while retaining sufficient internal capital, and plans to increase the full-year dividend to 33.3 yen per share.

By end-market segment (revenue contribution % and absolute value):

1. Automotive industry: 53.9% of total 2Q revenue, at 1.437 billion yen, up 4.0% year-over-year (a 55 million yen increase). Double-digit year-over-year growth in interior/exterior parts drove most of this gain.
2. Optical equipment industry: 22.9% of total 2Q revenue, at 612 million yen, up 9.9% year-over-year (a 55 million yen increase), driven by strong production of camera bodies and interchangeable lenses.
3. Electronic components industry: 5.0% of total 2Q revenue, at 135 million yen, down 5.0% year-over-year (a 15 million yen decrease). Strong performance for switch components was offset by weak demand for game machine components due to model transitions. Gains from automotive and optical segments offset the electronic segment decline to deliver overall 2Q revenue growth.

• Widespread cost inflation across all cost categories: Raw material costs, labor costs, fuel/utility factory expenses have all increased, and cost pass-through to customers has not kept pace with cost increases, leading to a year-over-year decline in 2Q profit.
• Exposure to US tariff policy volatility: Uncertainty around Trump-era automotive tariffs makes future demand projections difficult. If tariffs force vehicle price increases, auto sales volumes are expected to decline, preventing the company from issuing bullish earnings guidance.
• Regional business risks in China: Ongoing shifts in the Chinese economy and current headwinds for Japanese automakers operating in China are creating near-term performance pressure on the company's Chinese affiliates, even as long-term growth potential remains.
• Customer concentration risk in Vietnam: The Vietnamese subsidiary has improved profitability but relies on a small, concentrated customer base, leaving it with a weak operational foundation.

Q: What impact have Trump's automotive-related tariffs had on Toyo Dry Lube's business, amid recent developments that prior reciprocal tariffs were ruled unconstitutional?

A: In the 2Q period ending December 2025, we saw a mix of outcomes among our automotive customers: some carmakers maintained production as planned, while others cut production. Among our own customers, some saw flat production, while others saw nearly double-digit production declines. Despite this mixed impact, we have been able to maintain our sales volume and deliver solid performance to date, thanks to new product adoption that offset losses. During the quarter, we did lose some orders as production shifted from Japan to overseas, but new product adoption offset these losses and delivered a net positive result. It remains difficult to forecast future impacts clearly: if tariffs force vehicle prices to rise, auto sales volumes will likely decline, and we are not in a position to issue a bullish earnings forecast under this uncertain environment.