Toho Zinc Co.,Ltd. Q2 FY2026 earnings call

Company Overview & Core Strengths

• Founded in 1937, Toho Zinc is a ~90-year-old non-ferrous metal manufacturer with 4 domestic factories, holding the top domestic market share in lead and silver smelting, focused on supplying essential raw materials to Japanese industrial and social infrastructure.
• The company summarizes its core competitive advantages in three keywords (three Cs):
  • Create: Unique Technical Capabilities: Owns proprietary smelting technology that can produce the same products from both virgin ore and recycled raw materials; holds industry-leading recycling technology that produces zinc oxide from 100% waste electric furnace dust; and produces 99.95% high-purity electrolytic iron for high-end applications.
  • Cash in: Diversified Revenue Model: Can source from two types of raw materials, adjusts raw material mix and production planning dynamically based on market conditions to optimize profitability, while recovering multiple valuable metals (lead, silver, gold, rare metals) from ore to expand revenue sources. The core revenue sources are smelting processing fees (TC/RC for lead ore/precious metals) and sales premiums on finished metal products.
  • Clean: Closed-loop Lead Recycling Ecosystem: Operates a complete end-to-end lead recycling loop covering collection, disassembly, smelting and re-supply of lead from waste lead batteries, partnering with logistics and industry players to form a large-scale recycling consortium that supports domestic infrastructure and circular economy goals.

Business Portfolio Restructuring & Business Revitalization Plan

• After large losses in the resource business in FY2023, the company launched a full business portfolio review, focusing on core and growth businesses and exiting unprofitable segments: core/growth businesses have delivered stable profits, while restructuring/exit of unprofitable businesses has been mostly completed, shifting the company from a defensive to offensive growth phase.
• The 5-year revitalization plan runs from 2024 to 2030 (ending in the March 2030 fiscal year), with the following strategic priorities:
  • Expand lead, precious metals and rare metal production in the core lead/silver smelting business, increase the lead recycling ratio and expand the existing recycling loop.
  • Strengthen brand power for the 100% recycled zinc oxide product in the environment & recycling business to capture growing demand from tire manufacturers for higher recycled content.
  • Launch new electrolytic iron products in the electronic & functional materials business to capture growing demand from the aerospace, automotive and special alloy sectors, where the global market is expanding.
• The company received financial support from Advantage Partners and Tatsumi Shokai, and formed business alliances with Advantage Partners and business cooperation with Hanwa Co., Ltd. to rebuild its management and financial base.

Recent Operational Updates

• In November of the previous year, the company downward revised its FY2025 earnings forecast due to operational issues in the lead/silver smelting business, worsening raw material market conditions, and delayed business portfolio restructuring. As of the seminar:
  • The operational trouble has been fully resolved, production has recovered to planned levels, and the business portfolio review is almost complete.
  • Profit structure reforms for core/growth businesses are progressing as planned, with bottom-up improvement proposals being collected from all levels of the organization, including underutilized raw material utilization and new product development.

Based on FY25 full-year forecast baseline, the company operates four business segments:

1. Smelting Business (Lead & Silver): This is the company's core business, accounting for 80% to 90% of total revenue. It produces lead, silver, gold, bismuth and rare metals, with Toho Zinc holding the top domestic market share in lead (around 40% of total domestic production/supply) and top-tier domestic share in silver. The core advantage of this segment is its ability to process both ore and recycled raw materials (waste lead batteries), which is only achieved by 2 companies in Japan, creating a major competitive moat.
2. Environment & Recycling Business: Classified as a growth business. Its main product is 100% recycled raw material zinc oxide (made from industrial waste) used as a tire additive, utilizing a unique domestic production technology that matches tire manufacturers' sustainability targets for higher recycled content usage.
3. Electronic & Functional Materials Business: Classified as a growth business. It produces high-purity electrolytic iron used as base material for special alloys for aircraft landing gear and automotive CVT belts, holding a top global market share in the high-purity, high-end product segment where only 2 global producers remain.
4. Metal Recycling Business: A smaller segment that leverages the company's existing smelting technology capabilities. The previously held smelting (zinc) and resource businesses are classified as restructuring/exit segments, which had generated consistent large losses but have now been mostly restructured, leading to significant improvement in the overall profit structure.

• The 5-year business revitalization plan targets 7.4 billion yen in recurring profit by the final fiscal year ending March 2030; 2027 March quarter and beyond figures do not reflect current market conditions as of the 2024 plan publication.
• The company targets increasing net assets and equity ratio via accumulated earnings to strengthen its financial base.
• For FY2026, the company targets profit exceeding the original revitalization plan target, aiming to establish stable profit levels; the projected improvement assumes no major change in commodity market conditions, focusing on bottom-up corporate structure improvement rather than relying on favorable market moves.
• The company has set maintaining listing on the Tokyo Stock Exchange Prime Market as its top priority. As of September 30, 2025, it did not meet the listing maintenance criteria due to insufficient circulating market capitalization, but recent stock price increases have put the current market capitalization above the required threshold. The company will continue pushing forward the revitalization plan, improve PER, and strengthen IR activities to maintain listing, and expects to meet the criteria barring major unexpected stock price declines.
• The company expects larger revenue gains starting from FY2027 onwards, after the planned periodic repair of the large lead/silver smelting facility in March of the current year progresses as scheduled.

• Commodity market price volatility: Lead and silver prices are set by global markets (LME for lead, LBMA for silver), and the company has no direct control over metal prices. While current silver prices are at high levels, raw material prices also rise in tandem with metal prices, compressing processing margins if prices rise.
• TC/RC (smelting processing fees) are currently at historically low levels, pressured by distorted market balance from Chinese purchasing activity, creating a tough operating environment for the smelting business; the company expects this weakness to be temporary as it is cyclical and dependent on supply and demand balance, which will stabilize over time.
• Past operational trouble in the core smelting business was caused by multiple factors including aging equipment, labor shortages, and management gaps. While solutions and recurrence prevention measures have been implemented, operational stability remains a medium-term priority requiring planned capital investment and workforce strengthening.
• The company currently does not meet the TSE Prime Market listing maintenance criteria as of September 2025, and maintaining listing depends on stable stock price levels over the measurement period.
• New entry into the lead smelting industry is extremely difficult due to high capital costs for large-scale facilities and environmental equipment, strict permitting requirements, but existing competitors could still engage in competitive pricing that pressures margins, though the company's scale advantages offset this risk.
• Supply concentration risk for lead ore is mitigated by sourcing from 4 to 5 different regions including Mexico, South America and Australia, with ongoing rotation of suppliers to hedge supply risk.

Q: What specific rare metals are you targeting for increased production and sales under the revitalization plan?

A: The priority rare metals are silver, gold, antimony and bismuth. These can all be recovered from lead ore and waste lead batteries, and are high value-added products with strong market demand.

Q: How will you respond to current market volatility including the recent high silver price?

A: Our profitability is not determined by metal prices alone; it depends on multiple factors including raw material procurement terms, recovery rate, and operating rate. We capture opportunities from favorable market moves while conducting appropriate hedge transactions and flexibly adjusting raw material mix to ensure stable earnings.

Q: What is your view on recent large stock price movements driven by commodity market changes?

A: We are surprised by the recent large stock price moves. Higher silver prices and yen depreciation are positive for our business, but they also push up raw material costs, so we will respond flexibly and remain focused on delivering stable medium-term business growth. Full Q3 results will be announced in mid-February, and next fiscal year's plan will be announced in May.

Q: Will you pursue further additional restructuring of unprofitable businesses or assets going forward?

A: At this stage, we are focused on executing the existing revitalization plan, and we are not in a phase where we need to consider new major withdrawals or restructurings. That said, we will continuously review profitability and market conditions during plan execution, and will make flexible, reasonable judgments including additional restructuring via our formal governance processes if needed.

Q: What counts as lead and silver raw materials, and what is the production process?

A: Lead ore typically has lead content of around 60% for high-grade ore, which is our main virgin raw material. The main recycled raw material is waste lead batteries, which contain lead plates and lead paste; we also accept other industrial waste that contains lead, which we process alongside ore. We first produce pure electrolytic lead, then add additives to produce lead alloys as needed for customers.

Q: What is the cost structure for silver, since it is a byproduct?

A: Silver is not free. The price of lead ore already includes the value of silver and other valuable metals contained in the ore. Our business model deducts smelting processing fees from the total metal value of the ore to calculate the raw material cost. Higher recovery rates create additional free metal (the difference between actual recovered metal and the amount contractually owed to the ore supplier), which directly adds to profit, so higher recovery rates from our technology directly improve profitability.

Q: Where do you import lead ore from?

A: We import from Mexico, South America, Australia and other regions. Domestic lead ore deposits are already depleted, so we no longer source meaningful volumes domestically.

Q: Do you plan to diversify suppliers to reduce supply risk?

A: We already source from 4 to 5 different origins as standard practice, and continuously rotate new suppliers into our mix as mines are depleted, which is our standard approach to hedging supply risk.

Q: What impact has China's rare metal export restrictions had on your business?

A: We have seen large price increases for bismuth and antimony following the export restrictions, but we source raw materials from outside China as well, so production has continued uninterrupted. Higher prices have translated to higher selling prices, so there has been no material negative operational impact to date, the impact is mostly on market supply-demand balance.

Q: How do you manage price volatility risk, and how far forward do you hedge prices?

A: We hedge the price risk for the full period from raw material purchase to final product sale. There is typically a 4-5 month lag between purchasing ore and completing sale of the final product, and we hedge this entire period we hold the raw material/inventory. We do not operate for speculative purposes, stabilizing earnings is our top priority.

Q: What is the medium-long term demand outlook for lead and silver?

A: About 80% of lead demand comes from batteries. Even with growing EV adoption, all EVs still use lead auxiliary batteries for functions like air conditioning and infotainment. Global lead demand is currently forecast at ~15 million tons this year, growing to ~18 million tons by 2050, driven by growing demand for stationary industrial lead batteries for energy storage (particularly for solar power, where low costs make lead preferred over lithium in many off-grid applications globally). For silver, global annual demand is ~30,000 tons, ~20,000 tons of which is for industrial use, including silver paste for solar panels and lead-free solder. Industrial demand for silver continues to grow, so overall demand is expected to keep expanding.

Q: What is the current situation for TC/RC and processing fees?

A: TC for lead is currently at historically unprecedented low levels, similar to the difficult environment copper smelters are facing, driven by Chinese buying that has distorted market balance. This is cyclical, however. Global lead supply already has a 60%+ recycling rate, so demand for virgin ore is relatively low, and over time recycling will become the dominant supply source, so the current imbalance will eventually stabilize.

Q: What is the sensitivity of earnings to silver price changes?

A: Per our Q2 publication, on an annual basis, a $1 per ounce change in silver price leads to approximately 50 million yen in profit change. This is a simplified calculation, so it should not be used for full-year linear projections, as silver prices rose sharply only last November, so the full-year impact will not be as large as the simple projection. We prioritize stable profit, so we hedge price risk as well.

Q: Are you on track to meet the TSE Prime Market listing maintenance criteria for circulating market capitalization?

A: As of September 30, 2025, our circulating market capitalization was 8 billion yen, below the 10 billion yen threshold. However, with recent stock price increases including multiple up limit days, current market capitalization is now above the threshold. The exchange uses the 1-3 month average price, so barring a large unexpected drop in share prices we expect to maintain our Prime Market listing. We will continue to focus on executing our revitalization plan to grow earnings, which is the foundation for maintaining listing.

Q: Do you plan to hold in-person investor seminars?

A: We will proactively consider holding in-person seminars going forward.

Q: What is your view on current corporate awareness, and what are your plans to improve it?

A: We recognize our corporate awareness is currently low. We established a Public Relations & IR Department in December 2025, and will systematically work on improving awareness going forward, including expanding activities like this individual investor seminar that we had not done before.

Q: Do you consider pursuing M&A?

A: M&A is always under consideration as a strategic option to support medium-long term growth and improve corporate value as part of our ongoing business portfolio review.

Q: Is the company vessel "Toho" still operational, and will it require large capital expenditure for replacement soon?

A: It is still operating normally, and no decision on replacement or major repair has been made at this stage.

Q: What is the breakdown between annual contracts and spot sales for your products?

A: We primarily use annual contracts, spot sales account for a low proportion of total sales.

Q: How often do you review your business portfolio?

A: We review business portfolio on an ongoing basis. We monitor each business segment's performance continuously, and any segment that fails to meet our performance thresholds becomes a candidate for review.

Q: How much influence does Advantage Partners have over management decisions?

A: Advantage Partners holds a majority of voting rights, but our management decisions and daily operations are conducted independently by our board of directors and management team in accordance with the Companies Act and our internal governance rules.

Q: Do you have any target operating profit for non-core segments like antimony?

A: Antimony is a rare metal that is already included in the lead/silver smelting business earnings, so we do not set a separate standalone profit target for it. We have no control over global lead and silver prices, which are set by LME and LBMA based on supply and demand; only TC/RC and sales premiums are negotiated with counterparties based on market conditions.

Q: How did you resolve the recent labor shortage, and what positions were understaffed?

A: We are working with partner companies and recruitment agencies to accelerate hiring. The shortage was not concentrated in any specific job category.

Q: If silver prices rise, does that not hurt profit because raw material prices rise in tandem and compress TC/RC?

A: Your understanding is correct, but any free metal (additional recovered metal above the contractual amount) will see higher revenue when prices rise, so that part of the business benefits directly from higher silver prices.

Q: Have there been any recent changes in major shareholders or creditors?

A: Since the financial support from Advantage Partners, shareholder positioning has been stable. We continue to receive steady support from our relationship banks, so creditor positioning is also stable.

Q: What are the differences in profit structure and competitive advantages between your core smelting business and environment & recycling business compared to competitors?

A: For smelting, the main advantage is being able to process both ore and waste batteries, which lets us adjust raw material mix based on market conditions to minimize the impact of price volatility and geopolitical risk, plus we can recover multiple valuable metals beyond lead. For environment & recycling, we are the only domestic producer of 100% recycled content zinc oxide from waste, which gives us price competitiveness and helps tire makers meet their recycled content targets.

Q: What was the main cause of your recent poor performance?

A: The main cause was misjudgment on investment in the resource business and zinc smelting, which failed to generate the expected returns. We have now exited and restructured these unprofitable businesses, and have improved our decision-making process and governance structure to prevent recurrence.

Q: How do you contribute to carbon neutrality?

A: As a smelting company, we use large amounts of energy, so reducing CO2 emissions is a key priority. We are already progressing with step-by-step measures including fuel switching, introducing energy saving equipment, and improving process efficiency, and have already achieved initial improvements in energy use and emission intensity. We will continue to push forward improvements including capital investment in line with our medium-long term roadmap to fulfill our social responsibility and improve corporate value.