Sanoh Industrial Co.,Ltd. Q4 FY2025 earnings call

Overall 2025 March Year Performance

• Full year results delivered higher revenue but lower profit year-over-year, with performance deviating from plan quarter-over-quarter due to market downturns in China and Europe. A downward earnings revision was issued in Q3 following one-time charges in North/South America in Q2, poor operating utilization in China, and delayed price pass-through to European customers. Extraordinary losses were recorded for asset impairment and disposal primarily in China, resulting in a challenging year far from initial expectations.

Mid-Term Management Strategy Overview

• The company updated its mid-term strategy targeting 2030, with three phases: Phase 1 (2021-2023) focused on stabilizing the business base with constrained investment amid COVID-19 and auto production cuts; Phase 2 (2024-2028) is the seeding/positioning period with active growth investment, expected to create a temporary plateau in capital efficiency before Phase 3 (post-2028) delivers exponential growth from harvested investments. Targets for 2030 are 200 billion yen in consolidated revenue and ROE of 15% or higher.

Core Automotive Parts Business Strategy & Progress

• The "Sanoh Last Man Standing Strategy" targets gaining residual industry profit and becoming the global number 1 market share leader for automotive piping by 2030, through three core priorities:

1. Leverage high existing market share and high switching costs of critical hard-to-replace safety parts to improve profit margins: The strategy has delivered clear results in the UK and Brazil, and is now gaining traction in the Americas and Europe as competitors exit the internal combustion engine (ICE) business. Strong inbound inquiries from competitors' customers are growing, particularly in the Americas where U.S. competitors are facing financial stress and European competitors have been acquired and are scaling back ICE operations. New inquiries will contribute to earnings starting in FY2027 (March 2027) as the sales conversion lead time from inquiry to revenue recognition is approximately 2 years. Capacity expansion including potential inorganic acquisitions is under evaluation in Mexico to meet growing U.S. demand.
2. Expand local production capabilities and improve productivity across the global network: Total capital expenditure reached 9.4 billion yen in FY2025, with FY2026 planning continued active investment focused on Japan, North/South America, and India. Japan is expanding mother plant tube manufacturing capacity and implementing automation to improve production efficiency; North/South America is pursuing capacity expansion and equipment upgrades; India is building a new tube manufacturing factory to support future growth.
3. Tier 1.5 Strategy for thermal automotive parts: The company is investing heavily in developing thermal management components to support battery electric vehicles (EVs) and extend its product portfolio as demand for traditional fuel/engine components declines long-term. Development is ongoing for cooling components including cylindrical battery side cooling plates and inverter cooling plates, with prototype orders and joint development projects ongoing with automakers and Tier 1 suppliers.

Regional Business Priorities

• Japan: Stable but slow growth amid sluggish domestic auto sales, designated as a key investment region for efficiency automation investments and building new business track records. North/South America: Strong performance with ongoing growth of over 10% annually, designated as a key investment region with capacity expansion planned in Mexico. Europe: Low, uncertain performance amid environmental regulations limiting ICE activity, designated as a structural reform region focused on site consolidation, headcount reduction, and profitability improvement. China: Continued weakness for Japanese auto customers amid growth of local Chinese brands, targeting mid-term balanced downsizing of auto parts business while pursuing new business transformation, with growing early success in production solution partnerships with local Chinese suppliers. Asia: Stable strong growth, particularly in India where it targets over 15% annual growth leveraging 9 production facilities, designated as a key investment region for capacity expansion.

New Business Progress

• 1. Data center cooling business: Leveraging existing piping expertise and a prior track record supplying the Fugaku supercomputer, the company has developed a full product line for indirect rear-door water cooling and direct liquid cooling, with plans to enter the immersion cooling market. It launched valve-integrated fittings for water cooling systems in April 2025, participates in joint validation projects with industry partners, and expects to secure mass production orders in the first half of FY2026. • 2. Production solutions business: A dedicated FA (Factory Automation) division was established in April 2024 to commercialize the company's in-house piping processing and assembly equipment expertise for external sale. 2024 orders increased 5x year-over-year, with orders coming from multiple industries beyond automotive including construction, industrial equipment, semiconductors, and home appliances. FY2026 order targets are 300 million yen in Japan and 200 million yen in China. • 3. Refrigerator wire condenser business in India: The company is expanding production capacity at its Indian subsidiary, internalizing previously outsourced tube manufacturing and expanding facility space to increase sales, market share, and profitability. Sales are expected to reach ~1.6 billion yen in FY2026, with a long-term target of 10% operating profit margin, supported by 10% annual growth in the Indian refrigerator market.

For the 2025 March fiscal year, the geographic segment performance is as follows: 1. Japan: Revenue of 48.02 billion yen, operating profit of 1.014 billion yen. Revenue declined due to production cuts for both domestic and export customers, while profit decreased due to lower added value from reduced sales, higher personnel costs from wage hikes, and increased upfront investment for new businesses including personnel, consulting, and R&D expenses. 2. North and South America: Revenue of 67.306 billion yen, operating profit of 1.744 billion yen. Revenue grew strongly from strong sales by Japanese customers in North America and favorable yen depreciation translation effects. Profit remained stable at prior year levels despite one-time charges in Q2, supported by prior year price pass-through effects and stabilized production/improved utilization after inflation pressures eased. 3. Europe: Revenue of 22.267 billion yen, operating loss of 118 million yen. Revenue fell as weak sales to European customers outweighed yen depreciation translation effects. Profit turned to a loss due to persistent raw material cost inflation, incomplete price pass-through for rising personnel costs, and increased system update-related expenses. 4. China: Revenue of 14.358 billion yen, operating loss of 963 million yen. Revenue dropped sharply on continued weak sales from Japanese customers. Profit turned to a loss due to reduced earnings from lower sales and higher fixed costs including severance payments from workforce reductions amid lower production. 5. Asia: Revenue of 29.601 billion yen, operating profit of 2.847 billion yen. Revenue grew as higher production at the Indian subsidiary offset market declines in Thailand and Indonesia, alongside favorable yen translation effects. Profit increased on the back of higher revenue and effective cost control amid production fluctuations. Total company revenue was 159.538 billion yen, total operating profit was 4.86 billion yen.

For the 2026 March full fiscal year, management guides: • 147 billion yen in consolidated revenue, 5.5 billion yen in operating profit, 4 billion yen in ordinary profit, and 1.8 billion yen in net profit. The projected year-over-year revenue decline is driven primarily by foreign exchange translation assumptions, as the company uses assumptions of 140 JPY/USD and 155 JPY/EUR for the forecast. • A full year dividend of 28 JPY per share, split into 14 JPY interim and 14 JPY final dividend. • The forecast assumes no net impact from new U.S. tariff measures, as the company plans to pass all direct tariff costs through to customers. The company has already incorporated a 10% reduction in North American sales from April 2026 onwards relative to initial plans to account for potential demand contraction from higher vehicle prices caused by tariffs, though long-term demand impact remains highly uncertain. • Management maintains that the automotive parts business is on track to meet mid-term targets ahead of schedule, and will continue to execute targeted investment, structural reform, and business transformation to deliver long-term growth.

• Sustained market downturns in China and Europe have created ongoing pressure on regional profitability, with persistent weak demand from core customers in both regions. • New U.S. tariff measures introduce material uncertainty: while direct costs are planned to be passed through to customers, there is risk that cost pass-through will spill over into future reporting periods if customer negotiations take longer than expected, and higher vehicle prices could cause larger-than-expected demand contraction in the North American market. • Persistent raw material and personnel cost inflation, with ongoing risk that price pass-through will not fully offset higher input costs in slower growth regions. • Long-term industry risk from the global EV transition: as the adoption of battery EVs reduces demand for the company's traditional ICE-related piping and engine components, creating structural revenue risk if the company's thermal parts new product development does not scale as expected. • Geographic portfolio imbalance, with divergent performance across regions creating near-term profit headwinds as the company rebalances its portfolio and pursues structural reforms in underperforming regions.

Q: How does the company approach upfront investment for new businesses, and what is the expected timeline for returns? / A: Management frames new business investment as a core part of the mid-term transformation strategy to build a resilient multi-business portfolio. The company expects new businesses to remain in investment mode throughout Phase 2 (through 2028), and does not project large earnings contributions until Phase 3 begins after 2028. Upfront investment is being scaled gradually based on market traction to limit near-term earnings risk, with clear checkpoints to adjust investment levels based on performance.

Q: How much further benefit can the company get from price pass-through for cost increases, particularly in underperforming regions? / A: Price pass-through was largely completed in North/South America and Asia in prior periods, and is tracking as expected. In Europe, price pass-through has been slower than planned, and the company continues to negotiate with customers to cover residual cost inflation from higher material and labor costs. In China, the focus is on structural cost reduction rather than price pass-through given the current weak demand environment. Overall, the company expects incremental price pass-through to deliver modest margin improvement in FY2026.

Q: What are the key risks and points of emphasis to monitor for the FY2026 earnings forecast? / A: The primary key risk is the impact of U.S. tariff measures, which remains the largest external uncertainty for the year. Management also highlights that the conversion of recent new customer inquiries in the Americas and Europe to actual sales will be an important milestone to monitor, as these will drive earnings growth starting in FY2027. In new businesses, the achievement of planned mass production order targets in the data center cooling business is a key operational milestone for the year.