Sanoh Industrial Co.,Ltd. Q2 FY2026 earnings call

• Overall Consolidated Financial Performance

  • Total consolidated Q2 revenue: 78.522 billion yen, down 2.573 billion yen year-over-year, driven by slower demand in the Americas (due to US tariffs and yen appreciation), weak auto sales in Europe, and declining sales in China.
  • Total consolidated operating profit: 3.361 billion yen, up 977 million yen year-over-year, driven by lower one-time expenses in the Americas, revenue growth from new Japanese product launches, and cost cuts from headcount reductions in Europe and China.
  • A 2.595 billion yen negative goodwill special gain was recorded from the acquisition of Winkelmann Powertrain México in July 2025, pushing net income attributable to parent shareholders to 2.979 billion yen, significantly above the full-year net income guidance of 1.8 billion yen.

• Mid-Term Strategic Direction & Existing Auto Parts Business Progress

  • The company pursues the "Sankoh Last Man Standing" survivor profit strategy for the existing auto parts business, targeting global No.1 market share in automotive piping by 2030, alongside two transformations: shifting from auto parts to new businesses and from internal combustion engine (ICE) to non-ICE products to build a resilient multi-business portfolio.
  • The mid-term plan has three phases: Phase 1 (2021-2023) focused on stabilizing the business with constrained investment during COVID and semiconductor shortages; Phase 2 (2024-2028) is an active investment seeding period (expected to create a temporary plateau in capital efficiency); Phase 3 will enter the harvest period targeting exponential growth. The 2030 targets are 200 billion yen in consolidated revenue and 15%+ ROE.
  • Key auto parts strategy progress: The survivor strategy is delivering results in the Americas and Europe, with growing inquiries from customers of competitors that are exiting the ICE business, driving market share gains. The company acquired Winkelmann Powertrain México in July 2025, establishing a near-monopoly position in the market with already secured new model orders and expected significant sales growth. For battery EVs, the company is advancing development of thermal management components, with ongoing prototype orders and joint development of direct cooling cooling plates for batteries.

• New Business Progress

  • Data Center Business (top priority): The company has expanded its product lineup to include air cooling products alongside existing water cooling solutions, and secured its first mass production order for container data center water cooling modules from Getworks, plus multiple orders for ball valve fittings. Current full-year sales contribution is expected to be in the tens of millions of yen, targeting hundreds of millions of yen next fiscal year, and 20 billion yen to 25 billion yen in standalone revenue by 2030. The company has developed new products including the Active Flap Door for air cooling and an improved manifold manufacturing method that reduces part count, weight, and cost, and participates in the NTT Data Data Center Trial Field validation facility.
  • Production Solutions Business: Leveraging in-house manufacturing equipment expertise, the company sells factory automation equipment to non-automotive industries, with 2024 orders 9x higher year-over-year, targeting 300 million yen in orders in Japan and 200 million yen in China this fiscal year, and has launched a new matching business for customized low-cost overseas-sourced FA equipment.
  • Wire Condenser Business for Indian Refrigerators: The business targets the fast-growing Indian refrigerator market, with 2025 expected revenue of ~1.6 billion yen (up from 1.4 billion yen in 2023), and expects to maintain a 10% operating profit margin from 2025 onward, with ongoing capacity expansion to capture market growth.

1. Japan: Revenue = 26.742 billion yen, Operating Profit = 1.259 billion yen. Revenue increased year-over-year driven by new product launches and associated equipment sales to domestic and overseas customers, offsetting higher personnel costs, M&A expenses, and depreciation from capital investment, resulting in a significant operating profit increase. Revenue contribution: ~34% of total consolidated revenue.
2. North and South America: Revenue = 32.838 billion yen, Operating Profit = 1.09 billion yen. While US tariff measures began impacting results in Q2, the absence of prior year one-time expenses led to a year-over-year operating profit increase. Revenue contribution: ~41.8% of total consolidated revenue.
3. Europe: Revenue = 9.966 billion yen, Operating Profit = 88 million yen. Revenue declined due to weak sales at European automakers, and the end of prior year impairment depreciation adjustments led to a year-over-year profit decrease. Revenue contribution: ~12.7% of total consolidated revenue.
4. China: Revenue = 5.832 billion yen, Operating Loss = 314 million yen. Revenue continued to decline due to weak sales at Japanese customer automakers, but cost cuts from headcount reduction and lower depreciation from prior impairments reduced the loss size compared to prior periods. Revenue contribution: ~7.4% of total consolidated revenue.
5. Asia (excluding Japan/China): Revenue = 14.685 billion yen, Operating Profit = 1.426 billion yen. Revenue grew on stable operations, and successful cost control against volume fluctuations led to a slight operating profit increase. Revenue contribution: ~18.7% of total consolidated revenue.

• The full-year 2026 March fiscal year earnings guidance is maintained as originally announced, despite the first-half net income being far above guidance due to the negative goodwill gain from the Mexican acquisition.
  • Management will update guidance promptly after there is clarity on the outcome of US tariff price pass-through negotiations with customers and the completion of the planned Chinese business restructuring in the second half of the fiscal year, with appropriate timely disclosure when updates are possible.
  • The 2030 mid-term targets are maintained: 200 billion yen in consolidated revenue, 15%+ ROE, 20 billion-25 billion yen in standalone revenue for the data center business, and over 50 billion yen in total new business revenue.

• US tariff measures have started impacting North American results, with a 200 million yen negative impact recorded in Q2. Time lags between when tariffs are incurred on imported inputs and when costs can be passed through to customers create ongoing earnings uncertainty.
  • Chinese auto business sales have continued to decline quarter-over-quarter, with existing six local legal entities reaching the limit of sustainable operation amid continued weak demand from Japanese automaker customers, requiring restructuring in H2.
  • Weak auto demand in Europe has led to ongoing revenue declines, with additional restructuring costs recorded year-to-date.
  • Semiconductor supply chain disruptions have caused customer production shutdowns in the US starting October 2025, with an expected 1+ month impact on demand.
  • Data center industry standards have not yet consolidated around specific product types and cooling designs, creating uncertainty about production scale investment and future profitability.

Q: What is the specific content and scope of the planned Chinese business restructuring in H2? Is it a full withdrawal or just a scaling down? / A: Sankoh entered China over 20 years ago to serve Japanese automakers, and currently operates 6 local entities that have seen ongoing sales declines amid weak customer demand, after years of headcount reduction. The restructuring will involve consolidation and closure of unprofitable sites, which is a scaling down of the existing auto-related business, not a full withdrawal. China remains an important global market, and the company will pivot to growing new businesses there: it already has local partners for the data center business (which could deliver results faster than in Japan) and existing partnerships with dozens of equipment players to grow the production solutions business in China.

Q: What is the outlook for profitability for the data center business, specifically when will operating profit turn positive, and is the current profitability already higher than the auto parts business? / A: Currently, the business uses existing auto production capacity to fulfill orders, so while fixed cost allocation is an open question, the current small scale already delivers positive profitability. The business does not pursue unprofitable growth to gain market share like the highly competitive auto industry, so margins are already higher on average than auto parts, which will hold as sales grow. While some additional upfront investment for capacity expansion will likely reduce margins slightly as the business scales to 200 billion-250 billion yen in revenue, the business will not fall into sustained losses, and profit contributions will grow alongside sales growth.

Q: What is the basis for the 2030 20 billion-25 billion yen sales target for the data center business? Is this goal realistic? / A: The target is not based on current order backlog, but is derived from market growth forecasts. It is calculated based on projected market growth led by hyperscalers, with the target being half of the revenue coming from overseas high-growth markets (US, China, Taiwan) and half from domestic Japan, based on achieving a reasonable market share in these growing markets. The company plans to achieve the target through organic growth, M&A, and partnership models including licensing and after-sales services in addition to product sales.

Q: Why isn't the full-year guidance raised after the large negative goodwill gain pushed first-half net income far above the full-year target? / A: While first-half net income is already well above the full-year guidance of 1.8 billion yen, there are still too many unresolved uncertainties for the second half: specifically, the outcome of price pass-through negotiations for US tariff costs, and the one-time costs associated with the planned Chinese business restructuring. For these reasons, management has chosen to keep the original guidance unchanged and will issue an update when all these uncertainties are resolved and proper disclosure can be made.