TOPY INDUSTRIES,LIMITED Q4 FY2025 earnings call

2024 Fiscal Year Summary

• All segments faced extremely weak business conditions, with lower sales volume driving a sharp year-over-year decline in consolidated operating profit. However, structural reform and sustainable pricing initiatives made measurable progress that will strengthen the future business base. A formal target to reduce cross-held policy shares was set for the first time.
• 2 billion yen in total special losses were recorded for 2024: impairment losses at the underperforming U.S. steel wheel subsidiary Topy America, INC., and costs from consolidating two Chinese production sites into one to align with shrinking market share for Japanese automakers in China.
• Gains from sales of policy-held shares pushed net income attributable to parent shareholders to a year-over-year increase despite lower operating profit. DE/ratio fell to 0.5, but PBR has remained below 1x.

New Medium-Term Management Plan ("TOPY Active & Challenge 2027")

• Launched one year ahead of schedule to respond faster to changing business conditions, positioned as a structural reform and seeding phase ahead of a growth-focused plan starting after 2027, aligned with the unchanged 2030 vision.
• Core basic principles: 1) Improve profitability via structural reform of existing businesses; 2) Seed new growth businesses leveraging the company's core competencies.
• Key financial target: 6.0%+ ROE by FY2027, with a reference operating profit target of 13 billion yen. A follow-up plan will target 8.0% ROE, matching the cost of equity.

Business Strategic Initiatives

• Domestic business base strengthening: Optimize production systems, expand automation to improve cost competitiveness, focus on structural reform for aluminum/steel passenger wheel and construction machinery undercarriage parts businesses via group collaboration and site consolidation, and continue productivity improvements and sustainable pricing.
• **Overseas business base restructuring and strengthening: Restructure and optimize underperforming overseas operations first. Rebuild Topy America via expanding sales to local manufacturers, improving productivity, and establishing sustainable pricing. Expand aftermarket sales for the company's high global market share mining wheels via new product development and improved order fulfillment capabilities.
• Growth business seeding: Expand the scope of vertically integrated production (from raw steel to finished products) to more product categories to leverage the company's unique integrated electric furnace manufacturing strength, expand demand capture in fast-growing ASEAN and Indian aluminum wheel markets via stronger alliances, and upgrade recycling operations (a new non-ferrous sorting line will launch at the Meikai Recycling Center in October 2025 to enable external sales of non-ferrous materials for additional profit).

Financial Strategy and Shareholder Returns

• Adopted a progressive dividend policy for the new medium-term plan period, targeting a 2.5% DOE (dividend on equity) and will not cut dividends amid earnings volatility to provide more stable returns. It plans 130 yen annual dividend for FY2025 (a 27 yen increase, a new all-time high) with higher dividends planned for FY2026 and FY2027, and will conduct opportunistic share buybacks.
• 3-year cumulative cash allocation plan: 3 billion yen for human capital investment (employee training, benefits), ~10 billion yen for total shareholder returns (dividends + buybacks), with remaining cash allocated to structural reform and growth investment.
• Set a target to reduce cross-held policy shares to under 10% of consolidated net assets by March 2026, down from 14.8% at the end of March 2025.

Sustainability and Governance Strategy

• Strengthen human capital: Recruit specialized sales and engineering talent, develop autonomous employees, increase investment in training and benefits.
• Strengthen governance to enable faster, more flexible strategic execution amid high uncertainty, with a corporate-wide focus on unifying all employees under the "One Topy" ethos to address shared challenges.
• DX promotion: Train 600 DX personnel to improve data literacy, drive process efficiency, production innovation and advanced quality management.
• Carbon neutrality: Already achieved Japan's 2035 CO2 emission reduction target via exiting the power generation business and expanding energy conservation initiatives, and will continue further reduction efforts.

1. Iron and Steel Segment:

• 2024 Actual: 3.2 billion yen decrease in operating profit year-over-year, with lower revenue and profit, driven by weak domestic steel demand from delayed construction projects due to labor shortages, lower sales volume, and rising energy costs.
• 2025 Forecast: Flat sales volume, 0.8 billion yen decrease in operating profit year-over-year due to rising miscellaneous costs including repair expenses. Iron scrap prices are expected to remain flat year-over-year after falling in 2024, and electricity prices are also expected to remain flat after rising in 2024, with mild demand recovery forecast.

1. Automotive & Industrial Machinery Components Segment:

• 2024 Actual: 1 billion yen decrease in operating profit year-over-year, with lower revenue and profit. While progress was made on structural reform and sustainable pricing, sales volume dropped sharply due to automaker production halts from certification scandals, and labor costs rose. Input costs including aluminum ingot and purchased steel prices increased in 2024.
• 2025 Forecast: 3.5 billion yen increase in operating profit year-over-year, with higher revenue and profit. Growth is driven by recovering automotive production, ongoing structural reform and sustainable pricing efforts. Aluminum ingot and purchased steel prices are expected to decline, though low global construction machinery demand is forecast to persist.

Overall consolidated 2024 actual operating profit was 5.3 billion yen, a 5.1 billion yen year-over-year decrease. 2025 consolidated operating profit is forecast at 7.0 billion yen, a 1.7 billion yen year-over-year increase.

• Consolidated 2025 fiscal year operating profit is forecast at 7.0 billion yen, a 1.7 billion yen (32%) year-over-year increase, with revenue and net profit both growing year-over-year.
• The new medium-term plan targets 6.0%+ ROE by the end of FY2027, with a reference operating profit target of 13 billion yen, with a follow-up plan targeting 8.0% ROE to meet the cost of equity.
• 2025 annual dividend is forecast at 130 yen per share (all-time high, +27 yen year-over-year), with progressive dividends targeting higher annual dividends through the end of the new medium-term plan, aligned with a 2.5% DOE target.
• Iron and steel segment demand is expected to see mild recovery in 2025 after 2024 stagnation, with both iron scrap and electricity prices forecast to remain flat year-over-year. Automotive component sales volume is expected to recover after 2024's sharp decline, while low global construction machinery demand will persist through 2025.

• Persistent structural demand stagnation in the Japanese steel industry due to ongoing labor shortages, with continued weak global construction machinery demand creating downside pressure for the components segment.
• U.S. trade policy is expected to add 1.0 billion yen in direct tariff cost burdens to the company's U.S. operations in 2025, with continued uncertainty over future trade policy changes.
• Topy America, the company's U.S. subsidiary, has a history of underperformance with multiple years of impairment losses, and restructuring and profitability improvement efforts carry execution risk.
• Geopolitical and market unpredictability in the global automotive industry creates uncertainty for component demand, and the company's existing financial performance targets for the prior medium-term plan were all missed due to unexpected demand declines and cost increases.
• PBR has remained below 1x, creating pressure on the company to improve capital efficiency and market valuation.

Q: What level of impact do U.S. import tariffs have on Topy Kogyo's 2025 full-year earnings forecast, and how is the company planning to address this additional cost burden? / A: Management forecasts that tariffs will add approximately 1.0 billion yen in direct incremental cost to the 2025 full-year results. The company is evaluating options to offset this impact, including adjusting pricing to pass through costs to customers, shifting production between global sites, and evaluating the viability of expanded local production in the U.S. The company will adjust its strategy based on customer reaction and evolving market conditions.

Q: What concrete measures is Topy Kogyo implementing to achieve a PBR of 1x, a key market valuation target? / A: First, the company is accelerating reductions in cross-held policy shares, targeting under 10% of consolidated net assets by March 2026, which will improve overall capital efficiency. Second, it has revised its dividend policy to a progressive dividend structure targeting a 2.5% DOE, with more stable, growing shareholder returns that are less sensitive to near-term earnings volatility. Third, the new medium-term plan explicitly targets 6.0%+ ROE by 2027, with a long-term target of 8.0% ROE matching the cost of equity, which is expected to re-rate the company's valuation over time.

Q: What are the core drivers behind the expected 1.7 billion yen year-over-year improvement in consolidated operating profit for 2025? / A: The biggest driver is a 3.5 billion yen operating profit increase in the Automotive & Industrial Machinery Components Segment, which comes from recovering automotive production volume after 2024's industry-wide production disruptions, plus ongoing benefits from structural reform and sustainable pricing initiatives. This gain is partially offset by an 0.8 billion yen operating profit decrease in the Iron and Steel Segment from rising miscellaneous costs, leading to the net 1.7 billion yen consolidated improvement.

Q: Can you share updates on the company's steelmaking dust recycling technology, and what contribution it will make to future profits? / A: Topy Kogyo is moving forward with expanding its recycling capabilities, with a new non-ferrous sorting line set to launch at the Meikai Recycling Center in October 2025. This upgrade will increase sorting capacity after scrap shredding, allowing the company to not only supply processed material for its own steel operations but also sell sorted non-ferrous materials to third parties, creating a new profit stream from the recycling business that leverages the company's existing expertise.