TOPY INDUSTRIES,LIMITED Q4 FY2026 earnings call

• Company Overview & Core Competencies

  • Topy Industries operates three core business segments, with ~300 billion yen in annual revenue, ~5,300 employees, and is listed on the Tokyo Stock Exchange Prime Market. It holds leading market shares: ~50% domestic share for passenger vehicle steel wheels, ~80% domestic share for commercial vehicle wheels, and 90% global share for large mining machinery wheels.
  • The company's core competitive advantage is its integrated production from raw steel to finished products, allowing low manufacturing costs and custom material composition solutions for customers. It is an independent supplier able to partner with all global OEM customers.

• 2024 Fiscal Year Operational Results

  • The full year posted lower revenue and operating profit, driven by weak demand across all three core segments. Net income attributable to parent shareholders increased due to policy-held share sales.
  • The company completed structural reform of overseas steel wheel operations: it recognized an impairment loss on the low-productivity US base, consolidated two Chinese bases into one, and recorded 2 billion yen in total extraordinary loss, with positive profit impacts expected starting in fiscal 2025.

• Previous Mid-Term Plan (TOPY Active & Challenge 2025) Review

  • The company delivered partial results including exiting the power generation business, restructuring the fastener business, and consolidating Chinese passenger vehicle wheel operations, but all three financial targets (operating margin, EBITDA, ROE) were not met, primarily due to adverse demand conditions, elevated and persistent costs (a 5 billion yen negative impact), and underperformance of overseas subsidiaries, with resource constraints delaying growth investment.
  • The company reduced interest-bearing debt substantially as a result of prioritizing portfolio optimization over growth investment.

• New Mid-Term Plan (TOPY Active & Challenge 2027) Priorities

  • The new plan is a 3-year 'structural reform and seeding' phase, launched one year ahead of schedule to address current business challenges while advancing the 2030 long-term vision. The core strategic directions are: 1) improve profitability through structural reform of existing businesses; 2) seed future growth by leveraging core competencies.
  • Domestic existing business priorities: optimize domestic operations, expand facility automation, consolidate outdated sites, upgrade cross-group collaboration, improve productivity, and establish sustainable selling prices to pass through rising input costs. The most challenging project is relocating and modernizing three outdated construction machinery undercarriage part sites while maintaining ongoing production, which is currently progressing on schedule.
  • Overseas business priorities: Restructure the underperforming US operation by expanding sales to Detroit 3 local automakers (now over half of US subsidiary revenue), address low productivity from skilled labor turnover with Japanese parent support, and expand aftermarket sales of high global share mining machinery wheels by building short lead time fulfillment capabilities.
  • Growth seeding priorities: Leverage integrated production to expand high value-added products (mast rails, TACoil); expand aluminum wheel sales in high-growth ASEAN and Indian markets through strategic alliances (targeting 15% growth over 5 years); advance recycling business, including joint development of low CO2 zinc extraction from steelmaking dust, and preparation for upcoming EU automotive shredder residue (ASR) recycling regulations, with a new non-ferrous sorting line starting operation in fiscal 2025.

• Financial Strategy & Capital Efficiency

  • The company will cut policy-held share holdings from the current 20.3 billion yen (14.8% of net assets as of March 2025) to under 10% of net assets by March 2026.
  • Adopt a progressive dividend policy targeting a 2.5% dividend on equity (DOE), with planned aggregate shareholder returns of ~10 billion yen over the 3-year plan, including opportunistic share buybacks.

1. Wheel & Automotive Parts Segment: It is the company's largest segment, accounting for approximately 50% of total revenue. It produces passenger vehicle steel wheels, commercial vehicle wheels, construction machinery wheels, and automotive fasteners. In the 2024 fiscal year, it posted weak demand alongside declining revenue and profit. Under the new mid-term plan, the segment targets ~5 billion yen in profit improvement, driven by structural reform, sustainable pricing, and profitability improvement at overseas subsidiaries including the US operation.
2. Steel Segment: It is the company's second-largest segment. It produces construction steel, steel for shipbuilding and industrial machinery, and in-house raw material steel for processing. The segment is expected to deliver over 2 billion yen in profit improvement, mainly from productivity gains and expanded sales of high value-added products such as mast rails for forklifts.
3. Construction Machinery Undercarriage Parts Segment: It is the company's third-largest core segment, producing steel crawler belt components for construction machinery. The segment expects demand to recover moderately starting in fiscal 2026 following the industry's historical 6-7 year demand cycle.
4. Other: A small mica business producing cosmetic raw materials.

• For fiscal 2025, the company forecasts an increase in both revenue and profit, and expects to realize additional gains from policy-held share sales. The 2025 forecast incorporates 1 billion yen in direct cost increases from US trade tariffs, but does not include indirect impacts from potential automotive demand contraction that cannot be accurately estimated currently.
• The new mid-term plan sets a target ROE of 6.0%+ by fiscal 2027, which corresponds to a target operating profit of 13 billion yen. The company targets total profit improvement of 7 billion yen over the plan period, with 2 billion yen from the steel segment and 5 billion yen from the automotive parts segment.
• The next mid-term plan (post-2027, the 'harvest and growth' phase) targets an ROE of 8.0%+ aligned with the company's cost of equity, to be achieved after growth seeds planted in the 2024-2027 plan deliver profit contributions.
• The construction machinery industry is expected to see moderate demand recovery starting in fiscal 2026, based on its historical 6-7 year demand cycle.

• The steel industry faces persistent structural headwinds including labor shortages, while the passenger vehicle industry has high uncertainty from production shifts and geopolitical risks.
• The underperforming US operation faces structural challenges: low productivity from high skilled worker turnover, and reliance on stagnant Japanese automaker demand, requiring ongoing capital and management support to restructure.
• Structural reform of domestic production sites requires relocating and modernizing facilities while maintaining ongoing production, which creates execution risk amid general industry labor shortages.
• US trade policy creates direct tariff costs already reflected in guidance, but unquantifiable indirect risk from potential contraction in automotive demand from tariff impacts.
• Input costs including raw materials, energy, labor, and logistics have risen substantially, and while progress has been made on price pass-through, legacy pricing for long-term products remains pressured by low-cost imports, creating ongoing margin pressure.

Q: Which business areas will contribute the most to the 7 billion yen total profit improvement target under the new mid-term plan, and will growth businesses contribute to profits during this plan period?

A: 2 billion yen of the improvement will come from the steel segment via productivity gains and expanded sales of high value-added mast rails. 5 billion yen will come from the automotive and wheel segment via structural reform, sustainable pricing, and improved profitability at overseas subsidiaries including the US operation. Growth business profit contributions will mainly come in the next mid-term plan period; this plan period will rely on expanded sales of existing high value-added products to deliver earnings.

Q: What is the core root of the ongoing underperformance of the US subsidiary, and is the issue low sales or internal structural problems?

A: The core issue is very low productivity driven by high turnover of skilled production workers, paired with a historical overreliance on stagnant Japanese OEM demand. The company is addressing this with dedicated backup support from Japan to improve productivity, and has already grown Detroit 3 local OEM sales to over half of the US subsidiary's total revenue. The combination of expanding local customer sales, boosting productivity, and establishing sustainable pricing will deliver profitability improvement.

Q: What is TOPY GREEN WHEEL TECHNOLOGY, and what is its market need?

A: It is a technology that converts wheel deformation from driving on uneven roads into electricity. The generated power can be used to detect loose wheel nuts and send warning signals, and no battery replacement is required since it generates its own power. The technology was publicly unveiled at the 2023 Japan Mobility Show, and the company is currently working to commercialize the product.

Q: How does the company plan to address rising input costs and form sustainable selling prices?

A: The company has now been able to consistently pass through increases in raw material, energy, labor, and logistics costs. However, legacy products like wheels faced intense price competition and low-cost import pressure in the past, forcing production at very tight margin levels. The company has gradually negotiated base price revisions with customers, and has now been able to form sustainable pricing. Current market conditions are more favorable for price adjustments than in the past, as labor cost inflation has pushed industry-wide price increases, reducing customer pushback.

Q: What impact do tariffs and exchange rates have on the company's performance?

A: Most US-focused sales are produced at the company's US domestic factory, so direct tariff exposure is limited. The 2025 forecast includes 1 billion yen of direct tariff-related cost increases, which the company is managing via ongoing sustainable pricing efforts. Indirect demand impacts from tariff-driven automotive sales declines are too uncertain to quantify and are not included in guidance. For exchange rates, a 1 yen depreciation of the yen against the US dollar generates approximately 400 million yen in annual positive profit impact.