EXEDY Corporation Q4 FY2025 earnings call

• Financial Strategy Progress

  • Achieved the medium-term ROE target of 6% two years ahead of schedule (reached 6.4% in FY2025) after optimizing capital structure based on dialog with 7 major shareholders, pushing PBR up from 0.7x to 0.9x while maintaining A+ credit rating.
  • Rolled out ROIC-based management across the group, improving group ROIC from 2.7% to 8.6% between 2022 and 2024, and is currently pushing working capital optimization (inventory rationalization completed, receivables compression next).
  • Updated 3-year operating cash flow forecast from 75 billion yen to 81 billion yen, raised total planned dividend payout over the period from 22 billion yen to 28 billion yen, and completed 45 billion yen of share buybacks in FY2025.

• Organizational Restructuring

  • Implemented a large-scale organizational reform in April 2025 to accelerate change: established a new Core Business Headquarters to consolidate existing manufacturing/development functions for efficiency, reorganized R&D and production engineering to focus on new business, created a new Strategic Business Headquarters to accelerate new business development and aftermarket expansion, and established a Corporate Strategy Promotion Headquarters to oversee cross-functional strategy execution and capital allocation.

• Core Business Operations

  • OEM: Completed global production optimization: decided to liquidate the chronically unprofitable Exedy America and transfer production to other sites, implemented voluntary early retirement to slim down production capacity at two Chinese sites, will continue efficiency improvements globally.
  • Aftermarket: Expanding product assortment to include Korean/Chinese/European heavy vehicle clutches, pushing cost reduction for underperforming products, expanding AT aftermarket product lines via Dynax friction material and the acquired Alltranz business model rollout.

• New Business Development

  • 5 active projects are in progress (compact electric, commercial e-mobility, drones, smart robots, general-purpose electric drive units), with 2 projects already shipping products on schedule and 1 scheduled to start mass production in May 2025. Exedy will also continue pursuing M&A to reach the 2030 new business sales target.

• ESG & Human Capital

  • Issued 5 billion yen worth of restricted shares to employees in February 2025 (the first Japanese company to issue over 1 million yen per employee post regulatory reform), boosting employee stock ownership plan participation from 45.9% to 92.4% to align employee and shareholder incentives.

Exedy's overall business is ~90% automotive parts, with two core existing segments and a new business segment under development: 1) AT Business: Accounts for 65% of total automotive revenue, core product is torque converters. FY2025 saw order volume decline across the US and Japan, but segment performance benefited from reduced amortization burden post 2023 impairment and yen depreciation effects. The company is restructuring AT production to improve profitability, targeting an operating margin of 7-8% long-term. 2) MT Business: Accounts for 24% of total automotive revenue, core products are clutch covers and discs. This segment has higher profitability due to stable aftermarket demand, with FY2025 operating margin of ~14%, targeting 15% long-term. The company forecasts almost no shrinkage for medium and large manual clutch demand in the aftermarket, and is targeting 150 billion yen of sales growth to reach 57.4 billion yen in sales by 2030. 3) New Business: Targeting 100 billion yen in total sales by 2030, currently with 85.9 billion yen of planned sales mapped across 5 active development projects. All upfront development costs for new business are currently expensed, leading to the segment being unprofitable in the near term.

• For FY2026 (March 2026): Exedy forecasts total consolidated revenue of 285 billion yen (8% decrease YoY), operating profit of 19 billion yen (13% decrease YoY), net profit of 12 billion yen, and ROE of 6.6% (0.2 percentage points improvement YoY). The expected YoY decline is primarily due to continued AT order softness, higher human capital costs (including 2.7 billion yen of amortization for the employee share grant), and assumed yen appreciation, partially offset by production optimization and cost pass-through.
• Updated medium-term targets for the final year of REVOLUTION2026 (FY2027/March 2027): revenue target revised down from 290 billion yen to 280 billion yen, operating profit target revised up from 19 billion yen to 20 billion yen, and ROE target revised up from 6% to 6.7%.
• Shareholder return guidance: raised the minimum annual dividend per share from 200 yen to 250 yen, revised the DOE target upward from 4% to 5%, and will continue to return excess capital beyond optimal equity levels primarily via dividends after the end of the medium-term plan.

• US trade policy (tariff changes): There is uncertainty around current and upcoming US tariff policy, and the company cannot quantify the impact at this stage so it is not included in the FY2026 forecast. Direct import costs for US subsidiaries from Japan/Hungary/China will be fully passed through to customers, but indirect risks remain: customer shipments of finished vehicles/transmissions containing Exedy parts to the US could see reduced orders if tariffs increase demand, which would negatively impact Exedy order volumes.
• New business development: New business creation and scaling requires significant upfront investment and longer development timelines, and there is no guarantee that planned projects will reach projected sales or profitability targets.
• Macroeconomic and currency volatility: Yen appreciation would reduce the value of overseas earnings, while continued raw material and labor cost inflation could pressure margins if cost pass-through is slower than expected.

Q: Can you clarify the source of goods subject to potential US tariffs, and whether Exedy will absorb or pass through any additional tariff costs, including for OEM shipments? / A: Most imports to Exedy's US subsidiaries come from Japan, with small shares from Hungary, China, and Mexico; most customer-bound shipments ultimately entering the US also come from Japan, with some from Mexico. Exedy does not cut selling prices to absorb tariffs: all direct import tariffs incurred by Exedy's US units are mandated to be passed through to end customers. For indirect tariffs incurred by customers exporting to the US, Exedy will maintain its standard selling prices and does not absorb the extra cost.

Q: What explains the large other expense in Q4 FY2025, and why is the "Japan Other" segment expected to see large declines in FY2026? Is this conservative budgeting for tariff risks? / A: The 3.7 billion yen Q4 other expense comes from impairment losses tied to the liquidation of Exedy America and additional domestic facility impairment. The large projected decline in the other segment for FY2026 is not due to tariff risks, which are not included in the guidance. It is entirely from upfront planned development costs for accelerating new business projects, which are expensed as incurred.

Q: Is the 85.9 billion yen 2030 new sales target a high-confidence projection, and what is the basis for the number? / A: The target is not guaranteed, and has increased from 56.3 billion yen in the prior update as projects progress. The number is calculated based on identified market needs, total market size for each new product, and Exedy's projected accessible market share. Two projects are already shipping and have met initial launch expectations, one will start mass production in May 2025. Unlike Exedy's core automotive business with locked-in orders, these new products serve emerging undeveloped markets, so actual results will depend on product-market fit.

Q: What is the profitability outlook for existing core businesses to hit the 2030 8% ROE target, given new business will drag on earnings in the near term? / A: MT (higher profitability due to aftermarket) is already at 14% operating margin and is targeting 15% as the company expands aftermarket sales. AT is targeting 7-8% operating margin after production restructuring and price increases. With the current working capital structure, this existing business profitability is enough to hit the 8% aggregate ROE target even after absorbing early-stage new business losses as the portfolio transitions.