EXEDY Corporation Q2 FY2026 earnings call

Overall Strategic Progress

• The 6% ROE target for the mid-term plan "変革/REVOLUTION2026" was achieved 2 years early at 6.4% in FY2025, after balance sheet transformation to optimize capital structure. PBR improved from 0.7x to 1.04x while maintaining an A+ JCR credit rating.
• Management has shifted focus from ROE denominator (balance sheet) optimization to numerator (profit) improvement in FY2026, supported by early 2025 organizational restructuring that separated core business and new business units to speed up execution.

Core Business Initiatives

• OEM Core Business: Global production optimization is complete: Exedy America was liquidated, production shifted to other regions, and Chinese facilities underwent workforce reduction to slim operations. Price pass-through of cost increases and achievement of fair pricing is a top priority, breaking the long-standing auto industry norm of annual price reductions. Management reports a more receptive customer environment for price adjustment negotiations. The company is also capturing growing two-wheeler demand in India and Indonesia, with confirmed orders and mass production preparation underway.
• Aftermarket Core Business: Leveraging 50+ years of established global distribution (covering ~200 countries via 22 affiliates, 5,500 customers) and strong OEM-quality brand recognition to expand product lines. Expansion into Korean/Chinese/European heavy-duty vehicle clutches is on track for launch in H2 FY2026; friction product line expansion for AT aftermarket is complete for priority models, and Alltranz (Oceania affiliate) transmission aftermarket business model rollout to Japan/Malaysia is preparing for H2 2025 launch.

New Business Development

• Target: 100 billion yen in new business revenue by 2030, current planned pipeline totals 85.9 billion yen (75.7 billion from 5 confirmed electrification products, 10.2 billion from early-stage pipeline projects), with M&A targeted to fill the remaining gap. Key recent progress:
  • Small EV products: September 2025 started mass production of CVT-equipped drive units for Indian 3-wheel electric vehicles, targeting 24.2 billion yen in 2030 revenue. 2-wheel EV drive unit development is ongoing.
  • Commercial e-mobility: Prototype completed, customer test drives underway, with positive early feedback on smooth torque delivery from the integrated torque converter.
  • Drones: Completed fire-fighting drone demonstration at a national conference, and entered the drone survey/3D measurement business via a subsidiary stake.

Governance and Stakeholder Initiatives

• Corporate governance reform: Reduced board size from 12 to 7, with a majority independent outside directors; expanded variable, KPI-linked executive pay to align with shareholder interests, based on shareholder feedback.
• Human capital: Company-wide restricted stock grant to all participating employees (total 5.9 billion yen, ~200 million yen per employee), increasing employee shareholding association membership from 45.9% to 91.9% and aligning employee and shareholder incentives.
• Newly formalized SR (Stakeholder Relations) strategy to incorporate shareholder feedback into management and reduce cost of equity.

Overall automotive parts account for ~90% of total revenue:

1. AT Business (Automatic Transmission components, core product: torque converters): 65% of total revenue. In H1 FY2026, Japanese AT order volume decreased year-on-year, but China AT product sales increased against expectations, and the winding down of unprofitable Exedy America removed 900 million yen in negative drag. AT OEM was the main contributor to the upside in H1 operating profit relative to plan.
2. MT Business (Manual Transmission components, core products: clutch covers and clutch discs): 24% of total revenue. Split roughly evenly between OEM and after (replacement) business, with after business slightly larger. The 2030 target for MT after business sales is 57.5 billion yen.

• FY2026 Full Year Guidance (upward revised): Sales raised from 285.0 billion yen to 295.0 billion yen; operating profit raised from 19.0 billion yen to 21.0 billion yen; ROE raised from 6.6% to 7%.
• Long-term ROE Targets: The original 2030 8% ROE target is moved forward to 2027, and the 2030 ROE target is upward revised to 10%, with the 10% target set as a floor, not a ceiling. The 8% ROE target is fully achievable via core business profit improvement alone, with the 10% target dependent on successful new business scaling.
• Capital Allocation: Mid-term plan operating cash flow revised up from 81.0 billion yen to 87.0 billion yen; all 1.5 billion yen of cross-held policy shares will be sold, adding 7.5 billion yen in cash, which will first be allocated to growth investment, with any excess returned to shareholders.
• Shareholder Return: The 2025 full year dividend per share is raised from 250 yen to 300 yen. Policy is to maintain 60% equity ratio (optimal capital structure) with 100% total payout ratio, a 5% DOE floor for stable dividends, and excess capital returned to shareholders primarily via dividends after the mid-term plan ends.

• Demand for AT products is on a long-term declining trajectory as the auto industry shifts to electrification, requiring continued production capacity adjustment.
• Achieving full fair pricing for core OEM business is still in progress, negotiations with customers are ongoing, and further price increases are not guaranteed to be approved.
• The 10% 2030 ROE target is dependent on successful development and scaling of new business, which carries inherent execution and market risk.
• Higher-than-expected labor cost inflation continues to pressure margins, with 2.4 billion yen in year-on-year labor cost increases in H1 FY2026.

Q: Why did price increase negotiations progress faster than expected in H1, and what is the current status as of Q2 end? / A: Price increases have two components: passing through rising costs, and improving overall profitability to reach a fair price. Broader market acceptance of cost pass-through to end products has created a more open negotiating environment compared to the past, when customers would immediately reject cost increase requests. Management's strong commitment to achieving fair pricing, which supports negotiation teams on the ground, is also a key factor in early success.

Q: Does the 10.2 billion yen in planned 2030 revenue for non-mature new business projects reflect high confidence in achieving this target? / A: This 10.2 billion yen figure covers early-stage proposals that have been submitted and approved for further development, but have not yet reached full project status. Exedy runs an internal pitching process where teams present new business ideas to leadership; approved ideas get dedicated budget and delegated authority similar to an internal startup, and this pool covers those pre-project stage opportunities.

Q: ROE was raised but operating profit targets were unchanged, but core business pricing is going better than expected — could 2030 core business profits come in higher than currently guided, and is this message clear to investors? / A: The previous 8% ROE target is already fully achievable with core business alone. While there is upside potential if pricing improvements exceed current targets, management is sticking to the current target for now. The upward revised 10% ROE target is viewed as a floor, not a final maximum, and the internal aggregated operating profit target is actually slightly higher than the published number.

Q: How much was H1 operating profit above plan, what drove the upside, and what impact did foreign exchange have? / A: FX was a 200 million yen drag on operating profit relative to plan, due to a stronger yen than assumed. The upside came primarily from AT OEM business, where price pass-through progress was faster than planned, with some price increases that were expected for later periods pulled forward into H1. Full fair pricing has not yet been achieved, and negotiations will continue with the next deadline for April 2026 price reviews; faster progress would create further upside for H2. The current guidance only incorporates progress achieved to date.