ONOKEN CO.,LTD. Q2 FY2026 earnings call

• Long-term Vision and Mid-term Plan Structure

  • 2035 long-term vision: 500.0 billion yen revenue, 20.0 billion yen operating profit, 24.0 billion yen EBITDA, 10% ROE
  • First 3-year mid-term plan (ending 2028 March fiscal year): 310.0 billion yen revenue, 7.5 billion yen operating profit, 12.5 billion yen EBITDA, 6% ROE, focused on building foundational capabilities for long-term growth via the "Three Arrows" growth strategy, supported by human capital, IT/DX, and ESG enabling initiatives

• Three Arrows Growth Strategy

  • 1. Existing Business Expansion: Prioritize adding high-value processing to offset volume declines from long-term demographic trends; added new processing equipment including new square pipe and C-channel steel production at Shizuoka Center (with JIS certification), and expanded 3D processing capabilities; increased in-house delivery truck fleet to address ongoing logistics challenges; construction business is growing order backlog, increasing headcount and certified staff to improve positioning with general contractors
  • 1. Non-continuous M&A: M&A activity has progressed faster than planned, with 3 transactions completed since the CEO took office in June: acquisition of Chuo Kouzai (to gain deep processing expertise), acquisition of Marumi Kousho (to fill a geographic gap between Nagoya and Shizuoka in Tokai region), and planned acquisition of Stahl Kaketsu's steel division (Q1 2026 closing, to add processing and construction capabilities in Gifu prefecture and improve Tokai region positioning); management confirms continued aggressive pursuit of additional M&A opportunities
  • 1. Onoken e-Place Initiative: Aims to build an e-commerce platform for steel modeled after Amazon; allocates 5.0 billion yen over 3 years to build system infrastructure using IT/DX, CRM, AI, and plans to launch a test version by the end of the mid-term plan; leverages existing e-commerce expertise from Marumi Kousho

• Non-financial and Capital Management Initiatives

  • Human capital: 3 consecutive years of base pay increases, expanded dependent allowances to support working parents amid high inflation, conducts regular upskilling training for young employees, active recruitment
  • ESG: Established sustainability committee, transitioned Onoken Foundation to a public interest incorporated foundation offering need-based scholarships for university students, sponsors youth sports programs
  • Capital management and IR: Strong focus on improving PBR to at least 1x; maintains 69 yen annual dividend per share (no cut despite lower earnings); completed 500 million yen share buyback in H1, approved another 500 million yen buyback for H2; total shareholder return payout ratio reached 91%; expanded IR team to increase engagement with institutional and individual investors, will participate in the Fukuoka Exchange IR Festa in February 2026

1. Geographic Segments (all regions posted year-over-year revenue declines):
   • Kyushu/China Region: Revenue fell year-over-year; Q2 sales grew quarter-over-quarter, but operating profit declined slightly due to increased depreciation from the opening of the Fukuyama sales office.
   • Kansai/Chukyo Region: Revenue declined year-over-year, no specific profit adjustment disclosed.
   • Kanto/Tohoku Region: Revenue and operating profit declined in Q2 quarter-over-quarter, driven by softening sales and new depreciation expenses from the full launch of the Shizuoka Center.
2. Product Segments:
   • Iron and Steel Products Sales: Half-year sales volume decreased from 830,000 tons to 786,000 tons year-over-year, with declining prices driving lower revenue and profit; however, profit margin improved 0.4 percentage points from Q1 to Q2 (to 10.3% full-year forecast from 9.6% prior year) as inventory unit costs fell and spread between selling and inventory prices widened. Bar steel segment profit margin rose from 11.2% in Q1 to 12.5% in Q2.
   • Building Materials Sales and Contract Construction: Half-year contract construction revenue fell from 28.077 billion yen to 26.677 billion yen year-over-year due to project delays from general contractor scheduling impacts. While near-term revenue progress is behind plan, order backlog (including large, medium, and small projects) is growing steadily, especially for next fiscal year, and orders for civil engineering construction materials linked to national resilience initiatives are performing well.

• Full-year 2026 March fiscal year guidance was revised downward: revenue lowered from 275.4 billion yen to 254.7 billion yen, and net income attributable to parent shareholders lowered from 4.0 billion yen to 3.0 billion yen. The downward revision reflects lack of near-term improvement in steel sales volume, scheduling delays for construction projects, and increased depreciation expenses from recent large-scale capital investments.
• Management expects full-year steel profit margin to recover to 10.3% from 9.6% in the prior year, driven by improving market conditions and expanding spread. Lower H2 profit is expected to improve sequentially in H2 due to recovering steel market conditions, ramping up production at Shizuoka Center, and progressing redevelopment projects in the Kansai region.
• The 2028 March fiscal year end targets for the first mid-term plan are fully maintained with no downward revision; management confirms the targets are achievable and remains committed to exceeding them, as all preparatory investments are complete and positive demand trends are expected for next fiscal year onward.
• The annual dividend per share guidance is maintained at 69 yen, keeping the previously announced lower bound unchanged.

• Weak macroeconomic sentiment and ongoing impacts of Trump's tariffs have suppressed demand for steel products in the automotive and semiconductor sectors, leading to volume declines that pressured near-term earnings. Imported steel still creates pricing pressure for blast furnace (plate) products due to weak overseas demand.
• Construction project revenue timing is heavily dependent on general contractor scheduling, so near-term revenue can fall behind plan even when order backlog is healthy.
• The Japanese steel distribution market has too many fragmented players, creating a structurally low-margin environment that requires industry consolidation to improve long-term profitability.

Q: How does management assess the likelihood of a sustained steel market price increase, given mixed signals from domestic price hikes and unstable imported steel prices? / A: The Japanese steel market is split between two segments with different outlooks. Blast furnace products (plate products for manufacturing) have high import exposure linked to global market conditions, so price growth is hard to forecast due to weak global demand, even with current yen weakness. In contrast, electric furnace products (bar steel, H-section steel, rebar for construction) have almost no import share, and both producers and distributors are under severe margin pressure that makes price increases necessary. Demand has started recovering for electric furnace products, and management sees high probability of sustained price increases, which will benefit Onoken due to its large inventory of bar steel.

Q: What role does Onoken see for itself in the Japanese steel distribution industry, given that Nippon Steel’s chairman has noted excess fragmentation keeps industry profits low? / A: Management fully agrees that industry consolidation is necessary, as the overall Japanese steel market is shrinking and fragmentation is most severe in the secondary distribution segment, which has seen almost no consolidation. Onoken’s strategy is to source directly from mills and sell directly to customers where possible, regardless of traditional distribution tier labels, and it aims to play a central role in driving needed consolidation. This is core to the company’s mission of contributing to Japan’s development, which is why it is aggressively pursuing M&A.

Q: Why does management expect H2 operating profit to improve sequentially over H1, after the weaker-than-expected H1 result? / A: Three main factors drive the expected H2 improvement: 1) the steel market has bottomed and is starting to recover, which will raise profit margins; 2) the Shizuoka Center’s production volume is increasing steadily and will start contributing to earnings; 3) after the Expo-related slowdown, the Kansai region construction market has picked back up with new IR and redevelopment projects. The fading impact of Trump’s tariffs also supports a sequential improvement.

Q: Why is Onoken investing heavily in human capital (including 3 consecutive years of base pay increases) amid a difficult industry environment? / A: Management’s core goal is to make Onoken a place where employees are proud to work, and to make the steel and construction industries attractive places for young new hires. As a listed prime market company in the sector, Onoken aims to lead by example improving compensation and working conditions, to build a sustainable talent pipeline for the entire industry. This is a core long-term investment that supports all of the company’s growth goals.