TOCALO (3433) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative results for Q3 of the fiscal year ending March 2026 confirmed not only higher revenue and earnings but also a sustained improvement in profit margins, with improvements in both the gross margin and SG&A expense ratio increasing operating leverage. Revenue was ¥4.262B (+6.8% YoY), Operating Income was ¥953M (+12.3%), Ordinary Income was ¥989M (+12.8%), and Net Income attributable to owners of the parent was ¥700M (+11.4% equivalent, or +¥66M based on the actual amount of ¥644M). The primary reasons earnings growth exceeded revenue growth were a change in revenue mix driven by a 38.9% increase in sales at overseas subsidiaries and improved profitability resulting from a lower variable-cost ratio. Meanwhile, the core thermal spraying business (standalone) recorded an 8.6% decline in segment profit, as higher fixed costs, including increased personnel expenses and depreciation, weighed on the domestic business.

Factors Affecting Earnings

【Revenue】Revenue was ¥4.262B, up +6.8% YoY. While the core thermal spraying business (standalone) posted only a slight increase in revenue, supported by solid demand in the industrial machinery sector, overseas subsidiaries achieved a substantial increase in revenue to ¥865M (+38.9%) on the recovery of semiconductor- and steel-related demand, driving overall growth. Other surface treatment processing recorded a decline in revenue to ¥185M (-12.8%), due to continued inventory adjustments for agricultural machinery components.

【Profit and Loss】Operating Income was ¥953M (+12.3%), and Ordinary Income was ¥989M (+12.8%), representing earnings growth above the rate of revenue growth. The gross margin improved to 37.5% (36.6% in the previous year), while the SG&A expense ratio declined to 15.2% (15.4% in the previous year); these were the primary factors behind the margin expansion. However, fixed-cost burdens included a ¥898M increase in personnel expenses and a ¥356M increase in depreciation, resulting in an 8.6% decline in segment profit for the thermal spraying business (standalone). Non-operating income included ¥290M in subsidy income, which was temporary in nature and contributed to the increase in Ordinary Income. Extraordinary gains and losses were small at a net ¥0.009B, limiting their impact on Net Income. The gap of 34.9% between Ordinary Income of ¥989M and Net Income attributable to owners of the parent of ¥644M was primarily attributable to ¥290M in income taxes and ¥56M in profit attributable to non-controlling interests, rather than temporary factors. In conclusion, the Company posted higher revenue and earnings.

Segment Analysis

The core business, thermal spraying (standalone), represents the largest share of revenue, at ¥2.989B (approximately 70% of total revenue), but segment profit declined to ¥624M (-8.6% YoY), as higher fixed costs pressured profitability. In contrast, overseas subsidiaries posted a substantial increase in segment profit to ¥353M (+77.3%), serving as the primary driver of overall earnings growth. Domestic subsidiaries recorded profit of ¥24M (+7.2%), reflecting a recovery in automotive-related components. Other surface treatment processing posted a substantial decline in profit to ¥21M (-36.6%), largely due to the impact of inventory adjustments for agricultural machinery components. Across segments, the earnings growth rate of overseas subsidiaries was particularly pronounced, indicating an ongoing shift in the profit mix toward overseas operations.

Key Financial Indicators

Profitability: ROE (annualized) 13.7%, Operating Income margin 22.4%
Equity Ratio 77.8%, Current Ratio 326.0%
Days Sales Outstanding (DSO) was 102 days, while the work-in-process inventory ratio was high at 41.6%
Capital expenditures amounted to ¥593.3M (65.9% progress against the full-year plan of ¥900M), indicating an active growth-investment phase

Cash Flow Analysis

As this report does not include absolute cash flow data, cash flows are inferred from changes in the balance sheet. Cash and deposits increased 25.1% YoY to ¥1.811B. Long-term borrowings increased 194.1% YoY to ¥548M, presumably mainly to finance capital expenditures, including construction of new buildings at the Tokyo and Kitakyushu plants and the launch of a new overseas plant. With cash of ¥1.811B against interest-bearing debt of ¥630M, the Company remains in a net cash position, and no deterioration in liquidity due to increased borrowings is evident.

Earnings Quality

The gap of 34.9% between Ordinary Income of ¥989M and Net Income attributable to owners of the parent of ¥644M was attributable to recurring items, namely ¥290M in income taxes and ¥56M in profit attributable to non-controlling interests, with temporary factors having only a minor impact. Non-operating income of ¥420M was less than 1.0% of revenue and therefore immaterial; however, subsidy income of ¥290M accounted for approximately 70% of non-operating income and contributed to an increase in part of Ordinary Income, which should be noted when assessing earnings quality. Extraordinary gains and losses were extremely small at a net ¥0.009B, limiting their impact on Net Income.

Earnings Forecast and Guidance

Progress against the full-year forecasts of revenue of ¥5.700B, Operating Income of ¥1.300B, and Ordinary Income of ¥1.300B was 74.8% for revenue, 73.3% for Operating Income, and 76.1% for Ordinary Income. These figures are broadly consistent with the standard 75% progress rate, although the progress rate for Operating Income was slightly below this level, requiring the Company to secure Operating Income of ¥347M in Q4. The Company has not revised its full-year forecasts and assumes that the recovery trend in the semiconductor sector will continue. Prolonged inventory adjustments for agricultural machinery components and a delay in the semiconductor recovery are cited as downside risks.

Shareholder Returns

The Company plans to pay an interim dividend of ¥37 and a year-end dividend of ¥33 (forecast), for a full-year dividend of ¥70, implying a full-year forecast Payout Ratio of approximately 50.0%. The Company has established a shareholder return policy targeting a consolidated Payout Ratio of approximately 50% and DOE of at least 5%, while also indicating an intention to conduct share repurchases flexibly. The specific amount of share repurchases implemented during the current fiscal year has not been disclosed as of this report, and the Payout Ratio and Total Return Ratio should be evaluated separately.

Catalysts

【Short Term】Progress in the recovery of the semiconductor sector in Q4 and whether the Company can achieve full-year Operating Income of ¥1.300B.

【Long Term】Expansion of production capacity through construction of new buildings at the Tokyo and Kitakyushu plants and the launch of a new overseas plant, as well as progress in recovering the associated investments.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Profit margin were substantially above the industry median, placing the Company’s profitability at a high level within the industry.

Growth and Capital Efficiency

The revenue growth rate also exceeded the industry median but remained below the upper quartile of the IQR (8.9%); growth is therefore in the upper tier of the industry but not exceptional.

※Source: Compiled by the Company

Risk Factors

1. Working capital accumulation: Accounts receivable increased 7.1% YoY to ¥1.582B, while work-in-process inventory increased 22.3% YoY to ¥299M, resulting in a high work-in-process inventory ratio of 41.6%. It is necessary to determine whether this reflects a temporary increase associated with order progress or bottlenecks in the production process.

2. Continued decline in revenue from other surface treatment processing: Due to customer inventory adjustments for agricultural machinery components, revenue declined to ¥185M (-12.8%), while segment profit fell to ¥21M (-36.6%). Although the impact of prolonged adjustments on overall performance is expected to be limited, continued monitoring is necessary.

3. Increase in fixed-cost burden: Personnel expenses increased by ¥898M due to wage increases, while depreciation increased by ¥356M in conjunction with expanded capital expenditures. As a result, segment profit in the core thermal spraying business (standalone) declined 8.6%. The balance between rising fixed costs and profitability during the active investment phase will be a key focus going forward.

Key Points from the Earnings Results

1. The expansion of overseas subsidiaries’ contribution to profit is evident as a clear structural change. Segment profit at overseas subsidiaries surged to ¥353M (+77.3%), driving overall earnings growth by offsetting the decline in the domestic core business.

2. The Operating Income margin of 22.4% was substantially above the industry median of 8.6%, clearly demonstrating the Company’s high profitability based on the earnings data. However, Ordinary Income included ¥290M in subsidy income, and it should be noted that part of the increase at the Ordinary Income level included a temporary factor.

3. The full-year Payout Ratio of approximately 50.0%, together with the policy of DOE of at least 5%, clearly defines the shareholder return framework. The Company has maintained a net cash position while capital expenditures are progressing according to plan at 65.9%, indicating from the earnings data that investment and shareholder returns are being balanced.

Theoretical Share Price (For Reference)

Sensitivity: ¥1,236–¥1,307 at ±1% for the Cost of Equity, and ¥1,268–¥1,275 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI through an integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

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