Toyo Tire (5105) FY2026 Q2 Earnings Report

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Executive Summary

The second quarter of FY2026 resulted in higher revenue but lower earnings, as increased costs and growth in selling, general and administrative expenses pressured margins. Revenue was ¥2,841.9B, essentially flat year on year at +0.3%, while Operating Income declined 22.2% year on year to ¥375.0B, Ordinary Income fell 9.9% to ¥394.1B, and Net Income decreased 11.7% to ¥294.4B. The primary factor was the decline in profitability in the core Tire Business, against a backdrop of simultaneous deterioration in the gross margin and an increase in the SG&A expense ratio.

Factors Affecting Performance

【Revenue】Revenue was ¥2,841.9B, essentially flat year on year at +0.3%. By segment, the Tire Business declined slightly to ¥2,600.6B (down 0.1% year on year), while the Automotive Parts Business grew to ¥241.3B (up 4.9%). The Tire Business accounted for 91.5% of total revenue, indicating a high degree of dependence on a single business. The lack of volume growth was partially offset by product mix and pricing, leaving the top line at a plateau.

【Profit and Loss】Operating Income declined significantly by 22.2% year on year to ¥375.0B. The gross margin declined to 39.0% (approximately 40.6% in the previous year), while the SG&A expense ratio increased to 25.8% (approximately 23.6% in the previous year), resulting in a contraction of the Operating Income margin to 13.2% (approximately -3.8pt year on year). By segment, Operating Income in the Tire Business declined 22.6% to ¥364.2B, with its margin falling to 14.0%. The Automotive Parts Business generated ¥10.8B in Operating Income (down 0.6%), with its margin remaining low at 4.5%. Ordinary Income declined 9.9% to ¥394.1B, supported by foreign exchange gains of ¥13.9B and interest income of ¥7.3B, which narrowed the decline in Operating Income. Extraordinary items comprised gains of ¥3.1B and losses of ¥4.8B, resulting in a slight net negative impact, but the overall effect was limited. Net Income declined 11.7% to ¥294.4B. Overall, the Company experienced higher revenue but lower earnings, indicating that increased costs could not be sufficiently absorbed through pricing and product mix.

Segment Analysis

The Tire Business generated revenue of ¥2,600.6B (down 0.1% year on year) and Operating Income of ¥364.2B (down 22.6%), with its margin falling significantly from the previous year to 14.0%. The decline in earnings in the core business is determining the performance of the Group as a whole. The Automotive Parts Business recorded higher revenue of ¥241.3B (up 4.9%), but Operating Income decreased 0.6% to ¥10.8B, with its margin remaining low at 4.5%, indicating a low-profitability structure. The Group has a high degree of earnings dependence on the Tire Business, making margin trends in that business a likely inflection point for Group performance.

Key Financial Indicators

【Profitability】The Operating Income margin was 13.2% and the Net Income margin was 10.4%, both declining from the previous year. ROE was 5.4%, down from approximately 6.4% in the previous year.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥349.8B, exceeding Net Income of ¥294.4B, indicating that earnings continued to be supported by cash generation. However, OCF relative to EBITDA was weaker than in the previous year, primarily due to an increase in inventories.【Investment Efficiency】Capital expenditures were ¥169.2B, below depreciation and amortization expense of ¥188.5B, resulting in positive Free Cash Flow of ¥166.7B.【Financial Soundness】The Equity Ratio increased to 71.6% from 69.4% in the previous year, indicating a robust financial base. Short-term borrowings increased 73.0% year on year to ¥232.2B, while long-term borrowings decreased 42.0% to ¥181.8B, indicating a shift toward shorter-term funding that requires monitoring.

Cash Flow Analysis

OCF declined 15.4% year on year to ¥349.8B, but exceeded Net Income of ¥294.4B, indicating that earnings continued to be supported by cash generation. The subtotal before changes in working capital was ¥426.6B, including depreciation and amortization expense of ¥188.5B. However, an increase in inventories of ¥76.1B and a decrease in trade payables of ¥51.8B pressured cash generation and reduced actual OCF. Investing Cash Flow was -¥183.2B, of which capital expenditures accounted for ¥169.2B, maintaining an investment level approximately equivalent to depreciation and amortization expense. Financing Cash Flow was -¥229.4B; despite an increase in short-term borrowings, cash outflows resulted from repayments of long-term borrowings and dividend payments. Free Cash Flow was positive at ¥166.7B, a level sufficient to cover dividend payments. If inventory accumulation continues, it could affect cash-generating capacity in the second half of the fiscal year.

Earnings Quality

The difference between Ordinary Income of ¥394.1B and Net Income of ¥294.4B was primarily attributable to income taxes and other taxes of ¥98.1B, resulting in an effective tax rate of approximately 25.0%, a standard level. Non-operating income was ¥30.1B, of which foreign exchange gains of ¥13.9B accounted for more than half. As these gains cannot be considered a recurring source of earnings, their sustainability requires attention. Extraordinary items, comprising gains of ¥3.1B, including gains on the sale of fixed assets of ¥2.7B, and losses of ¥4.8B, including impairment losses of ¥2.1B and losses on the disposal of fixed assets of ¥2.7B, largely offset each other, resulting in a limited net impact. Comprehensive Income was ¥378.8B, exceeding Net Income of ¥294.4B, primarily due to a ¥91.4B increase in foreign currency translation adjustments. This reflects an increase in the value of assets held by overseas subsidiaries and does not indicate an improvement in the earnings power of the core business.

Earnings Forecast and Guidance

Progress against the full-year earnings forecast was 44.6% for Revenue, at ¥2,841.9B / ¥6,380.0B; 41.7% for Operating Income, at ¥375.0B / ¥900.0B; and 45.3% for Ordinary Income, at ¥394.1B / ¥870.0B. These figures are below the general first-half progress benchmark of 50%, with the delay particularly pronounced at the Operating Income level. The full-year forecast assumes that Revenue will continue to increase in the second half while earnings remain on a declining trend, with Revenue projected to rise 7.2% year on year, Operating Income to decline 7.6%, and Ordinary Income to decline 14.1%. The earnings forecast was revised during the current quarter, reflecting a review of the plan based on first-half results.

Shareholder Returns

The dividend for Q2 was ¥65 per share, up from ¥60 in the same period of the previous year. The full-year dividend forecast is ¥135. Based on current-period Net Income of ¥294.4B, the first-half Payout Ratio is approximately 34.0% when calculated using total dividends (¥65 per share × average number of shares outstanding during the period), and Free Cash Flow of ¥166.7B is sufficient to cover dividend payments. No revision was made to the dividend forecast during the current quarter, and the existing dividend plan remains unchanged.

Risk Factors

1. Segment concentration risk: The Tire Business accounts for 91.5% of Revenue, creating a structure in which the decline in its profit margin (14.0%, significantly worse than the previous year) directly affects Group performance.

2. Margin compression risk: The gross margin declined to 39.0% while the SG&A expense ratio increased to 25.8%, resulting in a contraction of the Operating Income margin to 13.2%. If the inability to absorb increased costs through pricing and product mix continues, profitability could remain under pressure in the second half and beyond.

3. Changes in the funding structure: Short-term borrowings increased 73.0% year on year to ¥232.2B, while long-term borrowings decreased 42.0% to ¥181.8B, indicating a shift toward shorter-term funding. Although the Equity Ratio of 71.6% indicates a robust financial base, the change in the funding composition warrants continued monitoring.

Industry Benchmark (For Reference; Based on Our Research)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability is above the industry median.

Growth and Capital Efficiency

Revenue growth is significantly below the industry median, and the lack of top-line growth is relatively pronounced within the industry.

※Source: Based on our research

Key Points from the Earnings Results

1. The profit margin of the core Tire Business declined significantly from the previous year and was the primary factor behind the Group-wide decline in earnings. Trends in the cost structure and pricing strategy of this business will be important areas of focus that determine future performance.

2. Progress against the full-year plan was below the first-half benchmark of 50% for both Revenue and earnings, with Operating Income progress particularly slow at 41.7%. The degree of profitability recovery in the second half will be the decisive factor in achieving the full-year plan.

3. While an increase in inventories is pressuring OCF, Free Cash Flow remains positive at ¥166.7B, indicating that funding for shareholder returns, including dividends, is currently maintained. Working capital trends will be an important focus in assessing future cash-generating capacity.

Theoretical Stock Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade period). It does not represent a forecast of the market stock price or a recommendation to take any specific investment action.

Sensitivity: ¥3,791–¥4,015 at ±1% for the cost of equity, and ¥3,893–¥3,913 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a time lag relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee the future stock price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by our 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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AI Financial Analysis

Executive Summary

TOYO TIRE’s FY2026 Q2 result was operationally weaker despite essentially flat revenue, with margin compression concentrated in the core tire business. Revenue increased 0.3% YoY to ¥284.2bn. Operating income declined 22.2% to ¥37.5bn, materially underperforming the top-line trend. Gross profit fell 3.5% to ¥110.9bn, and the gross margin contracted 154bp to 39.0%. SG&A expenses increased 9.9% to ¥73.4bn, lifting the SG&A-to-sales ratio by 226bp to 25.8%. Consequently, operating margin compressed 380bp to 13.2% from 17.0% a year earlier. Ordinary income declined less sharply, by 9.9% to ¥39.4bn, supported by ¥3.0bn of non-operating income, including ¥1.4bn of FX gains. Net income decreased 11.7% to ¥29.4bn, while net margin fell 140bp to 10.4%. The profit decline was therefore mainly an operating issue rather than a tax or financing-cost issue. The annualized reported ROE remained solid at 10.7%, supported by a 10.4% net margin, annualized asset turnover of 0.740x, and conservative 1.40x financial leverage. Cash earnings remained sound: operating cash flow was ¥35.0bn, exceeding net income by 19%, and free cash flow was positive at ¥16.7bn. However, cash conversion of 0.62x of EBITDA is below the 0.7x alert threshold, reflecting a working-capital-intensive manufacturing model and inventory investment. Liquidity and leverage remain very strong, with a 280.3% current ratio, ¥112.7bn of cash, 0.40x debt-to-equity, and 0.73x debt/EBITDA. FY2026 guidance implies second-half improvement, as first-half progress is 44.5% for sales, 41.7% for operating income, and 47.5% for net income against full-year targets. The investment focus is therefore whether tire-segment pricing, mix and cost discipline can restore operating margin while inventory and receivable cycles normalize.

Profitability Analysis

The annualized reported DuPont ROE is 10.7%, comprising a 10.4% net profit margin, 0.740x annualized asset turnover, and 1.40x financial leverage. The principal adverse movement was profitability rather than balance-sheet efficiency or leverage: operating margin fell 380bp YoY to 13.2%, while net margin fell 140bp to 10.4%. Gross margin declined 154bp to 39.0%, indicating lower gross-profit conversion on a nearly unchanged revenue base. SG&A then rose 9.9% YoY against 0.3% revenue growth, creating negative operating leverage and adding 226bp to the SG&A ratio. The tire business is the core business, contributing ¥36.4bn of segment operating income, or virtually all consolidated segment profit. Tire revenue declined 0.1% to ¥260.1bn, but segment profit fell 22.6% to ¥36.4bn; its segment margin consequently declined to 14.0% from 18.1%. Automotive parts revenue increased 4.9% to ¥24.1bn, but segment profit edged down 0.6% to ¥1.1bn, with a lower 4.5% margin versus 4.7% previously. The large disparity between tire and automotive-parts margins makes recovery in the tire operation the key determinant of consolidated profitability. Financial costs are not constraining returns: the interest burden was 1.047, interest coverage was 139.4x, and EBITDA interest coverage was 209.5x. The 25.0% effective tax rate and 0.750 tax burden were normal, so tax effects did not materially distort net profitability. EBITDA was ¥56.3bn and EBITDA margin was 19.8%, preserving a healthy cash-operating-profit base despite the decline in EBIT. Under JGAAP, EBITDA is particularly useful because it neutralizes depreciation and amortization; reported EBITDA before goodwill amortization was also ¥56.3bn.

Growth Assessment

First-half revenue growth of 0.3% indicates a broadly stable demand and sales base, but it did not translate into earnings growth. The tire business, which represented 91.5% of segment revenue, declined 0.1% YoY, while automotive parts grew 4.9% from a much smaller base. The earnings profile shows that volume and/or price-mix resilience was insufficient to offset higher operating costs and SG&A. Full-year guidance calls for revenue of ¥638.0bn, up 7.2% YoY, operating income of ¥90.0bn, down 7.6%, ordinary income of ¥87.0bn, down 14.1%, and net income of ¥62.0bn. Q2 progress against guidance is 44.5% for revenue, 41.7% for operating income, 45.3% for ordinary income, and 47.5% for net income, versus a standard 50% at the half-year point. The shortfall is less than 10 percentage points in each case, but the operating-income progress rate requires a stronger second half than the first half. Management has revised the earnings forecast, increasing the importance of execution against the updated assumptions. Growth quality is supported by a 10.4% net margin and positive ¥16.7bn free cash flow, rather than being driven principally by extraordinary gains. Extraordinary income of ¥0.3bn was substantially offset by ¥0.5bn of extraordinary losses, including ¥0.2bn of impairment loss, leaving limited influence on net income. Capex of ¥16.9bn equaled 90% of depreciation and amortization, suggesting investment broadly supports the existing production base but does not yet signal a pronounced capacity-expansion phase.

Financial Health

Financial health is strong. The current ratio of 280.3% and quick ratio of 211.3% are substantially above conventional liquidity thresholds, supported by ¥112.7bn of cash and ¥269.0bn of working capital. Current assets of ¥418.2bn comfortably cover current liabilities of ¥149.2bn. Total interest-bearing debt was ¥41.4bn, equal to only 0.40x equity and 7.0% of total capital. Debt/EBITDA was a conservative 0.73x, while interest coverage of 139.4x confirms ample capacity to service borrowing costs. Cash was 4.85x short-term debt, materially reducing near-term refinancing dependence. Nevertheless, the short-term debt ratio was 56.1%, above the 40% quality-alert threshold. This refinancing-risk alert reflects the debt maturity mix: short-term loans rose 73.0% YoY to ¥23.2bn while long-term loans declined 42.0% to ¥18.2bn. The shift appears to be a maturity reallocation rather than excessive leverage, as aggregate borrowing remains low and cash substantially exceeds short-term loans. The impact is therefore limited under current liquidity conditions, but continued reliance on short-term facilities would increase sensitivity to funding-market conditions and interest-rate movements. Equity increased to ¥549.9bn from ¥522.7bn, lifting the equity ratio to 71.6% from 69.4%. PPE represents 37.2% of total assets, consistent with a capital-intensive tire manufacturing footprint, while intangible assets are a modest 3.0% of assets.

Notable B/S Changes

Short-term loans: +¥9.8bn (+73.0%) to ¥23.2bn - debt maturity shifted toward short-term funding, producing a 56.1% short-term debt ratio; monitor refinancing discipline despite ¥112.7bn of cash. Long-term loans: -¥13.1bn (-42.0%) to ¥18.2bn - reduction in long-dated borrowing improves long-term leverage but contributes to the higher short-term funding share. Finished goods: +¥11.0bn (+12.0%) to ¥103.0bn - inventory build is significant in absolute terms and is consistent with elevated inventory-day and cash-conversion-cycle alerts. Property, plant and equipment: +¥5.0bn (+1.8%) to ¥285.7bn - the production asset base remains substantial at 37.2% of total assets, with capex of ¥16.9bn supporting manufacturing capacity and maintenance.

Cash Flow Quality

Cash-flow quality is favorable on a net-income basis but weaker on an EBITDA-conversion basis. Operating cash flow was ¥35.0bn, equivalent to 1.19x net income of ¥29.4bn and above the 1.0x high-quality threshold. The accruals ratio was -0.7%, indicating that reported earnings were not dependent on aggressive non-cash accrual creation. Free cash flow was positive at ¥16.7bn after ¥16.9bn of capital expenditures. However, cash conversion was only 0.62x of EBITDA, triggering the low-cash-conversion alert because less than 70% of EBITDA converted into operating cash flow. Working-capital movements explain the constraint: inventories increased by ¥7.6bn and trade payables declined by ¥5.2bn, both consuming cash, although a ¥1.4bn reduction in trade receivables supported cash flow. The receivable-cycle alert identifies annualized DSO of 89 days, above the 60-day warning level. This lengthens the cash collection period and raises sensitivity to distributor demand, customer credit conditions and shipment timing. Inventory-cycle alerts identify annualized DIO of 146 days and 109 days, both above the applicable 90-day and 60-day warning thresholds. The root cause is a large inventory commitment, including ¥103.0bn of finished goods, alongside ¥30.3bn of raw materials and ¥5.0bn of work in process. Elevated inventory days can reflect preparation for demand, product availability requirements, or slower sell-through; the investment impact is greater working-capital funding needs and potential markdown or obsolescence risk if demand weakens. The reported annualized cash conversion cycle of 205 days exceeds the 120-day warning threshold, indicating that inventory and receivable funding remain material despite a strong liquidity buffer. Capex/depreciation of 0.90x is moderately below replacement-level parity, but remains well above the 0.7x underinvestment warning threshold.

Dividend Sustainability

Dividend sustainability appears sound. The Q2 dividend is ¥65 per share, and the calculated interim payout ratio is 34.0% of first-half EPS of ¥191.14. The full-year forecast dividend of ¥135 per share implies a forecast payout ratio of approximately 33.5% against forecast EPS of ¥402.57. These payout levels are well below the 60% sustainability benchmark. First-half free cash flow of ¥16.7bn covers the indicated dividend requirement, with reported FCF coverage of 1.66x. Cash dividends paid were ¥10.8bn, also covered by first-half free cash flow by approximately 1.55x. The company’s low debt burden, substantial cash balance and strong interest coverage provide additional capacity to sustain the distribution through normal earnings volatility. The key condition is preservation of positive free cash flow as inventory funding, capital expenditure and the core tire margin evolve.

Risk Assessment

Business risks include Core tire business profitability risk: tire revenue declined 0.1% YoY while segment operating income fell 22.6%, reducing the segment margin by 409bp to 14.0%., Inventory and demand risk: elevated annualized DIO alerts of 109-146 days and ¥103.0bn of finished goods increase exposure to slower replacement-tire demand, product-mix shifts, discounting and inventory obsolescence., Working-capital cycle risk: annualized DSO of 89 days and a 205-day annualized cash conversion cycle increase funding requirements and make cash generation more sensitive to customer collections and channel inventory conditions., Manufacturing cost risk: the 154bp gross-margin decline and 226bp increase in the SG&A ratio indicate sensitivity to raw-material, logistics, energy, labor and production-efficiency pressures., FX risk: ¥1.4bn of FX gains supported non-operating income in the period; future currency movements can affect both overseas earnings translation and procurement/export economics., Automotive-parts execution risk: although revenue grew 4.9%, the segment generated only ¥1.1bn of operating income at a 4.5% margin, limiting its ability to offset volatility in the tire operation..

Financial risks include Refinancing-mix risk: the 56.1% short-term debt ratio exceeds the 40% alert threshold after short-term loans rose 73.0% YoY to ¥23.2bn., Cash-conversion risk: OCF/EBITDA of 0.62x is below the 0.7x threshold, despite OCF exceeding net income., Capital-maintenance risk: capex/depreciation of 0.90x suggests investment is slightly below depreciation; sustained sub-1.0x investment could eventually constrain modernization or capacity renewal..

Key concerns include The highest-priority issue is restoration of tire-segment margin, because the core segment accounts for virtually all operating profit and its earnings decline materially exceeded the change in revenue., The second priority is inventory normalization and improvement in the cash conversion cycle, as excess stock or slower sell-through could pressure both pricing and future operating cash flow., The refinancing alert is lower severity than the operating and working-capital risks because cash of ¥112.7bn is 4.85x short-term debt, debt/EBITDA is only 0.73x, and the current ratio is 280.3%., Industry-specific risks include natural-rubber, synthetic-rubber, carbon-black and energy-cost volatility; exchange-rate swings; automotive production cycles; and competitive pricing in replacement and OEM tire markets..

Investment Implications

Key takeaways include Revenue resilience was not converted into operating earnings: sales rose 0.3% but operating income fell 22.2%, with operating margin down 380bp to 13.2%., The tire business remains the earnings engine, but its segment profit fell 22.6% and margin declined to 14.0%., Reported earnings quality is solid on an OCF/net-income basis at 1.19x, while EBITDA cash conversion of 0.62x highlights working-capital pressure., Balance-sheet risk is low, with 0.40x debt-to-equity, 0.73x debt/EBITDA, 71.6% equity ratio and strong short-term liquidity., Dividend capacity is supported by a roughly 34% payout ratio and positive free cash flow, subject to continued inventory discipline and margin recovery., Updated full-year guidance requires a stronger second half, particularly for operating income, as first-half operating-income progress is 41.7%..

Metrics to watch include Tire business revenue, segment operating income and segment margin, Consolidated gross margin and SG&A-to-sales ratio, Annualized inventory days, receivable days and cash conversion cycle, Operating cash flow/EBITDA and free cash flow after capital expenditures, Short-term debt ratio, cash/short-term debt and funding-maturity mix, Progress against FY2026 guidance for ¥638.0bn sales, ¥90.0bn operating income and ¥62.0bn net income.

Regarding relative positioning, TOYO TIRE combines good annualized ROE of 10.7%, a 13.2% operating margin and exceptionally conservative leverage, placing its financial resilience ahead of many capital-intensive manufacturers. Its relative weakness is operational rather than solvency-driven: the sharp tire-segment margin decline and a long reported working-capital cycle reduce the quality of incremental revenue growth and leave earnings more exposed to cost and demand normalization.