Toyo Tire Corporation 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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