TOKAI CARBON CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

Although the Company secured higher revenue and higher earnings on an Operating Income and Ordinary Income basis, Net Income attributable to owners of the parent declined due to an increase in the effective tax rate and higher Net Income attributable to non-controlling interests. Revenue increased to ¥1737.3B (+9.9% YoY), Operating Income rose to ¥151.0B (+10.5%), and Ordinary Income increased to ¥148.4B (+9.3%). Meanwhile, Net Income attributable to owners of the parent declined 14.0% YoY to ¥72.4B (consolidated Net Income including non-controlling interests was ¥94.6B, down 5.4% YoY). The primary factors were the increase in the effective tax rate from 31.3% to 39.7% and the increase in Net Income attributable to non-controlling interests to ¥22.2B (+40.3% YoY), which meant that the improvement in earnings at the operating level was not sufficiently reflected in the bottom line.

Factors Affecting Results

【Revenue】Revenue increased 9.9% YoY to ¥1737.3B. Fine Carbon (+18.8%), Industrial Furnace (+29.6%), and Smelting & Lining (+13.0%) led double-digit growth, while Carbon Black, the largest segment (48.1% of total revenue, +10.5%), also contributed to the increase in revenue. Graphite Electrode, on the other hand, recorded an 8.8% decline.

【Profit and Loss】Operating Income increased 10.5% YoY to ¥151.0B. The gross profit margin was 24.9% (24.8% in the previous year), while the SG&A expense ratio was 16.2% (16.1% in the previous year), both remaining broadly flat. Accordingly, the accumulation of gross profit was reflected almost directly in the increase in Operating Income. Ordinary Income was ¥148.4B (+9.3%), and Profit Before Tax was ¥156.9B, including a net gain of ¥8.4B from extraordinary gains and losses, primarily comprising a ¥14.5B gain on the sale of investment securities. However, the effective tax rate increased from 31.3% in the previous year to 39.7%, and Net Income attributable to non-controlling interests increased to ¥22.2B (+40.3%). As a result, Net Income attributable to owners of the parent declined 14.0% to ¥72.4B. Overall, the Company achieved higher revenue and higher earnings on an Operating Income and Ordinary Income basis, but Net Income declined due to the increased tax burden.

Segment Analysis

Carbon Black is the core business, accounting for 48.1% of revenue across the six-segment structure (¥834.9B, +10.5% YoY). However, Operating Income declined 11.2% YoY to ¥72.4B, and the operating margin deteriorated by -2.1pt from 10.8% to 8.7%. Volumes and pricing appear to have remained firm, but margins may have been pressured by raw material costs and other factors. Fine Carbon recorded revenue of ¥330.7B (19.0% of total revenue, +18.8%) and Operating Income of ¥47.2B (+6.9%), while maintaining a high operating margin of 14.3%, albeit slightly lower than 15.8% in the previous year. Smelting & Lining recorded revenue of ¥308.4B (+13.0%) and a sharp increase in Operating Income to ¥20.2B (+564.5%), with its operating margin improving significantly from 1.1% to 6.5%. Graphite Electrode posted a decline in revenue to ¥169.0B (-8.8%), but Operating Income improved 60.3% to ¥7.9B, and its operating margin improved to 4.7% from 2.7% in the previous year. Industrial Furnace recorded revenue of ¥54.8B (+29.6%) and Operating Income of ¥12.1B (+37.1%), maintaining the highest operating margin among all segments at 22.1%. The primary driver of overall earnings growth was improved profitability in the five segments excluding Carbon Black, with other businesses offsetting the margin decline in the core business.

Key Financial Indicators

【Profitability】The Operating Income margin was 8.7%, broadly flat compared with 8.6% in the previous year. The gross profit margin of 24.9% and SG&A expense ratio of 16.2% also showed no significant year-on-year changes, indicating limited operating leverage. The Net Income margin, based on Net Income attributable to owners of the parent, was 4.2%, deteriorating by -1.1pt from 5.3% in the previous year. The impact of taxes and non-controlling interests was therefore greater at the Net Income level than at the operating level.【Cash Flow Quality】Cash and deposits declined 4.2% from the end of the previous fiscal year to ¥864.0B, while trade receivables increased 6.0% to ¥708.1B and inventories increased 2.7% to ¥294.4B, indicating an accumulation of working capital.【Investment Efficiency】ROE, calculated as Net Income attributable to owners of the parent divided by average equity during the period, was 2.3%, with the higher tax burden weighing on capital efficiency.【Financial Soundness】The Equity Ratio was 47.0%, slightly down from 47.9% in the previous year. Interest-bearing debt, comprising bonds, borrowings, and commercial paper, increased 10.7% from the end of the previous fiscal year to approximately ¥2083B. Bonds increased by ¥250B from the end of the previous fiscal year to ¥900B, indicating a partial shift in funding sources from borrowings to bonds.

Cash Flow Analysis

Cash and deposits declined by ¥37.5B (-4.2%) from the end of the previous fiscal year to ¥864.0B. In terms of working capital, trade receivables increased 6.0% to ¥708.1B and inventories increased 2.7% to ¥294.4B, while accounts payable also increased 9.6% to ¥223.4B, suggesting a tendency for funds to remain tied up in working capital. Interest-bearing debt increased 10.7% from the end of the previous fiscal year, primarily due to bond issuance (¥650B→¥900B, +¥250B), increasing external funding. These funds appear to have been allocated to share repurchases (-¥70.5B→-¥220.3B) and increased holdings of investment securities (+¥159.2B, +39.5%). Meanwhile, Property, Plant and Equipment remained broadly flat at ¥2897.0B, suggesting that priority may have been given to shareholder returns and financial assets rather than large-scale capital investment.

Earnings Quality

Against Profit Before Tax of ¥156.9B, income taxes were ¥62.2B, resulting in an effective tax rate of 39.7%, up +8.4pt from 31.3% in the previous year. This indicates that the improvement in recurring earnings power was not sufficiently reflected at the Net Income level. Extraordinary gains and losses made a net positive contribution of ¥8.4B, comprising extraordinary income of ¥14.6B, primarily from a ¥14.5B gain on the sale of investment securities, and extraordinary losses of ¥6.2B. This should be distinguished as a temporary factor with low recurrence. Net Income attributable to non-controlling interests increased 40.3% YoY to ¥22.2B, leaving the portion attributable to owners of the parent at ¥72.4B, or 76.5% of consolidated Net Income of ¥94.6B. Comprehensive Income was ¥224.2B, significantly exceeding Net Income of ¥94.6B, primarily due to ¥111.3B in valuation differences on other securities. Whereas Comprehensive Income was negative at -¥104.5B in the same period of the previous year due to deterioration in foreign currency translation adjustments, it turned positive in the current period, confirming the high level of volatility caused by market conditions.

Earnings Forecast and Guidance

Progress against the Full-Year plan for the first half was 45.0% for Revenue (¥1737.3B/¥3860.0B), 43.1% for Operating Income (¥151.0B/¥350.0B), 43.3% for Ordinary Income (¥148.4B/¥343.0B), and 32.9% for Net Income attributable to owners of the parent (¥72.4B/¥220.0B). Compared with the standard mid-year progress benchmark of 50%, all indicators were below target, with Net Income particularly behind schedule. The earnings forecast was revised during the quarter (with no revision to the dividend forecast), and the tax burden and trends in income attributable to non-controlling interests in the second half will be key to achieving the plan.

Shareholder Returns

The interim dividend was ¥20 per share, an increase of +¥5 from ¥15 in the same period of the previous year. The Full-Year dividend forecast is ¥40, resulting in a Payout Ratio of 36.8% against the Full-Year EPS forecast of ¥108.73. Treasury stock increased substantially from ¥70.5B at the end of the previous fiscal year to ¥220.3B, indicating an acceleration in share repurchases. Given financial soundness, including an Equity Ratio of 47.0%, and liquidity, there are no significant concerns regarding the Company’s ability to pay dividends in the near term.

Risk Factors

1. Carbon Black margin decline: Revenue increased 10.5% YoY, but Operating Income declined 11.2%, and the operating margin decreased by -2.1pt from 10.8% to 8.7%. Deteriorating profitability in the core business is limiting the overall operating margin.

2. Pressure on Net Income from the increased tax burden: The effective tax rate increased by +8.4pt from 31.3% in the previous year to 39.7%, while Net Income attributable to non-controlling interests also increased by +40.3%. As a result, despite growth in Operating Income and Ordinary Income, Net Income attributable to owners of the parent declined 14.0%.

3. Accumulation of working capital and increase in interest-bearing debt: Trade receivables increased +6.0% and inventories increased +2.7%, while cash and deposits declined -4.2%. Interest-bearing debt increased +10.7%, primarily due to bond issuance, accompanied by a change in the funding structure.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Return

The Operating Income margin is slightly below the industry median, while the consolidated Net Income margin is broadly in line with the industry median.

Growth and Capital Efficiency

The Revenue growth rate remains close to the industry median.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Operating Income and Ordinary Income increased (+10.5% and +9.3%, respectively), but Net Income attributable to owners of the parent declined 14.0%. The increase in the effective tax rate (31.3%→39.7%) and growth in income attributable to non-controlling interests (+40.3%) offset the improvement at the operating level.

2. By segment, Carbon Black (operating margin -2.1pt) was a drag on the overall margin, while Smelting & Lining (operating margin +5.4pt), Industrial Furnace, Graphite Electrode, and Fine Carbon all improved profitability. The drivers of earnings growth were therefore diversified across businesses.

3. Full-Year progress was 45.0% for Revenue and 43.1% for Operating Income, compared with only 32.9% for Net Income attributable to owners of the parent, below the standard mid-year progress benchmark of approximately 50%. Trends in the tax burden and non-controlling interests in the second half will be key points to monitor in assessing achievement of the Full-Year plan.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥1,598–¥1,691 at ±1% for the cost of equity, and ¥1,639–¥1,646 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end are used (there is a timing difference relative to the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. 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 professionals as necessary.

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