Toho Zinc Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

Although the deficit narrowed due to higher revenue and improvements in the gross profit margin and SG&A ratio, a significant portion of the return to final profitability was attributable to tax effects, requiring caution regarding earnings quality. Revenue was ¥311.0B (¥268.7B in the same period of the previous year, +15.7%), Operating Income was ¥-2.5B (¥-8.5B in the previous year, a 70.7% reduction in the loss), Ordinary Income was ¥-5.8B (¥-10.8B in the previous year, a 46.1% reduction in the loss), and Net Income turned profitable at ¥2.6B (¥-11.1B in the previous year). Revenue growth was led by Smelting (+37.4%) and Environmental and Recycling (+23.6%), and cost-ratio improvements also progressed. However, the ¥3.4B interest expense burden was substantial, and the company remained in the red at the ordinary income level. The return to final profitability was significantly supported by deferred tax income (▲¥10.8B), indicating that a substantial portion was attributable to factors with low recurrence.

Factors Affecting Earnings

【Revenue】Revenue was ¥311.0B, representing a year-on-year increase of +15.7%. By segment, Smelting was the largest growth driver at ¥265.1B (80.6% of total revenue, +37.4%), while Environmental and Recycling also grew to ¥21.2B (+23.6%). In contrast, Metal Recycling declined sharply to ¥7.6B (-82.4%), while Electronic Components and Functional Materials remained broadly flat at ¥9.4B (-1.0%), resulting in divergent performance across businesses.

【Profit and Loss】The gross profit margin improved to 3.2% (2.4% in the previous year), while the SG&A ratio declined to 4.0% (5.6% in the previous year), improving the operating margin to -0.8% (-3.2% in the previous year). However, the ¥3.4B interest expense burden among non-operating expenses was substantial, and the Ordinary Loss remained at ¥5.8B. The return to Net Income of ¥2.6B was primarily attributable to the recognition of deferred tax income (▲¥10.8B); it is important to note that Profit Before Tax remained negative at ¥-6.1B. By segment, Smelting posted a deep loss of ¥-24.8B, deteriorating from a loss of ¥-4.2B in the previous year, while Metal Recycling supported company-wide earnings by turning profitable at ¥10.6B, compared with a loss of ¥-6.8B in the previous year. Overall, the structure was one of higher revenue but lower profit at the operating and ordinary income levels, with Net Income turning profitable due to tax effects.

Segment Analysis

Smelting accounted for 80.6% of the revenue mix, indicating a high degree of concentration, with the segment’s earnings significantly influencing company-wide performance. Although Smelting revenue grew to ¥265.1B (+37.4%), the segment loss deteriorated to ¥24.8B from a loss of ¥4.2B in the previous year, suggesting headwinds from raw material and energy costs as well as yield. Environmental and Recycling continued to improve, with revenue of ¥21.2B (+23.6%) and profit of ¥5.7B (¥2.4B in the previous year), resulting in higher revenue and profit. Metal Recycling recorded a sharp revenue decline to ¥7.6B (-82.4%), but turned profitable at ¥10.6B compared with ¥-6.8B in the previous year, likely reflecting improvements in market conditions and spreads. Electronic Components and Functional Materials remained broadly flat, with revenue of ¥9.4B (-1.0%) and profit of ¥0.7B. The structure is one in which improved profits in the recycling-related segments offset the widening loss in Smelting, and the potential for further improvement in company-wide earnings depends on restoring profitability in Smelting.

Key Financial Metrics

【Profitability】The operating margin improved to -0.8% (-3.2% in the previous year) but remained negative, while the gross profit margin of 3.2% (2.4% in the previous year) remained low in absolute terms. The Net Profit Margin turned positive at 0.8% (-4.1% in the previous year), but the significant contribution from tax effects makes it difficult to characterize this as an improvement in underlying earnings power.【Cash Flow Quality】Although Operating Cash Flow (OCF) has not been disclosed, increases in inventory and work-in-process, together with an increase in accounts receivable (+¥17.0B, +18.4%), have tied up working capital, creating a structure in which revenue growth is not readily converted into cash generation.【Investment Efficiency】ROE was 1.4%, calculated as the product of the Net Profit Margin, Total Asset Turnover (0.289), and financial leverage (5.87x). High leverage is boosting reported ROE on an apparent basis. Low Total Asset Turnover reflects inventory accumulation.【Financial Soundness】The Equity Ratio improved to 17.0% (13.8% in the previous year) but remained low. Interest-bearing debt was approximately ¥738.7B, representing 68.6% of total assets, and was primarily composed of long-term borrowings of ¥613.7B. Although short-term liquidity was substantial, with a current ratio of 341.7%, the heavy interest expense burden continued to weigh on Ordinary Income.

Cash Flow Analysis

Although a statement of Operating Cash Flow has not been disclosed, cash flow trends can be inferred from changes in the balance sheet. Alongside revenue growth, accounts receivable increased by ¥17.0B (+18.4%) and inventories increased by ¥4.3B (+5.0%), expanding working capital. Accounts payable declined by ¥8.5B (-10.2%), making progress in settlement of purchases a source of cash outflow. Cash and deposits increased to ¥128.2B (¥113.3B in the previous year, +¥15.1B), but this appears to have been partly attributable to financing through interest-bearing debt, including short-term borrowings of ¥125.0B. It should therefore be evaluated separately from cash generation derived from operating activities. As long as inventory and work-in-process remain accumulated, revenue growth is unlikely to translate directly into an increase in cash.

Earnings Quality

Recurring earnings power remains weak, with the burden of non-operating expenses, including interest expense of ¥3.4B, resulting in an Ordinary Loss of ¥5.8B. The return to final profitability of ¥2.6B was significantly supported by the tax effect of deferred tax income (▲¥10.8B). The gap between Ordinary Income and Net Income reached approximately ¥8.4B, and the fact that profitability was driven by a low-recurrence factor is important when evaluating earnings quality. Special items were limited, consisting of a ¥0.3B extraordinary loss (loss on disposal of fixed assets) and ¥0.03B extraordinary income, and their impact on earnings was limited. Non-operating income included non-core items such as a foreign exchange gain of ¥0.4B and subsidy income of ¥0.2B, although these were small relative to revenue. Comprehensive Income was ¥36.5B, substantially exceeding Net Income, primarily due to an improvement in hedge valuation differences (valuation gains on derivatives). This should be noted as it does not directly translate into cash generation on the P/L.

Earnings Forecast and Guidance

Against the Full-Year plan (Revenue of ¥1,785.0B, Operating Income of ¥67.0B, Ordinary Income of ¥45.0B, and Net Income of ¥34.5B), Q1 progress was 17.4% for Revenue, while Operating Income and Ordinary Income were negative and Net Income reached only 7.5%, representing a weak start below the standard quarterly progress level of approximately 25%. The Full-Year plan calls for Operating Income to be almost flat year on year (-0.3%) and Ordinary Income to decline by -20.7%, suggesting that recovery in Smelting margins in the second half of the fiscal year is a prerequisite for achievement. No revisions to the earnings or dividend forecasts were announced this time.

Shareholder Returns

The annual dividend forecast under the company’s plan is ¥0, resulting in a Payout Ratio of 0%. The company also paid no dividend in the previous fiscal year. Given the high leverage (Equity Ratio of 17.0% and interest-bearing debt of ¥738.7B), this is consistent with a policy of prioritizing retained earnings and balance sheet improvement. No disclosure regarding share repurchases has been made.

Risk Factors

1. Deterioration in Smelting segment profitability: Smelting accounts for 80.6% of revenue and recorded a segment loss of ¥24.8B, deteriorating from a loss of ¥4.2B in the previous year. Accordingly, fluctuations in raw material prices, electricity costs, and yield have a significant impact on company-wide earnings.

2. High leverage and interest burden: Interest-bearing debt was approximately ¥738.7B, representing 68.6% of total assets, while interest expense of ¥3.4B weighed on Ordinary Income. Although the Equity Ratio improved to 17.0%, it remained low, making financial flexibility in a rising interest-rate environment a challenge.

3. Working capital accumulation: Accounts receivable (+¥17.0B) and inventories (+¥4.3B) increased, while accounts payable declined by ¥8.5B, indicating that inventory and work-in-process turnover remained slow. The fact that revenue growth is not readily connected to cash generation requires monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating and net profit margins were substantially below the industry median, placing the company among the lower-profitability manufacturers.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median and was at a high level close to the upper bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Although the operating loss narrowed due to higher revenue and improved cost ratios, a significant portion of the return to final profitability was attributable to deferred tax income. The continued loss at the Ordinary Income level is an important fact identifiable from the financial results data.

2. By segment, the loss in Smelting continued to widen, while Metal Recycling turned from a loss in the previous year to a profit of ¥10.6B, indicating a change in the earnings structure within the business portfolio.

3. Q1 progress against the Full-Year plan remained low, at 17.4% for Revenue and 7.5% for Net Income. Accordingly, the pace of recovery in Smelting margins during the second half of the fiscal year will determine the extent to which the Full-Year plan is achieved.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,083–¥1,151 at ±1% for the cost of equity, and ¥1,113–¥1,120 at ±0.1 for ω.

Notes:

• Net Income is substantially compressed relative to Operating Income due to tax expenses, acquisition-related costs, and non-controlling interests, among other factors (Net Income ÷ Operating Income 51%). This value reflects that compression at face value; if the factors are temporary, underlying earnings power may be higher than this.
• Net assets as of the end of the quarter are used, resulting in 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 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market share price or a recommendation of any specific investment action, nor does it predict or guarantee future share prices.)

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This report is an automatically generated earnings analysis document created by AI through analysis of XBRL earnings summary 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 a professional advisor as necessary.

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