TOHO TITANIUM COMPANY,LIMITED FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥41.04B
• Operating Income: ¥1.32B
• Net Income: ¥699M
• EPS: ¥9.83

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: FY2026 Q2 was a weak profitability quarter with sharp margin compression and subdued ROE despite robust operating cash flow. Revenue declined 6.2% YoY to 410.44, while operating income halved (-49.5% YoY) to 13.24 and net income fell 38.2% to 6.99. Gross profit was 66.89, translating to a 16.3% gross margin, with SG&A of 53.64 (13.1% of sales) leaving a narrow operating cushion. Operating margin slipped to 3.2% versus roughly 6.0% in the prior-year period, a compression of about 276 bps. Net margin contracted to 1.7% from about 2.6% a year ago, an estimated 89 bps deterioration. Ordinary income of 11.81 declined 30.7% YoY and ordinary margin compressed by roughly 101 bps to 2.9%, reflecting net non-operating losses (non-operating income 1.31 vs expenses 2.73). DuPont shows ROE at 1.2% (net margin 1.7%, asset turnover 0.331, leverage 2.12x), highlighting weak profit generation rather than balance sheet constraints as the key drag. ROIC is only 0.8%, far below a typical 7–8% cost-of-capital proxy, indicating value-dilutive deployment this period. Earnings quality was strong from a cash perspective: operating cash flow was 64.29, about 9.2x net income, aided by depreciation (30.34) and likely working capital release. However, heavy capital expenditures of 74.91 drove negative FCF of roughly -10.62, tempering the cash-flow strength. Liquidity metrics are mixed: the current ratio is healthy at 152%, but the quick ratio at 97.6% and high short-term borrowings (314.16) warrant attention to refinancing risk. Leverage against earnings is elevated (Debt/EBITDA ~12.2x), though interest coverage remains acceptable at 5.9x. Cost pressure and mix appear to be compressing gross-to-operating conversion; with revenue down modestly, opex discipline did not fully offset weaker gross profit per unit. Forward-looking, recovery hinges on normalization of titanium demand (especially aerospace) and improved price/cost spreads, while capital projects must translate into productivity/ROIC uplift. Overall, the quarter underscores cyclical pressure and heavy investment against weak near-term returns, with balance sheet flexibility adequate but not abundant.

Profitability Analysis

ROE decomposition (DuPont): ROE 1.2% = Net Profit Margin (1.7%) × Asset Turnover (0.331) × Financial Leverage (2.12x). The largest YoY change stems from Net Profit Margin: operating margin fell from ~6.0% to ~3.2% (-276 bps) and net margin from ~2.6% to ~1.7% (-89 bps). Business drivers: softer revenue (-6.2% YoY) combined with elevated cost of sales compressed gross margin carry-through, while SG&A at 13.1% of sales left limited operating income. Non-operating headwinds (net -1.42) further reduced ordinary profit. The margin compression likely reflects weaker pricing/mix in titanium products and/or higher input/energy costs; interest expense (2.25) also weighed on bottom line. Sustainability: margin pressure is partly cyclical (titanium demand, aerospace recovery) and partly cost-driven; absent clear price increases or cost pass-throughs, full-margin recovery is uncertain near term, while leverage-related interest drag persists until earnings or balance sheet improve. Operating efficiency: asset turnover at 0.331 is low and unchanged in directionally constrained capacity utilization/throughput; capital intensity is high with D&A at 7.4% of sales. Flags: SG&A as a share of sales (13.1%) is high relative to current gross profit, and operating income declined much faster than revenue, indicating negative operating leverage. The combination of weak net margin and low turnover is the core ROE constraint, not insufficient leverage.

Growth Assessment

Revenue contracted 6.2% YoY to 410.44, indicating subdued demand or price pressure in core titanium segments. Operating profit fell 49.5% to 13.24, signaling significant negative operating leverage from gross profit compression and fixed-cost absorption. Ordinary income (-30.7% YoY) and net income (-38.2% YoY) corroborate broad-based earnings pressure beyond core operations, including interest costs and other non-operating items. Current margins: gross 16.3%, operating 3.2%, EBITDA 10.6%, net 1.7%; the step-down from prior-year operating margin (~6.0%) implies a tougher pricing/cost environment. EBITDA of 43.58 vs D&A of 30.34 shows limited headroom to absorb shocks. Growth sustainability near term hinges on aerospace-grade sponge/ingot demand, industrial titanium adoption, and the company’s ability to pass through raw material and energy costs. The heavy capex (74.91) suggests capacity/quality upgrades or strategic investments aimed at medium-term growth/efficiency; near-term P&L benefits are not yet visible. Without an improvement in price-cost spread and utilization, earnings growth will be constrained despite investment.

Financial Health

Liquidity: Current ratio 152.2% (healthy), but quick ratio 97.6% is just below 1.0, implying reliance on inventory conversion to meet short-term obligations. Working capital is 217.42; inventories are sizable at 227.38, elevating liquidity sensitivity if demand softens. Solvency: Debt-to-equity 1.12x is moderate, but leverage vs earnings is high (Debt/EBITDA ~12.2x). Interest coverage is acceptable at 5.88x, mitigating immediate servicing risk. Maturity profile risk: Short-term loans of 314.16 exceed cash (33.66) and near-cash receivables (116.29), implying ongoing refinancing needs; rollover risk would rise if credit conditions tighten. No off-balance sheet obligations are reported in the provided data. Equity base is 582.93, supporting covenant headroom, but ROIC at 0.8% indicates low returns on the invested base.

Cash Flow Quality

OCF/Net income is 9.20x, indicating high cash conversion this period, supported by D&A of 30.34 and likely working capital release. Despite strong OCF (64.29), capex of 74.91 led to negative FCF of approximately -10.62, so self-funding of both capex and dividends is tight. The divergence (strong OCF vs weak NI) is favorable for quality but could be timing-related; absent detailed working capital breakdown, sustainability is uncertain. Interest paid (implied by 2.25 expense) is covered by EBITDA and OCF, but rising rates or lower EBITDA could compress coverage. No clear signs of working capital manipulation are visible, but inventory is high relative to receivables and cash, which may have driven cash inflow if de-stocked this quarter; reversals are possible.

Dividend Sustainability

Reported DPS is unreported; a calculated payout ratio of 183.5% suggests dividends (likely guidance or interim basis) exceeded current period earnings. With FCF at roughly -10.62 due to heavy capex, dividend coverage from internally generated cash is weak this period. Sustainability depends on near-term normalization of earnings or moderation of capex. Given low ROE (1.2%) and ROIC (0.8%), maintaining an elevated payout would likely require balance sheet support or increased leverage, which is undesirable given current Debt/EBITDA. Policy outlook likely prioritizes investment and balance sheet resilience over aggressive distributions until profitability improves.

Risk Assessment

Business Risks:

• Commodity price volatility in titanium and related inputs affecting price-cost spread
• Demand cyclicality in aerospace and industrial end-markets impacting volumes and mix
• Energy and utility cost inflation compressing margins
• Product mix shifts toward lower-margin grades reducing operating leverage
• Execution risk on large capex translating into ROIC improvement

Financial Risks:

• High short-term borrowings (314.16) vs quick assets, creating refinancing dependence
• Elevated leverage versus earnings (Debt/EBITDA ~12.2x) increasing sensitivity to profit downturns
• Interest expense drag (2.25) with effective tax rate of 35.2% keeping net margins thin
• Negative FCF this period due to heavy capex, pressuring cash balances

Key Concerns:

• ROIC at 0.8% well below cost of capital, indicating value dilution if sustained
• Operating margin compression of ~276 bps YoY, signaling deteriorating pricing or cost control
• Quick ratio below 1.0 suggests reliance on inventory conversion for liquidity
• Net non-operating losses (1.42) weighing on ordinary income

Investment Implications

Key Takeaways:

• Profitability deteriorated sharply with operating margin down to 3.2% and ROE at 1.2%
• Cash generation strong at OCF 64.29, but capex-heavy, resulting in negative FCF (~-10.62)
• Leverage relative to earnings is high (Debt/EBITDA ~12.2x) despite moderate D/E (1.12x)
• Liquidity is adequate on a current basis but tight on a quick basis, with sizable short-term debt
• ROIC 0.8% underscores urgency for returns from ongoing capex and cost improvements

Metrics to Watch:

• Operating margin and gross-to-operating conversion rate
• Titanium price indices and aerospace/industrial order trends
• Inventory levels and cash conversion cycle (AR and inventory days)
• Capex execution and subsequent ROIC trajectory
• Debt maturity ladder, interest coverage, and refinancing conditions
• FX (USD/JPY) sensitivity on exports and input costs

Relative Positioning: As a specialty titanium producer, the company currently exhibits lower profitability and capital efficiency than desirable, with margins compressed and ROIC well below peers’ cost-of-capital thresholds; balance sheet leverage versus EBITDA is elevated, making operational recovery and successful capex-driven efficiency gains critical to narrow the gap.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis