MEGMILK SNOW BRAND (2270) FY2026 Q3 Earnings Report

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Executive Summary

The current period’s results reflected both reduced revenue and lower operating profitability in the core business, as well as a sharp increase in net income driven by gains on the sale of investment securities. Revenue was ¥4657.6B (-0.8% year on year), Operating Income was ¥146.2B (-10.3%), and Ordinary Income was ¥166.4B (-5.8%), while Net Income increased substantially to ¥219.8B (+73.7%). The primary driver of the increase was extraordinary income of ¥186.7B, including a gain on the sale of investment securities of ¥185.9B. The core business recorded lower Operating Income because the increase in selling, general and administrative expenses exceeded the improvement in gross profit.

Factors Affecting Results

【Revenue】Revenue was ¥4657.6B, a year-on-year decrease of -0.8%. By segment, Dairy Products was the only segment to achieve revenue growth, at ¥1994.6B (+0.8%), while Beverages and Desserts declined to ¥1993.7B (-2.2%), and Feed and Seedlings declined to ¥368.9B (-2.2%). Dairy Products is the principal business, accounting for 42.8% of the revenue mix, but weakness in Beverages and Desserts weighed on overall results.

【Profitability】The gross profit margin improved to 17.0% from 16.7% in the previous year. However, selling, general and administrative expenses increased at a pace exceeding revenue growth, rising +4.1% year on year, and the SG&A ratio increased to 13.9% from 13.2% in the previous year. As a result, Operating Income declined to ¥146.2B (-10.3%). Ordinary Income declined by a slightly smaller amount to ¥166.4B (-5.8%) due to improved non-operating income and expenses. Net Income was lifted by extraordinary income of ¥186.7B, mainly attributable to the ¥185.9B gain on the sale of investment securities, increasing to ¥219.8B (+73.7%). Extraordinary losses also included an impairment loss of ¥22.6B associated with the cessation of production at the Okoppe Plant. The divergence between Ordinary Income and Net Income resulted from extraordinary gains and losses; on a core business basis, the company recorded lower revenue and lower profit.

Segment Analysis

Of the total segment profit of ¥148.5B, Dairy Products accounted for ¥75.7B (approximately 51.0% of the total) and remained the largest contributor, although profit declined -5.7% year on year. Despite higher revenue, its profit margin was approximately 3.6%, down from approximately 3.8% in the previous year, indicating the impact of raw material costs and other factors. Beverages and Desserts recorded segment profit of ¥36.1B, down -34.8% year on year, representing the most significant deterioration in profitability; its profit margin was only 1.8%. Feed and Seedlings recorded segment profit of ¥9.1B, a substantial increase of +117.0% year on year, and its profit margin improved to 2.4%. Recovery in consolidated Operating Income will require stable profitability in the core Dairy Products segment, together with improved profitability in Beverages and Desserts.

Key Financial Metrics

【Profitability】The Operating Income margin was 3.1%, down from 3.5% in the previous year, as the improvement in the gross profit margin to 17.0% from 16.7% was offset by the increase in the SG&A ratio to 13.9% from 13.2%. The Net Income margin was 4.7%, although it is important to note that this level includes gains on the sale of investment securities.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥112.0B. Compared with Net Income of ¥219.8B, the cash conversion multiple was low, as increases in trade receivables of ¥129.5B and inventories of ¥56.2B weighed on OCF.【Investment Efficiency】ROE (annualized) was 12.3%, indicating a certain level of capital efficiency; however, this figure is based on Net Income including extraordinary income and therefore does not represent recurring earnings power.【Financial Soundness】The Equity Ratio remained high at 55.0%. Cash and deposits declined to ¥99.2B from the previous year, but interest-bearing debt remained limited and leverage was at a conservative level.

Cash Flow Analysis

Operating Cash Flow was ¥112.0B, up +5.7% year on year, but appeared weak relative to Net Income of ¥219.8B in terms of cash generation. An increase in trade receivables of ¥129.5B and an increase in inventories of ¥56.2B were sources of cash outflow, partially offset by an increase in trade payables of ¥24.3B. Investing Cash Flow was an inflow of ¥28.7B, but this resulted from proceeds of ¥195.1B from the sale of investment securities and was not attributable to recurring investment activities. Financing Cash Flow was a substantial outflow of -¥253.7B, mainly due to share repurchases of ¥180.4B. Free Cash Flow was ¥140.7B, but this figure was supported by asset sales. The fact that OCF alone was insufficient to cover capital expenditures of ¥191.9B indicates an issue with working capital management.

Earnings Quality

Recurring earnings power is reflected in Operating Income of ¥146.2B and Ordinary Income of ¥166.4B. The divergence from Net Income of ¥219.8B was attributable to extraordinary income of ¥186.7B, particularly the one-time gain of ¥185.9B on the sale of investment securities. Extraordinary losses included an impairment loss of ¥22.6B associated with the cessation of production at the Okoppe Plant, while costs related to asset restructuring were also incurred. Non-operating income was ¥27.5B, including dividend income of ¥8.7B, and represents a recurring source of earnings; however, its impact on Net Income was smaller than that of extraordinary gains and losses. Comprehensive Income was ¥145.3B, below Net Income of ¥219.8B, mainly due to a decline of ¥69.8B in valuation differences on available-for-sale securities. This illustrates the impact of changes in the market value of held shares on net assets. Accordingly, current-period Net Income includes a significant one-time component, and Operating Income and Ordinary Income should be used to assess the core business’s earnings power.

Earnings Forecasts and Guidance

Progress toward the full-year forecast was 75.7% for Revenue, 76.9% for Operating Income, 80.8% for Ordinary Income, and 73.8% for Net Income. All metrics were tracking around the standard Q3 progress rate of approximately 75%. Progress for Operating Income and Ordinary Income was slightly ahead of schedule, indicating generally steady performance against the full-year plan. However, Net Income progress includes extraordinary income, so assessment of achievement of the full-year forecast should focus primarily on trends in Operating Income and Ordinary Income. The full-year forecast calls for Revenue of ¥6150.0B (-0.1% year on year) and Operating Income of ¥190.0B (-0.7%), indicating that significant earnings growth is not anticipated.

Shareholder Returns

The annual dividend forecast remains unchanged at ¥100 per share, resulting in a Payout Ratio of approximately 20.9% against the full-year forecast EPS of ¥478.62. Meanwhile, during the cumulative Q3 period, the company conducted share repurchases of ¥180.4B. Combined with dividend payments of ¥67.4B, total shareholder returns reached ¥247.9B. Consequently, the Total Return Ratio against cumulative Q3 Net Income of ¥219.8B was approximately 112.8%, which must be evaluated separately from the Payout Ratio. The Total Return Ratio exceeded 100% because the gain on the sale of investment securities temporarily increased Net Income. The fact that the scale of shareholder returns exceeded OCF of ¥112.0B also requires monitoring.

Risk Factors

1. Structurally low profitability: The Operating Income margin was 3.1%, below the industry median of 5.0%. The persistently high gross profit margin of 17.0% and cost of sales ratio of 83.0% indicate high earnings sensitivity to fluctuations in raw material costs, energy costs, and foreign exchange rates.

2. Deterioration in the profitability of Beverages and Desserts: Revenue declined -2.2% year on year, while segment profit declined -34.8% to ¥36.1B. Deterioration in profitability due to demand trends and increases in promotional expenses and costs may persist over the long term.

3. Working capital and cash flow quality: OCF was weak relative to Net Income, while trade receivables of ¥943.3B (+15.8% year on year) and the increase in inventories constrained cash generation. Asset restructuring costs, including the ¥22.6B impairment loss associated with the cessation of production at the Okoppe Plant, were also incurred.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Operating Income margin was below the industry median, while the Net Income margin exceeded the industry median, partly due to the impact of extraordinary income.

Growth and Capital Efficiency

The Revenue growth rate was significantly below the industry median, positioning the company behind its industry peers in terms of top-line growth.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Operating Income declined -10.3% year on year, indicating a downward trend in core business profitability. However, progress toward the full-year forecast was 76.9%, above the standard level, and performance against the full-year plan was generally steady.

2. The +73.7% increase in Net Income was mainly attributable to the ¥185.9B gain on the sale of investment securities and must be evaluated separately from improvements in core business profitability. Trends in Ordinary Income and Operating Income indicate the underlying performance.

3. The divergence between OCF and Net Income resulted from working capital factors, namely increases in trade receivables and inventories. Improving cash generation excluding asset sales will be a key focus going forward.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥3,378–¥3,577 at ±1% for the cost of equity, and ¥3,463–¥3,483 at ±0.1 for ω.

Notes:

• To exclude the impact of one-time gains and losses, normalized EPS calculated from Ordinary Income and other metrics is used (company forecast EPS is ¥478.6).
• Goodwill amortization of ¥1.9 per share is added back to profit (for non-cash expense treatment and comparability with IFRS companies).
• 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).

(Calculation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market stock price or a recommendation of any specific investment action, and does not predict or guarantee future stock prices.)

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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 the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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