KAGOME CO.,LTD. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥216.31B
• Operating Income: ¥17.64B
• Net Income: ¥24.49B
• EPS: ¥116.15

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: FY2025 Q3 was a weak quarter for Kagome, characterized by revenue contraction and sharp margin compression, partially offset by solid cash generation at the operating cash flow level. Revenue declined 4.4% YoY to 2,163.1, indicating demand softness and/or weaker sell-through relative to the prior year. Operating income fell 46.0% YoY to 176.4, driving operating margin down to 8.2%. Using the provided YoY rates, prior-year operating income and revenue imply an operating margin of roughly 14.4%, indicating a compression of about 628 bps. Net income decreased 52.6% YoY to 106.8, taking the net margin to 4.9%; by the same method, prior-year net margin was about 10.0%, a compression of roughly 502 bps. Gross profit was 754.2 with a gross margin of 34.9%, but prior-year gross margin is not disclosed, preventing a precise bps comparison at the gross level. A notable feature is the large gap between operating income (176.4) and profit before tax (308.9), implying substantial non-operating items (~+132.5) that are not disclosed in detail, while net income ends materially lower than pre-tax profit despite a moderate effective tax rate (20.7%), suggesting sizable below-tax adjustments and/or high non-controlling interests. Earnings quality from a cash perspective is acceptable, with OCF of 161.6 exceeding net income (OCF/NI = 1.51x), although free cash flow was deeply negative at -276.9 due to heavy investing cash outflows (-438.4). EBITDA was 266.0 (12.3% margin), providing some cushion but not enough to offset the pronounced margin erosion at the operating and net levels. Balance sheet leverage is moderate (D/E 0.84x) with equity ratio at 48.0%, though short-term borrowing (687.3) is sizable. ROE is 5.3% based on DuPont (net margin 4.9%, asset turnover 0.581, leverage 1.84x), and ROIC is 4.8%, below a typical 7–8% target and triggering a capital-efficiency warning. Dividend payout appears at 50.1% of earnings, which is within typical sustainability thresholds, but FCF coverage is negative (-5.17x) in this investment-heavy phase. Forward-looking, management likely needs to restore price/mix and cost pass-through to rebuild margins while ensuring that current investment outlays translate into ROIC improvement. Monitoring inventory normalization and the resolution of one-off/non-operating distortions will be key to assessing an earnings rebound. Overall, the quarter signals pressure on core profitability with adequate liquidity and OCF, but low ROIC and negative FCF frame a cautious near-term outlook.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 4.9% × 0.581 × 1.84 ≈ 5.3%. Component that changed most YoY: net profit margin. Based on the provided YoY changes, net margin declined from roughly 10.0% to 4.9% (~502 bps compression), whereas asset turnover and leverage likely moved less in the period. Business driver: margins were squeezed by weaker revenue (-4.4% YoY) against relatively sticky cost structures, evidenced by a sharp drop in operating income (-46.0% YoY). The sizable positive gap between operating income and pre-tax profit suggests non-operating gains, but the eventual drop from pre-tax profit to net income indicates offsetting below-tax items or higher non-controlling interests; core profitability deterioration rather than non-operating effects appears to be the main driver of lower ROE. Sustainability: the magnitude of margin compression appears cyclic/operational (pricing, mix, input costs, promotion), and thus partly reversible if cost pass-through and mix improve; however, absent clearer non-operating detail, we treat the negative delta as more than a one-time effect. Concerning trends: revenue decline alongside significant margin compression implies negative operating leverage; with SG&A detail unreported, we cannot confirm if SG&A grew faster than revenue, but the drop in operating margin indicates fixed-cost pressure likely exceeded top-line movement.

Growth Assessment

Top line contracted 4.4% YoY to 2,163.1, pointing to volume softness and/or normalization post prior-year strength; pricing/mix visibility is limited due to lack of segment detail. Operating income fell 46.0% YoY to 176.4, reflecting negative operating leverage and cost pressures. Net income declined 52.6% YoY to 106.8, magnified by below-tax adjustments and/or non-controlling interests as suggested by the gap between PBT and NI. EBITDA of 266.0 (12.3% margin) remains positive but down versus implied prior-year levels given the sharp drop in operating income. ROIC is 4.8%, below a typical 7–8% target, indicating current investments are not yet earning adequate returns. Equity-method income is negligible (-0.02), so profit is primarily driven by core operations rather than affiliates. Revenue sustainability hinges on regaining shelf-space velocity and mix in processed foods/beverages; improvements in raw material cost trends and FX could aid margins, but these are not evidenced in the current quarter. Outlook: near term cautious given the depth of margin compression; medium term requires execution on pricing, cost productivity, and harvesting returns from recent investments (Investing CF -438.4).

Financial Health

Liquidity: Current assets are 2,231.8, but current liabilities are unreported, so the current ratio is not calculable; explicit warning cannot be made, though short-term loans are sizable at 687.3. Solvency: Total liabilities 1,702.4 vs total equity 2,023.1 yields D/E of 0.84x, within conservative ranges (<1.5x). Equity ratio stands at a solid 48.0%. Maturity profile: short-term loans (687.3) exceed long-term loans (181.6), indicating some refinancing risk; however, large current assets (2,231.8) and significant inventories (1,266.4) provide coverage, albeit with lower liquidity quality for inventories. Maturity mismatch risk is moderate: accounts receivable (606.1) plus cash (not disclosed) and other current assets offset short-term funding, but reliance on inventory conversion is elevated. Off-balance sheet obligations: none disclosed in the provided data. Interest coverage cannot be computed due to missing interest expense; EBITDA of 266.0 suggests coverage is likely adequate, but confirmation is not possible.

Cash Flow Quality

OCF/Net income = 1.51x, indicating acceptable earnings quality and cash conversion in this period. Free cash flow was -276.9 as investing cash outflows (-438.4) far exceeded OCF; capex was -79.5, implying additional investments (e.g., M&A or strategic capex) beyond maintenance. Financing CF of +397.0 indicates the negative FCF was funded externally, likely increasing net debt. Dividend payments of -35.3 are well covered by OCF, but not by FCF in this investment-heavy phase. Working capital: inventories are high at 1,266.4; without period-over-period balance detail, we cannot quantify inventory build or release, but elevated inventories can dampen cash conversion if sell-through lags. No clear signs of working capital manipulation are visible from the limited data, though the PBT–NI gap suggests non-operating/below-tax effects rather than cash-based distortions.

Dividend Sustainability

Payout ratio is 50.1%, within a typical sustainable range (<60%) on an earnings basis. OCF coverage of dividends is strong in this quarter (OCF 161.6 vs dividends 35.3), but FCF coverage is negative (-5.17x) due to substantial investing outflows, implying reliance on external funding if such outflows persist. With D/E at 0.84x and equity ratio 48.0%, the balance sheet can support a stable dividend near term, but sustainability depends on normalization of investment cash outlays and recovery in operating margins. Policy outlook: absent disclosed guidance, a stable-to-cautious stance is reasonable, prioritizing margin recovery and ROIC improvement before dividend growth.

Risk Assessment

Business Risks:

• Margin pressure from input cost inflation and limited price pass-through, evidenced by ~628 bps operating margin compression.
• Revenue softness (-4.4% YoY) indicating potential demand or competitive headwinds.
• Operational leverage risk from fixed-cost base if volumes remain weak.
• Inventory risk (inventories 1,266.4) including potential obsolescence or write-downs if demand underperforms.

Financial Risks:

• Refinancing risk from high short-term loans (687.3) relative to long-term debt (181.6).
• Negative FCF (-276.9) funded by financing inflows (+397.0), increasing dependence on capital markets.
• ROIC at 4.8% below typical targets, raising capital efficiency concerns.
• Limited visibility on interest coverage due to unreported interest expense.

Key Concerns:

• Large discrepancy between operating income (176.4), profit before tax (308.9), and net income (106.8) with non-operating details unreported, implying earnings volatility from below-the-line items and/or high non-controlling interests.
• Sustained margin compression could keep ROE near 5% and below cost of equity.
• If investment outlays remain elevated, dividend funding could increasingly rely on financing absent OCF growth.
• Data gaps (current liabilities, interest expense, SG&A detail) limit precise risk quantification.

Investment Implications

Key Takeaways:

• Core profitability deteriorated: operating income -46% YoY; operating margin ~8.2% vs implied ~14.4% prior-year.
• Net margin halved to ~4.9% (implied ~10.0% prior-year); ROE 5.3% and ROIC 4.8% highlight weak capital efficiency.
• OCF quality is decent (1.51x NI), but FCF is deeply negative due to substantial investing cash outflows.
• Balance sheet remains sound (equity ratio 48.0%, D/E 0.84x), though short-term borrowings are high.
• Earnings visibility is clouded by significant non-operating/below-tax items not disclosed in detail.

Metrics to Watch:

• Price/mix and gross-to-operating margin recovery trajectory.
• Inventory levels and cash conversion cycle vs sales trends.
• ROIC uplift from current investment cycle and capex discipline.
• Short-term debt rollover and interest coverage once disclosed.
• OCF vs NI alignment and normalization of investing CF.
• Any disclosure clarifying the PBT–NI gap (non-operating gains, NCI, special items).

Relative Positioning: Within Japan’s packaged food peers, Kagome’s current quarter shows weaker profitability momentum (sharp margin compression, sub-6% ROE) and below-target ROIC, partly offset by solid operating cash generation and a still-conservative balance sheet. Execution on margin restoration and capital efficiency will be central to improving relative standing.

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
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