Euglena Co.,Ltd. FY2026 Q2 Earnings Report

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Executive Summary

For the cumulative Q2 of the fiscal year ending December 2026, Revenue and profit increased year on year. Although the Operating Income margin improved against a backdrop of a high gross margin, Profit Attributable to Owners of the Parent remained low due to profit allocations to non-controlling interests and other factors. Revenue was ¥265.1B (+8.0% YoY), Operating Income was ¥18.7B (+14.3%), and Ordinary Income was ¥17.1B (+45.8%). Net Income (consolidated net income for the period, including the portion attributable to non-controlling interests) increased substantially to ¥8.9B (+567.7%), but Interim Net Income Attributable to Owners of the Parent remained at ¥0.7B. Growth in the core Healthcare Business and improved non-operating income and expenses drove the increase in profit, while Profit Attributable to Non-Controlling Interests of ¥8.1B and income taxes of ¥8.2B restrained the final profit attributable to shareholders.

Factors Affecting Results

【Revenue】Revenue was ¥265.1B, up +8.0% YoY. The core Healthcare Business grew to ¥243.2B (+7.3%), driving overall performance. By channel, direct sales were ¥176.5B (+5.7%), distribution was ¥20.4B (+5.0%), and OEM, raw materials, and overseas operations were ¥46.0B (+15.3%), with OEM, raw materials, and overseas operations posting the highest growth. The Biofuel Business achieved high growth of ¥7.6B (+67.2%), while Other Businesses were ¥14.3B (-0.3%), essentially flat.

【Profit and Loss】Operating Income was ¥18.7B (+14.3%), and the Operating Income margin improved to 7.1% from the same period of the previous year. Although the gross margin was 69.2%, the SG&A expense ratio was high at 62.1%, indicating that the high gross margin has not been sufficiently converted into the final profit margin. Ordinary Income was ¥17.1B (+45.8%), reflecting both higher Operating Income and improved non-operating income and expenses. However, against Profit Before Tax of ¥17.1B, income taxes of ¥8.2B and Profit Attributable to Non-Controlling Interests of ¥8.1B were deducted, leaving Interim Net Income Attributable to Owners of the Parent at ¥0.7B. While the Healthcare Business posted a high profit margin of 12.5%, the Biofuel Business (profit margin -20.9%) and Other Businesses (same -14.1%) weighed on consolidated profit. In conclusion, both Revenue and profit increased.

Segment Analysis

The Healthcare Business generated Revenue of ¥243.2B (+7.3% YoY), Segment Profit of ¥30.4B (+10.1%), and a profit margin of 12.5%, serving as the core of consolidated earnings. The Biofuel Business achieved high growth, with Revenue of ¥7.6B (+67.2% YoY), but its Segment Loss expanded to ¥1.6B, deteriorating from the loss recorded in the same period of the previous year, indicating that growth has not translated into improved profitability. Other Businesses recorded Revenue of ¥14.3B (-0.3% YoY) and a Segment Loss of ¥2.0B, making only a limited contribution to company-wide earnings. Consolidated Operating Income of ¥18.7B reflects a structure in which losses from other segments and company-wide expenses (adjustments of approximately ¥8.1B) are deducted from Healthcare Business profit of ¥30.4B, indicating a high degree of dependence on a single business.

Key Financial Indicators

【Profitability】The Operating Income margin was 7.1%, improving from approximately 6.7% in the same period of the previous year. The gross margin of 69.2% reflects the value of raw materials and the brand, but the high SG&A expense ratio of 62.1% is putting pressure on the final profit margin. The Net Income margin, based on consolidated Net Income for the period, was 3.4%, while the margin based on Net Income Attributable to Owners of the Parent was 0.3%, indicating a significant divergence between the two.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥10.8B, substantially exceeding Net Income Attributable to Owners of the Parent of ¥0.7B, indicating strong cash backing for accrual-based earnings. However, the OCF-to-EBITDA ratio was only 0.35x against EBITDA of ¥30.8B, as income tax payments of ¥14.5B and an increase in inventories of ¥2.8B constrained cash generation. Free Cash Flow (FCF) remained positive at ¥4.1B.【Investment Efficiency】ROE was 2.8%. The significant reduction in the conversion of Profit Before Tax into Net Income Attributable to Owners of the Parent due to non-controlling interests and the tax burden is a constraint on capital efficiency.【Financial Soundness】The Equity Ratio was 45.6%, improving from 42.7% in the previous year. Although total assets decreased from the previous year to ¥692.7B, net assets increased to ¥315.7B, indicating a relative strengthening of the financial foundation. Short-term borrowings of ¥170.6B account for the majority of interest-bearing debt and are almost at the same level as cash and deposits of ¥171.7B, making this a point requiring monitoring from a liquidity management perspective.

Cash Flow Analysis

Operating Cash Flow was ¥10.8B, down -11.3% YoY, indicating that cash generation did not expand to the same extent as Profit Before Tax. Investing Cash Flow was -¥6.7B. While business acquisitions and the acquisition of intangible assets and investment securities were sources of cash outflow, a decrease in time deposits partially offset these outflows. Financing Cash Flow was -¥29.1B, primarily reflecting repayments of long-term borrowings of ¥24.1B, indicating progress in reducing interest-bearing debt. Free Cash Flow, calculated as Operating Cash Flow less Investing Cash Flow, remained positive at ¥4.1B, with investment funding through internal resources being maintained. Nevertheless, the breakdown of Operating Cash Flow shows that income tax payments of ¥14.5B and an increase in inventories of ¥2.8B constrained cash generation, leaving cash conversion efficiency relative to EBITDA at a relatively low level.

Earnings Quality

Ordinary Income of ¥17.1B improved substantially by +45.8% YoY, while extraordinary gains and losses were nearly zero both in the current period and the previous year. The impact of temporary factors was therefore limited, and the improvement can be viewed as an enhancement in recurring earnings power. Non-operating income was ¥2.6B, while non-operating expenses were ¥4.2B, including interest expenses of ¥3.0B, with financing costs associated with interest-bearing debt weighing on Ordinary Income. Against Profit Before Tax of ¥17.1B, income taxes of ¥8.2B (an effective tax rate of approximately 48%) and Profit Attributable to Non-Controlling Interests of ¥8.1B were deducted, reducing Interim Net Income Attributable to Owners of the Parent to ¥0.7B. Ordinary Income improvement has therefore not been sufficiently reflected in final profit. Comprehensive Income was ¥11.9B, exceeding Net Income on a consolidated basis of ¥8.9B, with a positive foreign currency translation adjustment of ¥2.9B contributing to the result. However, the portion of Comprehensive Income attributable to owners of the parent was only ¥3.7B, while the portion attributable to non-controlling interests accounted for the majority at ¥8.2B, a point that warrants attention when assessing earnings quality.

Earnings Forecasts and Guidance

The full-year earnings forecasts are Revenue of ¥530.0B (+5.2% YoY), Operating Income of ¥32.0B (+2.5%), and Ordinary Income of ¥28.0B (+18.4%). The progress rates based on first-half results were 50.0% for Revenue, 58.5% for Operating Income, and 61.0% for Ordinary Income. All exceeded the simple time-based allocation of 50%, indicating that first-half profit is ahead of plan. Meanwhile, the projected full-year growth rates for Operating Income and Ordinary Income are modestly below the first-half growth rates (+14.3% and +45.8%, respectively), suggesting that the plan incorporates a slowdown in profit growth and an increase in expenses during the second half. The fact that the earnings forecast was revised during the current quarter also suggests that the outlook for the second half has changed.

Shareholder Returns

The dividend for Q2 was ¥0 per share, and the full-year dividend forecast is also ¥0. As there is no applicable numerator or denominator for calculating the Payout Ratio, it is 0%. There were no share repurchases, and the Total Return Ratio was also 0%. Despite securing positive Free Cash Flow of ¥4.1B, the Company continues its no-dividend policy, indicating a priority on maintaining financial soundness and allocating funds to business investments.

Risk Factors

1. Profitability of the Biofuel Business: Revenue expanded to ¥7.6B, up +67.2% YoY, but the Segment Loss expanded to ¥1.6B. Revenue growth has not translated into the absorption of fixed and development costs, and the continuation of losses is weighing on consolidated profit.

2. Dependence on Short-Term Borrowings: Short-term borrowings of ¥170.6B account for the majority of interest-bearing debt and are almost at the same level as cash and deposits of ¥171.7B. The impact of changes in refinancing terms and interest rate trends on funding costs needs to be monitored.

3. Imbalance in Profit Attribution Structure: Against Profit Before Tax of ¥17.1B, Profit Attributable to Non-Controlling Interests accounts for nearly half at ¥8.1B. Together with income taxes of ¥8.2B, this compresses Profit Attributable to Owners of the Parent to ¥0.7B. The structure is such that improvements in consolidated performance are not sufficiently returned to the shareholders of the parent company.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

As industry median data is insufficient, the assessment is limited to absolute levels.

Growth and Capital Efficiency

As industry median data is insufficient, the assessment is limited to absolute levels.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The core Healthcare Business generated Revenue of ¥243.2B and a profit margin of 12.5%, serving as the center of consolidated earnings. The sustainability of growth in channels such as direct sales and OEM will determine the direction of consolidated performance.

2. While the Biofuel Business continues to achieve high growth, its losses are expanding. Whether Revenue growth can translate into exceeding the breakeven point will be a key factor determining the future quality of consolidated profit.

3. As of the first half, the progress rates for Operating Income and Ordinary Income against the full-year forecasts were 58.5% and 61.0%, respectively, exceeding the time-based allocation. Expense trends and consistency with the business investment plan in the second half will therefore be key points to observe in the earnings results.

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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 securities. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional adviser as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q2 performance was operationally constructive, with revenue growth, higher operating profit and a return to profit attributable to owners, although balance-sheet refinancing exposure and weak cash conversion remain material constraints. Revenue increased 8.0% year on year to ¥26.51bn. Operating income rose 14.3% to ¥1.87bn, outpacing sales growth and demonstrating positive operating leverage. The operating margin expanded by 40bp to 7.1% from 6.7% in the prior-year period. Gross profit increased ¥1.19bn to ¥18.34bn, while gross margin improved by 70bp to 69.2%. This unusually high gross margin for a food and health-product business indicates a value-added direct-to-consumer, functional-food and cosmetics mix rather than a commodity-oriented food model. SG&A increased 6.1% to ¥16.47bn, slower than revenue growth, which was the principal driver of margin improvement. Ordinary income increased 45.8% to ¥1.71bn as non-operating expenses declined, despite interest expense rising to ¥0.30bn from ¥0.23bn. Profit attributable to owners improved to ¥0.07bn from a ¥0.56bn loss, but the resulting 0.3% parent net margin remains very low. The gap between ordinary income and profit attributable to owners is mainly explained by ¥0.81bn of profit attributable to non-controlling interests and ¥0.82bn of income tax expense. Operating cash flow of ¥1.08bn was substantially above ¥0.07bn of profit attributable to owners, producing an OCF/net-income ratio of 14.84x and supporting cash realization at the parent-profit level. However, cash conversion from EBITDA was only 0.35x, reflecting substantial cash taxes and working-capital movements, and is a more cautionary measure of underlying cash generation. Free cash flow was positive at ¥0.41bn after ¥0.67bn of investing outflows, but this level is modest against the ¥19.24bn debt balance. The company materially reduced long-term loans but replaced much of that funding with short-term loans, increasing refinancing dependence. Cash and deposits of ¥17.17bn broadly covered ¥17.06bn of short-term loans, but this leaves limited cash headroom after considering other current liabilities and operating requirements. The full-year forecast implies a second-half operating-income requirement of ¥1.33bn, below the first-half result, while the ordinary-income requirement is ¥1.09bn; the revised outlook therefore appears achievable on a run-rate basis but remains sensitive to financing costs, tax outcomes and healthcare demand.

Profitability Analysis

Annualized DuPont ROE is 0.5%, decomposed into a 0.3% net profit margin, 0.765x annualized asset turnover and 2.19x financial leverage. The weak net margin is overwhelmingly the limiting factor; leverage is above one but does not compensate for the low conversion of operating profit into profit attributable to owners. The 7.1% EBIT/operating margin is below the 8%-plus level generally associated with a stronger earnings profile, but it improved 40bp year on year as SG&A growth of 6.1% trailed revenue growth of 8.0%. Gross-margin expansion to 69.2% also contributed, indicating favorable mix and/or pricing in the healthcare portfolio. EBITDA was ¥3.08bn and the EBITDA margin was 11.6%; adding back JGAAP goodwill amortization of ¥0.42bn produces pre-goodwill-amortization EBITDA of ¥3.50bn, or a 13.2% margin. Goodwill amortization represented 13.7% of reported EBITDA, a meaningful but not extreme JGAAP accounting drag when comparing with IFRS peers that do not amortize goodwill. Interest burden was 0.913, indicating that financing costs reduced EBIT by approximately 8.7% before tax; this remains manageable but is relevant given elevated debt. The tax burden factor of 0.043, based on profit attributable to owners relative to pre-tax income, is exceptionally low because a large portion of consolidated earnings accrued to non-controlling interests in addition to the reported tax charge. On a consolidated basis, income tax expense of ¥0.82bn represented an effective tax rate of 48.0% of ¥1.71bn pre-tax profit, above a normal Japanese statutory range and a significant suppressor of net earnings. The quality alert describing a 0.04 tax burden and an effective rate above 40% is therefore valid in economic effect: post-tax earnings available to parent shareholders remain disproportionately low. The reported alert referencing a 96% effective rate appears to arise from a parent-attributable profit denominator rather than consolidated pre-tax income; the disclosed consolidated tax rate is 48.0%.

Growth Assessment

Growth was led by the Healthcare business, the core business by both revenue and segment-profit contribution. Healthcare revenue increased 7.3% to ¥243.19bn and segment profit increased 10.1% to ¥30.39bn, implying a segment margin of 12.5% versus 12.2% a year earlier. Within Healthcare, direct sales rose 5.7% to ¥176.52bn, distribution increased 4.9% to ¥20.35bn, and OEM, ingredients and overseas sales grew 15.3% to ¥46.04bn. The faster expansion in OEM, ingredients and overseas business broadens channels beyond direct sales, although direct sales remained the dominant revenue source at approximately two-thirds of consolidated sales. Biofuel revenue increased 67.2% to ¥7.64bn, but its segment loss widened to ¥1.60bn from ¥1.14bn. Other business revenue was broadly flat at ¥14.23bn and its segment loss narrowed slightly to ¥2.02bn from ¥2.18bn. Unallocated corporate costs increased modestly to ¥8.05bn from ¥7.90bn, partially offsetting the Healthcare earnings gain. The revenue forecast of ¥53.00bn is 50.0% achieved at Q2, exactly matching the standard first-half progress rate. Operating-income progress is 58.5% against the ¥3.20bn full-year forecast, 8.5 percentage points ahead of the standard 50% rate. Ordinary-income progress is 61.0% against the ¥2.80bn forecast, 11.0 percentage points ahead of the standard rate, indicating that the revised forecast assumes a softer second half or contains prudence around non-operating items. The disclosed forecast revision makes subsequent management commentary on the assumptions behind the revised plan particularly important. Sustainable earnings expansion depends on preserving Healthcare gross margin, maintaining SG&A discipline, and reducing losses in the Biofuel and Other businesses.

Financial Health

Liquidity is adequate but not ample. The current ratio is 1.20x and the quick ratio is 1.11x, so current assets exceed current liabilities and the company does not breach the critical current-ratio-below-1.0 threshold. Working capital was positive at ¥5.24bn. Cash and deposits were ¥17.17bn, equivalent to 1.01x short-term loans of ¥17.06bn, which provides nominal coverage but little surplus liquidity against trade payables, taxes payable, contract liabilities and other operating obligations. Interest-bearing debt totaled ¥19.24bn, comprising ¥17.06bn of short-term loans and ¥2.18bn of long-term loans; bonds and convertible bonds are also reported within the financing structure. The short-term debt ratio was 88.7%, which directly supports the refinancing-risk alert: the company has shifted funding maturities sharply toward the next twelve months. Short-term loans increased ¥131.20bn year on year, while long-term loans declined ¥157.38bn, consistent with a major maturity reclassification or refinancing rather than a simple debt expansion. This maturity shift heightens reliance on bank facilities and rollover capacity even though total liabilities fell to ¥37.70bn from ¥43.81bn. Debt/EBITDA of 6.25x exceeds the 4.0x high-yield benchmark and is the principal leverage alert; it indicates a long debt paydown period on current EBITDA. D/E of 1.19x and debt/capital of 37.9% are not at aggressive-threshold levels, and EBITDA interest coverage of 10.12x plus EBIT interest coverage of 6.15x indicate current interest-service capacity. Total equity increased ¥30.43bn to ¥315.69bn, lifting the capital adequacy ratio to 47.8% from 42.7%. Goodwill was ¥108.23bn, equal to 34.3% of equity and 3.52x EBITDA: this is an elevated, but not warning-level, M&A asset exposure. Intangible assets represented 43.3% of total assets, well above the 30% concentration warning threshold, meaning valuation and future earnings remain sensitive to the cash-generating performance of acquired brands, customer relationships and other intangible assets. Deferred tax liabilities of ¥53.87bn are also substantial relative to equity and should be considered in evaluating the realizable equity base.

Notable B/S Changes

Short-term loans: +¥131.20bn (+333.2%) to ¥170.58bn - substantial migration toward short-term funding; refinancing liquidity is the principal balance-sheet risk. Long-term loans: -¥157.38bn (-87.8%) to ¥21.78bn - indicates debt repayment, maturity reclassification or refinancing into short-term facilities; reduces duration of funding. Retained earnings: +¥36.53bn to ¥5.87bn from negative ¥30.66bn - accumulated deficit position improved, supporting higher total equity. Investment securities: +¥5.70bn (+37.4%) to ¥20.93bn - increased financial-asset exposure and use of investment cash flows. Goodwill: -¥2.84bn to ¥108.23bn - decline is consistent with JGAAP amortization; remaining goodwill is 34.3% of equity and requires continued performance validation. Intangible assets: -¥9.42bn to ¥300.22bn - remains 43.3% of total assets despite the decline, maintaining elevated intangible-concentration and impairment sensitivity.

Cash Flow Quality

Operating cash flow was ¥1.08bn, down from ¥1.22bn in the prior-year period despite higher operating income. OCF exceeded profit attributable to owners by 14.84x, so there is no warning based on the conventional OCF/net-income-below-0.8 test. The accruals ratio was negative 1.5%, which is consistent with acceptable accrual quality. Receivables declined by ¥2.32bn in the operating-cash-flow reconciliation, providing a source of cash, while inventories increased by ¥2.84bn and reduced operating cash flow. Cash taxes paid were ¥14.46bn, materially above the ¥8.21bn income-tax expense and were a major reason that cash conversion lagged accounting EBITDA. Cash conversion of 0.35x is below the 0.7x warning threshold, validating the LOW_CASH_CONVERSION alert: only a limited portion of ¥3.08bn EBITDA converted to operating cash during the half. Positive free cash flow of ¥0.41bn was generated after reported capital expenditures of ¥1.18bn, but it is insufficient by itself to rapidly deleverage the balance sheet. Investing cash outflow totaled ¥6.74bn and included ¥2.88bn of intangible-asset purchases, ¥5.48bn of investment-security purchases and business-transfer payments, partly offset by a ¥16.43bn decrease in time deposits. CapEx/depreciation was only 0.10x, confirming both the UNDERINVESTMENT and CAPEX_UNDERINVESTMENT alerts. The root cause is that tangible capital expenditure of ¥1.18bn was far below ¥12.07bn depreciation and amortization. This may reflect an asset-light consumer-health model and a period of restrained physical investment, but sustained underinvestment could impair manufacturing capacity, product renewal and maintenance of the asset base. Inventory days were flagged at 100 days, above the 90-day warning level; together with the ¥2.84bn inventory cash outflow, this raises obsolescence and working-capital risk for health foods, cosmetics and biofuel-related products. The reported inventory alert warrants monitoring even though the business mix includes longer-cycle ingredients and finished goods; slower sell-through, demand forecasting errors or channel inventory accumulation would weaken future cash generation.

Dividend Sustainability

The Q2 dividend was ¥0 per share, and the full-year dividend forecast is also ¥0 per share. Accordingly, there is no current cash dividend commitment and no dividend payout-ratio burden on earnings or free cash flow. No share repurchases were reported, so there is also no buyback-related total-return obligation. Positive free cash flow of ¥0.41bn is preserved for operations, investment and debt management rather than shareholder distributions. Given debt/EBITDA of 6.25x, the 88.7% short-term debt ratio and modest cash conversion, retaining cash is consistent with balance-sheet priorities. Any future shareholder-return capacity would depend primarily on sustained Healthcare profitability, improved EBITDA-to-cash conversion and a reduction in refinancing dependence.

Risk Assessment

Business risks include Healthcare concentration: Healthcare generated ¥243.19bn of ¥265.07bn consolidated revenue and ¥30.39bn of segment profit, making the group dependent on direct-to-consumer functional foods and cosmetics demand., Biofuel execution risk: Biofuel revenue rose to ¥7.64bn but the segment loss widened to ¥1.60bn, requiring improved scale economics and cost control., Inventory and consumer-demand risk: the reported 100 inventory days alert and ¥2.84bn inventory increase create risks of slower sell-through, product obsolescence and discounting., Food and health-product risk: raw-material pricing, imported-input foreign-exchange exposure, food-safety incidents, regulatory changes in labeling or functionality claims, and private-brand competition can pressure sales and gross margin., Intangible-asset value risk: intangible assets represent 43.3% of total assets, making earnings and equity sensitive to the performance of acquired brands and other identifiable intangible assets..

Financial risks include Refinancing risk is elevated because ¥17.06bn of short-term loans account for 88.7% of interest-bearing debt and cash covers short-term loans by only 1.01x., Leverage risk is material at 6.25x debt/EBITDA, despite acceptable current interest coverage of 6.15x EBIT/interest and 10.12x EBITDA interest coverage., Cash-conversion risk is high: OCF/EBITDA was 0.35x, with inventory investment and cash taxes constraining conversion., Tax drag risk remains substantial, with a consolidated effective tax rate of 48.0% and only ¥0.07bn of profit attributable to owners from ¥1.71bn of pre-tax income., Goodwill exposure is elevated at 34.3% of equity; while goodwill/EBITDA of 3.52x is within a healthy payback range, weaker acquired-business performance could create impairment risk..

Key concerns include Highest priority: refinancing and liquidity management, given the sharp shift from ¥179.16bn of long-term loans to ¥170.58bn of short-term loans., High priority: conversion of the Healthcare segment's accounting profit into operating cash while limiting inventory accumulation., High priority: narrowing Biofuel losses so growth in this business does not dilute group returns., Medium priority: ensuring tangible and intangible investment remains sufficient, as CapEx/depreciation of 0.10x signals very limited physical reinvestment., Medium priority: sustaining the Q2 margin improvement while meeting the revised full-year forecast..

Investment Implications

Key takeaways include Revenue increased 8.0% and operating income increased 14.3%, with operating margin improving 40bp to 7.1%., Healthcare is the profit engine, delivering ¥30.39bn of segment profit and a 12.5% segment margin, while Biofuel and Other remained loss-making., The operating forecast is 58.5% achieved at Q2, while ordinary income is 61.0% achieved, providing a favorable first-half base relative to the revised annual plan., Cash flow is positive but constrained: free cash flow was ¥0.41bn and OCF/EBITDA was 0.35x., The capital structure has improved in total-equity terms, but ¥17.06bn of short-term loans and 6.25x debt/EBITDA make refinancing execution central..

Metrics to watch include Healthcare direct-sales growth and segment margin, Biofuel segment loss and revenue-to-loss scaling, Operating cash flow/EBITDA and inventory days, Short-term debt rollover, cash/short-term-debt coverage and debt/EBITDA, Effective tax rate and profit attributable to owners, Goodwill and intangible-asset impairment indicators, CapEx/depreciation and intangible-investment returns.

Regarding relative positioning, The company combines premium-margin healthcare characteristics with a more capital- and execution-intensive biofuel growth option. Its 69.2% gross margin is stronger than conventional food-sector norms, but its 7.1% operating margin, 0.5% annualized ROE, high intangible concentration and 6.25x debt/EBITDA place it below a mature, cash-generative consumer-staples profile.