KURARAY CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

Kuraray’s FY2026 Q2 results recorded increases in both revenue and profit, although the growth in net income was limited and variation was observed in earnings quality. Revenue was ¥4310.4B (+7.8% YoY), operating income was ¥288.4B (+9.8%), ordinary income was ¥259.8B (+22.1%), and net income was ¥151.7B (+8.1%). Revenue growth was driven by double-digit growth in the Functional Materials and Isoprene businesses in addition to the core Vinyl Acetate business. Ordinary income grew faster than operating income due to a reduction in non-operating expenses, while the recognition of extraordinary losses constrained net income growth.

Factors Affecting Performance

【Revenue】Revenue increased 7.8% YoY to ¥4310.4B, with all segments recording revenue growth. High-growth businesses, including Functional Materials (+12.0%), Isoprene (+14.9%), and Trading (+10.1%), lifted overall performance, while the core Vinyl Acetate business also remained solid with growth of +7.0%. Meanwhile, the Other category declined 27.3%.

【Profit and Loss】Operating income increased 9.8% YoY to ¥288.4B, supported by a gross margin of 29.9% (improved YoY), although the SG&A ratio rose slightly to 23.2%, partially offsetting the benefit of higher revenue. By segment, operating income in Functional Materials improved significantly to ¥48.8B (+184.9%), while Fibers also recovered sharply from the low level recorded in the previous year to ¥42.0B. In contrast, the core Vinyl Acetate business reported operating income of ¥253.8B (-15.0%), with its margin declining to 11.7%, weighing on company-wide profitability. Ordinary income increased 22.1% to ¥259.8B, exceeding operating income growth due to lower non-operating expenses. However, net income was limited to ¥151.7B (+8.1%) following the recognition of extraordinary losses of ¥44.1B. Revenue and profit both increased.

Segment Analysis

By segment, the core Vinyl Acetate business accounted for approximately 6割 of total company profit, with operating income of ¥253.8B (-15.0% YoY) and a profit margin of 11.7%, although its margin declined from the previous year. In contrast, Functional Materials reported ¥48.8B (+184.9%, profit margin 4.4%), Isoprene reported ¥17.9B (+236.4%, profit margin 3.9%), and Fibers reported ¥42.0B (profit margin 13.2%), confirming significant improvements in profitability. Trading continued to deliver stable growth, with operating income of ¥36.7B (+20.7%). The decline in the margin of Vinyl Acetate, which has a high concentration of company-wide profit, has been partially offset by the diversification effect arising from the recovery of Functional Materials and other businesses.

Key Financial Indicators

【Profitability】The operating margin was 6.7%, the gross margin was 29.9%, and the SG&A ratio was 23.2%. As SG&A expenses increased proportionately with revenue, operating leverage remained limited. ROE remained low at 2.0%. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥590.3B, approximately 3.9 times net income of ¥151.7B, indicating strong cash backing for earnings. 【Investment Efficiency】The equity ratio was 56.9%, and basic EPS was ¥46.98 (+8.0% from ¥43.50 in the previous year). 【Financial Soundness】Current assets of ¥6062.4B compared with current liabilities of ¥2306.8B provide a substantial short-term liquidity cushion. Long-term borrowings were ¥1771.3B and bonds were ¥500.0B, indicating increased use of long-term funding.

Cash Flow Analysis

Operating Cash Flow was ¥590.3B, a substantial 40.0% increase YoY, indicating strong cash backing for earnings after taking into account depreciation and amortization of ¥421.8B. Investing Cash Flow was -¥560.3B, apparently centered on investments in property, plant and equipment and intangible assets, reflecting an aggressive capital investment stance. As a result, free cash flow was limited to ¥30.0B, indicating that investment outlays preceded and compressed cash-generation capacity. Financing Cash Flow was positive at ¥138.1B, although ¥100.0B was allocated to share repurchases, suggesting that shareholder returns were implemented alongside external funding. In terms of working capital, accounts payable declined by ¥59.3B, acting as a partial downward pressure on cash flow.

Earnings Quality

The core source of recurring earnings was operating income of ¥288.4B, which was steadily generated by business operations. At the same time, extraordinary gains of ¥29.4B, including gains on the sale of investment securities of ¥11.8B, and extraordinary losses of ¥44.1B were recognized, creating a temporary net factor weighing on net income. Non-operating expenses of ¥62.9B, including interest expenses of ¥18.7B, exceeded non-operating income such as interest income of ¥10.4B and dividend income of ¥4.2B, resulting in a net negative balance. Operating Cash Flow reached approximately 3.9 times net income, indicating high-quality earnings that do not depend on accruals (accounting estimates). The divergence between ordinary income and net income was attributable to the ¥93.5B tax burden and the impact of extraordinary losses.

Earnings Forecast and Guidance

The full-year plan calls for revenue of ¥8800.0B, operating income of ¥700.0B, and ordinary income of ¥640.0B, with double-digit YoY growth expected for all three items. As of the first half, progress rates were 49.0% for revenue, 41.2% for operating income, and 40.6% for ordinary income. Revenue is generally on track with the plan, while profit progress is somewhat behind. The delayed profit progress appears to have been caused by the decline in the margin of the core Vinyl Acetate business, making the trend in profitability improvement toward the second half a key factor in achieving the plan. Although the earnings forecast was revised during the quarter, there was no revision to the dividend forecast.

Shareholder Returns

The interim dividend was ¥32 (+18.5% YoY), and the full-year dividend forecast is ¥64. Based on net income, the payout ratio is approximately 63.9%, calculated using total dividends of approximately ¥96.9B corresponding to the interim dividend of ¥32 against first-half net income of ¥151.7B. In addition, ¥100.0B was allocated to share repurchases, resulting in a high total return ratio of approximately 129.4% relative to first-half net income when dividends and share repurchases are combined. Total shareholder returns exceeded free cash flow of ¥30.0B, indicating that retained earnings and external funding are increasingly being used as sources of shareholder returns; this requires monitoring.

Risk Factors

1. Risk of margin pressure in the core business: Operating income in Vinyl Acetate was ¥253.8B, down -15.0% YoY, and its profit margin declined to 11.7%. Given the high concentration of company-wide profit in this business, fluctuations in market conditions and raw material and fuel prices could have a significant impact on overall performance.

2. Risk of cash flow compression from front-loaded investment: Investing Cash Flow was substantial at -¥560.3B, leaving free cash flow at only ¥30.0B. As capital investment continues, the pace of investment recovery will influence future cash-generation capacity.

3. Risk regarding the sustainability of shareholder returns: The combined amount of dividends and share repurchases substantially exceeded free cash flow of ¥30.0B. Maintaining the current level of returns will require further growth in Operating Cash Flow or improvement in asset efficiency.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company’s profitability, as measured by both operating margin and net margin, is below the industry median, placing it at a disadvantage in terms of profitability relative to the manufacturing industry average.

Growth and Capital Efficiency

The revenue growth rate also fell slightly below the industry median, placing the company’s revenue growth below the mid-range within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The decline in the margin of the core Vinyl Acetate business—operating margin of 11.7% and operating income down -15.0% YoY—has weighed on company-wide profitability. The structure indicates that the recovery in profitability of Functional Materials, Isoprene, and Fibers is diversifying and offsetting this pressure.

2. Operating Cash Flow was ¥590.3B, up +40.0% YoY, providing strong support for earnings. However, Investing Cash Flow reached -¥560.3B, leaving free cash flow thin at ¥30.0B. The fact that total shareholder returns, including dividends and share repurchases, exceeded free cash flow is noteworthy from a capital allocation perspective.

3. First-half progress against the full-year plan was 49.0% for revenue, compared with 41.2% for operating income and 40.6% for ordinary income. Profit progress is somewhat behind, making the extent of profitability improvement in the core business during the second half a key determinant of whether the plan will be achieved.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥2,230–¥2,359 at cost of equity ±1%, and ¥2,285–¥2,299 at ω±0.1.

Notes:

• As 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 from the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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 discretion and responsibility, after consulting a professional as necessary.

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