FOOD & LIFE COMPANIES (3563) FY2026 Q3 Earnings Report

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Executive Summary

Driven by the rapid expansion of its overseas business, the company delivered a high-quality earnings result characterized by higher revenue and profits, with profit growth exceeding revenue growth. Revenue was ¥3,904.2B (+24.7% YoY), Operating Income was ¥420.2B (+43.9%), Profit Before Tax was ¥404.9B (+47.5%), and Net Income attributable to owners of the parent was ¥265.8B (+47.1%). The Operating Income margin was 10.8%; an improvement in the SG&A ratio more than offset a slight decline in the gross profit margin, resulting in profit growth substantially exceeding revenue growth.

Factors Affecting Performance

【Revenue】Revenue was ¥3,904.2B, up +24.7% YoY. Domestic Sushiro remained the largest segment at ¥2,169.3B (+10.7%, 55.6% of total revenue), while Overseas Sushiro expanded rapidly to ¥1,506.4B (+61.8%), becoming the primary growth driver. Kyotaru reported lower revenue of ¥162.8B (-8.5%), while Domestic Sugidama posted modest revenue growth of ¥64.8B (+9.2%).

【Profit and Loss】Operating Income was ¥420.2B (+43.9%), and the Operating Income margin of 10.8% improved from the previous year. Although the gross profit margin of 56.9% declined slightly from the previous year, the improvement in the SG&A ratio to 46.3% more than offset the decline. Against financial expenses of ¥23.9B, financial income was ¥8.6B, resulting in Profit Before Tax of ¥404.9B (+47.5%). After income taxes of ¥122.2B (an effective tax rate of approximately 30.2%), consolidated Net Income was ¥282.7B (+46.7%), while Net Income attributable to owners of the parent was ¥265.8B (+47.1%). The company achieved both revenue and profit growth, with profitability improving as profit growth exceeded revenue growth.

Segment Analysis

Overseas Sushiro became the largest contributor to company-wide Operating Income, generating ¥203.7B (+83.2%, 13.5% margin). Domestic Sushiro accounted for the largest share of revenue at 55.6%, but its profit margin of 7.9% was lower than that of the overseas business, indicating that overseas operations continued to outperform domestic operations in terms of profitability. Despite lower revenue, Kyotaru generated Operating Income of ¥4.4B (+138.4%), while Domestic Sugidama generated ¥2.4B (+731.0%), demonstrating progress in improving the profitability of non-core businesses. Across the company, the higher margins of the overseas business have been a key factor driving the improvement in the Operating Income margin.

Key Financial Indicators

【Profitability】The Operating Income margin was 10.8%, while the Net Income margin attributable to owners of the parent was 6.8%. The Operating Income margin improved from the previous year due to higher margins in the overseas business and an improved SG&A ratio of 46.3%. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥622.5B, or 2.3 times Net Income attributable to owners of the parent of ¥265.8B, indicating strong cash support for reported earnings. 【Investment Efficiency】ROE was 21.8%, and basic EPS was ¥117.09 (¥79.87 in the previous year, +46.6% YoY). 【Financial Soundness】The Equity Ratio was 27.5%, improving from 24.0% in the previous year, and cash and cash equivalents were ¥644.6B. Interest-bearing debt, comprising bonds and borrowings, was approximately ¥774.8B, reaching approximately ¥2,281.4B when lease liabilities are included. Attention is therefore warranted regarding the apparently high leverage resulting from the application of IFRS 16.

Cash Flow Analysis

Operating Cash Flow was ¥622.5B, a substantial increase of +37.8% YoY, representing 2.3 times Net Income attributable to owners of the parent of ¥265.8B and demonstrating strong cash-generation capacity. Investing Cash Flow was -¥334.5B, of which capital expenditures accounted for ¥234.4B, indicating continued investment in store openings and expansion, including overseas. Financing Cash Flow was -¥250.5B, primarily comprising ¥183.8B in repayments of lease liabilities and ¥39.6B in dividend payments. Free Cash Flow after these items was ¥288.0B, sufficient to cover capital expenditures and dividends, indicating the financial capacity to fund both growth investments and shareholder returns through internally generated funds. Inventories increased by ¥27.4B and trade receivables increased by ¥25.7B, respectively, putting downward pressure on cash flow from operations before subtotal, but these increases can be viewed as growth in working capital associated with business expansion.

Earnings Quality

The scale of non-operating income and expenses was modest relative to revenue. Financial income was ¥8.6B, financial expenses were ¥23.9B, other income was ¥11.3B, and other expenses were ¥6.2B. Accordingly, the impact of one-time factors was limited, and earnings can be regarded as being based on recurring business activities. The difference between the Operating Income margin of 10.8% and the Net Income margin attributable to owners of the parent of 6.8% reflects the effective tax rate of approximately 30.2% and the burden of financial expenses, and is not at an unusual level. Operating Cash Flow of ¥622.5B substantially exceeded Net Income, indicating favorable accrual quality—the difference between accounting earnings and cash—and high earnings quality. Comprehensive income was ¥317.9B, including ¥299.3B attributable to owners of the parent. Its excess over Net Income of ¥265.8B was driven by a ¥35.2B increase from translation differences of foreign operations, with a temporary factor related to foreign exchange translation contributing to the result.

Earnings Forecast and Guidance

Progress against the full-year forecast was 77.3% for Revenue (¥3,904.2B/¥5,050.0B), 83.2% for Operating Income (¥420.2B/¥505.0B), and 84.4% for Net Income attributable to owners of the parent (¥265.8B/¥315.0B). Profit progress exceeded the standard Q3 cumulative progress rate of approximately 75%, confirming that profits are ahead of schedule relative to the full-year plan. The higher margins of the overseas business and improved SG&A efficiency are believed to have contributed to the stronger progress.

Shareholder Returns

The full-year dividend forecast is ¥20.00 per share, with no interim dividend planned. Based on forecast EPS of ¥138.73, the Payout Ratio is approximately 14.4%, representing a conservative level. No share repurchases were conducted during the current period, and shareholder returns currently center on dividends. Dividend payments of ¥39.6B are small relative to the scale of Operating Cash Flow and Free Cash Flow of ¥288.0B, indicating substantial overall capacity for shareholder returns.

Risk Factors

1. Rising dependence on the overseas business: Overseas Sushiro accounts for 38.6% of revenue and the largest share of Operating Income at 48.5%, increasing the impact of same-store sales trends and the quality of local operations on company-wide performance.

2. Increase in inventory and working capital: Inventories were ¥131.4B, up +28.3% from the previous year, with accumulation progressing at a pace slightly exceeding revenue growth of +24.7%. Trends in inventory turnover efficiency will be an important monitoring point.

3. Financial leverage including lease liabilities: The combined total of interest-bearing debt and lease liabilities reached approximately ¥2,281.4B, while the Equity Ratio was somewhat low at 27.5%. Financial expenses increased +24.0% YoY, warranting attention to changes in the burden in response to the interest-rate environment and the pace of store expansion.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (retail)

Profitability and Returns

Profitability is substantially above the industry median and ranks among the higher levels within the industry.

Growth and Capital Efficiency

The growth rate is nearly eight times the industry median, with overseas expansion standing out as a key growth driver within the industry.

※Source: Company analysis

Key Earnings Highlights

1. Overseas Sushiro became the largest contributor to Operating Income and secured a 13.5% profit margin, making it the primary driver of the company-wide improvement in the Operating Income margin to 10.8%.

2. The improvement in the SG&A ratio to 46.3% offset a slight decline in the gross profit margin, confirming a structure in which profit growth of +43.9% exceeded revenue growth of +24.7%.

3. Full-year progress is ahead on the profit side, with 83.2% for Operating Income and 84.4% for Net Income compared with 77.3% for Revenue. Operating Cash Flow also expanded +37.8% YoY, indicating good quality in the conversion of earnings into cash.

Implied 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 five-year fade period). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥839–¥892 at ±1% for the cost of equity, and ¥856–¥879 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).

(Calculation model: residual income model / Interest rate reference month: 2026-07 / This figure is neither a forecast nor a guarantee of future share prices)

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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 with professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q3 was a strong earnings release, with revenue growth, margin expansion and cash generation all materially ahead of the prior-year pace. Revenue rose 24.7% YoY to ¥390.4bn, led principally by rapid overseas Sushiro expansion. Operating income increased 43.9% to ¥42.0bn, outpacing revenue growth by 19.2 percentage points. Net income attributable to owners grew 47.1% to ¥26.6bn, while basic EPS increased to ¥117.09 from ¥79.87. Gross margin was 56.9%, down modestly by approximately 30bp from 57.2% a year earlier, indicating that input costs and product mix remained manageable despite a high-growth period. The operating margin expanded by approximately 143bp to 10.8% from 9.3%. The parent-attributable net margin expanded by approximately 104bp to 6.8% from 5.8%. SG&A rose 20.7% YoY, slower than revenue growth, and the SG&A-to-revenue ratio declined by approximately 154bp to 46.3%. This indicates favorable operating leverage, particularly in the international business. Overseas Sushiro was the largest contributor to segment profit at ¥20.4bn, surpassing domestic Sushiro's ¥17.2bn despite domestic Sushiro remaining the largest revenue business. Operating cash flow of ¥62.2bn exceeded parent-attributable net income by 2.34x, supporting a strong assessment of earnings cash conversion. Free cash flow was positive at ¥28.8bn after ¥23.4bn of capital expenditure, despite continued investment in store capacity and infrastructure. The balance sheet strengthened through retained earnings accumulation, with total equity increasing to ¥129.5bn and the equity ratio improving to 27.5% from 24.0% a year earlier. Nevertheless, the reported D/E ratio of 2.44x remains elevated, reflecting substantial lease obligations and debt associated with a store-based expansion model. The company has achieved 77.3% of full-year revenue guidance, 83.2% of operating-income guidance and 84.4% of net-income guidance after nine months, all ahead of the standard 75% seasonal progress rate. The earnings trajectory supports the revised full-year outlook, but the investment case remains sensitive to overseas execution, food-cost inflation, labor costs, foreign-exchange movements and the funding burden associated with leased stores.

Profitability Analysis

The annualized DuPont ROE is 27.4%, comprising a 6.8% net profit margin, 1.168x asset turnover and 3.44x financial leverage. The strongest contributor to the high ROE is financial leverage, although the improvement in operating profitability is the more constructive underlying driver. Operating margin increased to 10.8% from 9.3% in the prior-year Q3 cumulative period, while the gross margin decreased only modestly to 56.9% from 57.2%. This shows that earnings expansion was driven predominantly by SG&A leverage rather than by gross-margin expansion. SG&A increased 20.7% YoY versus 24.7% revenue growth, reducing the SG&A ratio to 46.3% from 47.8%. EBITDA grew to ¥74.1bn and the EBITDA margin reached 19.0%, reflecting strong fixed-cost absorption across the store network. Domestic Sushiro revenue increased 10.7% to ¥216.9bn and segment profit rose 12.4% to ¥17.2bn, with segment margin improving slightly to 7.9% from 7.8%. Overseas Sushiro revenue increased 61.8% to ¥150.6bn and segment profit increased 83.2% to ¥20.4bn; its segment margin expanded by approximately 158bp to 13.5%. Overseas Sushiro is therefore the core business on an operating-income-contribution basis, while domestic Sushiro remains the principal revenue base. KyoTaru revenue declined 8.5% to ¥16.3bn, but segment profit improved to ¥0.4bn from ¥0.2bn, lifting segment margin to 2.7%. Domestic Sugidama revenue grew 9.4% to ¥6.5bn and segment profit rose to ¥0.2bn from ¥0.03bn, although its contribution remains small. The interest burden was healthy at 0.964, meaning EBIT was only modestly reduced by net finance costs. The tax burden was 0.656, corresponding to a 30.2% effective tax rate, and was the principal deduction between pre-tax profit and net income. Annualized ROA is approximately 8.4% based on annualized parent-attributable earnings and average assets, indicating solid asset productivity for a restaurant operator with a large leased and fixed-asset base. Profitability appears operationally sustainable if international store productivity and domestic customer demand remain resilient, but the current ROE should not be viewed independently of leverage.

Growth Assessment

Revenue growth of 24.7% YoY was broad-based but heavily weighted toward overseas Sushiro, which generated ¥57.5bn of the group’s ¥77.3bn revenue increase. Domestic Sushiro added ¥20.9bn of revenue, demonstrating that the established Japanese business continues to expand despite its larger base. Overseas Sushiro's 61.8% revenue growth and 83.2% segment-profit growth indicate that the international rollout is producing both scale and operating leverage. The overseas segment's 13.5% segment margin exceeded the domestic Sushiro segment's 7.9%, making overseas execution increasingly important to consolidated earnings growth. Domestic Sugidama also improved profitability, while KyoTaru returned to a more meaningful although still low margin. Consolidated operating income grew 43.9%, materially faster than sales, confirming positive operating leverage. Impairment losses declined to ¥2.8bn from ¥5.6bn, reducing a prior drag on operating performance. The current forecast calls for FY2026 revenue of ¥505.0bn, operating income of ¥50.5bn and parent-attributable net income of ¥31.5bn. Q3 cumulative revenue progress is 77.3%, 2.3 percentage points above the standard 75% progress rate. Operating-income progress is 83.2%, 8.2 percentage points above the standard rate, while net-income progress is 84.4%, 9.4 percentage points above it. These trends imply that the full-year forecast is supported by the first nine months, although the remaining quarter has less implied earnings headroom than earlier in the year. The forecast assumes full-year operating-income growth of 39.9% and net-income growth of 37.3%, below the Q3 cumulative growth rates, which provides a degree of execution buffer. Growth sustainability depends on maintaining overseas unit economics, controlling new-store costs, and protecting domestic traffic and ticket trends against consumer spending pressure.

Financial Health

Liquidity is adequate, with current assets of ¥108.8bn versus current liabilities of ¥97.1bn, implying a current ratio of approximately 1.12x. The company is not in a current-ratio warning position, but the liquidity cushion is modest relative to a business with recurring rent, food procurement and payroll obligations. Cash and cash equivalents were ¥64.5bn, up ¥5.6bn from the beginning of the fiscal year. Other current financial assets increased to ¥9.1bn from ¥0.7bn, principally reflecting time-deposit activity, further supporting near-term liquidity. Net working capital was approximately ¥11.7bn based on current assets less current liabilities. Trade payables of ¥47.3bn substantially exceeded trade receivables of ¥17.6bn, which is structurally favorable for cash conversion in a consumer-facing restaurant format. However, lease liabilities were substantial at ¥25.6bn current and ¥125.0bn non-current, or ¥150.7bn in aggregate. Bonds and borrowings totaled ¥77.5bn, including ¥4.0bn current and ¥73.5bn non-current. The reported D/E ratio of 2.44x exceeds the 2.0x high-leverage threshold and is a material quality alert. The root cause is the capital intensity of the store network, especially the large IFRS lease-liability base alongside borrowings. This leverage is common to a degree in restaurant chains using long-term leased sites, but the level remains aggressive and raises sensitivity to a decline in store-level cash flow or higher financing costs. The impact is that a meaningful portion of enterprise cash generation must remain dedicated to debt service and lease payments, constraining financial flexibility during a demand downturn. Interest expense was ¥2.4bn against EBIT of ¥42.0bn, implying strong EBIT-to-finance-cost coverage of approximately 17.6x. Equity increased by ¥28.6bn from the beginning of the fiscal year to ¥129.5bn, driven mainly by earnings retention and favorable foreign-currency translation. The equity ratio improved to 27.5%, but liabilities still represented 70.9% of total assets. Goodwill was ¥30.4bn, equal to 23.5% of equity and 0.41x EBITDA, which is manageable and does not indicate an excessive M&A premium. Intangible assets represented 12.7% of total assets, also within a balanced range for an international branded restaurant operator.

Notable B/S Changes

Property, plant and equipment: +¥24.9bn from FY2025 year-end to ¥228.7bn - continued store-network and operating-asset investment increases fixed-asset intensity. Cash and cash equivalents: +¥5.6bn from FY2025 year-end to ¥64.5bn - operating cash generation exceeded capex, lease repayments, debt repayment and dividends. Other current financial assets: +¥8.4bn from FY2025 year-end to ¥9.1bn - mainly reflects increased time-deposit balances and provides an additional liquidity reserve. Inventories: +¥2.9bn (+28.3% versus the comparable prior-year balance) to ¥13.1bn - growth exceeded revenue growth and should be monitored for store-expansion needs, procurement timing and spoilage risk. Trade payables: +¥5.2bn from the comparable prior-year balance to ¥47.3bn - supplier financing supported operating cash flow, consistent with the group's favorable working-capital structure. Lease liabilities: +¥12.5bn from FY2025 year-end to ¥150.7bn - expanded leased-site obligations increase fixed financial commitments and contribute to elevated leverage. Retained earnings: +¥22.6bn (+26.5% versus the comparable prior-year balance) to ¥108.0bn - earnings accumulation was the principal driver of the equity increase and improved capital resilience. Total equity: +¥28.6bn from FY2025 year-end to ¥129.5bn - supported by ¥28.3bn of quarterly profit and ¥3.5bn of foreign-currency translation OCI, partly offset by ¥4.0bn of dividends.

Cash Flow Quality

Cash-flow quality was strong in FY2026 Q3. Operating cash flow increased 37.8% YoY to ¥62.2bn and was 2.34x parent-attributable net income of ¥26.6bn. This exceeds the 1.0x quality benchmark and indicates that reported earnings were more than supported by cash generation. The accruals ratio was negative 8.0%, which is favorable and consistent with cash conversion exceeding accounting earnings. EBITDA was ¥74.1bn and cash conversion, measured as operating cash flow divided by EBITDA, was 0.84x. This is solid, though below the 0.9x excellent benchmark, partly reflecting cash taxes, interest and operating working-capital requirements. Working capital consumed cash through a ¥2.7bn inventory increase and a ¥2.6bn receivables increase. These outflows were more than offset by a ¥4.2bn increase in payables and strong operating profitability. Inventory increased 28.3% to ¥13.1bn relative to the comparable prior-year balance, exceeding revenue growth and warranting monitoring in the context of store expansion and food-cost management. Capex was ¥23.4bn, up from ¥18.4bn in the prior-year period, consistent with continuing store and operating-asset investment. Capex represented 0.73x depreciation and amortization, below the 1.0x growth-investment benchmark but above a severe underinvestment profile. Free cash flow was ¥28.8bn after capex, comfortably positive. Lease payments of ¥18.4bn were classified within financing cash flow under IFRS; after capex and lease payments, operating cash generation still covered the ¥4.0bn dividend payment. Investing cash flow was ¥33.4bn, exceeding capex because it also included a net ¥7.6bn increase in time deposits and ¥1.6bn in lease deposits. Financing cash flow was negative ¥25.1bn, reflecting ¥18.4bn of lease repayments, ¥3.0bn of long-term debt repayment and ¥4.0bn of dividends. There is no material indication of working-capital manipulation: payables provided support, but the overall cash conversion remains robust even after taxes and interest.

Dividend Sustainability

The FY2026 forecast dividend is ¥20.00 per share, while forecast basic EPS is ¥138.73. This implies a forecast dividend payout ratio of approximately 14.4%, which is conservative and well below the 60% sustainability benchmark. Q2 DPS was nil, consistent with a year-end-focused dividend structure. Cumulative dividends paid were ¥4.0bn during the first nine months. Free cash flow of ¥28.8bn covered cash dividends by approximately 7.3x. Even after considering ¥18.4bn of lease payments, cash generation after capex and lease repayments was approximately ¥10.4bn, still covering dividends by about 2.6x. The low payout ratio preserves capital for overseas growth, store investment and balance-sheet strengthening. Given the reported D/E ratio of 2.44x, retaining a substantial portion of earnings is financially prudent. Dividend capacity is therefore strong on current earnings and cash-flow metrics, although future distributions should remain secondary to lease obligations, debt repayment and expansion funding needs. No share-buyback cash outflow was recorded in the period, so the dividend payout ratio is the appropriate shareholder-return measure.

Risk Assessment

Business risks include Overseas Sushiro generated ¥20.4bn of segment profit, or more than half of aggregate segment profit, making consolidated growth increasingly dependent on international store openings, local consumer acceptance, food sourcing and execution quality., Food-price inflation, especially seafood and rice costs, could pressure the 56.9% gross margin if menu pricing or product mix cannot offset procurement inflation., Labor-cost inflation and staffing shortages could erode the benefit of SG&A leverage, particularly across the domestic restaurant network., Domestic Sushiro remains the largest revenue business at ¥216.9bn; weaker Japanese consumer traffic, lower discretionary spending or competitive discounting would affect the largest established earnings base., Foreign-currency movements are increasingly material because overseas Sushiro accounted for 38.6% of consolidated revenue and recorded ¥35.2bn of favorable translation-related OCI during the period., Inventory increased 28.3% to ¥13.1bn, faster than revenue growth, creating monitoring risk around food procurement, spoilage, markdowns and new-store inventory planning..

Financial risks include HIGH_LEVERAGE: the reported D/E ratio of 2.44x exceeds the 2.0x aggressive-leverage threshold. Large lease liabilities of ¥150.7bn and bonds and borrowings of ¥77.5bn increase fixed financial commitments., The current ratio of approximately 1.12x is above 1.0x but below the 1.5x healthy benchmark, leaving a moderate liquidity buffer against short-term liabilities of ¥97.1bn., Lease repayments totaled ¥18.4bn in the first nine months, so a downturn in store-level cash generation would have a direct effect on financing flexibility., Non-current liabilities of ¥219.2bn materially exceed equity of ¥129.5bn, leaving balance-sheet resilience dependent on continued EBITDA generation and stable access to funding..

Key concerns include The high annualized ROE of 27.4% is partly leverage-driven through a 3.44x financial-leverage factor; a lower debt or lease burden would reduce ROE but improve resilience., Overseas Sushiro's rapid growth is highly earnings-accretive, but its increasing profit contribution raises the impact of country-specific regulation, supply-chain disruption and foreign-exchange volatility., Capex of ¥23.4bn and lease-related commitments require continued disciplined site selection and store-level return monitoring., The full-year forecast is well supported by nine-month progress, but the remaining quarter must preserve margins amid potentially volatile food, wage and foreign-exchange conditions..

Investment Implications

Key takeaways include Revenue grew 24.7% YoY and operating income grew 43.9% YoY, demonstrating substantial operating leverage., Operating margin expanded by approximately 143bp to 10.8%, as SG&A growth of 20.7% remained below revenue growth., Overseas Sushiro is the core business by segment-profit contribution, generating ¥20.4bn of segment profit with a 13.5% margin., Cash earnings were strong: operating cash flow was ¥62.2bn, 2.34x parent-attributable net income, and free cash flow was ¥28.8bn., The forecast dividend payout ratio is low at approximately 14.4%, leaving significant internally generated funding capacity., Balance-sheet risk is centered on the reported 2.44x D/E ratio and ¥150.7bn of lease liabilities, despite strong interest coverage and an improving equity ratio..

Metrics to watch include Overseas Sushiro revenue growth and segment margin, currently 61.8% YoY growth and 13.5%, respectively., Domestic Sushiro revenue growth, traffic, ticket size and segment margin, currently ¥216.9bn revenue and a 7.9% segment margin., Gross margin and SG&A ratio, currently 56.9% and 46.3%, respectively., Inventory growth relative to sales growth and store openings, following the 28.3% increase in inventories., Lease liabilities, lease repayments and the reported D/E ratio of 2.44x., Operating cash flow-to-EBITDA conversion, currently 0.84x, and free cash flow after store-investment requirements., Progress against FY2026 guidance of ¥505.0bn revenue, ¥50.5bn operating income and ¥31.5bn parent-attributable net income..

Regarding relative positioning, FOOD & LIFE COMPANIES combines restaurant-format gross margins and recurring cash generation with a rapidly scaling overseas platform. Its 10.8% operating margin and 19.0% EBITDA margin indicate solid profitability for a full-service, store-network-based food-service operator. Relative to lower-growth domestic restaurant peers, the overseas Sushiro business provides a stronger expansion engine; relative to asset-light consumer peers, however, the group carries meaningfully greater lease-related leverage and fixed-cost exposure.