Chuetsu Pulp & Paper Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥53.05B
• Operating Income: ¥1.35B
• Net Income: ¥966M
• EPS: ¥78.23

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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: Weak quarter with sharp profit compression and soft cash generation despite modest top-line decline. Revenue fell 4.5% YoY to 530.5, while operating income slumped 56.6% YoY to 13.6, driving ordinary income down 48.1% to 15.5 and net income down 52.0% to 9.8. Operating margin deteriorated to 2.6% (13.6/530.5) from roughly 5.6% a year ago, a contraction of about 307 bps. Net margin compressed to 1.9% from about 3.7% YoY, a decline of roughly 183 bps. Gross margin stands at 13.9% and SG&A was 60.2, implying an SG&A-to-sales ratio of 11.3% and SG&A-to-gross profit of 81.6%, leaving a thin operating buffer. EBITDA was 44.4, but ROE is only 1.7% and ROIC is a very low 1.0%, signaling weak capital efficiency. Ordinary income exceeded operating income as non-operating income reached 4.0 versus non-operating expenses of 2.0; non-operating income reliance is elevated (non-operating income ratio 40.9%). Cash generation quality was poor: operating cash flow was 4.2 versus net income of 9.8, an OCF/NI ratio of 0.43x, indicating earnings not well backed by cash. Free cash flow was likely negative as OCF (4.2) did not cover capital expenditures (-22.7), though full investing CF was not disclosed. Liquidity is tight with a current ratio of 103.5% and quick ratio of 80.6%, and short-term loans are sizable at 274.9 against cash of 40.8. Leverage by D/E is moderate at 1.06x and interest coverage is adequate at 8.1x, but Debt/EBITDA is elevated around 7.7x. The calculated payout ratio is high at 95.2%, which is inconsistent with weak OCF and negative implied FCF. Effective tax rate was 32.3%, roughly in line with statutory norms, offering no unusual tax tailwind. Forward-looking, recovery hinges on restoring spreads via pricing and cost pass-through, stabilizing energy/chemicals, and normalizing working capital to improve cash conversion. Without improvement in operating margins and cash conversion, dividend flexibility and deleveraging capacity are constrained.

Profitability Analysis

ROE decomposition (DuPont): ROE 1.7% = Net Profit Margin (1.9%) × Asset Turnover (0.450x) × Financial Leverage (2.06x). The largest negative driver YoY is the net margin, given operating income fell 56.6% on a 4.5% revenue decline, compressing operating margin by ~307 bps to 2.6%, and net margin by ~183 bps to ~1.9%. Business rationale: input cost pressure (energy, chemicals, logistics) and weaker pricing/mix likely squeezed gross profit, while SG&A remained relatively fixed, amplifying negative operating leverage. Non-operating income partially cushioned ordinary income, but this does not offset core margin erosion. Sustainability: absent clearer evidence of cost normalization or price hikes, the margin pressure looks cyclical but may persist near-term; non-operating contributions are less reliable and volatile. Asset turnover at 0.45x is low and likely constrained by a capital-intensive asset base; near-term improvement is unlikely without inventory normalization or asset-light shifts. Leverage of 2.06x is moderate and provided limited ROE support; incremental leverage would not be prudent given cash flow weakness. Concerning trend: SG&A as a share of sales (11.3%) is high relative to a 13.9% gross margin, leaving a narrow operating spread; revenue declined 4.5% while operating profit fell much more, evidencing unfavorable operating leverage.

Growth Assessment

Top-line contracted 4.5% YoY to 530.5, pointing to softer volumes and/or pricing in core paper/pulp segments; granularity by product mix was not disclosed. Profitability deterioration was severe: operating income -56.6% YoY to 13.6 and net income -52.0% to 9.8, indicating that cost inflation and weaker spreads outweighed cost controls. EBITDA of 44.4 provides some buffer, but conversion to EBIT and NI was limited by margin compression and depreciation (30.8). Non-operating income (4.0) provided support, but reliance on such items raises volatility risk. Near-term outlook depends on price pass-through, demand stabilization in printing/communication papers, and energy cost trends; sustained improvement requires gross margin recovery and tighter SG&A discipline. With ROIC at 1.0%, current growth is value-dilutive; investment hurdles may need to be raised or capital allocation tightened. Given negative implied FCF (OCF < capex) and tight liquidity, growth capex may face constraints until cash conversion improves.

Financial Health

Liquidity: Current ratio 103.5% (just above 1.0) and quick ratio 80.6% (below 1.0) indicate tight short-term liquidity; explicit warning needed for quick ratio <1.0. Solvency: D/E at 1.06x is moderate; interest coverage is adequate at 8.11x, though Debt/EBITDA of ~7.7x is elevated for a cyclical business. Maturity mismatch: Current liabilities 485.2 vs current assets 502.1 imply a slim cushion; short-term loans of 274.9 are large versus cash of 40.8, heightening refinancing risk if credit conditions tighten. Long-term loans are 67.8, suggesting a heavy short-term funding reliance; terming-out debt could reduce rollover risk. Off-balance sheet: None disclosed in the provided data. Equity base totals 572.0 (owners’ equity 581.6), providing some loss-absorption capacity, but low returns constrain accretion.

Cash Flow Quality

OCF/Net Income is 0.43x (4.22/9.82), below the 0.8 threshold, signaling potential earnings quality concerns and/or working capital headwinds. Free cash flow appears negative since OCF (4.22) does not cover capex (-22.70), though full investing CF was not disclosed; this constrains deleveraging and shareholder returns. Working capital: Accounts receivable of 249.3 and inventories of 111.0 are sizable; with revenue down, elevated receivables could be weighing on OCF (aging not disclosed). No clear signs of manipulation can be concluded from the data, but reliance on short-term borrowings alongside weak OCF warrants caution. Non-operating income aided earnings but not necessarily cash flow, underscoring the need for core cash earnings recovery.

Dividend Sustainability

The calculated payout ratio is high at 95.2%, while OCF is weak (4.22) and implied FCF is negative after capex, pointing to thin to negative coverage from internally generated cash. Dividends paid were not disclosed, and DPS data is unreported, limiting precision. Given tight liquidity (quick ratio 0.81) and significant short-term debt, maintaining a near-full payout would likely require balance sheet support or improved operating cash generation. Policy outlook likely hinges on profitability normalization and working capital release; a conservative stance would be prudent until OCF consistently exceeds both maintenance capex and dividends.

Risk Assessment

Business Risks:

• Commodity and energy cost volatility compressing paper/pulp spreads
• Demand decline/substitution in printing and communication papers
• Pricing power limitations amid competitive market conditions
• Operational execution risk in cost control and efficiency improvements

Financial Risks:

• Tight liquidity: quick ratio 0.81 and minimal working capital buffer
• Refinancing risk: large short-term loans (274.9) versus cash (40.8)
• High leverage on EBITDA basis (Debt/EBITDA ~7.7x) in a cyclical sector
• Weak cash conversion: OCF/NI 0.43x and implied negative FCF

Key Concerns:

• Material margin compression: operating margin ~2.6% vs ~5.6% YoY
• Low capital efficiency: ROIC 1.0% and ROE 1.7%
• Elevated reliance on non-operating income (non-operating income ratio 40.9%)
• Potential constraints on dividend sustainability given cash flow profile

Investment Implications

Key Takeaways:

• Core profitability deteriorated significantly; margins compressed by ~300 bps at operating level
• Cash generation lagged earnings (OCF/NI 0.43x), implying low earnings quality in the quarter
• Liquidity is thin and debt is skewed to short-term, raising rollover sensitivity
• ROIC at 1.0% indicates value-dilutive returns absent improvement
• Non-operating items cushioned ordinary income but are not a reliable earnings base

Metrics to Watch:

• Operating margin recovery and gross margin trajectory
• OCF/NI and free cash flow after maintenance capex
• Working capital turns (receivables and inventory days)
• Debt maturity profile and proportion of short-term loans
• Energy and chemical input cost trends vs pricing pass-through
• ROIC vs WACC to gauge value creation

Relative Positioning: Versus domestic pulp and paper peers, profitability and ROIC are on the weaker end this quarter, leverage on EBITDA is elevated, and liquidity is tighter; sustained improvement will require margin restoration and better cash conversion.

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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