Rengo Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

Profit increased substantially at all levels, driven by the establishment of price revisions and the relative stability of raw material and energy costs. Revenue was ¥2757.5B (up +10.6% YoY), Operating Income was ¥179.0B (up +72.5%), and Ordinary Income was ¥189.0B (up +80.3%). Net Income (Net Income attributable to owners of the parent; hereinafter used consistently) was ¥115.8B (up +92.8%), indicating that the improvement at the operating level was generally carried through to bottom-line earnings. Consolidated Net Income, including the portion attributable to non-controlling interests, was ¥129.1B (up +97.6%). The Operating Income margin improved to 6.5% from 4.2% in the same period of the previous year, an improvement of 2.3pt, making simultaneous revenue growth and margin expansion the defining characteristics of the quarter.

Factors Affecting Performance

【Revenue】All segments recorded revenue growth. Paperboard and paper processing-related businesses, the largest segment by revenue composition, generated ¥1392.5B (50.5% of total revenue, up +6.1% YoY) and were the primary contributor in terms of scale. Flexible packaging-related businesses generated ¥562.9B (20.4% of total revenue, up +14.2%), while overseas-related businesses generated ¥604.6B (21.9% of total revenue, up +17.7%), both showing strong growth. Heavy-duty packaging-related businesses generated ¥140.1B (5.1% of total revenue, up +13.4%). The growth rates of overseas-related and flexible packaging-related businesses exceeded the company-wide average (+10.6%), making them the main drivers of revenue growth.

【Profit and Loss】Operating Income was ¥179.0B (up +72.5% YoY), and the Operating Income margin of 6.5% improved by 2.3pt from 4.2% in the previous year. In addition to the improvement in the gross margin to 20.7% (18.9% in the previous year, +1.8pt), the SG&A expense ratio was 14.2%, with SG&A expense growth contained relative to revenue growth, resulting in operating leverage. Ordinary Income of ¥189.0B (up +80.3%) reflected the improvement in Operating Income almost directly, as non-operating income and expenses were broadly neutral (non-operating income of ¥35.4B and non-operating expenses of ¥25.4B). Extraordinary gains and losses were a net gain of +¥1.6B (including a ¥4.5B gain on sales of investment securities and a ¥1.6B loss on disposal and sale of fixed assets), indicating a limited impact from one-time factors. Net Income of ¥115.8B (up +92.8%) can be explained by the effective tax rate of 32.3% and the deduction of ¥13.3B in profit attributable to non-controlling interests; no unusual factors were observed in the divergence from Ordinary Income. Revenue and profit both increased.

Segment Analysis

All five segments recorded increases in both revenue and profit. Paperboard and paper processing-related businesses generated revenue of ¥1392.5B (+6.1%) and Operating Income of ¥101.4B (+46.7%), with a margin of 7.3%, making them the largest pillar in terms of both scale and profit. Flexible packaging-related businesses generated revenue of ¥562.9B (+14.2%) and Operating Income of ¥57.7B (+114.2%), with a margin of 10.3%, demonstrating the highest profitability among all segments and an outstanding profit growth rate. Heavy-duty packaging-related businesses generated revenue of ¥140.1B (+13.4%) and Operating Income of ¥7.0B (+44.8%), with a margin of 5.0%. Overseas-related businesses generated revenue of ¥604.6B (+17.7%) and Operating Income of ¥7.0B (+741.3%), representing substantial profit growth, although the margin remained at 1.2%, indicating significant room for profitability improvement compared with other segments. Other businesses generated revenue of ¥191.7B (+6.6%) and Operating Income of ¥4.7B (+64.2%), with a margin of 2.5%. While the high profitability of flexible packaging-related businesses contributed to improving overall earnings, overseas-related businesses continued to present structural profitability challenges despite revenue and profit growth.

Key Financial Indicators

【Profitability】The Operating Income margin was 6.5%, improving by 2.3pt from 4.2% in the previous year. The Ordinary Income margin was 6.9%, improving by 2.7pt from 4.2%, while the Net Income margin (on an attributable-to-owners-of-the-parent basis) was 4.2%, improving by 1.8pt from 2.4%. Margins expanded at all levels. ROE was 2.4%, indicating an improvement year on year on a quarterly basis. 【Cash Flow Quality】Accounts receivable were ¥3037.0B (¥2825.3B in the previous year, +7.5%), and inventories were ¥591.2B (¥573.0B in the previous year, +3.2%). Both growth rates were below the +10.6% increase in revenue, and no sharp deterioration in working capital was observed. Dividend income of ¥18.2B accounted for a substantial portion of non-operating income, indicating a stable composition of financial income. 【Investment Efficiency】Property, plant and equipment was ¥5621.4B (¥5595.7B in the previous year), remaining broadly flat, while goodwill was ¥171.1B, equivalent to 3.1% of net assets, reflecting a conservative level. 【Financial Soundness】The Equity Ratio (shareholders’ equity attributable to owners of the parent/total assets) was 37.2%. Interest-bearing debt included long-term borrowings of ¥1610.9B, bonds of ¥951.0B, and bonds due for redemption within one year of ¥300.0B, among other items. Against Operating Income of ¥179.0B, interest payments were ¥15.7B, resulting in interest coverage of approximately 11.4x and ensuring sufficient capacity to absorb financial expenses.

Cash Flow Analysis

As the financial statements for the current period do not include disclosure of a cash flow statement, fund movements are analyzed based on changes in the balance sheet. Cash and deposits were ¥808.5B, down ¥113.7B from ¥922.2B in the same period of the previous year. Within the overall funding structure, including interest-bearing debt (short-term borrowings of ¥1787.8B, long-term borrowings of ¥1610.9B, bonds of ¥951.0B, and bonds due for redemption within one year of ¥300.0B, among other items), on-hand liquidity was somewhat compressed. Meanwhile, accounts receivable (+7.5%) and inventories (+3.2%) increased at rates below revenue growth (+10.6%), suggesting that pressure on funds from a rapid expansion in working capital was limited. Property, plant and equipment was ¥5621.4B, representing a modest increase of +¥25.7B from the previous year, with capital expenditure progressing at a moderate pace. Treasury stock increased +40.1% to ¥171.8B (¥122.6B in the previous year), and cash outflows associated with shareholder returns may have been one factor contributing to the decline in cash balances.

Earnings Quality

Revenue from recurring business activities accounted for the vast majority of profit, indicating good earnings quality. Non-operating income was ¥35.4B (1.3% of revenue), primarily consisting of dividend income of ¥18.2B, indicating limited dependence on financial income. Extraordinary gains and losses consisted of extraordinary income of ¥4.6B (including a ¥4.5B gain on sales of investment securities) and extraordinary losses of ¥3.0B (including a ¥1.6B loss on disposal and sale of fixed assets), resulting in a net gain of only +¥1.6B. This was small relative to Net Income, and the impact of one-time factors can be considered immaterial. The reduction from Ordinary Income of ¥189.0B to Net Income of ¥115.8B (attributable to owners of the parent) was due to income taxes and other taxes of ¥61.5B, equivalent to an effective tax rate of 32.3%, and the deduction of ¥13.3B in profit attributable to non-controlling interests; this was not an unusual divergence. Goodwill amortization of ¥8.4B was a JGAAP-specific factor compressing profit and loss, but was small relative to the goodwill balance of ¥171.1B and did not materially impair earnings quality. Comprehensive income was ¥256.2B, exceeding consolidated Net Income of ¥129.1B, with other comprehensive income, primarily valuation differences on securities of ¥99.5B, serving as the main contributor.

Earnings Forecast and Guidance

Progress against the full-year plan in Q1 was 25.3% for revenue (¥2757.5B/¥10900.0B), 38.9% for Operating Income (¥179.0B/¥460.0B), 43.0% for Ordinary Income (¥189.0B/¥440.0B), and 37.3% for Net Income (¥115.8B/¥310.0B). Revenue was broadly in line with the simple progress rate (25%), while progress at each profit level exceeded the simple progress rate by more than 10pt, representing strong progress reflecting the establishment of price revisions and stable raw material and energy costs. As of the current quarter, there were no revisions to the earnings forecast or dividend forecast. The full-year Operating Income forecast represents an increase of +24.0% YoY, and the Q1 actual growth rate (+72.5%) is progressing faster than the full-year plan. However, raw material and fuel prices and foreign exchange trends in the second half could contribute to the normalization of progress.

Shareholder Returns

The company’s annual dividend plan is ¥50, and the Payout Ratio against forecast EPS of ¥125.78 is approximately 39.8%. The plan anticipates an increase from the previous year’s dividend results, which were in the ¥20 range on a combined interim and year-end basis, and there has been no revision to the dividend forecast as of the current quarter. Treasury stock increased +40.1% to ¥171.8B (¥122.6B in the previous year), confirming the execution of shareholder returns through share repurchases. The Payout Ratio based solely on dividends is approximately 39.8%; however, when evaluating the scale of total returns including share repurchases, it is necessary to distinguish this from the Payout Ratio and view it as the Total Return Ratio.

Risk Factors

1. Risk of renewed increases in raw material and energy costs: The gross margin improved to 20.7% from 18.9% in the previous year, supported by the relative stability of raw materials such as recovered paper, resins, and films, as well as electricity and fuel costs. If these costs rise again, they could pressure the gross margin depending on the speed of price pass-through.

2. Low profitability of the overseas segment: Overseas-related businesses achieved substantial profit growth and a return to profitability, with revenue of ¥604.6B (+17.7%) and Operating Income of ¥7.0B (+741.3%), but the margin remained low at 1.2% compared with other segments (paperboard 7.3%, flexible packaging 10.3%, and heavy-duty packaging 5.0%).

3. Dependence on short-term liabilities and on-hand liquidity: Cash and deposits declined to ¥808.5B from ¥922.2B in the previous year, while short-term borrowings were ¥1787.8B and bonds due for redemption within one year were ¥300.0B, leaving a large balance of short-term interest-bearing debt. Although interest coverage of approximately 11.4x ensures the capacity to absorb interest payments, changes in refinancing conditions require attention.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin were below the industry median, placing profitability in the lower half of the industry.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median, placing the company’s revenue growth pace in the upper tier of the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Margin improvement was clear at all profit levels. The Operating Income margin expanded by 2.3pt from 4.2% in the previous year to 6.5%, while the simultaneous improvement in the gross margin (+1.8pt) and containment of SG&A expense growth resulted in operating leverage. This is noteworthy as an indication of a change in the company’s earnings structure.

2. While the high profitability of flexible packaging-related businesses (Operating Income margin of 10.3%) contributed to improving company-wide earnings, overseas-related businesses remained at a margin of 1.2% despite revenue growth and substantial profit growth, indicating that the profitability gap between segments is a structural feature.

3. Profit progress against the full-year plan (Operating Income 38.9%, Ordinary Income 43.0%) substantially exceeded revenue progress (25.3%), indicating that the effects of price revisions and stability in the cost environment became apparent ahead of plan in the first half.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on 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: ¥1,978–¥2,093 at ±1% for the cost of equity, and ¥2,028–¥2,038 at ±0.1 for ω.

Notes:

• Since Net Income progress against the full-year forecast (37%) exceeds the standard rate (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies progressing ahead of plan tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets at the end of the quarter are used (there is a timing difference relative to 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 forecast or guarantee 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 responsibility, after consulting professionals as necessary.

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