SUMITOMO CHEMICAL COMPANY,LIMITED FY2027 Q1 Earnings Report

Quick View

Executive Summary

The most important point this quarter is that, in addition to higher revenue, a significant improvement in the operating margin and a turnaround to profitability in equity-method investment gains and losses resulted in a substantial turnaround in net income from the quarterly loss recorded in the same period last year. Revenue was ¥5782.0B (¥5261.4B last year, YoY+9.9%), while operating income was ¥610.4B (¥254.5B last year, YoY+139.8%; operating margin of 10.6%, improving by +5.7pt from 4.8% last year). Profit before tax increased substantially to ¥603.1B (¥58.2B last year), and profit for the quarter attributable to owners of the parent was ¥407.8B, representing a turnaround to profitability from a loss of ¥45.2B in the same period last year (consolidated profit for the quarter was ¥513.5B, compared with ¥38.7B last year). In addition to improved gross margin and restrained SG&A expenses as a percentage of revenue, the turnaround in equity-method investment gains and losses and the reduction in finance costs boosted bottom-line earnings.

Factors Affecting Results

【Revenue】Revenue was ¥5782.0B (YoY+9.9%), with all six segments reporting higher revenue. Essential & Green Materials accounted for the largest share of revenue at 29.4% (¥1701.9B, +2.9%), followed by ICT & Mobility at 25.7% (¥1485.7B, +8.1%), Sumitomo Pharma at 22.3% (¥1290.0B, +20.2%), and Agro & Life at 18.8% (¥1089.9B, +12.5%). Strong growth in Sumitomo Pharma and Agro & Life drove the overall revenue growth rate higher.

【Profit and Loss】Operating income was ¥610.4B (YoY+139.8%), and the operating margin improved significantly to 10.6% from 4.8% last year, an improvement of +5.7pt. Gross margin improved to 33.6% from 31.1% last year, while the SG&A expense ratio declined slightly to 25.2% from 25.4%; operating leverage emerged through both improved pricing and product mix and cost management. By segment, Essential & Green Materials was the largest contributor, with operating income of ¥272.2B (+598.3%), while Agro & Life also improved substantially to ¥96.3B (+334.0%). In contrast, ICT & Mobility posted lower operating income of ¥130.3B (-29.0%) despite higher revenue, while Sumitomo Pharma also declined modestly to ¥188.5B (-10.3%). Equity-method investment gains and losses turned profitable at +¥122.2B, compared with -¥98.3B in the prior-year period, and finance costs declined to ¥132.8B from ¥263.2B last year, driving profit before tax up to ¥603.1B from ¥58.2B. In conclusion, the Company achieved both higher revenue and higher profit.

Segment Analysis

Looking at segment operating income (core operating gains and losses), Essential & Green Materials was the largest driver of Company-wide profit at ¥272.2B (profit margin of 16.0%, YoY+598.3%). Sumitomo Pharma recorded ¥188.5B (profit margin of 14.6%, YoY-10.3%), while ICT & Mobility recorded ¥130.3B (profit margin of 8.8%, YoY-29.0%). Although both maintained double-digit profit margins, Sumitomo Pharma and ICT & Mobility declined from the prior-year period. Agro & Life improved substantially to ¥96.3B (profit margin of 8.8%, YoY+334.0%), recovering from the low profitability recorded last year. Advanced Medical Solutions reported an operating loss of -¥19.4B (compared with -¥10.2B last year), with the loss expanding as start-up costs for the CDMO business continued to weigh on profit. The increase in revenue but decline in profit at ICT & Mobility may have been affected by price competition and higher costs, representing a factor weighing on the pace of Company-wide profit growth.

Key Financial Indicators

【Profitability】The operating margin improved significantly to 10.6% from 4.8% last year, while the net profit margin based on profit attributable to owners of the parent was 7.0% (negative last year). Both the gross margin of 33.6% (31.1% last year) and the SG&A expense ratio of 25.2% (25.4% last year) improved, indicating that the recovery in profitability is progressing through both pricing and product mix and cost management.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥49.6B, substantially below profit attributable to owners of the parent of ¥407.8B, indicating that increases in inventories and deterioration in working capital constrained cash generation.【Investment Efficiency】ROE was 3.6%, while asset turnover efficiency against total assets of ¥36135.1B remained low. The extent to which improved profit margins translate into ROE may remain limited unless working capital efficiency also improves.【Financial Soundness】The equity ratio improved slightly to 30.5% from 29.6% last year. Interest-bearing debt consisted of short-term debt of ¥2885.5B and long-term debt of ¥8436.2B. Based on finance costs of ¥132.8B against EBIT of ¥610.4B, interest coverage is calculated at approximately 4.6x, a level at which resilience to rising interest rates requires monitoring.

Cash Flow Analysis

Operating Cash Flow was ¥49.6B, down -79.3% from ¥240.0B in the same period last year, contrasting with the significant increase in profit before tax to ¥603.1B. The primary factors were an increase in inventories of -¥625.9B and changes in other working capital of -¥1170.1B. Although an increase in trade payables of +¥925.5B partially offset these items, the accumulation of inventories and accounts receivable weighed on cash generation. Investing Cash Flow was -¥492.3B, reflecting continued investment activity centered on the acquisition of property, plant and equipment of -¥359.1B, resulting in free cash flow (OCF + investing cash flow) of -¥442.7B. Financing Cash Flow was +¥555.7B. While proceeds from non-controlling interests of +¥968.75B and a net increase in commercial paper of +¥360B supplemented liquidity, there were also repayments of long-term borrowings of -¥696.2B and dividend payments of -¥123.9B, indicating that the funding structure is being reviewed. As a result, cash and cash equivalents amounted to ¥2232.0B at period-end, up +¥146.1B from ¥2085.9B at the beginning of the period. However, cash generation from operating activities themselves remained weak during the quarter.

Earnings Quality

The improvement in earnings this quarter was driven substantially not only by the recovery in recurring business profitability but also by the turnaround in equity-method investment gains and losses from -¥98.3B last year to +¥122.2B. This turnaround factor should be considered when assessing earnings quality, as it accounted for part of the increase in profit before tax. Finance income increased to ¥125.5B from ¥66.8B last year, while finance costs declined to ¥132.8B from ¥263.2B, resulting in a substantial improvement in net finance income and expenses. Changes in interest-rate and foreign-exchange conditions also boosted non-operating income and expenses. Comprehensive income was ¥916.5B, substantially exceeding net income of ¥513.5B. The primary reason for the difference was other comprehensive income of ¥402.95B, particularly the +¥132.1B translation adjustment of foreign operations and the +¥214.35B valuation gain on equity financial assets measured at fair value through other comprehensive income. From an accruals perspective, OCF of ¥49.6B was substantially below profit attributable to owners of the parent of ¥407.8B, suggesting that non-cash profit recognition, mainly due to inventory increases, is progressing. The speed of cash conversion of earnings should therefore be assessed by monitoring the progress of future normalization in working capital.

Earnings Forecast and Guidance

Progress against the full-year earnings forecast was 24.5% for revenue against a forecast of ¥23600B, 34.5% for operating income against ¥1770B, and 58.3% for EPS, with actual EPS of ¥24.70 against forecast EPS of ¥42.4 (forecast net income of ¥700B). All of these exceeded the standard progress rate of approximately 25% as of Q1. In particular, the high progress rates for net income and EPS confirm that the pace of recovery from the quarterly loss recorded in the same period last year is exceeding the full-year plan. No revisions were made to either the earnings forecast or dividend forecast during the quarter, and management maintained its current full-year plan.

Shareholder Returns

Dividend payments during the quarter were ¥123.9B. Based on the full-year forecast DPS of ¥16 and forecast EPS of ¥42.4, the full-year payout ratio is calculated at 37.7%. Share repurchases were effectively not conducted (-¥0.0B). Free cash flow was negative at -¥442.7B during the quarter, indicating that dividends were not sufficiently covered by cash generated from operating activities on a quarterly basis. However, on a full-year basis, a payout ratio of 37.7% is considered manageable if the recovery in earnings continues.

Risk Factors

1. Deterioration in the profitability of ICT & Mobility Solutions: Although revenue in this segment increased +8.1%, operating income declined to ¥130.3B (YoY-29.0%), indicating that the quality of revenue growth is weaker than that of other segments.

2. Deterioration in working capital and weaker cash generation: Inventories resulted in a cash outflow of -¥625.9B, while other working capital resulted in a cash outflow of -¥1170.1B. OCF of ¥49.6B was substantially below profit attributable to owners of the parent of ¥407.8B. If inventories and accounts receivable remain elevated, this could lead to future impairment losses or increased dependence on external financing.

3. Resilience to finance costs: Finance costs were ¥132.8B against EBIT of ¥610.4B, resulting in interest coverage of approximately 4.6x. The financing structure appears to depend on a net increase in commercial paper of +¥360B and proceeds from non-controlling interests. Increased dependence on short-term financing requires monitoring.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin exceed the industry median, indicating that profitability is above the manufacturing industry average.

Growth and Capital Efficiency

The revenue growth rate also exceeds the industry median, placing the pace of revenue growth relatively high among peers.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The operating margin improved to 10.6% from 4.8% last year, an improvement of +5.7pt. Operating leverage emerged through both improved gross margin (33.6%, compared with 31.1% last year) and control of the SG&A expense ratio (25.2%, compared with 25.4% last year). Whether this improvement represents a structural recovery in profitability rather than a temporary factor will be determined by segment-level profitability trends from the next quarter onward.

2. Full-year progress was 34.5% for operating income and 58.3% based on profit attributable to owners of the parent, both representing high progress for Q1. The particularly high progress rate for net income reflects the recovery from the loss recorded in the same period last year. Whether profitability improvements in each segment, which underpin the full-year plan, will continue is the key point to monitor.

3. OCF was ¥49.6B, substantially below profit attributable to owners of the parent of ¥407.8B, as increases in inventories and working capital constrained cash generation. A gap has emerged between the improvement in earnings and the cash flow situation, making progress in normalizing working capital a key focus in future earnings data.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥610–¥645 at ±1% for the cost of equity, and ¥626–¥628 at ±0.1 for ω.

Notes:

• Because progress in net income against the full-year forecast (58%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of plan tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net income is substantially compressed relative to operating income due to tax burden, acquisition-related expenses, and non-controlling interests, among other factors (net income ÷ operating income 40%). This figure reflects that compression at face value; if the factors are temporary, underlying earnings power may be higher.
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual income model / Interest rate reference month: 2026-06 / This figure does not predict or guarantee future share prices)

---

This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings summary 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 a professional advisor where necessary.

---End of Report---