TSUMURA & CO. (4540) FY2027 Q1 Earnings Report

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Executive Summary

In Q1 FY2027, the Company secured revenue growth in its single Pharmaceutical Business segment. However, operating income was sluggish due to a decline in the gross profit margin, while ordinary income and net income increased substantially, driven by foreign exchange gains. Revenue was ¥4.970B (+15.3% YoY), while operating income remained at ¥0.788B (+2.1%). In contrast, ordinary income increased significantly to ¥0.975B (+57.8%), and net income attributable to owners of the parent rose substantially to ¥0.646B (+47.8%). The operating margin declined to 15.9% from 17.9% in the previous year, whereas the ordinary income margin improved to 19.6% from 14.3%. This difference was primarily attributable to non-operating income of ¥0.248B, including foreign exchange gains of ¥0.214B. EPS was ¥86.63, compared with ¥58.16 in the previous year.

Factors Affecting Performance

【Revenue】Revenue was ¥4.970B, up ¥0.660B, or +15.3%, from ¥4.309B in the same period of the previous year. The Company operates a single segment consisting solely of its Pharmaceutical Business, and no business-level breakdown is disclosed. However, cost of sales increased to ¥2.711B (+20.1%), exceeding the rate of revenue growth, indicating that the revenue increase was accompanied by higher costs.

【Profit and Loss】Gross profit was ¥2.260B, and the gross profit margin declined to 45.5% from 47.6% in the previous year, a decrease of 2.1pt. SG&A expenses were ¥1.472B (+15.0%), increasing at approximately the same rate as revenue, indicating that cost controls were maintained. However, due to the deterioration in the gross profit margin, operating income increased only 2.1% to ¥0.788B, substantially below the revenue growth rate. Meanwhile, non-operating income of ¥0.248B, including foreign exchange gains of ¥0.214B and dividend income of ¥0.013B, boosted ordinary income, which increased significantly by 57.8% to ¥0.975B. Extraordinary items were limited, consisting of extraordinary income of ¥0.002B and extraordinary losses of ¥0.001B, and therefore had a limited impact on the bottom line. Net income attributable to owners of the parent was ¥0.646B (+47.8%). In conclusion, although operating income increased only marginally, ordinary income and net income rose substantially due to foreign exchange gains, a non-operating factor. This was a case of revenue and profit growth, but attention is warranted because the quality of earnings growth is highly dependent on foreign exchange factors.

Key Financial Indicators

【Profitability】The gross profit margin declined to 45.5% from 47.6% in the previous year, and the operating margin declined to 15.9% from 17.9%. In contrast, the ordinary income margin improved to 19.6% from 14.3%, while the net profit margin, based on income attributable to owners of the parent, improved to 13.0% from 10.1%. Non-operating foreign exchange gains were a factor supporting the profitability indicators.【Cash Flow Quality】Operating cash flow (OCF) was -¥0.444B, representing a significant divergence from net income attributable to owners of the parent of ¥0.646B. This was primarily due to a reversal in working capital caused by increases in trade receivables and inventories and a decrease in trade payables, indicating a delay in converting earnings into cash.【Investment Efficiency】ROE was 1.8%. The Company was in an active investment phase, with capital expenditures reaching approximately 2.9 times depreciation. Although the EBITDA margin remained high at 22.8%, improvements in asset efficiency are still in progress.【Financial Soundness】The equity ratio remained at a solid 62.9%. However, short-term borrowings increased sharply to ¥1.579B from ¥0.333B in the previous year, indicating a shortening of the funding structure. Cash and deposits of ¥7.728B substantially exceeded current liabilities of ¥10.002B, and there is little concern regarding the Company’s ability to meet near-term payments.

Cash Flow Analysis

Operating cash flow was -¥0.444B, widening from -¥0.117B in the previous year, while free cash flow was -¥1.522B. The deterioration in OCF resulted from a reversal in working capital due to increases in trade receivables (-¥0.327B) and inventories (-¥0.287B), a decrease in trade payables (-¥0.414B), and corporate income tax payments (-¥0.484B). Investing cash flow was -¥1.077B, primarily reflecting capital expenditures of ¥0.993B, indicating that aggressive investment continues. Financing cash flow was +¥0.661B, with an increase in short-term borrowings (+¥1.247B) compensating for the funding shortfall, while the balance of bonds declined as redemptions progressed. The Company’s cash generation from operating activities was insufficient to cover investment and dividend payments, resulting in reliance on short-term funding. The normalization of working capital from the next period onward will determine the quality of the Company’s liquidity management.

Quality of Earnings

Against operating income of ¥0.788B, the recurring source of earnings, non-operating income was ¥0.248B, equivalent to approximately 5.0% of revenue. However, the majority of this amount, ¥0.214B, consisted of foreign exchange gains, a highly temporary item. Extraordinary items were minimal, consisting of extraordinary income of ¥0.002B and extraordinary losses of ¥0.001B, and had a limited impact on net income. The effective tax rate was approximately 31.1%, calculated as corporate income taxes of ¥0.304B divided by profit before tax of ¥0.976B, a normal level. Meanwhile, OCF of -¥0.444B was substantially below net income attributable to owners of the parent of ¥0.646B. As accruals increased due to growth in trade receivables and inventories, a relatively large portion of current-period net income was not supported by cash flow.

Earnings Forecast and Guidance

Q1 progress against the full-year forecast was 23.3% for revenue (¥4.970B / ¥21.360B), 21.0% for operating income (¥0.788B / ¥3.750B), 27.5% for ordinary income (¥0.975B / ¥3.550B), and 24.6% for net income (¥0.646B / ¥2.620B). Operating income progress was slightly below the simple proportional benchmark of 25%, while ordinary income was ahead of schedule due to the recognition of foreign exchange gains. Full-year ordinary income is forecast to decline 11.3% YoY. Since the substantial increase in ordinary income as of Q1 reflects the foreign exchange environment during the first half, progress is expected to normalize over the full year. There were no revisions to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥158.00 per share, implying a payout ratio of approximately 45.0% based on projected full-year EPS of ¥351.46. There was no revision to the dividend forecast for the quarter, and the existing shareholder return policy remains in place. No share repurchases were identified based on the current-period data, and it is appropriate to evaluate shareholder returns primarily on the basis of the payout ratio. Since free cash flow was negative in Q1, dividends could not be fully funded by operating cash flow on a quarterly basis. However, the assessment of the sustainability of shareholder returns could change if working capital normalizes on a full-year basis.

Risk Factors

1. Decline in gross profit margin: The gross profit margin declined to 45.5% from 47.6% in the previous year, while costs of ¥2.711B increased by +20.1%, exceeding revenue growth of +15.3%. Rising costs caused operating income growth of +2.1% to diverge substantially from the revenue growth rate.

2. Increasing dependence on foreign exchange: The 57.8% increase in ordinary income was significantly supported by non-operating income of ¥0.248B, the majority of which consisted of foreign exchange gains of ¥0.214B. This item is temporary in nature and could reverse due to market fluctuations.

3. Reversal in working capital and increase in short-term funding: Trade receivables and inventories increased by a combined ¥0.614B, while trade payables decreased by ¥0.414B, resulting in OCF of -¥0.444B. This funding shortfall was offset by an increase in short-term borrowings (+¥1.247B, +374%), increasing dependence on short-term funding.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (pharma)

Profitability and Returns

The operating margin is slightly below the industry median, while the net profit margin is substantially above the industry median.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median and was close to the upper end of the IQR, indicating strong growth.

Source: Compiled by the Company

Key Points from the Earnings Results

1. While the top line grew +15.3% YoY, exceeding the industry average, the decline in the gross profit margin of 2.1pt limited operating income growth to +2.1%. The quality of revenue growth and trends in cost control will therefore be key points to monitor.

2. The substantial increases in ordinary income and net income were significantly supported by foreign exchange gains of ¥0.214B. As the profit growth was driven by non-operating factors, it should be evaluated separately from trends in operating income.

3. OCF was -¥0.444B and free cash flow was -¥1.522B. The reversal in working capital—consisting of increases in trade receivables and inventories and a decrease in trade payables—raised funding requirements, while short-term borrowings surged +374% YoY. The pace of working capital normalization is a structural observation point that will determine future liquidity trends.

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

Sensitivity: ¥4,738–¥5,012 at ±1% for the cost of equity, and ¥4,864–¥4,876 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥14.5 per share is added back to earnings (due to its non-cash nature and to facilitate comparability with IFRS companies).
• Since 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 relative to the full-year forecast.
• Since net assets include non-controlling interests, the theoretical value may be calculated at a somewhat elevated level.

(Model: Residual Income Model / Interest Rate Base 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 available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional advisor where necessary.

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AI Financial Analysis

Executive Summary

Tsumura delivered strong top-line growth in FY2027 Q1, but operating-profit conversion weakened and cash generation remained materially negative. Revenue rose 15.3% YoY to ¥49.7bn. Operating income increased only 2.1% to ¥7.9bn, substantially lagging sales growth. Gross profit expanded 10.1% YoY to ¥22.6bn. The gross margin nevertheless declined 210bp YoY to 45.5%, reflecting cost-of-sales growth of 20.1%, faster than revenue. SG&A rose 15.0% YoY to ¥14.7bn, broadly in line with revenue but faster than gross profit. Consequently, the operating margin compressed 200bp to 15.9%, while remaining above the 15% excellent-profitability benchmark. Ordinary income jumped 57.8% to ¥9.8bn because a ¥2.1bn FX gain replaced the prior-year ¥1.7bn FX loss. Net income attributable to owners increased 47.8% to ¥6.5bn, and EPS reached ¥86.63. Net margin improved 290bp to 13.0%, but the improvement was driven principally by non-operating FX gains rather than the operating business. Comprehensive income was ¥13.2bn, supported by ¥6.4bn of other comprehensive income, including positive foreign-currency translation effects. Operating cash flow was negative ¥4.4bn despite positive net income, producing an OCF/net-income ratio of negative 0.69x. Free cash flow was negative ¥15.2bn after ¥9.9bn of capital expenditure, so internally generated cash did not cover investment needs or the ¥5.8bn dividend payment during the quarter. The earnings profile is therefore mixed: core profitability remains high, while sales growth has not yet translated proportionately into operating earnings or cash flow. Full-year guidance was maintained, implying management continues to expect revenue of ¥213.6bn, operating income of ¥37.5bn, and profit attributable to owners of ¥26.2bn. Q1 progress is 23.3% for sales, 21.0% for operating income, and 24.6% for attributable profit, leaving operating-income delivery modestly back-end weighted. The near-term focus is whether margin recovery, completion of the large production-capacity investment program, and working-capital normalization can convert accounting earnings into cash.

Profitability Analysis

The reported annualized DuPont ROE is 6.8%, decomposed into a 13.0% net profit margin, 0.330x asset turnover, and 1.59x financial leverage. The principal positive Q1 change was net-margin expansion, as attributable profit growth of 47.8% exceeded revenue growth of 15.3%. However, this was not primarily an operating-margin outcome: operating margin fell from 17.9% to 15.9%, while ordinary income benefited from a ¥2.1bn FX gain. Financial leverage is moderate rather than aggressive on a balance-sheet basis, with D/E of 0.59x and debt/capital of 19.8%. Asset turnover remains modest, consistent with a capital-intensive manufacturing base and substantial construction in progress. Operating leverage was unfavorable in Q1 because gross profit increased 10.1%, below the 15.0% rise in SG&A, resulting in only 2.1% operating-income growth. Cost of sales increased 20.1%, producing the 210bp gross-margin decline. The current 15.9% EBIT margin and 22.8% EBITDA margin remain robust for a pharmaceutical manufacturer, but the margin trend requires monitoring. The extended DuPont tax burden was 0.661, equivalent to a 31.1% effective tax rate. The interest burden of 1.239x is above 1.0 because non-operating income, especially FX gains, more than offset interest expense; it should not be interpreted as evidence that financing costs are immaterial. Interest expense of ¥0.5bn was well covered by EBIT at 14.41x and by EBITDA at 20.67x. Goodwill amortization was ¥0.3bn, only 2.3% of reported EBITDA, so JGAAP goodwill amortization does not materially distort the profitability comparison. The 6.8% annualized ROE is below the 8% benchmark despite high margins, indicating that limited asset turnover and a conservative-to-moderate capital structure constrain equity returns.

Growth Assessment

Revenue growth of 15.3% was strong and exceeded the full-year guidance growth assumption of 10.9%. Q1 sales progress of 23.3% is only 1.7 percentage points below a straight-line 25% full-year run rate and is broadly consistent with guidance. By contrast, operating-income progress of 21.0% is 4.0 percentage points below the Q1 seasonal benchmark, indicating that management's full-year margin target requires improvement after Q1. Operating income is expected to grow 6.5% for the full year, compared with only 2.1% achieved in Q1. Ordinary-income progress is 27.5%, 2.5 percentage points ahead of the 25% benchmark, but this outperformance reflects FX gains and should not be treated as fully recurring operating momentum. Attributable-profit progress of 24.6% is broadly on track with the full-year plan. Growth investment is substantial: quarterly capex was ¥9.9bn, equal to 2.90x depreciation and amortization. Construction in progress was ¥62.1bn, representing 36.8% of PPE, indicating a major capacity-expansion program that should support future production but raises execution requirements. Revenue quality is supported by a 15.9% operating margin, but the Q1 gross-margin decline means the durability of volume-led growth depends on cost absorption, product mix, and production efficiency. The pharmaceutical business is operated as a single segment, making it the core business. FX gains of ¥2.1bn represented 27.2% of operating income and materially lifted ordinary and net profit, creating volatility around reported earnings growth.

Financial Health

Liquidity is strong, with a 354.8% current ratio, 329.1% quick ratio, and ¥254.9bn of working capital. Cash and deposits of ¥77.3bn covered short-term loans of ¥15.8bn by 4.89x. Current assets of ¥354.9bn substantially exceeded current liabilities of ¥100.0bn, so there is no apparent near-term maturity mismatch. Interest-bearing debt was ¥93.7bn, comprising ¥15.8bn of short-term loans and ¥77.9bn of long-term loans; short-term debt represented 16.9% of debt. D/E of 0.59x and debt/capital of 19.8% indicate a balance sheet that is conservatively capitalized in relation to equity. Interest coverage is strong at 14.41x on EBIT and 20.67x on EBITDA. However, the reported Debt/EBITDA ratio of 8.29x exceeds the 4.0x high-leverage alert threshold and the 8.0x elevated-risk threshold. The root cause is a sizable debt balance relative to the reported quarterly EBITDA measure, alongside the ongoing investment program. Its impact is mitigated by substantial liquidity, low short-term refinancing reliance, and high interest coverage, but debt reduction and EBITDA conversion remain important credit-monitoring items. Short-term loans increased from ¥3.3bn to ¥15.8bn, or 374.4% YoY. This increase corresponds closely to ¥12.5bn of financing cash inflow from increased short-term loans and partly funded negative operating and investing cash flows. Long-term loans were broadly stable at ¥77.9bn, while bonds payable declined from ¥45.0bn to ¥30.0bn. Total equity increased ¥7.2bn YoY to ¥378.8bn, aided by retained earnings and positive translation adjustments. Goodwill was only 4.7% of equity and 3.0% of assets, while intangible assets were 8.6% of assets; therefore, balance-sheet value is not heavily dependent on M&A-related assets. Goodwill/EBITDA of 1.59x is also well below the 5x healthy threshold. No material off-balance-sheet obligations are indicated by the available financial information.

Notable B/S Changes

Short-term loans: +¥12.5bn (+374.4% YoY) to ¥15.8bn - increased short-term funding partly supported negative operating and investing cash flows; cash coverage remains high at 4.89x. Construction in progress: +¥1.8bn (+2.9% YoY) to ¥62.1bn, representing 36.8% of PPE - a very large share of fixed assets remains under construction, underscoring capacity-project execution and return-on-investment risk. Accounts receivable: +¥4.1bn (+5.7% YoY) to ¥76.4bn - the Q1 receivables increase contributed to negative operating cash flow and corresponds with elevated 140-day DSO. Work in process: +¥4.8bn (+19.3% YoY) to ¥30.0bn - rising production-stage inventory adds to the already long broader inventory cycle and working-capital requirement. Intangible assets: +¥1.2bn (+2.3% YoY) to ¥51.6bn - the asset base remains manageable at 8.6% of total assets, with no indication of excessive M&A-related asset concentration.

Cash Flow Quality

Cash-flow quality is the principal weakness in Q1. Operating cash flow was negative ¥4.4bn versus ¥6.5bn of profit attributable to owners, giving the flagged OCF/net-income ratio of negative 0.69x, well below the 0.8x concern threshold. Cash conversion, measured as OCF/EBITDA, was negative 0.39x and materially below the 0.7x alert threshold. The immediate root cause was working-capital outflow and cash tax payments: trade receivables increased by ¥3.3bn, inventories increased by ¥2.9bn, trade payables decreased by ¥4.1bn, and income taxes paid were ¥4.8bn. These movements reduced cash generation despite EBITDA of ¥11.3bn. The impact is that Q1 reported profit was not cash-backed, constraining internally funded investment and shareholder distributions. The accruals ratio of 1.8% remains below the 5% high-quality benchmark, which moderates concern about broad-based accounting accrual risk, but it does not offset the negative cash conversion observed in the period. Receivable days of 140 days exceed the 60-day alert threshold; the elevated collection cycle ties up cash and should be monitored for normalization as sales scale. Inventory-day alerts require attention at both levels reported: 87 days exceeds the 60-day threshold for finished goods, while the 573-day measure captures the broader raw-material and work-in-process footprint. The broader inventory exposure is consistent with ¥114.4bn of raw materials and ¥30.0bn of work in process, and is particularly relevant for a Kampo pharmaceutical manufacturer that requires secured botanical inputs and extended production processes. The cash conversion cycle of 617 days is far above the 120-day alert threshold, reflecting the combination of high receivable and inventory days with lower supplier financing. This working-capital intensity is likely partly structural for the business, but the Q1 deterioration in receivables, inventories, and payables raises the cash requirement of growth. Investing cash flow was negative ¥10.8bn, principally reflecting ¥9.9bn of PPE purchases and ¥0.6bn of intangible-asset purchases. Accordingly, free cash flow was negative ¥15.2bn. Capex/depreciation of 2.90x confirms an expansionary investment phase rather than maintenance-only spending. Financing cash flow of ¥6.6bn, including higher short-term borrowings, partially funded the aggregate cash outflow, while quarter-end cash and cash equivalents fell ¥7.1bn to ¥71.2bn.

Dividend Sustainability

The full-year dividend forecast is ¥158 per share, unchanged from the announced plan. Against forecast EPS of ¥351.46, the implied dividend payout ratio is 45.0%, within the sub-60% sustainability benchmark. The dividend is therefore supported by forecast accounting earnings and a substantial equity base. Q1 cash dividends paid were ¥5.8bn, while Q1 free cash flow was negative ¥15.2bn. Consequently, quarterly free cash flow did not cover dividends or the elevated capex program. This does not by itself indicate an unsustainable dividend because the company holds ¥77.3bn of cash and has strong short-term liquidity. Nevertheless, dividend funding is currently reliant on the balance sheet and financing capacity during the investment phase rather than on current-period free cash flow. No share repurchases were reported in the current period, so the relevant shareholder-return measure is the dividend payout ratio rather than a total return ratio. The key requirement for durable dividend coverage is a recovery in operating cash flow through improved working-capital conversion and moderation of expansion capex after projects are completed.

Risk Assessment

Business risks include Margin risk: gross margin declined 210bp to 45.5% and operating margin declined 200bp to 15.9%; sustained cost inflation or unfavorable product mix would prevent sales growth from translating into operating-profit growth., Working-capital risk: receivable days of 140 and the 617-day cash conversion cycle create a large cash commitment as revenue expands., Inventory-management risk: finished-goods inventory days of 87 exceed the 60-day threshold, while the broader 573-day inventory measure reflects substantial raw-material and work-in-process holdings. The high level may be partly structural for botanical-input procurement and production, but demand shortfalls, obsolescence, or procurement misjudgments would increase carrying-cost risk., Capacity-project execution risk: construction in progress of ¥62.1bn equals 36.8% of PPE, above the 20% alert threshold. Delays, cost overruns, or slower-than-expected demand absorption could depress returns on the elevated capex program., Foreign-exchange risk: ¥2.1bn of FX gains equaled 27.2% of operating income. This boosted Q1 ordinary income, but a reversal in exchange-rate conditions could materially reduce non-operating earnings., Pharmaceutical-industry risk: product demand is exposed to reimbursement and healthcare-policy pricing pressure, regulatory requirements, manufacturing-quality standards, and supply availability for herbal raw materials..

Financial risks include Earnings-to-cash divergence: OCF/net income was negative 0.69x and cash conversion was negative 0.39x. Persistently negative operating cash flow would increase reliance on cash reserves and borrowing., Leverage alert: reported Debt/EBITDA was 8.29x, above both the 4.0x high-leverage and 8.0x elevated-risk thresholds. Strong interest coverage and low debt/capital mitigate immediate solvency risk, but EBITDA growth and cash generation must improve., Short-term borrowing increased 374.4% YoY to ¥15.8bn. Although cash covers short-term debt 4.89x, the increase indicates that the investment and working-capital cycle has required additional short-term funding., Capital-allocation risk: capex of ¥9.9bn, 2.90x depreciation, combined with negative operating cash flow resulted in negative ¥15.2bn free cash flow..

Key concerns include Highest priority: conversion of ¥6.5bn of attributable profit into positive operating cash flow through receivable collection, inventory discipline, and supplier-payment normalization., High priority: whether full-year operating income can recover from 21.0% Q1 progress to achieve the ¥37.5bn plan without further gross-margin erosion., High priority: delivery and eventual utilization of the large construction-in-progress balance., Medium priority: sustainability of ordinary-income growth after excluding the favorable ¥2.1bn FX gain., Medium priority: maintaining dividend cash coverage as capex remains above depreciation..

Investment Implications

Key takeaways include Revenue grew strongly by 15.3% YoY, while the 15.9% operating margin remains above the excellent-profitability benchmark., Operating-profit growth of 2.1% lagged revenue because gross margin declined 210bp and SG&A growth outpaced gross-profit growth., Net-income growth of 47.8% was materially aided by a ¥2.1bn FX gain, so ordinary and net-profit momentum exceeds underlying operating momentum., Liquidity and balance-sheet capitalization are strong, but the reported 8.29x Debt/EBITDA and sharp increase in short-term loans warrant monitoring during the investment cycle., The central analytical issue is cash conversion: negative ¥4.4bn OCF and negative ¥15.2bn FCF contrast with positive reported earnings., The forecast dividend payout ratio of 45.0% is reasonable relative to forecast earnings, although current free cash flow does not fund distributions..

Metrics to watch include Gross margin and operating margin versus the Q1 levels of 45.5% and 15.9%, Progress toward full-year operating-income guidance of ¥37.5bn; Q1 progress was 21.0%, Operating cash flow, OCF/net income, and OCF/EBITDA conversion, Receivable days of 140, finished-goods inventory days of 87, broader inventory days of 573, and the 617-day cash conversion cycle, Construction-in-progress spending and completion of the ¥62.1bn balance, Short-term loan balance, reported Debt/EBITDA of 8.29x, and interest coverage, FX gains and losses relative to operating income.

Regarding relative positioning, Tsumura combines strong reported margins, very high liquidity, and modest balance-sheet debt/capital with a less favorable cash-conversion profile. Its M&A asset exposure is low, with goodwill equal to 4.7% of equity and goodwill amortization only 2.3% of EBITDA, whereas the more material differentiators are the capital-intensive expansion program, long operating cash cycle, and sensitivity of Q1 non-operating earnings to foreign exchange.