TOWA PHARMACEUTICAL CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥130.48B
• Operating Income: ¥10.44B
• Net Income: ¥8.21B
• EPS: ¥166.86

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: Solid top-line growth with mixed margin dynamics, stronger below-the-line support, and healthy cash conversion; leverage and capital efficiency remain key overhangs. Revenue rose 5.7% YoY to 1,304.8, supported by steady generic demand, while operating income was broadly flat at 104.4 (-0.7% YoY), implying cost pressures at the operating level. Gross profit reached 472.1 with a gross margin of 36.2%, and SG&A totaled 367.6, keeping operating margin at 8.0%. Ordinary income increased to 119.8 (+15.9% YoY) aided by a positive non-operating balance (income 27.7 vs expenses 12.3), lifting ordinary margin to 9.2%. Net income jumped 25.3% YoY to 82.1, with net margin at 6.3%, benefiting from lower non-operating drag and a manageable tax rate (31.3%). Operating margin compressed by roughly 52 bps YoY (from ~8.5% to 8.0%), while net margin expanded by about 99 bps (from ~5.3% to 6.3%), and ordinary margin widened by ~81 bps (from ~8.4% to 9.2%). Earnings quality looks solid: OCF of 140.9 is 1.72x net income, pointing to strong cash conversion and limited accrual risk. Estimated free cash flow was modestly positive at ~12.9 (OCF minus capex of 128.0), which likely does not fully cover implied dividends this half-year but is seasonally acceptable. Balance sheet liquidity is robust (current ratio 280%), but leverage is elevated on an EBITDA basis, as long-term loans (1,920.7) dominate liabilities. ROE stands at 4.6% on DuPont, constrained by low asset turnover (0.272) and a low ROIC of 2.2%, signaling capital efficiency challenges. Non-operating contributions are meaningful (net non-op +15.4), cushioning flat operating trends; reliance should be monitored. Interest coverage is healthy at 9.1x, indicating debt service is currently manageable despite high absolute debt. Goodwill (262.3) and intangibles (434.6) signal potential impairment sensitivity if pricing pressure intensifies. Forward-looking, drug price revisions and API cost volatility remain key profit swing factors; sustaining OCF and improving ROIC via mix/efficiency gains will be central. Overall, a stable quarter operationally with improved bottom-line optics and cash conversion, offset by structurally low capital efficiency and leverage intensity.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.6% = Net Profit Margin 6.3% × Asset Turnover 0.272 × Financial Leverage 2.67x. The most notable change YoY is at the margin layer: operating margin compressed (~52 bps), but net margin expanded (~99 bps) aided by a better non-operating result, lifting ordinary and net income relative to revenue. Business drivers: cost of sales and/or SG&A pressures at the core business likely weighed on operating leverage, while higher interest income and/or lower non-operating drag supported ordinary profit; the effective tax rate remained within a normal range. Sustainability: the net margin uplift tied to non-operating items is less structural than an operating margin recovery; without improvement in gross/SG&A efficiency, net margin support could prove transient. Asset turnover at 0.272 reflects a capital-heavy balance sheet (notably intangibles and working capital), limiting ROE despite leverage. Financial leverage at 2.67x supports ROE but raises risk given debt levels; reliance on leverage rather than efficiency is not a long-term solution. Concerning trends: operating income lagged revenue growth (−0.7% vs +5.7%), indicating weaker operating leverage; SG&A trend YoY is unreported, but the flat operating income suggests SG&A and/or COGS growth outpaced sales. ROIC at 2.2% is below the 5% warning threshold, indicating returns are below cost of capital, a key structural challenge.

Growth Assessment

Top-line growth of 5.7% YoY appears sustainable near term, driven by generic penetration and stable demand, but subject to biannual NHI price revisions. Operating profit growth was negative (−0.7% YoY), highlighting cost inflation (APIs, logistics, compliance) and pricing headwinds; mix improvements and productivity gains are needed to reaccelerate operating profit. Ordinary and net profit growth (+15.9% and +25.3%) benefited from net non-operating gains and improved below-the-line profile; this growth is less repeatable unless operating efficiency improves. EBITDA was 191.3 with a 14.7% margin, indicating reasonable cash earnings despite operating margin compression. Forward outlook hinges on cost pass-through, inventory normalization, and procurement discipline; maintaining OCF > NI is a positive signal. Key swing factors: API/raw material prices, FX on imports, competitive pricing, and regulatory pricing changes.

Financial Health

Liquidity is strong: current ratio 280% and quick ratio 225% far exceed benchmarks, and working capital is ample at 1,647.0. No warning for current ratio (<1.0) or extreme leverage (D/E > 2.0); reported D/E is 1.67x, above the conservative 1.5x benchmark but below the 2.0x warning level. Interest-bearing debt is concentrated in long-term loans (1,920.7) with modest short-term loans (57.8), limiting near-term refinancing pressure; cash and deposits of 495.8 provide a buffer. Maturity mismatch risk is low given current assets (2,559.8) vs current liabilities (912.8). Interest coverage at 9.09x indicates comfortable debt service capacity. Asset composition includes substantial goodwill (262.3) and intangibles (434.6), implying potential impairment risk if profitability deteriorates. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF/Net Income at 1.72x signals high earnings quality with strong cash conversion. Estimated free cash flow was approximately 12.9 (OCF 140.9 minus capex 128.0); investing CF details were unreported, so this FCF is an approximation. Working capital appears supportive rather than a drag this quarter, consistent with OCF > NI; no clear signs of working capital manipulation are evident from the limited disclosures. Given capex needs, sustaining FCF sufficient to cover dividends will require continued OCF strength and disciplined investment pacing.

Dividend Sustainability

The calculated payout ratio is 43.9%, within a generally sustainable range (<60%). On an implied basis, dividends would be ~36.0 (0.439 × NI 82.1). Estimated FCF of ~12.9 for the period does not fully cover implied dividends, suggesting half-year undercoverage on cash basis; however, seasonality and timing of capex/OCF could normalize on a full-year basis. With strong liquidity, near-term dividend capacity is supported, but structurally low ROIC (2.2%) and high leverage constrain long-term headroom for dividend growth absent improved operating margins and asset efficiency. Dividend policy details (DPS, FCF coverage, historical track record) were unreported; assessment relies on calculated payout.

Risk Assessment

Business Risks:

• NHI drug price revisions leading to price erosion and margin compression
• API/raw material cost inflation and FX-driven import cost volatility
• Heightened competition in generics pressuring prices and market share
• Quality/compliance and supply chain disruption risks affecting production
• Inventory obsolescence risk from product switches or demand shifts

Financial Risks:

• High leverage on an EBITDA basis (Debt/EBITDA ~10.3x) despite comfortable interest coverage
• Low ROIC (2.2%) indicating weak capital efficiency and potential value dilution
• Goodwill/intangible impairment risk if earnings weaken
• Refinancing and interest rate risk given sizable long-term debt
• Potential FCF undercoverage of dividends in capex-heavy periods

Key Concerns:

• Operating margin compression despite revenue growth
• Meaningful reliance on non-operating gains to support ordinary and net income
• Asset turnover of 0.272 limiting ROE to 4.6%
• Data gaps (SG&A breakdown, investing CF, DPS) limit full diagnostics

Investment Implications

Key Takeaways:

• Revenue growth (+5.7% YoY) with flat operating profit implies cost pressures at core operations
• Net and ordinary profit growth (+25.3% and +15.9%) were supported by below-the-line items
• Cash conversion is strong (OCF/NI 1.72x), underpinning earnings quality
• Leverage is elevated on EBITDA metrics (~10.3x) though interest coverage is solid (9.1x)
• Capital efficiency remains a structural weak point (ROIC 2.2%, ROE 4.6%)

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio trajectory
• Gross margin sensitivity to NHI price revisions and API costs
• OCF/NI and inventory turnover days
• Net debt/EBITDA and interest coverage
• ROIC improvement via mix and asset utilization
• Non-operating income/expense balance and sustainability

Relative Positioning: Within Japan generics, Towa exhibits solid liquidity and cash conversion but weaker capital efficiency (low ROIC, low asset turnover) and higher leverage relative to more conservatively financed peers; near-term profit resilience benefits from non-operating support, while medium-term competitiveness hinges on cost discipline, mix optimization, and procurement efficiency.

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
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