TOWA PHARMACEUTICAL CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The Company reported increases in both revenue and earnings for the quarter; however, the substantial increases in ordinary income and net income were largely attributable to the reversal of non-operating gains and losses. Revenue was ¥713.8B (+9.6% YoY), operating income was ¥65.2B (+25.2%), ordinary income was ¥79.4B (+100.9%), and net income attributable to owners of the parent was ¥55.3B (+120.1%). The operating margin improved to 9.1%, from 8.0% in the previous year, an improvement of +1.1pt, supported by a lower cost-of-sales ratio and restrained selling, general and administrative expense ratio. Meanwhile, the sharp increase in ordinary income was primarily driven by the reversal from a ¥14.5B loss on derivative valuation in the previous year to a ¥14.2B valuation gain in the current period, as well as the recognition of ¥3.4B in foreign exchange gains. The contribution from these temporary factors was substantial.

Factors Affecting Performance

【Revenue】Revenue increased to ¥713.8B, representing a +9.6% YoY increase. By segment, domestic revenue was ¥559.8B (78.4% of total, YoY +6.1%), while overseas revenue was ¥156.1B (21.6% of total, YoY +25.0%). Strong overseas growth drove the overall increase.

【Profitability】The gross profit margin improved to 36.6%, from 36.3% in the previous year, an improvement of +0.3pt. The SG&A expense ratio also declined by -0.9pt to 27.4%, from 28.3% in the previous year, resulting in an improvement in the operating margin to 9.1%, from 8.0%, an improvement of +1.1pt. Ordinary income surged to ¥79.4B (YoY +100.9%), primarily because non-operating derivative valuation gains and losses reversed from a ¥14.5B valuation loss in the previous year to a ¥14.2B valuation gain in the current period, together with the recognition of ¥3.4B in foreign exchange gains. The contribution from these temporary factors was substantial. Net income was ¥55.3B (YoY +120.1%), while the effective tax rate declined to 30.4%, from 36.5% in the previous year, contributing to the earnings increase. Operating income, ordinary income, and net income all increased; therefore, the overall conclusion is that the Company achieved higher revenue and higher earnings.

Segment Analysis

The domestic segment generated revenue of ¥559.8B (YoY +6.1%) and operating income of ¥70.1B (YoY +2.0%), with a 12.5% profit margin, making it the core earnings pillar that generates the majority of total Company profit. The overseas segment continued to achieve strong growth, with revenue of ¥156.1B (YoY +25.0%), but operating income remained at ¥0.05B, compared with a ¥5.6B loss in the previous year. Although the segment returned to profitability, its profit margin remained at virtually zero. Inter-segment adjustments totaled a negative ¥5.0B, primarily due to ¥5.1B in goodwill amortization, and were reflected in total Company operating income of ¥65.2B. The revenue mix remains weighted toward the domestic business, at 78.4% domestic and 21.6% overseas, indicating a high degree of dependence on the domestic business.

Key Financial Indicators

【Profitability】ROE was 3.0%, the operating margin was 9.1% (8.0% in the previous year), and the net profit margin was 7.7% (3.9% in the previous year), with all indicators improving from the previous year.【Cash Flow Quality】Operating Cash Flow (OCF) was limited to ¥7.3B, and the OCF-to-net-income ratio was approximately 0.13x, a low level relative to net income of ¥55.3B. Increases in inventories (-¥43.4B) and trade receivables (-¥9.1B) constrained cash generation.【Investment Efficiency】Capital expenditures were ¥30.9B, below depreciation and amortization expense of ¥45.5B, resulting in free cash flow of -¥25.7B.【Financial Soundness】The equity ratio was 38.0%, largely unchanged from 37.5% in the previous year, while the current ratio remained strong at 282.1%. At the same time, the Company continues to rely on debt-based financing, centered on long-term borrowings of ¥1,791.8B.

Cash Flow Analysis

OCF was ¥7.3B, down -87.6% from ¥58.9B in the previous year. Despite the increase in profit before tax, deterioration in working capital constrained cash generation. Specifically, the increase in inventories reduced OCF by ¥43.4B and the increase in trade receivables reduced OCF by ¥9.1B, while the ¥22.1B increase in trade payables provided a partial offset. Investing Cash Flow was -¥33.0B, of which capital expenditures accounted for ¥30.9B. Financing Cash Flow was -¥3.5B, as repayments of long-term borrowings (-¥63.5B) and increases in short-term borrowings (+¥16.3B), among other items, largely offset one another. As a result, free cash flow (OCF + investing cash flow) was -¥25.7B, indicating that investments and dividend payments during the quarter were financed through the use of cash on hand.

Earnings Quality

Operating income, which reflects recurring earnings capacity, increased +25.2% YoY to ¥65.2B, representing a substantive improvement supported by improvements in the gross profit margin and SG&A expense ratio. In contrast, the substantial increases in ordinary income and net income were largely driven by the reversal of market-sensitive items, namely the ¥14.2B gain on derivative valuation (compared with a ¥14.5B valuation loss in the previous year) and ¥3.4B in foreign exchange gains. From an earnings-quality perspective, some caution is therefore warranted regarding the sustainability of these gains. Extraordinary items were virtually nonexistent (extraordinary income of ¥0.0B and extraordinary loss of ¥0.0B), and the divergence between ordinary income and net income falls within the range explained by the 30.4% effective tax rate. Comprehensive income was ¥63.5B, exceeding net income of ¥55.3B by ¥8.2B. The primary factor was a +¥7.7B foreign currency translation adjustment, although the divergence between the two figures was limited.

Earnings Forecast and Guidance

Progress against the full-year plan was 23.5% for revenue, 20.4% for operating income, 26.5% for ordinary income, and 25.7% for net income. Compared with the benchmark of 25% for evenly distributed quarterly progress, operating income is slightly behind schedule, while ordinary income and net income are ahead. This difference reflects the aforementioned reversal in non-operating gains and losses, and progress at the operating level is somewhat conservative. The full-year plan calls for revenue of ¥3,040B (YoY +11.1%), operating income of ¥320B (YoY +38.5%), and ordinary income of ¥300B (YoY +6.8%), assuming an acceleration in earnings growth during the second half of the fiscal year. As of the current quarter, no revisions have been made to the earnings forecast or dividend forecast.

Shareholder Returns

The dividend forecast is ¥85.00 per share for common stock, implying a payout ratio of approximately 19.7% against forecast EPS of ¥430.77. No revision has been made to the dividend forecast as of the current quarter, and dividends paid during the period totaled ¥18.9B. No share repurchase has been disclosed. Since shareholder returns consist solely of dividends, they should be evaluated using the payout ratio rather than the total return ratio. In addition to common stock, the Company has issued a class of shares with different rights—Class A preferred shares—and the dividend terms for these shares are separately stipulated from those for common stock.

Risk Factors

1. Deterioration in working capital and weak cash conversion: OCF declined -87.6% YoY to ¥7.3B, and the ratio to net income of ¥55.3B remained at approximately 0.13x. Inventories increased by ¥43.4B and trade receivables increased by ¥9.1B, with longer inventory holding and collection periods constraining cash generation.

2. Profitability of the overseas segment: Overseas revenue grew strongly to ¥156.1B (YoY +25.0%), but operating income remained at ¥0.05B, leaving the profit margin at virtually zero. The gap with the domestic segment, which has a 12.5% profit margin, is substantial, and total Company earnings remain dependent on the domestic business.

3. Dependence on non-recurring non-operating gains and losses: The substantial increases in ordinary income and net income (YoY +100.9% and +120.1%, respectively) were largely driven by the reversal of market-sensitive items, namely the ¥14.2B derivative valuation gain and ¥3.4B foreign exchange gain. If these gains disappear in subsequent periods, the pace of earnings growth may slow.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The operating margin is substantially below the industry median, while the net profit margin is slightly above the median, resulting in differing assessments within the industry at the operating and bottom-line levels.

Growth and Capital Efficiency

The revenue growth rate is approximately in line with the industry median, representing a standard pace of growth within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin improved to 9.1%, from 8.0% in the previous year, confirming an improvement in profitability accompanied by improvements in both the gross profit margin and SG&A expense ratio.

2. The substantial increases in ordinary income and net income were primarily attributable to the reversal of non-operating derivative valuation gains and foreign exchange gains. The difference from the pace of core operating improvement (operating income YoY +25.2%) is an important consideration when assessing earnings quality.

3. The OCF-to-net-income ratio was a low 0.13x. The delay in cash generation caused by increases in inventories and trade receivables will be a key point to monitor in assessing progress in inventory turnover and capital efficiency for the full year.

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

Sensitivity: ¥4,027–¥4,270 at cost of equity ±1%; ¥4,135–¥4,162 at ω±0.1.

Notes:

• Goodwill amortization of ¥41.4 per share is added back to earnings (to reflect a non-cash expense and enhance comparability with IFRS companies).
• 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 somewhat higher.

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This value does not forecast or guarantee the future share price)

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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 responsibility, and you should consult a professional as necessary.