The Yokohama Rubber Company,Limited FY2026 Q1 Earnings Report

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Executive Summary

FY2026 Q1 (Jan–Mar) results: Revenue ¥3,038.1B (YoY +¥286.9B +10.4%), Operating Income ¥260.1B (YoY +¥66.7B +34.5%), Ordinary Income ¥259.6B (YoY +¥120.9B +87.1%), Net Income Attributable to Owners of Parent ¥147.2B (YoY +¥61.9B +72.6%) — significant revenue and profit growth. Improvements in tire pricing and volume, together with steady growth in the MB (diversified businesses) segment, contributed to an improvement in operating margin from 7.0% to 8.6% (+1.6pt). Gross margin expanded materially to 38.8% (up +5.6pt from 33.2%), and segment profit surged to ¥444.4B (from ¥240.7B, +84.6%). However, Other Expenses of ¥193.8B (prior year ¥58.8B) partially offset profits; this includes impairment losses of ¥38.6B. Progress against full-year guidance (Revenue ¥1,300.0B, Operating Income ¥1915.0B, Net Income ¥1090.0B) stands at Revenue 23.4%, Operating Income 13.6%, Net Income 13.5%, below the standard 25% pace. This reflects large early-year corporate tax payments (¥530.9B) and working capital increases (Inventory +¥106.5B, Trade Receivables +¥13.9B), resulting in Operating Cash Flow (OCF) of -¥291.1B and Free Cash Flow (FCF) of -¥661.5B. On financing, short-term borrowings and CP issuance generated Financing Cash Flow +¥495.8B, maintaining cash balance at ¥935.9B. Equity Ratio is 51.0% and D/E Ratio is 0.94x, indicating a healthy capital base, but interest-bearing debt rose to ¥6,025.7B, making de-leveraging a mid-term issue.

Drivers of Performance

[Revenue] Revenue ¥3,038.1B, up +10.4% YoY. Tire Business accounted for ¥2,781.2B (+11.1%), representing 91.5% of group revenue, supported by strong sales of high-value-added products in North America and Asia and favorable FX effects. MB (diversified businesses) recorded ¥239.8B (+4.2%), supported by industrial demand for aircraft parts and conveyor belts. Other Businesses were ¥17.0B (-4.5%). External customer sales after inter-segment adjustments rose across all segments, driven by improvements in both volume and price. FX effects likely contributed positively at the revenue stage; comprehensive income FX translation differences improved materially to +¥93.6B from -¥369.5B, with yen depreciation supporting results.

[Profitability] Gross profit ¥1,180.1B (gross margin 38.8%), expanded by ¥268.9B YoY. Gross margin improved +5.6pt YoY, driven by price improvements, higher-value product mix, and raw material cost reductions. SG&A was ¥735.7B (SG&A ratio 24.2%), up ¥64.3B YoY, but growth in SG&A (+9.6%) was contained relative to revenue growth (+10.4%). As a result, segment profit (gross profit - SG&A) surged to ¥444.4B from ¥240.7B (+84.6%). Operating Income ¥260.1B reflects the deduction of net “Other income/expense” of -¥184.3B (prior year -¥47.3B) from segment profit; Other Expenses ¥193.8B include impairment losses of ¥38.6B (double prior year ¥18.8B). Financial income ¥44.5B and financial expenses ¥44.9B nearly offset, leaving Ordinary Income ¥259.6B roughly in line with Operating Income. Corporate tax and other taxes were ¥110.6B (effective tax rate 42.6%), resulting in Net Income ¥149.0B and Net Income Attributable to Owners of Parent ¥147.2B. Comprehensive Income ¥262.7B comprises Net Income ¥149.0B plus Other Comprehensive Income ¥113.7B, with FX translation differences +¥93.6B and FVOCI fair value changes +¥20.5B contributing. In summary, revenue and operating profitability improved significantly, but one-off expenses (impairment and other expenses) and large tax payments partially constrained bottom-line growth.

Segment Analysis

Tire Business: Revenue ¥2,781.2B (prior ¥2,503.2B, +11.1%), Segment Profit ¥420.2B (prior ¥222.2B, +89.1%) — substantial profit improvement. Segment profit margin improved from 8.9% to 15.1% (+6.2pt), driven by expanded premium tire sales and pricing policy success in North America and Asia. MB Business: Revenue ¥239.8B (prior ¥230.2B, +4.2%), Segment Profit ¥22.4B (prior ¥18.5B, +21.1%) — steady growth, with stable demand for aircraft parts and industrial belts and improving margins. Other Businesses: Revenue ¥17.0B (prior ¥17.8B, -4.5%), Segment Profit ¥1.8B (prior ¥0.1B) — small but in profit. Group total segment profit ¥444.4B, with Tire Business accounting for 94.5% of profitability. Reconciliation to consolidated Operating Income ¥260.1B primarily includes Other Expenses ¥184.3B as the main adjustment item.

Key Financial Metrics

[Profitability] Operating margin 8.6% (prior 7.0%, +1.6pt), Net margin 4.9% (prior 3.1%, +1.8pt) — both improved. Expansion of gross margin to 38.8% (prior 33.2%, +5.6pt) drove profitability gains; segment profit margin 14.6% (prior 8.8%, +5.8pt) improved sharply. ROE annualized approx. 5.6% (quarter profit basis), improved YoY. Tire Business segment profit margin 15.1% (prior 8.9%, +6.2pt) was the driver. Net financial result was ¥44.5B - ¥44.9B = -¥0.4B, essentially neutral; interest burden is limited.

[Cash Quality] With OCF -¥291.1B vs Net Income ¥149.0B, OCF/Net Income = -1.95x, indicating very weak cash conversion. Main drivers were working capital increases (Inventory +¥106.5B, Trade Receivables +¥13.9B, Trade Payables +¥21.2B, Other WC -¥162.5B) and large corporate tax payments ¥530.9B. OCF/EBITDA (EBITDA estimated = Operating Income ¥260.1B + D&A etc. ¥204.1B = ¥464.2B) = -0.63x, raising concerns about short-term cash generation.

[Investment Efficiency] Total asset turnover 0.59x (annualized; Revenue ¥3,038.1B ÷ Total Assets ¥24,622.2B) is low, reflecting large tangible fixed assets and goodwill balances. Tangible fixed assets ¥6,552.1B (32.0% of total assets), Goodwill ¥3,366.0B (16.4%), indicating that early realization of M&A synergies is key to improving investment efficiency.

[Financial Health] Equity Ratio 51.0% (prior 51.6%, -0.6pt), D/E Ratio 0.94x (interest-bearing debt ¥6,025.7B ÷ Equity ¥10,434.8B) — maintaining healthy levels. Current ratio 177% (Current Assets ¥8,475.0B ÷ Current Liabilities ¥4,795.8B), cash balance ¥935.9B — short-term liquidity is preserved. Interest-bearing debt increased ¥668.0B from prior ¥5,357.7B, mainly due to short-term borrowings and CP increases (+¥677.3B). Interest coverage (EBIT ¥260.1B ÷ Financial Expenses ¥44.9B) = 5.8x, indicating sound interest-paying ability.

Cash Flow Analysis

OCF was -¥291.1B (prior -¥188.6B), a widening deficit. Operating cash subtotal (before working capital changes) improved to ¥258.4B (prior ¥201.8B), but working capital outflow -¥549.5B (Inventory -¥106.5B, Trade Receivables -¥13.9B, Trade Payables +¥21.2B, Other -¥162.5B, reflecting slower inventory turnover) and corporate tax payments -¥530.9B (prior -¥375.7B) accelerated cash outflows. Inventory increases likely reflect front-loading production based on demand expectations, but could pressure margins if sales underperform. Investing Cash Flow was -¥370.5B, driven by CapEx -¥325.9B (prior -¥210.1B). Proceeds from sales of tangible fixed assets +¥14.8B partially offset investments. Intangible asset acquisitions -¥3.2B were minor. Free Cash Flow -¥661.5B (prior -¥1,627.2B) improved materially as prior-year large M&A outflow (-¥1,418.6B) was absent. Financing Cash Flow +¥495.8B was net funding: short-term borrowings +¥344.3B and CP +¥400.0B covered working capital and investments; offset by long-term borrowings repayments -¥77.2B, dividend payments -¥134.2B, and lease payments -¥33.5B. Cash ended at ¥935.9B, down ¥138.0B from opening ¥1,073.9B; FX effects +¥27.8B partly offset declines. Near-term focus should be inventory reduction and smoothing tax payments to improve OCF; mid-term, achieving positive FCF and de-leveraging are prerequisites to maintaining financial health.

Quality of Earnings

Quality of earnings is weak: OCF/Net Income = -1.95x and OCF/EBITDA = -0.63x indicate profits are not converting into cash. From Segment Profit ¥444.4B to Operating Income ¥260.1B, Other Expenses ¥193.8B (including impairment ¥38.6B) were deducted — one-off expenses represent about 42% of Operating Income. Impairment doubled from prior ¥18.8B to ¥38.6B, suggesting reduced profitability for certain assets. Financial income ¥44.5B and financial expenses ¥44.9B largely offset, so non-operating contributions were neutral. Comprehensive Income ¥262.7B comprises Net Income ¥149.0B plus Other Comprehensive Income ¥113.7B; FX translation differences +¥93.6B, FVOCI fair value changes +¥20.5B, and cash flow hedge +¥4.3B contributed positively. These are temporary FX/valuation gains; sustainable operating performance is best reflected at the segment profit level ¥444.4B (prior ¥240.7B, +84.6%). On the accrual side, working capital increased net by ¥99.2B (Inventory +¥106.5B, Trade Receivables +¥13.9B, Trade Payables +¥21.2B), causing cash outflows and widening the timing gap between revenue recognition and cash collection. Large corporate tax payment ¥530.9B relates to prior-year income and results in a high effective tax rate of 42.6% for the period; smoothing tax effects and recognizing tax benefits remain tasks ahead. While recurring earnings are supported by improved gross margins and segment profit expansion, weak cash conversion and one-off expense burdens indicate room for improvement in earnings quality.

Forecasts & Guidance

Full-year guidance unchanged: Revenue ¥1,300.0B, Operating Income ¥1915.0B (assumed +25.2% YoY), Net Income ¥1,090.0B, EPS ¥693.36, Dividend ¥62 (interim/end ¥31 each). The company indicates revisions may be possible but no concrete revisions were disclosed this quarter. Q1 progress vs guidance: Revenue 23.4% (¥3,038.1B ÷ ¥1,300.0B), Operating Income 13.6% (¥260.1B ÷ ¥1,915.0B), Net Income 13.5% (¥147.2B ÷ ¥1,090.0B) — below the 25% standard pace. The lower pace is attributable to early large corporate tax payments and working capital buildup (inventory accumulation) and one-off Other Expenses ¥193.8B. The improvement in gross margin 38.8% and operating margin 8.6% provide a base for achieving guidance, but require inventory reduction and tax smoothing from Q2 onward. If Tire Business segment profit margin of 15.1% is maintained full-year, there is significant upside potential in H2. However, the risk of cumulative Other Expenses and impairments could offset gains; acceleration of operating income progression is needed. Dividend payout ratio on forecast EPS is about 8.9%, conservative and likely sustainable, but with negative FCF in the short term, dividends are being funded by cash and short-term borrowing (Financing Cash Flow +¥495.8B). To achieve guidance, conditions assumed include monthly Revenue growth of +8–10% from Q2 onward, maintaining Operating Income margin of 8–9%, and normalization of working capital.

Shareholder Returns

Dividend payments this quarter were ¥134.2B (payment of prior fiscal year year-end dividend); no interim dividend decision was made this period. Full-year dividend forecast is ¥62 (interim/end ¥31 each), up ¥14 (+29.2%) from prior ¥48. Payout ratio on forecast EPS ¥693.36 is about 8.9%, low and sustainable on a net income basis. However, FCF is -¥661.5B, so dividend payments are being funded from cash balance and short-term borrowing (Financing Cash Flow +¥495.8B). Cash balance ¥935.9B, current ratio 177% — short-term liquidity secured and dividend continuity is likely. Share buybacks this quarter were -¥0.0B (prior -¥41.8B), so total shareholder return comprised dividends only. Mid-term, FCF turnaround via inventory reduction and working capital normalization is a prerequisite for covering dividends from internal funds and expanding total return. While there is room for further dividend increases given the low payout ratio, current priority appears to be de-leveraging and improving OCF, indicating a conservative, sustainability-focused dividend policy.

Risk Factors

1. Continued negative OCF and working capital expansion risk: OCF -¥291.1B, OCF/Net Income = -1.95x — cash conversion is not functioning. Inventory increase ¥106.5B reflects front-loaded production based on demand expectations; if sales disappoint, price reductions and promotion could compress gross margins and trigger inventory valuation losses. Trade Receivables increase ¥13.9B and Trade Payables increase ¥21.2B are broadly balanced, but Other WC -¥162.5B (changes in accrued expenses / advance receipts) is opaque. Corporate tax payment ¥530.9B is temporary for prior-year income, but if effective tax rate remains high at 42.6%, cash outflows may outpace net income growth. Near-term priorities are improving inventory turnover and smoothing tax payments; failure to do so risks entrenched FCF deficits, rising interest-bearing debt, and delayed de-leveraging.

2. Rising leverage and delayed de-leveraging risk: Interest-bearing debt ¥6,025.7B (up ¥668.0B from ¥5,357.7B, +12.5%), D/E 0.94x — still healthy but trending up. Short-term borrowings and CP increased by +¥677.3B to meet initial working capital and tax payment needs. Debt/EBITDA (estimated) ~13.0x (Interest-bearing debt ¥6,025.7B ÷ annualized EBITDA ¥1,856.8B) is high, increasing repayment burden. Interest coverage 5.8x is sound, but rising rate environment could increase financial expenses and pressure Net Income. Goodwill ¥3,366.0B (32.0% of equity) stems from past large M&A (e.g., Goodyear acquisition); delayed realization of synergies risks goodwill impairment and equity erosion. De-leveraging requires FCF positive conversion, dividend restraint, or asset sales; current payout ratio 8.9% is low leaving limited scope to cut dividends, and asset disposals are not disclosed. Mid-term, achieving positive OCF and restraining CapEx to drive FCF will be necessary to accelerate debt repayment, but trade-offs with growth investment exist.

3. Accumulation of one-off expenses and impairment risk: Other Expenses ¥193.8B (74.5% of Operating Income) include impairment losses ¥38.6B, doubling from prior ¥18.8B. Details of impaired assets are unspecified but suggest weakened profitability in certain businesses or regions, and restructuring or disposal losses may continue. Goodwill ¥3,366.0B (32.0% of equity) is high; if M&A integration underperforms, further impairment testing may identify additional goodwill write-down risk. If items included in Other Expenses (restructuring costs, asset write-downs, litigation provisions, etc.) accumulate through the year, progress at the Operating Income level may fall substantially short of standard pace, jeopardizing full-year guidance. Monitoring frequency and magnitude of impairments and one-offs, and early realization of structural reform benefits, will be key to risk mitigation.

Industry Benchmark (Reference, Company Aggregation)

Profitability & Returns

Operating margin exceeds the industry median 6.8% by +1.7pt, driven by gross margin improvement and cost control. Net margin lags the median 5.9% by -1.0pt, pressured by high tax burden (effective tax rate 42.6%) and Other Expenses.

Growth & Capital Efficiency

Revenue growth is -2.7pt below the median 13.2% but remains in double digits and at a mid-range pace within the industry. Price and volume improvements in the Tire Business are driving growth.

※ Source: Company aggregation

Key Points to Watch in the Results

1. Large improvements in gross margin and segment profit margins are key to achieving full-year guidance. Gross margin 38.8% (+5.6pt YoY) and segment profit margin 14.6% (+5.8pt YoY) improved sharply, led by Tire Business segment profit margin 15.1% (prior 8.9%). If price improvements and expansion of high-value-added product mix persist, there is substantial upside in H2. To reach full-year Operating Income ¥1,915.0B, maintaining Operating Income margin of 8–9% and monthly Revenue growth of +8–10% from Q2 onward are assumed. Realization of M&A synergies (e.g., Goodyear business) is progressing and acceleration of synergy realization could be an upside catalyst.

2. Improving OCF and reducing inventory are short-term priorities. OCF -¥291.1B, OCF/Net Income -1.95x indicate cash conversion failure, driven by inventory increase ¥106.5B and corporate tax payments ¥530.9B. Inventory days likely increased, embedding risks of markdowns and valuation losses in case of poor sales. If inventory reduction and accelerated collection of receivables lead to OCF turning positive from Q2, FCF improvement and de-leveraging can follow. Tax smoothing (reducing effective tax rate from 42.6% toward ~35%) would also help curb cash outflows.

3. De-leveraging and goodwill health are mid-term evaluation axes. Interest-bearing debt ¥6,025.7B, D/E 0.94x, Debt/EBITDA ~13.0x, and rising short-term borrowing/CP reliance are elevated. Goodwill ¥3,366.0B (32.0% of equity) is a large legacy of past large M&A; delays in synergy realization increase impairment risk. FCF turnaround and CapEx restraint to accelerate debt repayment are conditions for improving capital efficiency and maintaining ratings. Monitoring frequency and magnitude of impairments and one-off expenses, and early evidence of structural reform and earnings improvement, are critical to mid- to long-term sustainability.

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This report is an AI-generated financial analysis document created by analyzing XBRL financial statement data. It is not a recommendation to invest in any specific security. Industry benchmarks are reference information aggregated by the firm from public financial statements. Investment decisions are your responsibility; consult advisors as needed.