TOTO LTD. FY2027 Q1 Earnings Report

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Executive Summary

The first quarter of FY2027 ended March 2027 saw revenue growth but a decline in operating income, while ordinary income and net income increased, supported by non-operating income and extraordinary gains. Results therefore diverged across the various stages of the income statement. Revenue was ¥1686.1B (+1.7% year on year), while operating income was ¥80.7B (-1.6%), as the 2.0% increase in selling, general and administrative expenses outpaced revenue growth and weighed on core earnings. Meanwhile, ordinary income rose 7.3% to ¥93.7B, boosted by ¥25.8B in non-operating income, including ¥11.1B in foreign exchange gains and ¥8.0B in dividends received. Consolidated net income increased 11.0% to ¥70.9B, including ¥69.1B attributable to owners of the parent (+9.5%), with extraordinary gains, including ¥10.4B in gains on sales of investment securities, also contributing to double-digit growth. The decline at the operating level was primarily attributable to lower margins in the core Housing Equipment Business, making this a quarter characterized by increased reliance on non-operating and extraordinary factors.

Factors Driving Performance Changes

【Revenue】Revenue increased 1.7% year on year to ¥1686.1B. By region, the overseas segments of the Global Housing Equipment Business generally expanded, with the Asia/Oceania Business up 14.8%, the Mainland China Business up 14.5%, the Europe Business up 29.3%, and the Americas Business up 6.9%. In contrast, the domestic Japan Housing Equipment Business reported a 1.5% decline in revenue. The Advanced Ceramics Business, a new growth area, also posted solid revenue growth of 5.8%. The Japan Housing Equipment Business remains the core segment, accounting for approximately 65% of total revenue, and its decline restrained the overall revenue growth rate.

【Profit and Loss】Operating income declined 1.6% year on year to ¥80.7B. The gross margin was nearly flat at 35.3% (35.4% in the previous year), while the SG&A ratio edged up to 30.5% (30.4%), causing the operating margin to decline to 4.8% (4.95%). By segment, operating income in the Global Housing Equipment Business fell 24.0% to ¥22.1B, while the Japan Housing Equipment Business declined 46.1% to ¥6.3B, resulting in lower profits in the two core businesses. The Americas Business fell into an operating loss of ¥0.7B, while the Mainland China Business continued to record an operating loss of ¥3.1B. In contrast, the Advanced Ceramics Business maintained high profitability, with operating income of ¥65.1B (+10.0%; margin of 40.7%), supporting company-wide earnings. Despite the decline in operating income, the addition of ¥25.8B in non-operating income (foreign exchange gains and dividends received) and ¥10.6B in extraordinary gains (gains on sales of investment securities) resulted in ordinary income of ¥93.7B (+7.3%) and net income of ¥70.9B (+11.0%). In summary, the operating level showed revenue growth but lower profit, while ordinary income and net income increased on the back of non-operating and extraordinary factors. Improving core earnings power remains an issue for the next quarter and beyond.

Segment Analysis

Profitability disparities among segments are pronounced. Revenue in the Global Housing Equipment Business increased 3.3% to ¥1756.9B, but operating income declined 24.0% to ¥22.1B, reducing the operating margin to 1.3% and resulting in higher revenue but lower profit. By breakdown, the Asia/Oceania Business recorded revenue of ¥257.7B (+14.8%) and profit of ¥19.2B (-12.2%); the Americas Business posted revenue of ¥200.3B (+6.9%) but fell into an operating loss of ¥0.7B; and the Mainland China Business reported revenue of ¥178.5B (+14.5%) and an operating loss of ¥3.1B, an improvement from the previous-year loss of ¥16.1B. The domestic Japan Housing Equipment Business recorded revenue of ¥1101.3B (-1.5%) and profit of ¥6.3B (-46.1%; margin of 0.6%), with both revenue and profit declining and making it the primary factor weighing on the company-wide margin. The Advanced Ceramics Business, a new growth area, was the only highly profitable segment, with revenue of ¥159.8B (+5.8%) and profit of ¥65.1B (+10.0%; margin of 40.7%). More than 80% of the company-wide operating income of ¥80.7B is generated by this business. From the current period, the method of calculating segment profit, including the allocation method for common expenses, has been changed; year-on-year comparisons are based on figures calculated under the revised method.

Key Financial Metrics

【Profitability】The operating margin was 4.8%, down -16bp from 4.95% in the previous year. The ordinary income margin improved by +28bp to 5.6% from 5.27%, while the consolidated net profit margin improved by +35bp to 4.2% from 3.85%. These figures also illustrate how non-operating and extraordinary factors compensated for the decline in underlying profitability at the operating level. 【Cash Flow Quality】Non-operating income was equivalent to only 1.5% of revenue, but its contribution to ordinary income reached approximately 28%. Extraordinary gains of ¥10.6B accounted for approximately 10% of pre-tax income of ¥104.3B, indicating a somewhat elevated weighting of non-recurring items in ordinary income and net income. 【Investment Efficiency】ROE was 1.3%, based on net income attributable to owners of the parent of ¥69.1B. EPS was ¥42.00 (¥37.32 in the previous year, +12.5%). Total asset turnover remains low, leaving room for improvement in capital efficiency. 【Financial Soundness】The equity ratio remained high at 67.0% (64.5% in the previous year, +2.5pt), while the current ratio was 164.3% and the quick ratio was 121.9%, indicating no liquidity concerns. Interest-bearing debt was limited to short-term borrowings of ¥23.3B and long-term borrowings of ¥1.3B, leaving financial leverage low.

Cash Flow Analysis

Although the company does not disclose a statement of cash flows, funding trends can be inferred from changes in the balance sheet. Cash and deposits amounted to ¥1012.7B, down ¥315.8B from ¥1328.6B at the end of the same period of the previous year. Meanwhile, inventories increased to ¥870.3B (+8.8%), while accounts payable and notes payable declined to ¥714.2B (from ¥807.2B in the previous year), suggesting that the accumulation of working capital may have pressured cash on hand. Accounts receivable and notes receivable amounted to ¥888.9B, down from ¥1031.9B in the previous year, indicating some progress in collections. Investment securities increased 17.2% to ¥743.7B, suggesting that some funds were allocated to securities alongside an expansion in unrealized gains. Overall, the increase in inventories and decline in accounts payable and notes payable are areas of concern from a cash-efficiency perspective. Future trends in inventory levels and payment terms will be important in assessing the company’s cash-generation capacity.

Quality of Earnings

The earnings structure for the current period consisted of operating income of ¥80.7B, supplemented by ¥25.8B in non-operating income (1.5% of revenue), resulting in ordinary income of ¥93.7B. The addition of ¥10.6B in extraordinary gains, primarily ¥10.4B in gains on sales of investment securities, brought pre-tax income to ¥104.3B. The main components of non-operating income were foreign exchange gains of ¥11.1B and dividends received of ¥8.0B. Both are linked to market conditions and foreign exchange movements and should therefore be distinguished from recurring business earnings. The ¥10.4B gain on sales of investment securities recorded as an extraordinary gain is a temporary factor, and there is no assurance that it will recur at the same level in subsequent periods. Consolidated net income was ¥70.9B after deducting income taxes of ¥33.4B from ordinary income, corresponding to an effective tax rate of approximately 32.0%. Thus, profit growth was secured even after the tax burden, due to contributions from non-operating and extraordinary factors. While the operating margin declined from the previous year, the improvement in the ordinary income and net profit margins warrants a cautious assessment from the perspective of core earnings quality.

Earnings Forecast and Guidance

The progress rates for Q1 against the full-year plan (revenue of ¥7850.0B, operating income of ¥600.0B, ordinary income of ¥585.0B, and net income of ¥460.0B) were 21.5% for revenue, 13.5% for operating income, 16.0% for ordinary income, and 15.0% for net income, all below the simple benchmark of 25%. Operating income progress was particularly low in relative terms, apparently reflecting the decline in profitability in the Housing Equipment Business and the continued losses in the Americas and China businesses. The full-year plan calls for an 11.6% increase in operating income year on year, while ordinary income is forecast to decline 3.6%. This may reflect an assumption that non-operating factors such as foreign exchange gains and dividends received, which boosted ordinary income in the current period, will normalize over the full year. No revisions were made to the earnings forecast during this quarter.

Shareholder Returns

Under the company’s plan, the annual dividend forecast is ¥120 per share, resulting in a payout ratio of approximately 42.9% against forecast EPS of ¥279.78. Given the financial foundation of an equity ratio of 67.0% and cash and deposits of ¥1012.7B, the company appears to have sufficient capacity to maintain its dividend for the time being. However, working capital expanded during the current period due to factors such as higher inventories, and the trend in operating cash flow, which provides the source of dividend funding, will need to be monitored in subsequent quarters. No revisions were made to the dividend forecast during this quarter.

Risk Factors

1. Margin compression and regional profitability disparities in the Housing Equipment Business: The Global Housing Equipment Business has a thin operating margin of 1.3%, while the Japan Housing Equipment Business has a margin of 0.6%. The Americas Business recorded an operating loss of ¥0.7B, and the Mainland China Business recorded an operating loss of ¥3.1B. The low-profitability structure of the core businesses is a factor depressing the company-wide operating margin of 4.8%.

2. Accumulation of working capital: Inventories increased to ¥870.3B (+8.8%), while accounts payable and notes payable declined to ¥714.2B, suggesting deterioration in cash efficiency. If inventory normalization does not progress, this could lead to the risk of inventory write-downs and prolonged cash constraints.

3. Reliance on non-operating and extraordinary factors: Growth in ordinary income and net income was supported by non-recurring factors such as foreign exchange gains of ¥11.1B, dividends received of ¥8.0B, and gains on sales of investment securities of ¥10.4B. If these factors reverse, they may affect the pace of profit growth in subsequent periods.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Compared with the manufacturing industry median, both the operating margin and net profit margin are positioned in the lower range, indicating relatively weaker profitability within the industry.

Growth and Capital Efficiency

The revenue growth rate also falls below the industry median, indicating that the pace of revenue growth remains moderate compared with the manufacturing industry average.

Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin declined -16bp from the previous year to 4.8%, while growth in ordinary income and net income was supported by non-recurring factors such as non-operating income and extraordinary gains. The extent of recovery in core earnings power will be an important point of focus from the next quarter onward.

2. By segment, the Advanced Ceramics Business in the new growth area stands out with a margin of 40.7%, generating more than 80% of operating income of ¥80.7B. Improving profitability in the core Housing Equipment Business, particularly in the Americas and China, will be an issue to monitor as the company seeks to diversify its overall profit structure.

3. Progress against the full-year plan was 21.5% for revenue and 13.5% for operating income, below the simple benchmark. Profitability improvements in the Housing Equipment Business during the second half are therefore positioned as a prerequisite for achieving the plan.

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

Sensitivity: ¥3,233–¥3,421 at ±1% for the cost of equity, and ¥3,324–¥3,326 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing gap relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not predict 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 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 a professional as necessary.

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