NIPPON CERAMIC CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

Revenue was flat and the Company maintained a high operating margin of 23.0%, but net income declined substantially due to the absence of the previous year’s extraordinary gains. Revenue was ¥136.9B (+0.1% YoY) and operating income was ¥31.5B (-0.1% YoY), indicating that underlying business earnings power remained stable at approximately the previous year’s level. Ordinary income increased by double digits to ¥36.5B (+16.9% YoY), mainly due to the contribution of non-operating income, including foreign exchange gains of ¥2.2B and interest income of ¥1.8B. Net income declined substantially to ¥26.0B (-39.0% YoY), reflecting a reaction to the ¥35.2B in extraordinary gains, including gains on the liquidation of subsidiaries, recorded in the same period of the previous year. This should therefore be viewed separately from operating-level earnings power.

Factors Affecting Performance

【Revenue】Revenue was ¥136.9B, essentially flat at +0.1% YoY. The gross margin improved slightly to 31.9% (31.5% in the previous year), indicating that the price and cost mix remained stable.

【Profit and Loss】Operating income was ¥31.5B (-0.1% YoY), maintaining an operating margin of 23.0%, while SG&A expenses were contained at ¥12.2B (8.9% of revenue). Ordinary income increased to ¥36.5B (+16.9% YoY), but foreign exchange gains of ¥2.2B and interest income of ¥1.8B accounted for the majority of the ¥5.4B in non-operating income, indicating a substantial contribution from non-operating factors. Net income was ¥26.0B (-39.0% YoY), mainly due to the absence of the previous year’s extraordinary gains, including gains on the liquidation of subsidiaries, totaling ¥35.2B. Extraordinary gains and losses in the current period were virtually nonexistent (extraordinary gains of ¥0.01B). In conclusion, the Company presents a complex picture that cannot be described as revenue growth and profit growth: operating-level earnings increased slightly despite limited revenue growth, ordinary income increased, and net income declined substantially due to the reversal of extraordinary factors. In substance, the situation is close to “revenue growth and net income decline,” with few elements of revenue contraction.

Key Financial Metrics

【Profitability】The operating margin of 23.0% and net margin of 19.3% both remained at high levels. ROE was 5.4%; based on a decomposition of net margin of 19.3% × total asset turnover of 0.25 × financial leverage of 1.12x, the low total asset turnover and conservative leverage are constraints on ROE despite the high net margin. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥35.0B, exceeding net income of ¥26.0B, and OCF/net income was 1.35x, indicating strong cash backing for earnings. 【Investment Efficiency】Capital expenditures were ¥3.9B, below depreciation and amortization of ¥6.4B, while CapEx/revenue was restrained at approximately 2.8%, indicating limited aggressiveness in replacement investment. 【Financial Soundness】The equity ratio was 89.4%, and the current ratio was approximately 985%, based on current assets of ¥402.5B against current liabilities of ¥40.9B. The Company was in a net cash position with cash and deposits of ¥281.5B, indicating exceptionally strong financial resilience.

Cash Flow Analysis

Operating Cash Flow increased substantially by 90.2% YoY to ¥35.0B, supported by working capital improvements, including a decrease in trade receivables (+¥11.1B) and a decrease in inventories (+¥3.3B), while payment of income taxes and other taxes of ¥16.4B placed pressure on cash flows. Investing Cash Flow was -¥22.3B. Although capital expenditures were modest at ¥3.9B, expenditures associated with the replacement of time deposits were significant. Financing Cash Flow was -¥52.8B, primarily reflecting ¥17.9B in share repurchases and dividend payments. Although the Company secured a surplus of ¥12.7B on a free cash flow basis, total shareholder returns during the period exceeded free cash flow and were supported by drawing down a portion of cash on hand. Against the backdrop of ample cash and deposits of ¥281.5B, there are no immediate liquidity concerns.

Earnings Quality

Earnings for the current period were derived almost entirely from operating activities, but the increase in ordinary income depended on non-operating income, including foreign exchange gains of ¥2.2B and interest income of ¥1.8B, giving it a non-recurring character subject to market and interest-rate conditions. Extraordinary gains and losses declined substantially from ¥35.2B in the previous year, including gains on the liquidation of subsidiaries, to ¥0.01B in the current period. The year-on-year decline in net income was therefore attributable to this reversal and does not indicate a deterioration in business fundamentals. The difference of ¥10.5B between ordinary income of ¥36.5B and net income of ¥26.0B was primarily attributable to the recognition of income taxes and other taxes, resulting in a relatively normalized tax burden ratio of approximately 28.7%. OCF exceeded net income, and cash conversion of earnings was favorable from an accrual perspective as well; overall, earnings quality can be assessed as high.

Earnings Forecast and Guidance

First-half progress against the full-year plan was 48.9% for revenue (¥136.9B/¥280.0B), 48.4% for operating income (¥31.5B/¥65.0B), and 54.4% for ordinary income (¥36.5B/¥67.0B). Progress for net income was generally on track after excluding the aforementioned extraordinary factors. The higher progress rates for ordinary income and net income than for revenue and operating income reflect the boost from non-operating income, such as foreign exchange gains and interest income. The pace of progress in the second half may vary depending on full-year foreign exchange and interest-rate conditions. The earnings forecast and dividend forecast remain unchanged.

Shareholder Returns

First-half dividends were zero, under the year-end lump-sum dividend structure, while the full-year dividend forecast is ¥165 per share. Based on projected full-year net income of ¥47.0B, the payout ratio is estimated at approximately 72%, using the total dividend amount and the number of shares outstanding at the end of the period. This is slightly above the industry-average level of less than 60%. In addition, the Company conducted ¥17.9B in share repurchases during the period, resulting in an even higher total return ratio when dividends and share repurchases are combined. Against the backdrop of ample cash and deposits of ¥281.5B and an equity ratio of 89.4%, there is no issue with the Company’s ability to implement shareholder returns. However, the fact that the scale of returns exceeds current-period free cash flow of ¥12.7B should be monitored.

Risk Factors

1. Declining working capital efficiency: Trade receivables of ¥41.5B and inventories of ¥48.5B represent substantial asset balances, suggesting room to reduce inventories and receivables from a cash efficiency perspective.

2. Dependence on non-operating income: Foreign exchange gains of ¥2.2B and interest income of ¥1.8B, which contributed to the increase in ordinary income, are subject to market conditions. Foreign exchange and interest-rate trends from the second half onward may affect the ordinary income margin.

3. Gap between shareholder returns and free cash flow: The combined amount of ¥17.9B in share repurchases and dividend payments exceeds free cash flow of ¥12.7B, indicating that a portion of the funding for shareholder returns depends on drawing down cash on hand.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net margin substantially exceed the industry median, placing the Company among the industry leaders in profitability.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, placing the Company toward the lower end of the industry in terms of top-line growth.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The operating margin of 23.0% and net margin of 19.3% substantially exceed the industry median of 9.7% and 5.4%, respectively, highlighting the Company’s high profitability. Meanwhile, the revenue growth rate of 0.1% is below the industry median of 10.6%, confirming a structure characterized by high profitability but low growth.

2. The increase in ordinary income (+16.9%) was driven by the contribution of non-operating income, such as foreign exchange gains and interest income, while operating income was essentially flat. This indicates that the core business currently remains flat in terms of growth drivers.

3. The payout ratio based on the ¥165 dividend forecast is calculated at approximately 72%, while total returns, including share repurchases, exceed free cash flow of ¥12.7B. Ample cash on hand of ¥281.5B supports shareholder returns, and the combination with financial soundness, reflected in an equity ratio of 89.4%, suggests substantial capacity to continue implementing returns.

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 to undertake any specific investment action.

Sensitivity: 2,319円–2,447円 at ±1% for the cost of equity, and 2,380円–2,382円 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a time lag 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: 2026-07 / 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 with a professional as necessary.

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