JAPAN PULP AND PAPER COMPANY LIMITED FY2027 Q1 Earnings Report

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Executive Summary

The Company recorded higher revenue and higher earnings, driven by the return to profitability in Overseas Wholesale and increased earnings in Paper Processing. Revenue was ¥1,562.81B (+8.0% YoY), Operating Income was ¥31.49B (+29.7%), Ordinary Income was ¥35.24B (+35.4%), and Net Income attributable to owners of the parent was ¥18.14B (+55.6%). In addition to the effects of higher revenue, operating leverage was achieved as the rate of increase in SG&A expenses (+7.2%) remained below the rate of increase in Revenue, resulting in improved margins at each earnings level.

Factors Driving Performance Changes

【Revenue】Revenue was ¥1,562.81B, up +8.0% YoY. By segment, Overseas Wholesale posted the largest increase at ¥871.92B (+12.1%), followed by Paper Processing at ¥135.80B (+7.5%) and Domestic Wholesale at ¥497.71B (+3.3%). Meanwhile, Environmental Raw Materials at ¥47.30B (-7.1%) and Real Estate Leasing at ¥10.07B (-2.8%) recorded declines in revenue.

【Profit and Loss】Operating Income was ¥31.49B (+29.7% YoY), and the Operating Margin improved to 2.02% from 1.68% in the same period of the previous year. Ordinary Income was ¥35.24B (+35.4%), and the Ordinary Income Margin was 2.25% (1.80% in the previous year). Net Income attributable to owners of the parent was ¥18.14B (+55.6%). In terms of earnings, the largest positive factor was the turnaround in Overseas Wholesale on a segment Ordinary Income basis, from a loss of ¥2.70B in the previous year to a profit of ¥1.92B, while Paper Processing also contributed to higher earnings with profit of ¥19.25B (+23.0%). Extraordinary income was ¥0.66B and extraordinary losses were ¥0.94B, resulting in a net loss of only ¥0.28B; therefore, the increase in Net Income was attributable to improved profitability in the core business rather than temporary factors. In conclusion, the Company achieved higher revenue and higher earnings.

Segment Analysis

Overseas Wholesale was the largest segment, with revenue of ¥871.92B (+12.1%), and turned from a loss of ¥2.70B in the same period of the previous year to a profit of ¥1.92B. Paper Processing recorded revenue of ¥135.80B (+7.5%) and profit of ¥19.25B (+23.0%), maintaining the highest margin among all segments at 14.2%. Domestic Wholesale posted revenue of ¥497.71B (+3.3%) and profit of ¥15.63B (+28.7%), achieving earnings growth exceeding revenue growth and demonstrating improved profitability. Environmental Raw Materials recorded slightly lower revenue and profit, with revenue of ¥47.30B (-7.1%) and profit of ¥2.84B (-4.4%), while Real Estate Leasing also recorded lower earnings, with revenue of ¥10.07B (-2.8%) and profit of ¥3.22B (-18.7%). The overall earnings growth was supported by the return to profitability in Overseas Wholesale and improved margins in Paper Processing and Domestic Wholesale.

Key Financial Indicators

【Profitability】The Operating Margin was 2.02%, an improvement of 34bp from 1.68% in the same period of the previous year, while the Ordinary Income Margin also expanded to 2.25% (1.80% in the previous year). The Net Profit Margin, based on Net Income attributable to owners of the parent, rose to 1.16% from 0.81% in the same period of the previous year. The Gross Profit Margin improved slightly to 17.62% (17.09% in the previous year). 【Cash Flow Quality】Non-operating income of ¥12.02B accounted for only 0.8% of Revenue and primarily consisted of dividend income of ¥5.16B and interest income of ¥2.13B, indicating limited dependence on non-operating income. Extraordinary gains and losses resulted in a net loss of ¥0.28B, and the increase in Net Income was based on recurring improvements in profitability. 【Investment Efficiency】ROE (Annualized) was 5.6%, while the high effective tax rate of 42.7% somewhat constrained the increase in Net Income. 【Financial Soundness】The Equity Ratio improved slightly to 34.7% from 32.6% in the same period of the previous year; however, short-term borrowings increased to ¥586.00B (+30.3% YoY). Compared with cash and deposits of ¥275.22B, the Company continues to exhibit relatively high dependence on short-term funding.

Cash Flow Analysis

As detailed data from the Statement of Cash Flows has not been disclosed, funding trends are analyzed based on changes in balance sheet items. Accounts receivable were ¥1,446.68B, an increase of +4.1% YoY, below the +8.0% growth in Revenue, with no significant deterioration in collection efficiency. Inventories decreased to ¥650.76B, down -5.1% YoY, and no inventory accumulation was identified. Meanwhile, accounts payable increased only +3.5% to ¥1,032.69B, indicating limited financing capacity on the procurement side. Short-term borrowings increased by ¥136.14B (+30.3% YoY) to ¥586.00B, suggesting funding needs associated with the acquisition of PPB Ltd and the increase in working capital. Cash and deposits were ¥275.22B, only 0.47 times short-term borrowings, indicating a thin liquidity cushion centered on current assets and increasing dependence on external financing.

Earnings Quality

The earnings growth for the current period was not driven by an increase in extraordinary gains and losses, but by improved profitability in the core business. Extraordinary gains of ¥0.66B (including gains on sales of fixed assets) and extraordinary losses of ¥0.94B (including business restructuring expenses) were recorded, resulting in a net loss of ¥0.28B; thus, there were no temporary factors supporting the increase in Net Income. Non-operating income and expenses resulted in a net gain of ¥3.75B, with dividend income of ¥5.16B and interest income of ¥2.13B exceeding interest expense of ¥7.37B. However, this amount represented approximately 0.8% of Revenue and was not central to the earnings structure. Meanwhile, the effective tax rate was high at 42.7%; income taxes of ¥14.9B were recorded against Profit Before Tax of ¥35.0B, constraining the conversion of pre-tax earnings growth into Net Income. As the rate of increase in accounts receivable was below the rate of increase in Revenue and inventories also declined, no deterioration in accrual quality was observed, and earnings quality can be considered generally sound.

Earnings Forecast and Guidance

The full-year Company plan calls for Operating Income of ¥155.0B (+42.9% YoY), Ordinary Income of ¥150.0B (+37.8%), forecast EPS of ¥73.85, and forecast dividends of ¥36.00, with no revisions to the earnings forecast or dividend forecast. Q1 progress rates were 20.3% for Operating Income, 23.5% for Ordinary Income, and 22.7% for Net Income attributable to owners of the parent (estimated from forecast EPS). Although all were below the 25% benchmark for even quarterly progress, none represented a major deviation of more than 10 points. Continued profitability in Overseas Wholesale, maintenance of high profitability in Paper Processing, and improvement in the revenue declines in Environmental Raw Materials and Real Estate Leasing will be key to achieving the full-year plan.

Shareholder Returns

The full-year forecast dividend per share is ¥36.00, implying a forecast Payout Ratio of approximately 48.7% based on forecast full-year EPS of ¥73.85. This Payout Ratio covers dividends only and is distinct from the Total Return Ratio, which includes share repurchases. Treasury stock increased by ¥28.85B YoY to ¥79.46B (deduction), but the amount of share repurchases executed during the current quarter cannot be identified solely from this change in the balance. There was no revision to the dividend forecast, and the achievement of full-year Net Income of ¥80.0B is the premise underlying the planned dividend level.

Risk Factors

1. Refinancing and liquidity risk: Short-term borrowings increased to ¥586.00B (+30.3% YoY), while cash and deposits of ¥275.22B remained only 0.47 times short-term borrowings. The Company has a high dependence on short-term funding, and changes in the refinancing environment could readily affect its funding position.

2. Risk related to finalization of acquisition goodwill valuation: Goodwill of ¥33.97B has been provisionally recorded in connection with the acquisition of all shares of PPB Ltd in the Overseas Wholesale business. As of the quarter-end, purchase price allocation had not been completed, and the goodwill balance after finalization and potential future impairment indicators require ongoing monitoring.

3. Impact of high tax burden on Net Income: The effective tax rate was high at 42.7% (Profit Before Tax of ¥35.0B and income taxes of ¥14.9B), constraining the efficiency with which growth in Profit Before Tax translates into Net Income attributable to owners of the parent.

Industry Benchmark (Reference; Compiled by the Company)

Key Points from the Earnings Results

1. The turnaround of the Overseas Wholesale segment from a loss in the same period of the previous year to a profit of ¥1.92B, leading overall earnings growth, is noteworthy as a sign of structural improvement in profitability. Paper Processing and Domestic Wholesale also recorded earnings growth exceeding revenue growth, confirming the effect of operating leverage.

2. Q1 progress rates against the full-year plan were 20.3% for Operating Income and 23.5% for Ordinary Income, slightly below the standard progress benchmark of 25%. The establishment of sustained profitability in Overseas Wholesale and improvement in the revenue declines in Environmental Raw Materials and Real Estate Leasing will be key areas of focus for achieving the full-year plan.

3. The provisional recording of ¥33.97B in goodwill associated with the acquisition of PPB Ltd and the 30.3% increase in short-term borrowings are points requiring monitoring with respect to the future financing structure and finalization of the goodwill valuation.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,133–¥1,197 at ±1% for the Cost of Equity, and ¥1,160–¥1,167 at ±0.1 for ω.

Notes:

• Net Income is significantly compressed relative to Operating Income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (Net Income ÷ Operating Income 52%). This value reflects that compression at face value, and if these factors are temporary, the underlying earning power may be higher.
• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the quarter-end are used (there is a timing difference 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 (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and 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 benchmark is 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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