UNICHARM (8113) FY2026 Q2 Earnings Report

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Executive Summary

Despite revenue growth, net income attributable to owners of the parent declined, making the combination of higher revenue and lower profit the most important point for the current period. Revenue increased to ¥4871.3B (+4.9% YoY), Operating Income rose to ¥650.3B (Operating Margin: 13.3%), and Profit Before Tax, corresponding to the ordinary income stage, increased to ¥666.1B (+6.6% YoY). However, Net Income attributable to owners of the parent remained at ¥410.3B (-1.9% YoY). Consolidated Net Income, including non-controlling interests, was ¥488.3B (+4.6% YoY), with the increase in profit allocated to non-controlling interests being one factor behind the sluggish growth in profit attributable to owners of the parent.

Factors Affecting Performance

【Revenue】Revenue increased to ¥4871.3B, up +4.9% YoY. By segment, PersonalCare generated ¥3968.2B (81.5% of total, YoY +4.0%), while PetCare generated ¥828.7B (17.0% of total, YoY +9.6%), with PetCare showing relatively higher growth.

【Profit and Loss】Operating Income was ¥650.3B (Operating Margin: 13.3%), with the Company maintaining a gross margin of 40.7% and an SG&A ratio of 27.3%. PetCare’s segment profit margin was 19.0% (YoY +21.6%), exceeding PersonalCare’s 12.1% (YoY +10.8%) and contributing to the improvement in overall profitability. Profit Before Tax increased to ¥666.1B (+6.6% YoY), supported in part by positive net financial income (financial income of ¥52.5B − financial expenses of ¥31.4B = +¥21.0B). However, Net Income attributable to owners of the parent declined to ¥410.3B (-1.9% YoY). The gap versus consolidated Net Income (¥488.3B, YoY +4.6%) was attributable to the increase in profit allocated to non-controlling interests; consequently, the overall result was higher revenue but lower profit.

Segment Analysis

PersonalCare, the core business, recorded higher revenue and profit, with Revenue of ¥3968.2B (81.5% of total, YoY +4.0%) and Operating Income of ¥480.4B (YoY +10.8%, Operating Margin: 12.1%). PetCare posted Revenue of ¥828.7B (17.0% of total, YoY +9.6%) and Operating Income of ¥157.2B (YoY +21.6%, Operating Margin: 19.0%), demonstrating the highest growth rate and profit margin among the two segments and contributing to the improvement in the Company-wide profit margin.

Key Financial Metrics

【Profitability】Operating Margin was 13.3%, Gross Profit Margin was 40.7%, and the SG&A ratio was 27.3%, resulting in a profit spread from gross profit of 13.3pt. Net income attributable to owners of the parent margin was 8.4%, while the consolidated Net Income margin was 10.0%.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥615.6B, equivalent to 1.50 times Net Income attributable to owners of the parent of ¥410.3B, indicating a favorable level of cash conversion.【Investment Efficiency】ROE was 5.4% on a Q2 cumulative basis. The substantial capital base, reflected in an Equity Ratio of 65.9%, limits the leverage effect and contributes to relatively low capital efficiency.【Financial Soundness】Cash and cash equivalents stood at ¥2544.7B, compared with interest-bearing debt of only ¥133.2B, securing a substantial net cash position. The Equity Ratio of 65.9% was virtually unchanged from 65.0% in the previous year, indicating that the Company continues to maintain a conservative financial structure.

Cash Flow Analysis

Operating Cash Flow was ¥615.6B, up +3.8% YoY, exceeding Net Income attributable to owners of the parent of ¥410.3B and indicating favorable cash conversion. Investing Cash Flow represented an outflow of ¥170.0B, primarily due to capital expenditures of ¥109.9B and expenditures related to the acquisition of subsidiaries. Financing Cash Flow was an outflow of ¥476.2B, mainly reflecting dividend payments of ¥156.5B and share repurchases of ¥190.1B. As a result, Free Cash Flow, calculated as Operating Cash Flow less Investing Cash Flow, was ¥445.7B, securing a level sufficient to support both shareholder returns and growth investments. Cash and cash equivalents stood at ¥2544.7B at the end of the period, remaining virtually flat compared with the end of the previous year.

Earnings Quality

Profit Before Tax of ¥666.1B increased +6.6% YoY, reflecting improved profitability in the core business, and no significant recognition of one-time extraordinary gains or losses was identified. Financial income of ¥52.5B exceeded financial expenses of ¥31.4B, resulting in positive net financial income of ¥21.0B and supporting Profit Before Tax. Meanwhile, Net Income attributable to owners of the parent declined -1.9% YoY, indicating a divergence between the growth in Profit Before Tax and the decline in profit attributable to owners of the parent. This divergence was primarily attributable to the increase in profit allocated to non-controlling interests (non-controlling interests of ¥953.9B), potentially reflecting changes in the earnings structure of consolidated subsidiaries. As Operating Cash Flow has remained above Net Income attributable to owners of the parent, the reported profit has favorable cash backing, and profit inflation attributable to accruals appears limited.

Earnings Forecast and Guidance

The full-year earnings forecast calls for Revenue of ¥1兆150B (+7.4% YoY), forecast EPS of ¥40.68, and forecast dividends of ¥22.00, with revisions to the earnings forecast having been made during the current quarter. The Q2 cumulative Revenue progress rate was 48.0%, slightly below the standard 50% level. On an EPS basis, Q2 cumulative EPS of ¥23.75 represented 58.4% progress against the full-year forecast of ¥40.68, exceeding the progress rate for revenue. In the second half, Net Income attributable to owners of the parent, which declined YoY on a Q2 cumulative basis, must turn to full-year growth (approximately +7.3% YoY on the Net Income basis under the Company’s forecast). Cost trends in the second half and the allocation of profit to non-controlling interests will be key factors in achieving this target.

Shareholder Returns

The Q2 dividend was ¥11.00 per share, representing 50% progress against the full-year dividend forecast of ¥22.00. No revision was made to the dividend forecast, and the dividend policy remains in line with the initial plan. Dividend payments totaled ¥156.5B, resulting in a Payout Ratio of 38.2% against Net Income attributable to owners of the parent of ¥410.3B. In addition, the Company conducted share repurchases of ¥190.1B, bringing total shareholder returns, combining dividends and share repurchases, to ¥346.6B. The return ratio against Free Cash Flow of ¥445.7B was approximately 77.8%. Given the strength of Operating Cash Flow and the net cash position, the current level of shareholder returns appears to be within a financially sustainable range.

Risk Factors

1. Earnings quality: While Revenue increased +4.9% YoY, Net Income attributable to owners of the parent declined -1.9% YoY. The increase in profit allocated to non-controlling interests was the cause, and improvement in profit attribution during the second half will be required to achieve the full-year plan.

2. Inventory levels: Inventories were ¥1256.1B, accounting for 10.2% of total assets and increasing from ¥1233.4B in the same period of the previous year. If demand or raw material costs fluctuate, inventory adjustments could affect profit margins.

3. Structural factors in the business portfolio: While PersonalCare is expected to face structural constraints in domestic demand, PetCare is driving the Company with high growth and a high profit margin. The growth gap between the segments could affect the future earnings mix.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both Operating Margin and Net Income Margin exceed the industry median, indicating that profitability is relatively favorable compared with the manufacturing industry average.

Growth and Capital Efficiency

The Revenue Growth Rate is below the industry median, indicating that growth is relatively moderate compared with the Company’s high level of profitability.

※Source: Compiled by the Company

Key Earnings Highlights

1. While core-business profitability is improving, as reflected in an Operating Margin of 13.3% and Profit Before Tax growth of +6.6%, Net Income attributable to owners of the parent declined -1.9% YoY, requiring attention to the attribution structure of profit growth.

2. Operating Cash Flow was equivalent to 1.50 times Net Income attributable to owners of the parent, indicating favorable cash conversion. The financial base is solid, with net cash of approximately ¥2411B and an Equity Ratio of 65.9%. Total shareholder returns of ¥346.6B, including dividends and share repurchases, were implemented within the range of Free Cash Flow.

3. The PetCare segment demonstrated growth and profitability above the Company-wide average, with Revenue growth of YoY +9.6%, profit growth of YoY +21.6%, and a profit margin of 19.0%, increasing its relative importance in the business mix.

Theoretical Share Price (Reference Value)

Sensitivity: ¥465–¥492 at Cost of Equity ±1%, and ¥478–¥478 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this does not constitute a forecast of the market share price or a recommendation of any specific investment action, nor does it predict or guarantee future share prices.)

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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 responsibility, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q2 results were operationally strong, with revenue growth and substantial margin expansion, although profit attributable to owners declined modestly. Revenue increased 4.9% YoY to ¥487.1bn. Gross profit rose to ¥198.3bn and the gross margin expanded by 174bp YoY to 40.7%. Operating income increased 14.1% YoY to ¥65.0bn. The operating margin improved by 107bp YoY to 13.3%, placing profitability in the upper end of the stated 8–15% “good” range. The operating-income increase materially outpaced revenue growth, indicating favorable gross-margin development and positive operating leverage despite SG&A rising 7.6% YoY to ¥133.2bn. Profit before tax rose 6.6% to ¥66.6bn. Total net income increased 4.6% to ¥48.8bn, while profit attributable to owners declined 1.9% to ¥41.0bn. Accordingly, the owners’ net margin declined by approximately 59bp YoY to 8.4%, despite the improvement in operating profitability. Finance income of ¥5.2bn exceeded finance costs of ¥3.1bn, resulting in an interest burden of 1.024x and confirming that financing costs are not constraining earnings. The effective tax rate was 26.7%, producing a tax burden of 0.616, which was the principal drag between operating earnings and earnings attributable to owners. Operating cash flow was ¥61.6bn, exceeding attributable earnings by 1.50x and supporting high cash conversion. Free cash flow was ¥44.6bn after ¥11.0bn of capital expenditures. The company also deployed ¥19.0bn toward share repurchases and paid ¥15.7bn in dividends to owners during the first half. Revenue has reached 48.0% of the ¥1,015.0bn full-year forecast, broadly consistent with a normal first-half run rate, while attributable profit has reached 58.6% of the ¥70.0bn forecast, 8.6 percentage points ahead of the standard 50% progress rate. Management has revised its forecast, and the above-plan earnings progress creates a favorable execution base for the second half. The key issues for the outlook are whether elevated inventory days normalize, whether the improved gross margin can be retained, and whether shareholder distributions remain calibrated to free-cash-flow generation.

Profitability Analysis

Annualized reported ROE is 9.1%, decomposed into an 8.4% net profit margin, 0.791x asset turnover and 1.36x financial leverage. This shows that returns are primarily supported by a solid consumer-products margin and efficient asset utilization rather than aggressive balance-sheet leverage. Financial leverage is conservative and therefore is not a material contributor to, or risk for, ROE. The most notable operating change was margin expansion: gross margin rose to 40.7% from approximately 39.0% a year earlier, while operating margin rose to 13.3% from approximately 12.3%. The 14.1% increase in operating income versus 4.9% revenue growth demonstrates favorable operating leverage. SG&A increased 7.6% YoY, faster than sales, but the 9.6% increase in gross profit more than absorbed this cost growth; the margin outcome therefore remains constructive. The extended DuPont analysis shows a 0.616 tax burden and a 1.024x interest burden. The interest burden above 1.0x reflects net finance income, while the tax burden explains much of the gap from EBIT to net income. Profit attributable to owners declined 1.9% despite higher operating income, resulting in a lower owners’ net margin of 8.4%. Annualized ROE of 9.1% is respectable but below the stated 10–15% benchmark for a “good” ROE profile. Sustained improvement in gross margin and SG&A discipline would be the clearest route to improving this return profile without increasing leverage.

Growth Assessment

First-half revenue growth of 4.9% to ¥487.1bn was accompanied by a 14.1% increase in operating income, indicating that growth was profitable rather than purely volume-led. Gross profit increased 9.6% YoY, materially faster than sales, and was the main driver of operating-income expansion. The company’s annual revenue forecast of ¥1,015.0bn implies 7.4% YoY growth for the full year. First-half revenue progress of 48.0% is only 2.0 percentage points below the normal 50% first-half benchmark and does not itself indicate a material execution shortfall. Full-year attributable profit is forecast at ¥70.0bn, up 7.3% YoY, and Q2 cumulative attributable profit represents 58.6% of that target. This 8.6-percentage-point lead versus a standard 50% first-half progress rate provides an earnings buffer, although the second half must still absorb normal seasonality and investment needs. Forecast EPS of ¥40.68 compares with cumulative first-half EPS of ¥23.75. Operating performance appears stronger than the attributable-profit trend, as operating income rose while owners’ earnings were slightly lower YoY. Acquisition cash outflow of ¥22.0bn represented about 4.5% of first-half revenue, indicating active but not aggressive portfolio investment. Intangible assets increased to ¥113.8bn, or 9.2% of assets, which remains below the 20% concentration benchmark. Revenue sustainability will depend on maintaining brand strength, pricing and mix, as well as demand resilience in core personal-care categories. For a consumer-products manufacturer, pulp, polymer, energy and logistics-cost volatility remains a material risk to the gross-margin recovery.

Financial Health

The balance sheet is conservatively capitalized, with total equity of ¥907.0bn, an equity ratio of 65.9%, and total liabilities of ¥324.5bn. Interest-bearing debt was only ¥13.3bn, equivalent to roughly 1.5% of total equity, while debt/capital was 1.4%. The reported debt-to-equity ratio of 0.36x is comfortably below the 1.0x conservative benchmark and far below the 2.0x warning threshold. Current assets were ¥621.0bn and current liabilities were approximately ¥250.1bn, implying a calculated current ratio of about 2.48x; this is well above the 1.0x warning threshold. Cash and cash equivalents of ¥254.5bn were also substantially above short-term loans of ¥6.9bn. The REFINANCING_RISK alert is driven by a short-term debt ratio of 51.4%, meaning just over half of interest-bearing borrowings mature within one year. Its root cause is the increase in short-term loans from ¥3.5bn to ¥6.9bn, or 96.4% YoY. However, its practical impact is limited by the very low absolute debt balance and substantial cash holdings; refinancing exposure is not material on the reported balance sheet. The LIQUIDITY_STRESS alert states a cash/short-term-debt ratio of 0.00x, but the reported cash balance and short-term loans imply cash coverage of roughly 37x. The alert therefore is not corroborated by the reported balance-sheet amounts, and liquidity is strong on the available figures. Other financial assets totaled ¥248.8bn across current and noncurrent classifications, further supporting financial flexibility. Noncurrent financial liabilities totaled ¥31.2bn, and total noncurrent liabilities were limited at ¥74.4bn. Net defined-benefit liability was ¥16.1bn, equivalent to approximately 1.8% of total equity and manageable in the context of the capital base. No maturity mismatch is evident because liquid current assets materially exceed current obligations.

Notable B/S Changes

Short-term loans: +¥3.4bn (+96.4% YoY) to ¥6.9bn - the increase drives the 51.4% short-term debt ratio, but absolute refinancing exposure remains limited given ¥254.5bn of cash. Current assets: -¥20.6bn to ¥621.0bn - mainly associated with lower current financial assets and receivables, while liquidity remains strong. Trade and other receivables: -¥8.4bn to ¥146.4bn - supports collection discipline and partly offsets the modest inventory increase. Trade and other payables: -¥18.3bn to ¥203.3bn - reduces spontaneous supplier financing and should be monitored alongside working-capital cash conversion. Other financial assets (current): -¥19.9bn to ¥80.4bn - a notable reallocation or reduction in liquid financial holdings, although cash and total financial assets remain substantial. Other financial liabilities (noncurrent): +¥7.9bn (+33.6% YoY) to ¥31.2bn - requires monitoring as non-debt financial obligations have increased. Intangible assets: +¥16.8bn to ¥113.8bn - consistent with acquisition and investment activity; at 9.2% of assets, intangible-asset concentration remains moderate. Total equity: +¥15.7bn to ¥907.0bn - strengthened by earnings and positive OCI, supporting the 65.9% equity ratio.

Cash Flow Quality

Cash-flow quality was strong. Operating cash flow was ¥61.6bn, equal to 1.50x profit attributable to owners of ¥41.0bn, well above the 0.8x earnings-quality warning threshold. The negative 1.7% accruals ratio also supports cash-backed rather than accrual-dependent earnings. Free cash flow was ¥44.6bn after capital expenditures of ¥11.0bn, providing meaningful internal funding capacity. Operating cash flow remained ahead of total net income of ¥48.8bn as well, at approximately 1.26x. Inventory working-capital movement was a ¥0.9bn cash inflow, while other working-capital changes used ¥1.4bn; neither amount indicates a material working-capital-driven inflation of operating cash flow. Income taxes paid were ¥18.2bn, broadly consistent with the tax expense profile. Interest received of ¥3.5bn exceeded interest paid of ¥0.6bn, consistent with the company’s net-cash financial position. The HIGH_INVENTORY_DAYS alert identifies annualized inventory days of 79, above the 60-day manufacturing efficiency benchmark. The root cause is inventory of ¥125.6bn, equal to 10.2% of total assets and slightly higher than ¥123.3bn a year earlier. While the increase in inventory itself was modest at 1.8% YoY and below sales growth, 79 days nonetheless warrants monitoring for slow-moving stock, inventory obsolescence and pressure on future cash conversion. The impact is currently moderated by strong operating cash generation, but a sustained rise in inventory days could absorb cash and weaken future free-cash-flow conversion. Investing cash flow of ¥17.0bn included ¥22.0bn of acquisition spending, partly offset by other investing inflows. Financing cash outflow of ¥47.6bn primarily reflected dividends, share repurchases and other shareholder-related cash uses.

Dividend Sustainability

The Q2 dividend was ¥11.00 per share, and the calculated dividend payout ratio was 49.9%. This is below the 60% sustainability benchmark and indicates that the ordinary dividend remains covered by earnings. Free cash flow coverage of the dividend was 2.18x, demonstrating ample first-half cash support for the distribution. The full-year dividend forecast is ¥22.00 per share, equal to roughly 54.1% of forecast EPS of ¥40.68. This implies a modestly higher but still sustainable ordinary payout ratio if the full-year earnings target is achieved. Dividends paid to owners during the first half were ¥15.7bn. Share repurchases were ¥19.0bn, bringing dividends plus buybacks to ¥34.7bn. On an attributable-profit basis, the first-half total return ratio was approximately 84.5%, above the 80% sustainability reference point but below 100%. Free cash flow covered first-half dividends plus buybacks by approximately 1.29x. Thus, capital returns were cash-funded in the period, but the margin of coverage becomes narrower once repurchases are included. Continuation of the current return pace is sustainable provided operating cash flow and free cash flow remain at least broadly stable and inventory does not become a significant cash drag.

Risk Assessment

Business risks include Input-cost risk: pulp, polymers, packaging materials, energy and logistics expenses can pressure the 40.7% gross margin if pricing or mix cannot offset inflation., Consumer demand and competitive risk: personal-care categories require continued brand investment, product innovation and shelf-space competitiveness to sustain revenue growth., Inventory-management risk: annualized inventory days of 79 exceed the 60-day benchmark, raising the risk of slower sell-through, markdowns or a future working-capital cash outflow., Foreign-exchange and overseas execution risk: translation differences contributed ¥99.7bn to OCI, demonstrating that overseas asset values and reported equity can be sensitive to currency movements., M&A integration risk: acquisition spending of ¥22.0bn in the first half requires successful integration and realization of expected commercial or cost benefits..

Financial risks include Short-term debt ratio risk: 51.4% of interest-bearing debt is short term, and short-term loans increased 96.4% YoY to ¥6.9bn. Absolute refinancing risk is low because cash is ¥254.5bn., Capital-return intensity risk: dividends plus repurchases represented an estimated 84.5% of first-half attributable earnings, reducing flexibility if earnings or cash flow weaken., Tax and minority-interest sensitivity: operating income growth did not translate into growth in owners’ profit, leaving owners’ earnings more exposed to below-operating-line movements..

Key concerns include Whether the 107bp operating-margin expansion can be sustained while SG&A growth of 7.6% remains above sales growth of 4.9%., Whether inventory days can move toward the sub-60-day benchmark without impairing product availability or growth., Whether the revised full-year forecast can be delivered after first-half revenue reached 48.0% of the annual target., Whether buybacks remain aligned with free-cash-flow generation as acquisition and operating investment requirements continue..

Investment Implications

Key takeaways include Operating momentum was favorable: revenue grew 4.9% YoY, operating income grew 14.1% YoY, and operating margin expanded to 13.3%., Cash conversion was strong, with operating cash flow at 1.50x attributable earnings and free cash flow of ¥44.6bn., The balance sheet provides substantial resilience, supported by a 65.9% equity ratio, ¥254.5bn of cash and only ¥13.3bn of interest-bearing debt., Attributable profit declined 1.9% YoY despite operating-income growth, making the translation from operating performance to owners’ earnings a central monitoring point., The 58.6% first-half progress rate toward the full-year attributable-profit forecast is ahead of the standard 50% run rate, whereas the 48.0% revenue progress rate is broadly on schedule., Inventory efficiency and the pace of shareholder returns are the principal cash-allocation variables to monitor..

Metrics to watch include Operating margin and gross margin retention after the Q2 13.3% operating margin and 40.7% gross margin., Annualized inventory days, currently flagged at 79 days., Revenue progress versus the ¥1,015.0bn full-year forecast and attributable-profit progress versus the ¥70.0bn forecast., Operating cash flow and free cash flow relative to dividends and share repurchases., Short-term borrowing levels and the share of total debt maturing within one year., Acquisition cash outflows and the growth of intangible assets following portfolio investment..

Regarding relative positioning, The company presents a high-quality defensive consumer-products financial profile: operating margin is in the good range, cash conversion is strong, and leverage is exceptionally low. Its annualized 9.1% ROE is sound but below the 10–15% level associated with a stronger return profile, leaving margin durability, asset efficiency and disciplined capital allocation as the key determinants of relative financial performance.