GUNZE LIMITED Q2 FY2026 earnings call

Overall Interim Financial Results

• Consolidated net sales totaled 65.27 billion yen, down 2.059 billion yen year-over-year; 1.6 billion yen of this decline comes from the discontinued electronic components business, leaving an underlying sales shortfall of just over 0.3 billion yen.
• Operating profit totaled 3.186 billion yen, down 0.379 billion yen year-over-year; ordinary profit totaled 3.205 billion yen, down 0.462 billion yen year-over-year; parent net income was a loss of 0.658 billion yen, after a 3.498 billion yen special loss related to apparel structural reform recorded in Q1.
• Management confirms that core growth businesses (Medical and Engineering Plastics) retain their underlying competitiveness with no fundamental issues; domestic engineering plastics sales grew strongly at Gunze's Moriyama circular recycling factory, but overseas headwinds offset this growth in H1.

Mid-Term Management Plan Second Stage Corporate Structure Improvement Initiatives

Gunze entered the second stage of its mid-term management plan in 2025, after the first stage failed to hit original profit/ROE targets. Three core projects are underway to improve corporate structure:

• Apparel Structural Reform: The goal is to restructure apparel into a stable profit-contributing business. Initiatives include winding down domestic production bases, and offering a voluntary early retirement program for apparel employees aged 40 and over, which received 82 applicants. The program provides career support, enhanced retirement allowances, and outplacement services with no pre-set target headcount; all related costs have already been incorporated into results. The segment is currently focused on brand consolidation, SKU reduction, accelerating the direct-to-consumer e-commerce shift, and inventory compression.
• Human Resources System Reform: Gunze is reforming its 20+ year old seniority-based system to enable workforce activation, planned for launch in spring 2026. The new system will respect individual choice, support long tenure, eliminate friction for mid-career hires, shift to a performance-based model instead of seniority, prioritize fairness, transparency, and a balance between individual career goals and organizational needs. It targets hiring of autonomous, self-motivated employees, with a target of raising mid-career hires to 50% of total annual hiring.
• Build Up Pro (BU Pro) Company-Wide Rationalization: This initiative targets both cost reduction and long-term corporate structure improvement. Unlike prior internal cost-cutting that only compared performance to prior year results, BU Pro uses external expertise, sets up a dedicated headquarter team, and benchmarks all business functions against industry peers and competitors to identify underperforming areas. The goal is to implement sustained cost-cutting and embed a culture of continuous improvement to prepare for long-term demographic change and industry consolidation.

1. 機能ソリューション事業 (Functional Solutions): The segment recorded lower revenue but higher year-over-year profit. Revenue fell 1.6 billion yen entirely due to the discontinuation of the electronic components business at the end of the prior fiscal year. Within the segment, plastic film faced weak domestic consumer demand from food price hikes and severe low-price competition globally from cheap Chinese chemical imports. Engineering plastics saw solid performance for office automation (OA) applications, but this was offset by very weak demand from the semiconductor sector, plus new factory depreciation costs. Overall, the discontinuation of the low-margin electronic components business improved segment profit. Segment revenue contribution share was roughly stable compared to 2022 when excluding the discontinued electronic components business, and operating margin slightly improved.
2. メディカル事業 (Medical): Revenue saw a small year-over-year increase, but profit declined. Domestic absorbable products grew, but faced intense competition for supplied medical lasers. In China, tissue reinforcement materials grew steadily, but other product lines were hit by government regulations on high-cost healthcare that pushed selling prices down. Additional headwinds included lower yen-denominated revenue from renminbi depreciation, new factory depreciation from the Ayabe facility expansion, and higher fixed costs from increased staffing for anti-adhesion materials expansion. Segment revenue contribution share grew compared to 2022, while operating margin declined. Operating margin fell from 19.8% to 14.6% year-over-year for the quarter.
3. アパレル事業 (Apparel): Revenue saw a small year-over-year decrease, and profit declined. Traditional brick-and-mortar retail channels continued to face headwinds from reduced shelf space and consumer spending cutbacks, but e-commerce sales of core products (Acedron, women's innerwear) grew by more than 20%. The segment is prioritizing inventory reduction and production adjustment as part of ongoing structural reform, which forced production cuts that raised per-unit production costs. It also saw the largest impact from wage increase-driven fixed cost growth. Operating margin declined, and revenue contribution share remained roughly stable.
4. ライフクリエイト事業 (Life Create): The segment achieved both revenue and profit growth. The core Tsukashin shopping center business performed well, supported by post-renewal momentum and new customers from a nearby large-scale residential development. Sports clubs saw improved profitability after prior year unprofitable store closures, with stable revenue. The greening segment faced headwinds from a post-World Expo large project pullback and construction delays from extreme heat. Segment revenue contribution share fell slightly compared to 2022, while profit share grew and operating margin slightly improved.

• Management maintains the full-year consolidated earnings guidance originally issued at the start of the fiscal year, with no upward or downward revisions. H1 results were slightly below plan but within management's original expectations, and sequential improvement was seen in Q2, with full recovery expected in H2.
• All segment-level full-year earnings guidance is also maintained with no revisions.
• The full-year annual dividend forecast of 216 yen per share is maintained unchanged, in line with the original commitment to shareholders.
• Gunze will launch a new share repurchase program from November 6, 2025 to March 24, 2026, with an upper limit of 1.4 million shares or 5 billion yen, aligned with prior announced capital slimming and shareholder return policies.
• Recent stock split and shareholder benefit expansion has increased individual shareholders' ownership weight from 33% to 40%, adding 13,000 new individual shareholders, which meets management's goal of growing product fans among retail investors.

• Externally, the Chinese economic slowdown and policy changes create material headwinds: Renminbi depreciation reduces yen-denominated revenue from the Chinese medical business, while Chinese government price/volume controls on high-cost healthcare have pushed down selling prices for medical products in China. For chemical and plastics businesses, restarted Chinese chemical capacity combined with weak global demand has led to a flood of low-priced Chinese chemical exports to ASEAN and other regional markets, pushing down industry selling prices and compressing margins.
• Internally, new capacity investments in core growth businesses (Medical and Engineering Plastics) are not yet contributing to profit: new factories were completed in H1 and depreciation has started, but equipment relocation, facility setup, and new employee training are still ongoing, so sales expansion has not caught up to increased fixed cost, dragging down near-term profits.
• Apparel structural reform is focused on inventory and production adjustment in the near term, so the segment cannot be expected to contribute material profit growth in the current fiscal year, and faces ongoing headwinds from consumer spending cutbacks in brick-and-mortar retail and wage-driven fixed cost growth.

Q: H1 delivered lower revenue and profit with slow progress, why keep full-year guidance unchanged, and what specific H2 turnaround plans do you have? / A: Management confirms H1 results were slightly below plan but within pre-season expectations. The decline stems from expected upfront investment costs for new capacity in growth businesses, plus unanticipated external China-related headwinds. Management expects the new capacity investments in Medical and Engineering Plastics will reach full commercial operation in H2, delivering improved production cost competitiveness and enabling market expansion. Core business competitiveness remains intact, so no guidance change is needed.

Q: How long do you expect the negative impact from Chinese market weakness on Functional Solutions and Medical to last, and what mitigation plans do you have? / A: Chinese economic outlook is currently highly uncertain, but Gunze is implementing targeted measures to minimize impact. For the plastics business, Gunze will accelerate manufacturing cost reduction and focus on developing and selling differentiated higher-value products to compete with low-cost Chinese imports. For the Medical business, Gunze will expand its sales target base beyond large hospitals to small and medium-sized hospitals in China to offset regulatory pressure on high-value products.

Q: What is the goal of introducing a job-based system in HR reform, and what fields do you target for increased mid-career hiring? / A: The job-based system will shift management salaries to a performance-based structure tied to clear role responsibilities, replacing the old seniority-based system. Mid-career hiring already accounts for nearly 40% of annual hiring, with a target of 50% by the end of the mid-term plan. Hiring will focus on globally capable talent to support global expansion, and experienced talent for the growing Medical business, which is the company's core growth driver.

Q: Why grow individual shareholders, and is this for activist defense? / A: Growing individual shareholders is not for activist defense. Management expects more individual shareholders will become fans of Gunze products, particularly driving higher sales for apparel products, which is the core expected benefit.

Q: Why did Medical's operating margin fall from 19.8% to 14.6% year-over-year? / A: The decline comes from three main factors: ongoing Chinese healthcare cost control has increased price pressure and usage restrictions on high-value medical consumables, renminbi depreciation has created negative foreign exchange impact, and inventory write-downs from discontinuing distribution of a third-party imported product also dragged down margin.