Medical Ikkou Group Co.,Ltd. Q4 FY2025 earnings call

Overall Consolidated Performance

• Full year (February 2025) consolidated revenue hit 48.393 billion yen, up 8.493 billion yen year-over-year; operating profit was 1.692 billion yen (up 132 million yen YoY), ordinary profit 1.816 billion yen (up 64 million yen YoY), parent net profit 1.133 billion yen (up 93 million yen YoY). All top-line and profit metrics hit all-time records.

Financial Position and Capital Return

• Cash and cash equivalents declined to 6.768 billion yen due to M&A and capital investment; interest-bearing debt exceeded 100 billion yen, but net interest-bearing debt stood at 871 million yen, which management views as well contained relative to 2.455 billion yen in EBITDA. Net interest-bearing debt stayed at sustainable levels.
• Equity ratio remained at 41.2%, above the 40% target level. ROE improved slightly to 8.3% from 8.2% YoY.
• A full year dividend of 120 yen per share (60 yen interim, 60 yen year-end) is planned, with a 36.1% payout ratio.

Operational Expansion Highlights

• Over the past 1-2 years, the company rapidly expanded its overall footprint to cover 1 prefecture, 1 territory, 2 urban prefectures and 22 prefectures across Japan, from a smaller regional base.
• The specialized visiting pharmacy service for nursing facility residents, launched 3 years prior, has seen steady demand growth, and the company is rolling out this service across all stores to leverage synergy between its pharmacy and care businesses.
• Seven M&A transactions were completed during the period, with goodwill increasing only 122 million yen YoY, which management says was well controlled.

1. Dispensing Pharmacy Business: Revenue was 24.709 billion yen, contributing 51% of total consolidated revenue; operating profit was 1.234 billion yen, down 171 million yen year-over-year. The business added 6 acquired stores and 1 new opened store (1 store closed), reaching 100 total stores. Total prescription volume saw a slight increase overall from M&A, though existing store volume declined; revenue grew from unit price increases and acquisition synergies, but higher labor and other costs pushed profit down, with 140 million yen in store impairment charges recorded.
2. Healthcare Business: Revenue was 8.121 billion yen, contributing 16.8% of total consolidated revenue; operating profit was 163 million yen, down 10 million yen year-over-year. Revenue grew from unit price increases at existing facilities and an acquired business in Tokyo (the company's first Tokyo entry for care services), but profit declined due to rising labor costs and upfront pre-opening costs for a new facility in Mie Prefecture opened in March 2025. The business operates 113 total facilities across Japan, expanding into Tokyo during the period.
3. Pharmaceutical Wholesale Business: Revenue was 15.357 billion yen, contributing 31.7% of total consolidated revenue; operating profit was 344 million yen, up 168 million yen year-over-year. This segment drove the company's overall revenue growth, with a 6.921 billion yen year-over-year revenue increase from multiple acquisitions completed in the period. The business faced rapidly rising purchase costs, but scale expansion from M&A helped offset these pressures, and it expanded the company's geographic footprint into new regions including Shikoku and expanded coverage in Chiba Prefecture.

• The company launched its new 3-year "Re-Start 1,2,3 Plan" from FY2026 (March 2025) through FY2028 (February 2028), targeting 600 billion yen in total consolidated revenue and 25 billion yen in operating profit by the end of the plan period.
• Segment-level revenue targets for FY2028 are: 300 billion yen for Dispensing Pharmacy, 200 billion yen for Pharmaceutical Wholesale, 100 billion yen for Healthcare.
• Profit targets by fiscal year are: 19.5 billion yen operating profit for FY2026, 22.8 billion yen for FY2027, and 25 billion yen for FY2028.
• Starting from FY2026, the company committed to maintaining a dividend payout ratio of at least 35%.
• Growth will be driven primarily by M&A to expand top-line revenue, with a focus on realizing integration synergies early, reducing costs, opening new pharmacies and care facilities, and building out the synergetic business model across the three core segments.

• The dispensing pharmacy business faces structural pressure from rising labor costs, and existing store prescription volume has declined, leading to lower segment profit. The company recorded material impairment charges for underperforming stores in the latest period.
• The pharmaceutical wholesale industry has faced rapidly rising purchase costs that pressure margins, though scale expansion from M&A has helped partially offset this pressure.
• The healthcare business faces rising labor costs that weigh on profitability, and upfront pre-opening costs for new facilities near-term pressure segment profit.
• M&A carries the risk of integration challenges, and pursuing acquisitions of struggling operators would not improve the company's overall financial position, creating a dilemma for acquisition targeting.
• The company noted that its stock price has underperformed despite improving operating results, though management did not outline specific material risk factors beyond market dynamics.

Q: What is the strategic approach to M&A in pharmaceutical wholesale, what is the priority use of operating cash flow over the 3-year plan, and what does management view as the reasons for the recent weak stock price? / A: The company operates as the regional agent for generic drug maker Sawai Pharmaceutical, and it is now the largest agent for Sawai by revenue. Larger scale brings lower procurement costs as is standard across all industries. The company focuses on completing M&A that does not damage the firm's financial position, with goodwill growth kept low despite large revenue gains from recent deals. Priority is given to high-return investments first, with shareholder return governed by the committed 35%+ payout ratio policy. Management declined to comment on stock price levels, noting the market sets prices based on its own view.

Q: What is the cross-segment synergy from operating all three core businesses (pharmacy, healthcare, wholesale) together? / A: As Japan's population ages, more elderly will reside in nursing facilities, and few facilities currently have specialized pharmacists manage resident medications (most handle it in-house). The company's co-located pharmacies can take on this specialized management role for internal and external facilities, which reduces workload for facility staff and eliminates medication errors/omissions for residents. This expanded pharmacy business also drives increased volume for the company's generic drug wholesale segment. In the current environment of relative deflation for regulated industry prices, reducing operational waste from synergy is key to improving overall profitability.

Q: For the dispensing pharmacy business' 300 billion yen revenue target, will growth be driven mostly by M&A or organic new store openings, and what is the acquisition strategy? / A: Pharmaceutical dispensing is already a highly penetrated market, so there is very limited opportunity for organic new store openings, meaning M&A will be required to hit the 300 billion yen target. Based on current average revenue per store, the target implies roughly 120 total stores (up from 100 today). The company takes a patient, opportunistic approach to acquisitions, with deals coming via brokers or direct inbound offers, and it does not actively pursue large distressed chains. Most inbound opportunities are for small numbers of stores, and the company avoids acquiring heavily underperforming operations, as these would not strengthen the company's financial position.