Earth (4985) FY2026 Q1 Earnings Report

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Executive Summary

Although revenue growth was maintained, the increase in SG&A expenses exceeded sales growth, limiting the rate of operating income growth and resulting in a decline in net income. Revenue was ¥479.1B (+7.0% YoY), operating income was ¥63.4B (+1.1%), ordinary income was ¥63.0B (+2.4%), and net income attributable to owners of the parent was ¥44.6B (-4.7%). The decline in net income was primarily attributable to the absence of the ¥3.5B gain on step acquisition recorded in the same period of the previous year. On a pretax income basis, the decline in underlying earnings power appears limited.

Factors Affecting Results

【Revenue】Revenue increased 7.0% YoY to ¥479.1B. By segment, the core Household Products Business generated ¥429.6B (+5.6%), while the Comprehensive Environmental Sanitation Business generated ¥84.2B (+8.9%), with the latter posting the higher growth rate. Revenue growth was supported by increased sales in both businesses.

【Profitability】Operating income increased 1.1% YoY to ¥63.4B, while ordinary income increased 2.4% to ¥63.0B, securing profit growth; however, both rates were well below the 7.0% increase in revenue. Cost of sales increased 7.6% YoY and SG&A expenses increased 8.6%, both exceeding revenue growth. As a result, the gross margin declined to 44.0% from 44.3% and the operating margin declined to 13.2% from 14.0%. Net income was ¥44.6B, down 4.7% YoY, primarily due to the absence of the ¥3.5B gain on step acquisition recorded in the same period of the previous year. Extraordinary income and losses were generally immaterial in the current period. In summary, the key feature was that, although revenue and operating income both increased, profit growth failed to keep pace with revenue growth, while net income declined due to the reversal of a temporary factor.

Segment Analysis

The Household Products Business generated revenue of ¥429.6B (+5.6% YoY) and segment profit of ¥62.8B (+3.2%), with a profit margin of 14.6%. It is the core business, accounting for the majority of consolidated operating income of ¥63.4B. The Comprehensive Environmental Sanitation Business generated revenue of ¥84.2B (+8.9%) and segment profit of ¥2.8B (+32.5%), with a profit margin of 3.3%. Although its profit growth rate was high, its profitability was substantially below that of the Household Products Business. The Comprehensive Environmental Sanitation Business led revenue growth through its high growth rate, but the contribution to profit remains dependent on the Household Products Business.

Key Financial Metrics

【Profitability】The operating margin was 13.2%, down approximately 0.8pt from 14.0% in the same period of the previous year. The net profit margin was 9.3%, down approximately 1.1pt from 10.4%, while the gross margin also narrowed slightly to 44.0% from 44.3%.【Cash Quality】Cash and deposits decreased 25.5% YoY to ¥173.9B, while accounts receivable increased to ¥362.6B and finished-goods inventories increased to ¥309.3B, indicating that the expansion of working capital associated with revenue growth affected the cash balance.【Investment Efficiency】Annualized ROE remained high at 21.8%, while R&D expenses were ¥7.7B, equivalent to 1.6% of revenue.【Financial Soundness】The equity ratio improved to 50.9% from 50.2% in the same period of the previous year; however, short-term borrowings increased approximately 188.7% YoY to ¥214.2B, with the majority of interest-bearing debt being short-term.

Cash Flow Analysis

Although individual data from the statement of cash flows were not provided, changes in the balance sheet offer insight into funding trends. Cash and deposits decreased 25.5% YoY to ¥173.9B, while short-term borrowings increased approximately 188.7% to ¥214.2B, indicating greater reliance on external financing. Accounts receivable increased to ¥362.6B and finished-goods inventories increased to ¥309.3B, suggesting that the accumulation of operating receivables and inventories associated with revenue growth may have pressured the cash balance. Given the highly seasonal business structure, this may represent a temporary increase in working capital associated with expanded sales during the peak season; however, the progress of collections and inventory reduction will determine future funding trends.

Earnings Quality

The divergence between ordinary income and net income in the current period can be explained by the disappearance of a temporary factor that existed in the same period of the previous year. In the same period of the previous year, a ¥3.5B gain on step acquisition was recorded as extraordinary income, whereas extraordinary income and losses in the current period consisted only of a minor ¥0.03B loss on disposal of fixed assets and were effectively close to zero. Consequently, ordinary income increased 2.4% YoY, while net income decreased 4.7%, resulting in different year-on-year directions. Non-operating income consisted of small items such as dividends received and foreign exchange gains, and no factor was identified that would materially distort the quality of recurring earnings. The decline in net income was attributable to the reversal of a temporary factor and should not be interpreted as a deterioration in recurring earnings power itself.

Earnings Forecast and Guidance

The full-year company forecasts are revenue of ¥1880.0B (+4.9% YoY), operating income of ¥90.0B (+11.3%), and ordinary income of ¥95.5B (+7.4%). There were no revisions to the earnings or dividend forecasts during the quarter. Q1 cumulative progress rates were 25.5% for revenue, 70.4% for operating income, and 66.0% for ordinary income, with profit progress substantially exceeding revenue progress. This reflects the product characteristics of the business, in which seasonal demand is concentrated. The full-year operating margin is premised at 4.8%, compared with 13.2% on a standalone Q1 basis. Trends in promotional expenses and inventory levels after the peak season will provide indicators for assessing achievement of the full-year forecasts.

Shareholder Returns

The full-year dividend forecast is ¥130 per share, while the full-year EPS forecast is ¥283.79, implying a forecast payout ratio based solely on dividends of approximately 45.8%. This is below 60%, and the dividend burden relative to forecast earnings cannot be considered excessive. Net income attributable to owners of the parent in Q1 was ¥44.6B, reaching 71.9% of the full-year forecast of ¥62.0B. Even after taking seasonality into account, earnings progress is sufficient to support the dividend forecast. As no share repurchase results for the current period have been disclosed, the payout ratio is evaluated based solely on dividends.

Risk Factors

1. Expansion of working capital and reliance on short-term borrowings: Short-term borrowings increased approximately 188.7% YoY to ¥214.2B and account for the majority of interest-bearing debt. Accounts receivable of ¥362.6B and finished-goods inventories of ¥309.3B increased simultaneously with the decline in cash. The progress of collections and inventory reduction after the peak season will be an indicator of funding efficiency.

2. Downward trend in profit margins: The gross margin declined to 44.0% from 44.3%, while the operating margin declined to 13.2% from 14.0%. SG&A expense growth (+8.6%) exceeded revenue growth (+7.0%), and future margin trends will be influenced by improvements in pricing, product mix, and promotional efficiency.

3. Level of R&D investment: R&D expenses were ¥7.7B, equivalent to 1.6% of revenue. The level of investment in new product development and differentiation technologies in the household and sanitary products markets requires ongoing monitoring from the perspective of medium- to long-term competitiveness.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin exceed the industry median, placing profitability at a relatively high level within the industry.

Growth and Capital Efficiency

The revenue growth rate is slightly above the industry median but has not reached the upper end of the industry IQR, placing growth in the middle-to-upper range of the industry.

※Source: Compiled by the Company

Key Takeaways from the Results

1. Q1 delivered revenue growth of +7.0% and operating income growth of +1.1%; however, SG&A expense growth exceeded revenue growth, resulting in year-on-year contractions in both the operating margin and gross margin.

2. The 4.7% YoY decline in net income was attributable to the reversal of the ¥3.5B gain on step acquisition recorded in the same period of the previous year, while ordinary income increased 2.4% and therefore moved in the opposite direction. Excluding extraordinary income and loss factors, recurring earnings power was broadly maintained.

3. Increases in accounts receivable and finished-goods inventories, a decline in cash, and a sharp increase in short-term borrowings were observed simultaneously. The expansion of working capital associated with revenue growth is therefore a key point of focus in the financial data.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,524–¥3,726 at ±1% for the cost of equity, and ¥3,617–¥3,626 at ±0.1 for ω.

Notes:

• Because progress toward the full-year forecast for net income (72%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of forecast tend to exceed their forecasts. The adjustment may be excessive for highly seasonal businesses).
• Because 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).
• Because net assets include non-controlling interests, the theoretical value may be calculated at a somewhat high level.

(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; this 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, consulting a professional as necessary.

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