Earth (4985) FY2026 Q2 Earnings Report

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Executive Summary

The cumulative Q2 of the fiscal year ending December 2026 resulted in higher revenue but lower earnings, with the key focus being margin pressure from increased SG&A expenses rather than profitability. Revenue increased to ¥1,090.5B (+6.2% YoY), while Operating Income declined to ¥132.2B (△2.5%), Ordinary Income to ¥134.8B (△1.3%), and Net Income to ¥90.9B (△5.9%). Revenue growth was achieved in both the Household Products Business and the Comprehensive Environmental Hygiene Business segments; however, SG&A expenses expanded at a faster pace than revenue, primarily due to higher advertising and promotional expenses, causing the Operating Income margin to decline to 12.1% (approximately 13.2% in the previous year).

Factors Affecting Earnings

【Revenue】Revenue increased 6.2% YoY to ¥1,090.5B. By segment, the Household Products Business generated revenue of ¥909.95B (83.5% of the total, +5.8% YoY), while the Comprehensive Environmental Hygiene Business generated ¥181.9B (16.7% of the total, +7.7% YoY), with both businesses contributing to revenue growth. The growth rate of the Comprehensive Environmental Hygiene Business exceeded that of the Household Products Business.

【Profit and Loss】Operating Income declined 2.5% YoY to ¥132.2B. The gross margin declined from the previous year to 43.3%, while SG&A expenses increased 7.7% YoY to ¥340.1B, exceeding the 6.2% revenue growth rate. One of the primary factors was the increase in advertising and promotional expenses to ¥56.8B (16.7% of SG&A expenses). Ordinary Income declined 1.3% YoY to ¥134.8B, with non-operating income and expenses, including dividend income and foreign exchange gains, making a slight contribution and mitigating the decline in Operating Income. Net Income declined 5.9% YoY to ¥90.9B, as extraordinary losses of ¥4.3B (including impairment losses of ¥0.8B related to the liquidation of Ansu Daily Chemical (Suzhou) Co., Ltd.) weighed on final earnings. Overall, the company recorded higher revenue but lower earnings, primarily due to a temporary decline in margins resulting from front-loaded investment in SG&A expenses.

Segment Analysis

The Household Products Business recorded revenue of ¥909.95B (+5.8% YoY) and segment profit of ¥122.6B (△1.8% YoY), resulting in a margin of 13.5% (approximately 1pt lower YoY). Despite higher revenue, profit declined, making this business the primary cause of the decline in the overall company margin. The Comprehensive Environmental Hygiene Business recorded revenue of ¥181.9B (+7.7% YoY) and segment profit of ¥9.7B (+9.1% YoY). Although its margin of 5.3% was below that of the Household Products Business, it achieved both revenue and profit growth. The Household Products Business continued to account for approximately 92.7% of total segment profit, and the margin trend in this business remains the primary factor determining company-wide performance.

Key Financial Metrics

【Profitability】The Operating Income margin was 12.1% and the gross margin was 43.3%, both declining from the previous year. The Net Income margin was 8.3%. 【Cash Flow Quality】Operating Cash Flow (OCF) was △¥5.3B, a significant deterioration from +¥32.7B in the previous year, resulting in negative OCF/Net Income. The primary factor was the ¥201.4B increase in trade receivables, indicating a delay in the conversion of earnings into cash. 【Investment Efficiency】ROE (annualized) remained high at 20.8%. Capital expenditures of ¥18.4B were below depreciation and amortization of ¥24.0B, indicating a maintenance-oriented investment stance rather than expansion as of the first half. 【Financial Soundness】The Equity Ratio was 52.6%, indicating a stable financial base. Free Cash Flow was △¥35.8B, meaning that investment and shareholder returns were not being funded solely through internal funds and were supplemented by an increase in short-term borrowings (Financing CF +¥9.2B).

Cash Flow Analysis

Operating Cash Flow was △¥5.3B, a substantial deterioration from +¥32.7B in the previous year, primarily due to the ¥201.4B increase in trade receivables. The accumulation of accounts receivable, which significantly exceeded revenue growth (+6.2%), delayed the conversion of earnings into cash. Investing CF was △¥30.4B, including capital expenditures of ¥18.4B as well as the acquisition of subsidiary shares and other items. As a result, Free Cash Flow was △¥35.8B, indicating that dividends and investments were not being funded by operating activities. Financing CF was +¥9.2B, with increased short-term borrowings covering the funding shortfall. Cash and deposits stood at ¥205.4B, providing ample near-term liquidity; however, progress in collecting trade receivables during the second half will be directly linked to an improvement in cash management.

Quality of Earnings

The gap between Ordinary Income of ¥134.8B and Net Income of ¥90.9B was attributable to extraordinary losses of ¥4.3B (including impairment losses of ¥0.8B) and income taxes and other taxes of ¥39.7B. The extraordinary losses were temporary factors, including impairment of fixed assets associated with the liquidation of Ansu Daily Chemical (Suzhou) Co., Ltd., and should be evaluated separately from recurring earnings power. Non-operating income of ¥5.5B included dividend income of ¥1.0B and foreign exchange gains of ¥0.5B, neither of which was large enough to materially affect the profitability of the core business. Meanwhile, comprehensive income was ¥87.4B, slightly below Net Income of ¥90.9B, with adjustments related to retirement benefits of △¥4.1B and valuation differences on securities of △¥3.4B serving as negative factors. In addition, because OCF was below Net Income and accompanied by a sharp increase in trade receivables, the quality of earnings warrants monitoring from an accrual perspective, namely the divergence between accrual and cash accounting.

Earnings Forecast and Guidance

The full-year earnings forecast remains unchanged at revenue of ¥1,880.0B (+4.9% YoY), Operating Income of ¥90.0B (+11.3% YoY), and Ordinary Income of ¥95.5B (+7.4% YoY). First-half Operating Income of ¥132.2B has already exceeded the full-year forecast of ¥90.0B, representing a progress rate of 146.9% on a simple calculation. This suggests that the company may be incorporating a substantial increase in expenses or a decline in earnings due to seasonality in the second half. Since the company has maintained its plan, it would be useful to confirm the assumptions underlying the full-year plan, including promotional spending in the second half and trends in raw material and logistics costs.

Shareholder Returns

The interim dividend at the end of Q2 was ¥0 per share, while the full-year forecast dividend is ¥130 per share. Based on the average number of shares outstanding during the period of 21,874 thousand shares, the estimated annual total dividend amount is approximately ¥28.4B, resulting in a Payout Ratio of approximately 45.9% against the full-year Net Income forecast of ¥62.0B. Compared with first-half Net Income of ¥90.9B, the total dividend payout ratio remains approximately 31.3%. Meanwhile, first-half Free Cash Flow was △¥35.8B, and the current cash flow level does not sufficiently cover the planned annual dividend amount. The stability of the dividend funding source depends on progress in collecting trade receivables and the recovery of OCF in the second half.

Risk Factors

1. Delays in collecting trade receivables: Accounts receivable increased 69.7% YoY (¥393.5B), significantly outpacing the revenue growth rate. This directly resulted in the deterioration of OCF (△¥5.3B), and collection progress in the second half will determine cash management and cash-generating capacity.

2. Declining profitability in the core segment: Despite revenue growth (+5.8%), the Household Products Business recorded a decline in profit (△1.8%), and its margin declined by approximately 1pt from the previous year. If the increase in SG&A expenses, particularly advertising and promotional expenses, becomes entrenched, the recovery in company-wide profitability may be delayed.

3. Divergence between the full-year plan and first-half results: First-half Operating Income of ¥132.2B substantially exceeded the full-year forecast of ¥90.0B, suggesting that the company may be anticipating a corresponding increase in expenses or seasonal factors in the second half. The assumptions underlying the unchanged plan should be monitored closely.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Returns

The company’s profitability exceeds the industry median in both Operating Income margin and Net Income margin, representing a relatively favorable level.

Growth and Capital Efficiency

The revenue growth rate was below the industry median, indicating that the company’s revenue growth pace is relatively moderate within the industry.

※Source: Company analysis

Key Takeaways from the Earnings Results

1. The Operating Income margin of 12.1% and Net Income margin of 8.3% exceed the industry median, but both show a declining trend from the previous year. The margin trajectory of the core Household Products Business is therefore a structural factor that will determine future profitability.

2. OCF shifted from positive to negative compared with the previous year, and Free Cash Flow also declined to △¥35.8B. The sharp increase in trade receivables was the underlying factor, making the status of earnings conversion into cash a key point identifiable from the earnings data.

3. Although first-half Operating Income substantially exceeded the full-year forecast, the plan remains unchanged. The cost structure and the incorporation of seasonality in the second half are therefore key points in the earnings results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,695–¥3,907 at ±1% for the cost of equity, and ¥3,792–¥3,803 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥8.8 per share is added back to earnings (to account for a non-cash expense and enhance comparability with IFRS companies).
• Since the progress of Net Income against the full-year forecast (142%) exceeds the standard level (50%), forecast EPS is adjusted upward within a maximum range of +10% (because companies with progress ahead of plan tend to exceed their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Since 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 from the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated at a slightly 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; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast 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 benchmarks are reference information compiled by the company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional as necessary.

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