Earth Corporation FY2026 Q2 Earnings Report

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Executive Summary

Although Revenue increased 6.2%, higher SG&A expenses, including advertising and personnel expenses, weighed on earnings, resulting in a year-on-year decline in Operating Income, Ordinary Income, and Net Income—a result characterized by higher revenue but lower earnings. Revenue was ¥1,090.5B (¥1,026.7B in the previous year, +6.2%), Operating Income was ¥132.2B (¥135.5B, △2.5%), and Ordinary Income was ¥134.8B (¥136.6B, △1.3%). Net Income attributable to owners of the parent was ¥87.9B (¥93.8B in the previous year, △6.2%), while consolidated Net Income, including the portion attributable to non-controlling interests, was ¥90.9B (¥96.5B in the previous year, △5.9%). The primary drivers of higher revenue were expansion in both the core Household Products Business and the Comprehensive Environmental Hygiene Business. However, the Operating Income margin declined to 12.1% from the previous year due to increases in the cost of sales ratio and SG&A ratio.

Factors Affecting Financial Performance

【Revenue】Revenue was ¥1,090.5B, an increase of +6.2% year on year. On a segment-total basis, the Household Products Business generated ¥976.8B in revenue (approximately 89.6% of the total, YoY +5.8%), while the Comprehensive Environmental Hygiene Business generated ¥181.9B (YoY +7.7%); both segments contributed to revenue growth. Cost of sales was ¥618.2B, and the cost of sales ratio increased to 56.7% from 56.0% in the previous year, resulting in a gross profit margin of 43.3%.

【Profit and Loss】SG&A expenses increased to ¥340.1B (SG&A ratio of 31.2%, compared with 30.8% in the previous year). Advertising expenses were ¥56.8B (¥47.2B in the previous year, +20.3%), while salaries and allowances were ¥91.3B (+4.4%); both expanded at a pace exceeding the revenue growth rate. As a result, Operating Income was ¥132.2B (△2.5%), and the Operating Income margin deteriorated to 12.1% from 13.2% in the previous year. Non-operating income and expenses resulted in a net gain of ¥2.6B, mainly due to dividend income of ¥1.0B and foreign exchange gains of ¥0.5B, resulting in Ordinary Income of ¥134.8B (△1.3%). After recording extraordinary losses of ¥4.3B, including an impairment loss of ¥0.8B as a temporary factor, Profit Before Tax was ¥130.6B, and Net Income attributable to owners of the parent was ¥87.9B (△6.2%). Despite higher revenue, expenses increased at a faster pace than earnings, resulting in a year-on-year decline in profit.

Segment Analysis

The core Household Products Business recorded segment-total revenue of ¥976.8B (YoY +5.8%) and Operating Income of ¥122.6B (YoY △1.8%, margin of 12.5%), resulting in higher revenue but lower earnings. This segment was most significantly affected by higher advertising expenses and increased costs. The Comprehensive Environmental Hygiene Business recorded segment-total revenue of ¥181.9B (YoY +7.7%) and Operating Income of ¥9.7B (YoY +9.1%, margin of 5.3%), securing both revenue and profit growth. Although smaller in scale, its profit growth rate exceeded that of the Company as a whole. As the Household Products Business accounts for the majority of revenue and profit, margin trends in this business determine consolidated profitability.

Key Financial Metrics

【Profitability】The Operating Income margin was 12.1%, down from 13.2% in the previous year, while the Net Income margin, based on income attributable to owners of the parent, also declined to 8.1% from 9.1% in the previous year. ROE was 10.4%. 【Cash Quality】Operating Cash Flow (OCF) was △¥5.3B, significantly below Net Income of ¥87.9B, indicating a delay in the conversion of earnings into cash. 【Investment Efficiency】Capital expenditures were ¥18.4B, within the range of depreciation and amortization expense of ¥24.0B, indicating a restrained investment policy. Research and development expenses were ¥16.9B, equivalent to 1.5% of revenue. 【Financial Soundness】The Equity Ratio was 52.6%, down from approximately 54.4% in the previous year. Although total assets expanded to ¥1,662.7B, working capital requirements increased, primarily due to growth in trade receivables.

Cash Flow Analysis

Operating Cash Flow was △¥5.3B, representing a significant gap from Net Income of ¥87.9B. The primary factor was an increase in trade receivables, which represented a △¥201.4B cash outflow factor in the cash flow statement. This was not fully offset by a decrease in inventories (+¥10.1B) and an increase in trade payables (+¥3.0B). Investing Cash Flow was △¥30.4B, of which capital expenditures were ¥18.4B, within depreciation and amortization expense of ¥24.0B; no large-scale investments were observed. Financing Cash Flow was +¥9.2B, with an increase in short-term borrowings compensating for the shortfall in operating and investing cash flows. As a result, Free Cash Flow (Operating Cash Flow + Investing Cash Flow) was △¥35.8B, indicating that dividends and investments were not funded by operating activities during the period. The impact of expanding trade receivables accompanying revenue growth on liquidity will be a point of focus from the perspective of future collection trends.

Quality of Earnings

Recurring earnings were primarily supported by non-operating income of ¥5.5B, including dividend income of ¥1.0B and foreign exchange gains of ¥0.5B. This exceeded non-operating expenses of ¥2.9B, including interest expenses of ¥1.0B, thereby supporting Ordinary Income. Meanwhile, extraordinary losses of ¥4.3B, including an impairment loss of ¥0.8B and a loss on disposal of fixed assets of ¥0.2B, were temporary factors. Excluding these items, recurring earnings power was close to the level indicated by Ordinary Income of ¥134.8B. Comprehensive Income was ¥87.4B (¥84.9B attributable to owners of the parent), with the gap from Net Income attributable to owners of the parent of ¥87.9B limited to approximately ¥3.0B. This resulted from offsetting effects of foreign currency translation adjustments of +¥3.9B, valuation differences on securities of △¥3.4B, and adjustments related to retirement benefits of △¥4.1B. The fact that Operating Cash Flow was below Net Income reflects an increase in accruals, or uncollected revenue, due to growth in trade receivables, indicating relatively weak cash backing for current-period earnings.

Earnings Forecast and Guidance

The Company’s full-year earnings forecast is Revenue of ¥1,880.0B (YoY +4.9%), Operating Income of ¥90.0B (YoY +11.3%), and Ordinary Income of ¥95.5B (YoY +7.4%). First-half Revenue of ¥1,090.5B represents progress of 58.0% against the full-year forecast, while Operating Income of ¥132.2B and Ordinary Income of ¥134.8B are both already above the full-year forecasts, representing progress rates of approximately 147% for Operating Income and approximately 141% for Ordinary Income. No revisions were made to the earnings or dividend forecasts during the quarter, suggesting that a conservative plan reflecting expense increases and demand trends in the second half remains in place.

Shareholder Returns

The full-year dividend forecast is ¥130 per share, with an interim dividend of ¥0 (no dividend). The Payout Ratio based on the full-year forecast EPS of ¥283.79 is approximately 45.8%. Operating Cash Flow for the first half was negative, indicating that part of the funds for dividends was supplemented through borrowings and other sources. Whether cash generation will recover depending on full-year working capital trends will be a key focus going forward.

Risk Factors

1. Working Capital Deterioration Risk: Trade receivables increased significantly from the previous year and represented a △¥201.4B cash outflow factor in the cash flow statement. Depending on collection-period trends, this may affect liquidity going forward.

2. Short-Term Funding Dependence Risk: Financing Cash Flow was positive, primarily due to an increase in short-term borrowings, creating a structure in which short-term funding supplements shortfalls in Operating Cash Flow and Investing Cash Flow. Changes in the interest-rate environment could increase costs.

3. Profitability Pressure Risk: The cost of sales ratio and SG&A ratio both increased due to higher advertising expenses (+20.3%) and personnel expenses, resulting in a lower Operating Income margin than in the previous year. Continued monitoring is necessary to determine whether cost increases will continue to outpace revenue growth.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company’s Operating Income margin and Net Income margin both exceed the manufacturing-industry median, indicating relatively high profitability within the industry.

Growth and Capital Efficiency

The Revenue growth rate was below the industry median, indicating relatively moderate growth in terms of revenue expansion.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The top line increased in both the Household Products Business and the Comprehensive Environmental Hygiene Business. However, the Operating Income margin declined to 12.1% from 13.2% in the previous year due to higher advertising and personnel expenses, resulting in higher revenue but lower earnings.

2. Operating Cash Flow was △¥5.3B, significantly below Net Income, primarily due to an increase in trade receivables. Reviewing the conversion of earnings into cash in light of future collection trends would be useful.

3. First-half Operating Income and Ordinary Income are already above the full-year Company forecasts, while the plan remains unchanged in consideration of expense trends and the demand outlook for the second half.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson type, explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

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 (due to its non-cash nature and for comparability with IFRS companies).
• Since Net Income progress against the full-year forecast (142%) exceeds the standard (50%), forecast EPS is adjusted upward within a maximum range of +10% (because companies ahead of schedule tend to exceed 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 time lag relative to the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest-rate reference month: 2026-07 / This figure 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 release data. It does not recommend investment in any specific security. 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 professionals as necessary.

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