The sustainability of record profits will be tested after one-off factors fall away

Revenue in the first half of the fiscal year ending December 2026 was ¥592.983 billion and operating profit was ¥51.850 billion, representing year-on-year increases of 13.3% and 92.2%, respectively. Revenue reached approximately 52.0% of the full-year forecast of ¥1.14 trillion, while operating profit reached approximately 66.5% of the ¥78.0 billion full-year forecast, indicating that profit is progressing at a substantially faster pace than revenue.

However, not all of the profit improvement is necessarily recurring. In the first quarter, the reversal of ¥5.9 billion in repair-related liabilities associated with the company’s pigment operations in Germany contributed to the increase in profit. In the first half, the company also recorded extraordinary income of ¥3.178 billion, including a ¥2.759 billion gain on the sale of artwork, and extraordinary losses of ¥3.393 billion, including ¥950 million in restructuring-related retirement losses and ¥901 million in losses on the liquidation of an affiliated company. No impairment loss was recorded in the second quarter, but the company has recognized a large goodwill impairment loss in the past. Assessing earnings quality therefore requires the adjusted level of operating profit to be viewed separately.

The first-half operating margin was approximately 8.7%, calculated by dividing operating profit of ¥51,850 million by revenue of ¥592,983 million, improving by approximately 3.6 percentage points from approximately 5.2% in the same period of the previous year. Since the operating margin implied by the full-year forecast is approximately 6.8%, the company’s plan assumes a lower margin in the second half than in the first half. In the third quarter, the focus will be on whether the effects of price revisions and cost control remain after excluding the one-off reversal, and whether the decline in second-half margins caused by higher raw-material prices is within the company’s assumptions.

Higher shipments of high-value-added products, pricing actions, cost control, and the translation benefit from a weaker yen on overseas earnings are all factors the company cites for the profit increase. In the third quarter, assuming no repeat of the reversal of repair-related liabilities, it will be important to see whether the company can disclose year-on-year operating profit, segment profit, extraordinary income and expenses, and impairment losses. The reliability of the full-year forecast will depend not only on whether cumulative third-quarter operating profit exceeds approximately 75% of the full-year forecast, but also on whether the company can explain the underlying earnings level after excluding one-off profits.