Revenue growth was offset by pressure from the gross margin and SG&A expenses, making first-half margin recovery the key focus

First-quarter revenue rose 14.2% year on year to ¥66,165 million, but operating profit fell 2.0% to ¥3,868 million. According to the earnings presentation, the operating margin declined 1.0 percentage point year on year to 5.8%, indicating that revenue growth did not translate directly into operating profit growth. The full-year operating profit forecast is ¥11,000 million, so ¥5,500 million for the six months would be one benchmark if the company is to secure half of the forecast in the first half.

On the earnings side, the gross margin fell 1.3 percentage points year on year to 32.3%, while SG&A expenses were ¥17.5 billion. In the first-quarter operating profit bridge, revenue growth contributed ¥1.6 billion, while cost of sales and SG&A expenses were negative factors of ¥900 million and ¥1.0 billion, respectively. The impact of the Middle East was a positive ¥200 million, while foreign exchange and other factors had no impact. This shows that most of the benefit from higher revenue was offset by cost factors.

At the next earnings report, it will be necessary to assess not only whether first-half revenue reaches 50% of the full-year forecast of ¥240,000 million, but also the quality of the revenue growth. In particular, it will be important to see whether the gross margin, which fell to 32.3%, improves, and whether SG&A expenses of ¥17.5 billion increase further because of efforts to strengthen the sales and administrative structure or costs related to the new core system. The first-quarter materials did not disclose the company’s own assessment against plan, the revenue and profit levels required for the remainder of the period, or the breakdown between unit prices and volumes. It will therefore also be necessary to check whether the second-quarter materials provide additional details on the impact of raw-material prices, price revisions and SG&A expenses.