Can cost inflation be absorbed and June price revisions restore margins in 2Q?

In the first quarter of the fiscal year ending March 2027, revenue was ¥7,392 million, up 4.0% year on year, while operating profit was ¥137 million, down approximately ¥112 million from ¥249 million in the same quarter of the previous year. The operating margin declined by approximately 1.6 percentage points, from approximately 3.5% in the same quarter of the previous year to approximately 1.9%, indicating that higher revenue has not translated into profit growth. In FY2027-H1, we will assess whether the operating margin in 2Q alone exceeds the 1Q level of 1.9% and how far the cumulative H1 margin recovers.

The operating profit bridge in the earnings presentation identified ¥58 million from higher revenue and other factors, ¥103 million from price revisions, ¥116 million from inventory valuation and other factors, ¥38 million from other cost-of-sales items, ¥54 million from the absence of Expo sponsorship costs incurred in the previous year, and ¥30 million from other SG&A items as positive contributors to the year-on-year increase in profit. Negative contributors were ¥442 million from higher raw material costs, ¥42 million from higher labor costs, and ¥27 million from higher personnel expenses. The disclosed items total an operating profit decline of approximately ¥111 million year on year. In particular, the negative impact of higher raw material costs substantially exceeded the positive contributions from price revisions and higher revenue.

The company introduced price revisions in June in response to rising raw material prices and explained that, as of 1Q, it had not been able to fully absorb the increase in material costs. Accordingly, in FY2027-H1, it will be necessary to assess which products and sales channels were covered by the price revisions, whether the higher selling prices after the revisions were accompanied by lower volumes, and whether the profit contribution from the revisions increased from ¥103 million. However, the revision rate, revenue covered, implementation rate, and the breakdown between volume and price have not been disclosed, so the progress of price pass-through cannot currently be replicated by rate or amount.

The full-year operating profit forecast is ¥2,000 million and the revenue forecast is ¥30,800 million, implying a planned operating margin of approximately 6.5%. The gap versus the 1Q actual margin of 1.9% is approximately 4.6 percentage points, requiring a substantial improvement in profitability over the remaining 3 quarters. Whether the ¥442 million impact of higher raw material costs in 1Q was temporary or will continue as long as prices for materials such as copper and resin remain elevated will affect the achievability of the full-year plan, but the raw material price assumptions and assumed amount of price pass-through embedded in the forecast have not been disclosed.

The company operates as a single segment comprising only its faucet and plumbing-fixtures business, so differences in profitability between multiple segments cannot be assessed. Accordingly, it will be important for the H1 results to continue disclosing the operating profit bridge and to show the impacts of higher raw material costs, price revisions, labor costs, personnel expenses, and inventory valuation on the same basis as in 1Q. In particular, we will assess whether the margin has improved even excluding the ¥54 million benefit from the absence of the previous year's Expo sponsorship costs, to determine whether the recovery in earnings is more than simply a rebound from a prior-year factor.