Operating margin declines as higher costs outweigh revenue growth

In FY2027-Q1, revenue rose 4.0% year on year to ¥673,436 million, but operating profit fell 11.4% to ¥55,412 million and ordinary profit fell 13.3% to ¥49,561 million. Profit declined despite revenue growth, resulting in a simple operating margin calculation of approximately 8.2%. This was approximately 1.4 percentage points below the approximately 9.7% calculated from revenue of ¥647,341 million and operating profit of ¥62,523 million in the previous year’s quarter.

The company explained that operating expenses increased ¥33,206 million year on year and that higher cost of sales, including the impact of rising crude oil prices, was a factor behind the decline in operating profit. By segment, energy solutions segment profit fell 51.4% year on year to ¥26,979 million, suggesting that higher raw material and power procurement costs may have had a significant impact on the profitability of the core business. In FY2027-H1, it will be necessary to distinguish between a temporary impact from crude oil prices and electricity procurement costs and structural pressure that will persist into the second half.

The full-year forecasts are revenue of ¥2,947,000 million, operating profit of ¥186,000 million, ordinary profit of ¥173,000 million and net income attributable to owners of the parent of ¥137,000 million, with no revision to the forecasts as of FY2027-Q1. Operating profit progress was 29.8%, above revenue progress of 22.9%, but seasonality by quarter must be taken into account, so this cannot be viewed as simply strong performance. Assuming an even distribution over 6 months, operating profit of ¥93,000 million would be one calculation-based benchmark, but in FY2027-H1 it will be important to review actual progress together with the company’s assumptions for the second half.

At the next results announcement, it will be necessary to examine the increase in cost of sales, crude oil price and foreign exchange assumptions, power procurement costs and the energy solutions margin in detail. If the operating margin falls below 8.2% in FY2027-Q1 or operating profit progress against the full-year forecast falls significantly below ¥93,000 million, revenue growth alone will be less likely to support the full-year plan. Conversely, if cost pressure eases and the margin improves in H1, it will be easier to assess the likelihood of achieving the full-year operating profit forecast of ¥186,000 million.