Will the profitability improvement that secured higher operating profit despite lower revenue continue into the third quarter?

First-half revenue was ¥3,292.3 million, down 2.8% year on year, while operating profit was ¥272.2 million, up 1.9%. Based on prior-year first-half revenue of ¥3,387.0 million and operating profit of ¥267.2 million, the operating margin rose from approximately 7.9% to approximately 8.3%, indicating an improved ability to absorb lower revenue and secure profit. Ordinary profit was ¥275.2 million, up 2.4%, and interim net profit attributable to owners of the parent was ¥186.6 million, up 4.4%, so profit growth continued below the operating line as well.

The improvement in profit was not attributable solely to increases in sales volume or project numbers. In the operating profit bridge in the earnings presentation materials, the ¥94.6 million decline in revenue was a negative factor, while lower subcontracting costs of ¥38.8 million, lower labor costs of ¥51.4 million and lower SG&A expenses of ¥17.0 million were positive factors. Other costs increased by ¥75.0 million. In total, cost improvements almost offset the negative effect of lower revenue, resulting in operating profit increasing by approximately ¥50 million year on year.

However, on a quarterly basis in the first half, operating profit was ¥185.6 million in the first quarter versus ¥86.5 million in the second quarter alone, with a second-quarter standalone operating margin of 5.9%. In addition to the 8.3% margin for the first half as a whole, it will be necessary to examine standalone and cumulative third-quarter margins and determine whether they depend on the profitability of specific large projects or the timing of expense recognition during the period. The company has also explained that the decline in SG&A expenses partly reflected development personnel costs being recorded in cost of sales, so another point for review is how fully comparisons by expense category with the prior-year period reflect underlying cost improvements.

The full-year forecasts are revenue of ¥7,200 million, operating profit of ¥504.0 million, ordinary profit of ¥504.0 million and net profit attributable to owners of the parent of ¥330.0 million. First-half operating profit progress was 54.0%, exceeding the 45.7% progress for revenue. In the third quarter, we will review the maintenance of an operating margin in the 8% range, the amount of SG&A restraint, and explanations regarding the subcontracting cost ratio and profitability of large projects, and assess whether maintaining the full-year operating profit forecast depends solely on cost controls.