Earth Corporation (4985) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Katsunori Kawabata, Representative Director, President and CEO at the Earth Corporation. A few moments ago, we announced the company's results for the fiscal year ended December 2024. In this presentation, we will be going over the results outline. This will then be followed by a review of the first year of the ongoing medium-term business plan and the outlook for fiscal year 2025. After the presentation, we will be taking questions from stakeholders. First are the financial results highlights for the fiscal year ended December 2024. We registered JPY 169.27 billion in sales and JPY 6.42 billion in operating income for a year-over-year increase in both sales and profits and also a significant overperformance versus the initial forecast on both accounts as well. The results also came in above the revised forecast announced back in November. Higher sales volumes were the fruit of a variety of sales initiatives. This, coupled with multiple other initiatives such as price revisions translated into an improvement in the gross profit amount and consequently, an improvement to the company's bottom line. I would like to use this opportunity to go over these initiatives and results in detail in a moment. Let us start by taking a look at sales and gross profit margin on a management accounting basis for the 3-year period between 2022 and 2024. The results for Insecticides and Repellents in Japan are shown here in pink. The results for our Household products in Japan in light blue. Results Overseas in yellow. The General Environment and Sanitation business in green. And lastly, results for others are shown here in gray. We show here a portfolio breakdown, but in broad strokes, our core segment of insecticides and repellents expanded. The category of household products has required our attention for some time to ensure improvements and bring it back into top shape. We have, therefore, continued carrying out efforts in this area starting in the second half of last year and into the current fiscal year. These have borne fruit, allowing us to stop the bleeding and turn this product category around. I will be going over the details in a moment. In terms of key topics in the Overseas business, as was the case with the previous and medium-term business plan, we positioned our overseas operations as the centerpiece of the ongoing medium-term business plan. We have finished sowing the seeds for future growth in this business. And these efforts have borne fruit, allowing us to record over JPY 20 billion in sales in the overseas segment in 2024. Our target for this business still remains a long way off, but as it stands, we continue making good progress in the right direction. Next is the General Environment and Sanitation business. The Earth Group has 2 main business pillars, the manufacturing of products and the General Environment and Sanitation business. We, therefore, view General Environment and Sanitation, which now generates over JPY 30 billion in sales annually, as one of our two core businesses. The KPI for this business is the number of contract agreements with companies, and we continue seeing growth on this front. Higher personnel expenses in recent years have led to a slight decrease in the gross profit margin, but we nevertheless view these numbers as being within an acceptable and expected range. So we will be carrying out further efforts and measures in this business. I would now like to give you a status update on domestic operations in the Insecticides and Repellents business. The vertical bar graph on the left contains a general market overview. The market for Insecticides and Repellents saw peak demand in 2020 during the COVID-19 pandemic. This peak was then followed by a downward trend, but we are now starting to see signs of a recovery. Despite a decline in insect pest numbers, the market itself is growing on account of higher unit values and rapidly growing demand for the preventative use of insecticides. Against this backdrop, we believe one of the Earth Group's competitive advantage is to be our ability to develop and commercialize products that accurately reflect our customers' preferences. We equate market share with customer loyalty and the Earth Group continued growing its market share, which stood at 57.3% at the end of 2024, even amidst a growing market. As a result of global warming, the market for insecticides and repellent solutions now continues later into the year. Simply put, these products are progressively becoming year-round staple products, a trend we see on both the customer and store distributor sites and which is reflected in the graph in the middle here. Lastly, the graph on the right shows product returns. Previously, we would see product returns in the winter season but now that insecticides and repellents are progressively becoming year-round stable products, this has led to a steady reduction in product returns. I would now like to go over some initiatives we carried out in fiscal year 2024. We carried out to the proactive deployment of new products, living up to our position as category leaders to deliver new and innovative products addressing customer needs and offering a high value-added proposition. For example, we released our Gokishu! and Zero No Knight and these have made strong market contributions. We also enacted price revisions as shown here on the right-hand side. As has been the case with our competitors, the Earth Group too has been impacted by soaring raw material prices. Against this backdrop, we carried out price revisions for our product offerings while communicating the reason for these price changes in a clear and transparent manner. These efforts have helped our results. Circling back to what I said earlier, we need to turn things around in the category of household products. This segment consists of 2 core product categories, mouthwashes and bath salts. We will be going over the category of bath salts later when discussing our group restructuring initiatives but in broad strokes, while we retained the #1 position for this product category, competitors have been slowly chipping away at our market share over the years. Because of this, we have decided to review our offerings on a per product basis. Within this scope, we refreshed our key product brands of Onpo and Kikiyu. For example, we released Onpo Dekamru as a new offering. In the 3 months since release, these releases have reversed the previous downward trend and in fact, have boosted results. These new products will make a full 12-month contribution in fiscal year 2025. So we expect these to make a steady results contribution. Bath salts delivered strong results in January 2025. So we expect this trend to continue for the full year. Next is the category of mouthwashes, which is another category where we need to turn things around. Here, we launched Damon last fall, a new brand of mouthwashes to complement our existing Mondahmin line by targeting consumers in younger demographics. As with our revamped offering in the bath salts category, we have about 3 months' worth of data for this product line. As you can see from the slide, the numbers showed tremendous strength as this product has been very well received by consumers, even to an extent exceeding our original expectations. We expect Damon to make a 12-month results contribution in fiscal year 2025. And furthermore, we will also do some work on Mondahmin itself, which is our core product. This initiative has been greenlit internally. So we expect to be able to share with you an announcement on this front in this year. Generally speaking, green shoots are now starting to emerge. So we want to continue executing these efforts in earnest and without getting complacent. Next is a status update for the Overseas business. Circling back to what I said earlier, and although perhaps this was somewhat overdue, we are working in earnest to grow this business. Things have been going well with sales exceeding JPY 20 billion in fiscal year 2024. We divide our operations into countries, we are actively focusing our efforts on, in which we set up local subsidiaries, and countries we will be targeting next through our export business. Our efforts have been going well across the board. First, let me start with our operations in Thailand and Vietnam, which are core markets in the overseas business. Here we carry out efforts and initiatives, specifically tailored to these local markets and have succeeded in terms of consumer loyalty. In Thailand, our joint product launch with Kao has been successful, and Earth has grown to hold the #2 position in terms of the market for insecticides and repellents in the country. Going forward, we expect to be able to achieve the top market share in the insecticides and repellents category in Thailand as we have done in Japan. And we will be carrying out our utmost efforts to this end. Next is Vietnam. Unlike the U.S. dollar and other major currencies, a weaker Japanese yen versus the Vietnamese Dong, doesn't have much of an impact on results. As such, we haven't really benefited from these foreign exchange rate effects, but have nevertheless been able to meet the targets we set for ourselves in the country. We see no problems with our results on a local currency basis in Vietnam. Given the population trends and other factors, we believe Vietnam will leapfrog Thailand at some point in the future. So we intend to make efforts to position ourselves in this market with the strategy tuned to the needs and preferences of the Vietnamese consumer. In summary, our operations overseas continue delivering strong results with Thailand and Vietnam being 2 core markets for the Earth Group. Next are the markets of Malaysia and the Philippines shown here in green. We started our operations from scratch in Malaysia and through M&A in the Philippines. Regarding our operations in the Philippines, while we delivered a strong performance, we recorded an impairment loss in 2024 in order to regroup and refocus our operations. That said, generally speaking, things have been going well. We expect to reach operating profitability for both countries in the next 2 or 3 years. These are the only 2 markets overseas for us where our operations aren't yet in the black. But now that we are done sowing the seeds for future growth here, profitability is now in sight. In terms of our operations in China, results have been on a continuous downward trend through 2023. We then made the decision towards the latter half of 2023 to completely revamp our operations in the country, both at the brick-and-mortar store level and online. These efforts had gradually borne fruit as of the end of 2024. And we feel there is the potential for us to achieve much more in this market. We are confident that our approach is the right one, and we are seeing encouraging results. So we think now it's really a matter of delivering. Results so far in 2025 already indicated that we will see further growth this year, which is what we expect to happen. Lastly, we are in the process of deciding where to set up our next local subsidiary to act as an export base. Saudi Arabia, Hong Kong and Taiwan are key markets for us, and we have also made inroads into the North American market. This business is different from our other operations overseas involving local subsidiaries in different countries, but we nevertheless intend to continue growing exports as a key business for us. All put together, the overseas business delivered over JPY 20 billion in sales in 2024, and we have plans to exceed this amount in 2025. We will be outlining these targets for 2025 in a moment, and we welcome questions from stakeholders pertaining to this topic. Next is the General Environment and Sanitation business. As I stated earlier, our business is divided into the manufacturing of products in the General Environment and Sanitation business. While it's not a 50-50 ratio, we do view the General Environment and Sanitation business as a key pillar. This business is built upon the Earth Group's accumulated expertise and knowledge base. So we want to leverage this and offer our clients high-quality services, leading to client satisfaction. Client satisfaction in turn leads to an increase in the number of contracts as evidenced by the graphs on Page 11. As you can see, the number of contracts has been on a steady upward trend underscoring the strength of our expertise. This business now does a JPY 30 billion in sales, and we have plans to further nurture this business to a scale of JPY 50 billion, JPY 60 billion, JPY 70 billion. There is a scale befitting our second core pillar business. As it stands, we continue making good progress. Next is an analysis of the operating income change versus the forecast. Here, we outlined a number of factors, both negative, such as soaring raw material prices and positive, such as higher gross profit and draw lines in the center and bottom corresponding to the increase in marginal operating income and decrease in fixed expenses. Naturally, we try to maintain an adequate balance while trying to maximize the length of the blue lines. I believe we managed to do just that in fiscal year 2024 going over and managing these change factors on a monthly basis. And we have plans to continue doing this in fiscal year 2025 as well. Circling back to what I said earlier, we recorded an extraordinary loss in fiscal year 2024. As outlined in the medium-term business plan, we closed down operations at our Kakegawa Plant as part of our efforts to consolidate production. This resulted in the recording of an impairment loss. We also recorded an impairment loss associated with our operations in the Philippines, done with the purpose of catalyzing further growth in the country. These extraordinary losses, which we view in a forward-thinking light towards further future growth, came to JPY 1.46 billion. That said, naturally, these have no impact on the company's cash flow. This concludes my overview of the results for the fiscal year ended December 2024. Next is a review of the first year of the ongoing medium-term business plan. Before moving on to the results for the medium-term business plan, I believe there is a need to convey to stakeholders that we position this 3-year period corresponding to the ongoing medium-term business plan as a period during which we will address and adapt to changes in the external business climate through things like an overhaul to our internal corporate structure. This involves some degree of sacrifice and the expenditure of resources. The sectors colored pink correspond to the bottom line operating income forecast for the medium-term business plan covering fiscal years 2024 through 2026. Here, we expected operating income to drop to around JPY 3 billion. So we communicated to shareholders the need for some short-term sacrifices. Sacrifices are indeed needed over a 2-year period. But on the other hand, we'll be building a strong foundation, allowing us to deliver a strong profit performance in 2026 and beyond. Within the medium-term business plan, the commitment was to transform our business while working to benefit from tailwinds in the external business climate. And I believe we achieved these goals in fiscal year 2024. As I said, we did benefit from a tailwind for the overall market as a whole. So this graph explores what our results would have been solely on the basis of the Earth Group's base earnings power. Without the aforementioned overall market tailwind, we believe our base intrinsic earnings power would have allowed us to achieve JPY 5.5 billion in operating income. The remainder from a realized performance of JPY 6.42 billion is the result of industry tailwinds. In summary, and even excluding any possible tailwinds, our earnings power has improved to a point where we are already JPY 2.5 billion above what we initially thought we would be able to deliver in operating income. We positioned this figure of JPY 5.5 billion as a baseline, we expect to be able to exceed by around JPY 1 billion in 2025. Furthermore, should we benefit from fortuitous market tailwinds like we did in 2024, then we expect to deliver additional profits. Even in the case of market headwinds, we want to deliver at least JPY 6.5 billion in operating income. As such, while I initially mentioned our commitment to a target of JPY 3 billion, the Earth Group's earnings capacity baseline has already significantly exceeded this threshold target. In summary, our earnings power has grown substantially. As it stands, we are guiding for over JPY 7 billion in operating income in 2026. Here is the positioning of the ongoing medium-term business plan. As I mentioned earlier, the ongoing plan is centered around efforts to reform the earnings structure and build a framework. Since we are delivering profits, perhaps stakeholders feel we aren't allocating enough resources to this goal. But I would like to use this opportunity here today to assure you that we are in the process of executing all the initiatives we committed to. On top of these initiatives, we have been able to deliver the results I outlined earlier. I would now like to discuss our post structural reform division. In light of the external market environment, the Earth Group will work to secure market share. In doing so, boosting our pricing power, and this is allowing us to build a high profitability model and expanding our operations on a global scale. Our portfolio management style consists of 2 categories: Japan and overseas, and we continue executing our initiatives for each without deviating from our vision. Next are our group restructuring initiatives. Perhaps you are already familiar with these as we have previously announced the group's restructuring initiatives. But since some time has elapsed, it is now important for stakeholders to make sure progress is being made in the execution of these initiatives. Put briefly, things are progressing according to the plan outlined by the Earth Group and communicated to stakeholders. These initiatives are: One, the shift to a holdings company structure. And two, integrating the Earth Corporation and BATHCLIN. Allow me to go over this shifts to a holding company structure. It's not in my personality and in our corporate culture to become a holdings company in NIM only. Rather, we will be weighing the benefits and drawbacks of our current operations on a consolidated basis, leveraging these learnings in the transition to a holding structure for the Earth Group. Some might say the adoption of the holding structure slows down the decision-making process. But we have determined that the opposite is true for the Earth Group as we believe this shift will actually speed up decision-making. As it stands, each operating company, while a part of the Earth Group is an individual company with its own profitability mandate. The shift to a holding structure allows the Earth Group to formulate integrated cross-company strategies. Overlapping categories exist covering multiple operating companies. So this integrated approach eliminates any inefficiencies that might arise from this and also allows for the better utilization of the Earth Group's manufacturing plans, including our plant assets overseas. We are working to create this structure directly under the Earth Group to be implemented as soon as possible. This constitutes our efforts in the shift towards a holding structure. Another initiative is addressing soaring raw material prices. As you can see, we have been working on this over the years. The price of raw materials entered a gradual rising trend starting in 2022 and has continued over the years through 2024 and even 2025, as we expect higher prices to have a negative profit impact of JPY 690 million. Between 2022 and 2025, the total negative profit impact totals JPY 7.97 billion. In other words, had we done nothing, profit results for the Earth Group would have been reduced by close to JPY 8 billion during this period. Through 2024, we made use of cost reductions and price revisions in order to offset the higher price of inputs. This continued into 2025. And the forecast we worked here are on the basis of actual conversations and agreements we have reached with retailers. Thanks to this, we now expect to be able to offset in 2025, the cumulative negative impact accrued since 2022. In fact, we believe we will be able to come ahead by JPY 110 million overall. So we will be working to this end. Together with this, we also worked to reduce the number of SKUs in order to build a lean structure for our business. We started by setting a 30% reduction target within the medium-term business plan. The original plan was to carry out this reduction over a 3-year period, but we reasoned it would be better to reduce straightaway whenever possible. Consequently, we were able to meet this 30% reduction target corresponding to 774 SKUs right off the gate last year ahead of schedule. This translated into a significant reduction in inventory turnover days and consequently, to a cash flow improvement. Now just because we were able to meet the 30% reduction target ahead of schedule, doesn't mean we will rest on our laurels. Any further reductions from here are extra reductions not included within the scope of the original plan. So we are currently in the process of reviewing the feasibility and benefits of carrying out further reductions. In summary, as it stands, our efforts to reduce the number of SKUs have had positive results. Next, our initiatives towards human capital management, which together with the ESG is an important area. Within this scope, we are carrying out robust efforts to address human capital materialities as we believe human capital management to be an indispensable component of our operations. For example, previously within the scope of well-being. While we didn't carry out employee satisfaction surveys, we have now stepped up our efforts through the use of engagement surveys, identifying a variety of issues and challenges facing our employees. We are also working on securing and training management talent by focusing on supporting career paths and the pooling of human capital. In other words, the idea is to reduce our dependence on any individual employee. This isn't a matter of being pleased with ourselves for doing these initiatives as there is also a need to obtain recognition by outside entities for the initiatives we are enacting. These include credit rating companies like MSCI, the CDP Disclosure Insights Action and [indiscernible] certification in health and productivity management outstanding organization 500 certification, et cetera. Our objective isn't to collect ESG certifications, but rather we view these as confirmation that we are working in the right direction toward the right goals. I would now like to discuss the Earth Group's progress versus the quantitative targets for 2026, we have set for ourselves within the medium-term business plan. The progress is as shown in the table on Page 24, which goes over each line item and compares it into 2023 realized results and to the 2026 targets. In summary, we believe we have made considerable progress towards the targets we set for ourselves. As for example, we are now a very short distance away in terms of the consolidated sales target. The key issue here will therefore be how to further improve profitability. One might get the impression that the various capital efficiency metrics went down slightly versus 2023 realized results. But this is in line with company forecasts. I'll be going over the details in a moment. But in short, we are making good progress in terms of ROE and other metrics. Next is the status update on profitability and capital efficiency with various graphs to help illustrate trends over time. ROE doesn't paint the whole picture. So there is a need to take other metrics such as ROIC and WACC into account. Debt decreased, thanks to working capital optimization, such as improvements in inventory efficiency. And this has also translated into an improvement in debt and the debt-to-EBITDA ratio. I would now like to go over the forecast for the fiscal year ending December 2025. Here, we have outlined our targets for the Earth Group's business portfolio. The targets remain unchanged. In other words, our strategy is to secure profits through our domestic operations while catalyzing initiatives overseas with an eye towards future profits. We have a clear demarcation between operations in Japan and overseas operations. And to this end, we will be adding the General Environment and Sanitation business as a business outside the purview of manufacturing. Over time, we intend to grow this business to the status of second core pillar for our company. Lastly, we also include MA-T in our portfolio targets as an area for future growth. The idea is to grow this business so that it makes up for the cumulative amount spent on this project and its ongoing running costs, thereby making a profit contribution to the Earth Group as a whole. Our portfolio plan is therefore centered around these 4 business pillars and covers initiatives and targets for now for the near future as well as long-term objectives. Next are the planned highlights for fiscal year 2025. These highlights are not based on fiscal year 2024 results, but rather follow the baseline outlined in the medium-term business plan. As I stated earlier, the Earth Group has gradually increased its earnings power and we will work to complete preparations in 2025 in anticipation of 2026, which is the final fiscal year of the ongoing medium-term business plan. As it stands, we don't expect to record any significant extraordinary losses in fiscal year 2025 and believe we will be able to bring ROE back above the 6% line. This graph shows a comparison between realized results in 2024 and the forecast for 2025 on a management accounting basis. We are fully committed to achieving these targets, which may perhaps strike investors as a somewhat conservative plan. Next is the topic of shareholder returns. The Earth Group is committed to the distribution of stable dividends and places importance on our shareholder returns policy. Realized DOE came in at 3.9% in 2024, slightly below our stated target of 4%. So this is something we are aware of and we'll work to rectify. The dividend for 2024, which included a commemorative dividend of JPY 2 per share for the company's 100th anniversary, so a JPY 120 per share, which we now position as the new dividend distribution threshold. We announced a dividend increase of JPY 2 per share in the first quarter of last year and if the results are valid, we would like to make a similar announcement this year as well. So this is something we are working towards. Last is a topic of note. Osaka will be hosting the 2025 Expo, which is expected to be a significant event generating significant inbound visitor traffic. The Japan MA-T Industrial Association chaired by the Earth Corporation, will hold an exhibition titled Future Healthcare at the Osaka Healthcare Pavilion in the interest of further promoting MA-T. MA-T has very promising applications in the development of disinfectants and this technology has been recognized by the Japanese government for its importance. We invite you to join us at this year's EXPO 2025 in Osaka, which we view as a good opportunity to grow recognition for the potential of MA-T. This concludes today's presentation. Thank you for your time.