Lion Corporation (4912) Earnings Call Transcript & Summary

Thank you very much for joining us for our briefing of the earnings results of our company despite your busy schedule today. I also would like to express my gratitude to you for your day-to-day support for our IR activities. Today's presentation will cover the 3 items on the screen today. Let me follow this agenda as I go along. First, on the financial results of the fiscal 2021. We have achieved a revised forecast, both in terms of sales and all levels of profits announced on July 30 last year. However, this represents an increase in sales, but a drop in profits year-on-year. Sales of consumer products increased as a recall from the strong sales of hand soaps, et cetera, was offset by antipyretic analgesics and other main products as well as an increase in overseas sales, especially in China and in Industrial Products. The core operating income decreased due to rising raw material costs and competition-related expenses despite our enhanced efforts for total cost reductions. The operating profit and profit for the period attributable to owners of the parent decreased due to the drop in core operating income, an absence of a gain on transfer of noncurrent assets recorded in 2020. This slide summarizes market trends of domestic consumer products and key overseas areas that we do our business in. In the total 38 domestic home product markets we currently operate, sales amounted to 95% of the year before, reflecting a recall decrease in sales volume of hand soaps and household detergents. But when you exclude hand soaps and hygiene-related products, sales were mostly on par with the previous year. The overall market is showing a gradual growth and beginning to return to the pre-COVID-19 levels. Trends by segment are as shown on this slide. And therefore, I'd like to skip the explanation. As for overseas markets, sales of hand soaps fell short of those in the previous year in both Southeast Asia and Northeast Asia, due to recall from the year before, but grew in each of the countries as compared to 2019, partly because of the increased number of hand washing. Sales of laundry detergents continued to shrink year-on-year due to stagnation in consumption of the COVID-19 infection expense and the situation remains challenging. This shows our consolidated financial results. Net sales reached JPY 366.2 billion, up 3.1% or JPY 10.88 billion year-on-year and up 1.9% on the basis of constant currency, excluding exchange rate fluctuations. Core operating income went down by JPY 5 billion to JPY 30.92 billion. The operating profit was down by JPY 12.89 billion due to the absence of a gain on transfer of land site recorded in 2020. EBITDA, which has been used since this fiscal year as an indicator of profitability on a cash basis during upfront investments, posted JPY 45.17 billion, down JPY 2.49 billion year-on-year. This slide shows year-on-year changes in core operating income. The factors for increase totaled JPY 1.7 billion. In terms of changes in sales, product mix and others, increased sales growth as well as the rise in gross profit, but changes in segment structure and increased depreciation expenses led to a drop in gross profit, which resulted in a net increase of JPY 500 million. Total cost reduction, especially in raw materials costs contributed JPY 1.2 billion. On the other hand, factors for decrease totaled JPY 6.7 billion. In addition to the increased price of raw materials, we have also increased sales promotion and other competition-related expenses as well as R&D expenses. As a result, core operating income went down by JPY 5 billion year-on-year. This shows results by business segment. Net sales indicated in upper lines are total net sales, while those in lower lines are sales to external customers. In Consumer Products, drop in sales of hygiene-related products due to recall were offset by sales of toothbrushes, fabric softeners and antipyretic analgesics, resulting in year-on-year increase in total net sales. Segment profits shrank by 22.8% due to a drop in gross profit, resulting from the changes in sales mix and increasing costs. In Industrial Products, both sales and profit increased year-on-year. Chemicals topped the previous year in sales due to recovery in market prices, especially in the automotive industry. And hygiene-related products performed well, while in detergent for industrial use, those for restaurants struggled. Segment profit increased because of the increased gross profit due to increase in sales. Overseas business posted a rise in sales and drop in profit. As for the results by geography, I will give more details later. Moving on to the net sales of Consumer Products business by product category. In oral care category, main products such as toothpastes, toothbrushes and dental products exceeded the previous year and the market. Beauty care category fell significantly short of the year before due to the decline in the sales volume of hand soaps. Fabric care category was up year-on-year due to the growth in fabric softeners. Living care category, though food preparation products declined due to recall from the previous year as dishwashing and bath detergent topped a year before and our new product of bathroom detergent had a positive effect. In pharmaceuticals, antipyretic analgesics, our mainstay increased in sales, contributing to the increase in sales because of the demand for COVID-19 vaccine side reactions as well as a new product effect. Next slide shows Overseas business results by region. In Southeast Asia, though there remained an impact by weak consumption, net sales increased by 3.5% year-on-year and by 1.3% on a constant currency basis excluding exchange rate fluctuations. Contributions include enhanced sales promotion in regional areas in Thailand, especially for detergents and the renewal of detergent products, emphasizing their antiviral features in Malaysia, which resulted in securing exposure in stores. On the other hand, the core operating income was affected by a rise in raw materials costs, resulting in a year-on-year decline. Northeast Asia saw its net sales grow by 15.1% year-on-year and by 6.3% on a constant currency basis, excluding exchange rate fluctuations. In China, with continued strength due to enhanced sales promotions for electronic and live commerce, we achieved over 20% year-on-year growth. But in South Korea, in addition to the recall in hygiene-related products, the shrinking market of laundry detergents pushed down the sales. Now I would like to discuss the new medium-term management plan, working toward 2030. We believe it is important to reinforce management driven by our purpose, which is to make a difference in everyday lives by redesigning habits so that we can fulfill our social role and responsibility. Holding up our vision of becoming an advanced daily health care company, we will aim to contribute to sustainable society and enhance our corporate value by evolving and developing the kind of health care only Lion can realize. Over the past 10 years, with our challenge, profitability increase as a theme, we have worked on shift toward higher-added-value products, strengthening our profitability base, consolidation of affiliates and other structural reforms. On the other hand, because of the impact of COVID-19, more recently, the social mission and significance of our company has been further enhanced. For the next 10 years, while continually reinforcing future-oriented growth investment, we will seek to accelerate business growth and expand our corporate value. Our management theme is to aim to enhance Lion's market, economic and social presence. More specifically, we will accelerate the growth through more proactive investments, generate cash and reinvest and return it to shareholders and expand the process further. With this, we hope to create a spiral that will lead to sustainable expansion of corporate value. As a metric to evaluate the level of realization of this spiral and help further expand it, we will focus on the expansion of sales growth rate and EBITDA, while in parallel, strengthening the ROIC management and improve investment efficiency. Here, you can see the overall picture of the strategic framework. With this, we will implement our approach, driven by the purpose of making a difference in everyday lives by redesigning habits and increase corporate value by enhancing economic values, as you see on the slide, through contribution to the realization of sustainable society. Now let me talk about our more specific design for the business growth to reach JPY 600 billion in 2030. In this cumulative bar chart, you can see our targets of business growth by area. The important points are the steady growth of domestic existing businesses and the business growth in overseas and new businesses. Among them, what is most important will be the expansion of overseas businesses. The 3 key items are to evolve glocalization to maximize synergy, expand Qingdao Lion business and expand into new countries and areas. Let me give you more details one by one. As a grand concept of global strategies, we have glocalization strategies. With these strategies, we have leveraged our strengths of detailed marketing tailored to the local needs by country and area and of the reliable quality as a Japanese manufacturer and enter new countries and expanding our businesses. However, more recently, because of increasing similarity and commonality in lifestyles and needs across national and regional borders and other environmental changes, we now need to evolve the business style one step further. By defining cross-border market types instead of country or area-based ones, in light of characteristics and trends of consumers in each of the countries, we will evolve glocalization strategies in order to maximize synergy and advance efficient business management via optimum approach for each market type. This slide shows the framework of the market-type based marketing already implemented. We categorize markets into 3 types across countries and regions and develop strategies for each. The categorization of 3 types is based on features and trends identified through our conventional glocalization strategies in addition to GDP growth rates and income levels. For example, the approach for Type I countries and regions would be to seek volume-based growth through general purpose low-cost products tailored to the local needs. In Type II, we will seek maximization of product and distribution strategy. And in Type III, we will offer high-end products focusing on Japanese brands so that we can realize quality-based growth through more value-added products. The accumulated insight and know-how through these strategies can be applied and implemented in future entry into new countries and areas as well as in expansion into new categories. This slide shows the growth directions in countries where we currently operate. We will aim for total sales of JPY 240 billion in net sales based on the CAGR of 10%. In particular, Qingdao Lion is aiming to grow to reach JPY 100 billion in 2030, and it will be a key in our global strategies. And so I will explain in more details later. Between the 6 consolidated group companies, except for Qingdao Lion, we have achieved 6.9% CAGR for the past 10 years. Though we have been affected by COVID-19 in the short term, we hope to reach JPY 140 billion in 2030 on the basis of 5% CAGR, excluding China. If you look at the growth directions by market type as for Type I and II, on top of the share expansion through quality-based growth in laundry detergent, we will move into the personal care field centering around oral care, based on our expertise from success in home care and to expand channels through e-commerce reinforcement so that we can realize scale expansion. As for Type III, which is focused on Northeast Asia and urban areas, we will continue to shift to value-added products, reinforce mouthwashes to generate synergy with toothpastes and to expand contacts with consumers through more sophisticated e-commerce so that we can enable quality-based growth. Next, let me explain our approach for Qingdao Lion. Previously, with our focus on oral care, leveraging global brand such as Systema and Clinica, we have expanded our business through the enhancement of brand perception, appealing the Japanese quality as well as synergistic growth of local brands and achieved a CAGR of 16% for the past 10 years. Going forward, we will further accelerate this momentum and expand business areas with the oral care business as a starting point. More specifically, we will expand into areas we have not operated our business so far, such as inland China, expand into areas such as dental clinics, pets and commercial use, which have affinity with oral care and leverage new channels, including D2C. To this end, efforts are already underway through concentration and shift of management resources and reinforce promotion foundation so that we'll be able to realize growth of 22% CAGR to reach around JPY 100 billion in sales in 2030. Lastly, I will touch upon expansion into new countries and areas. We are considering possible M&A, particularly in Asia where we can expect to see a big growth of the middle class, the main driver of consumption going forward. We will aim to enter at least 4 new countries by 2030 or 2 or more countries in the current medium-term management plan. With this in mind, we have created a dedicated unit under the direct control of the President, me, Kikukawa, reinforcing hiring mid-carrier specialists. Next, I will touch upon the existing domestic businesses and new businesses. Here now we'll expand on our plan to offer new products and services based upon the 4 fields of value creation. Awareness as well as the social reason for health and hygiene are rising. Health care unique to Lion. Lion would like to further evolve and advance better daily routine. With this in mind, Lion has established 4 domains as our growth drivers of value creation. This has already been explained. Please refer to the description here in regards to its aims and directions. We have assigned leaders in each domain. To realize this vision, we will advance business operations and we'll accelerate our efforts to create new values. In order to realize this new value creation centering around these 4 domains, we need to further evolve from the conventional business models. We keep to evolve in value provided from tangible things to intangible things. We need to expand targets in order to deliver solutions to the social issues. We need to evolve our business operations from just a manufacturer to become a total health care servicer. We need to build an ecosystem involving the industry, government, academia, medical and the private sector. We do believe those changes will become a foundation for the new value creation. I will go into details later when I explain the first stage or the new medium-term management plan with specific examples. Next, I will explain our sustainability strategy. Lion has succeeded its finding spirit benefiting society through business activities. We have a long track record of addressing not only the economic development but also global environmental and social issues. We have our target for 2050 for decarbonized society. We will become carbon negative. For resource circulating society, we will use recirculating plastics, centering around our purpose. Lion will create environmentally friendly habits with consumers. We will make our contributions to the environment not only here in Japan, but we will also involve Asian countries as well. Now allow me to explain these graphs. The left shows Japan's CO2 emissions by section in 2019. CO2 from the residential sector encircled in red accounted for about 15% in the total emissions in Japan. It amounted to about 160 million tonnes. There are not so many businesses who are addressing the residential CO2 emissions. Lion believes this is going to be a unique role we need to fill up because we have many contact points with consumers. Lion will make diversified efforts to create environmentally friendly habits at home, such as offering products which consume less water and others. The right graph shows Lion's plastic use and reduction effects. In Japan, the use of refill products and more concentrated products such as liquid type has reduced in plastic use by almost 80%. Those refill products have become a norm here in Japan as our culture and habit. But those types of products are yet to be introduced into overseas countries. We do believe that if refill products penetrate into the Asian countries, it will definitely have a good impact in reducing plastic usage. We are collaborating with the Kao for horizontal recycling, and we need to make further efforts to reduce the plastic consumption and we need to build recycling models, and we would like to propose this in Asia. This shows Lion's efforts to create environmentally friendly habits and their contributions to sustainability in terms of the KPIs, and I will not go into too much details. Of course, we have CO2 emissions coming from the business operations. We have those target of the CO2 reduction in Scope 1 and Scope 2. We'll make a steady progress here going forward. Next, I will explain our new medium-term management plan, which started this year. We will implement 3 consecutive 3-year medium-term management plans to realize Vision2030 on a rolling basis, adjusting strategy and policy to changes in the business environment to enhance precision as we go. The first stage starting this year is to get on a growth track and create the foundations for new growth; transform business foundations; active human resources and organizations. The first stage is now positioned as 3 years to have a gear change toward accelerated growth. We will execute our growth strategy and in parallel transform the management base to accelerate transformation. We also reinforced an ROIC management to enhance management control. This does include our effort to allocate management resources in a more appropriate manner. Next, I will explain the specific actions based on the 3 growth strategies. This slide shows specific initiatives we plan to take. The top is growth strategy. This is our strategy to accelerate the business in China and M&A initiatives. These points have been already explained. So here, I will particularly expand on the top item on accelerated growth in 4 fields of value creation. I will explain our oral health initiatives as one example. First, what is Lion's oral health business? This shows its entire picture. In health care, oral health is increasing its importance. But in reality, consumers still have a long way to go in terms of awareness. So we'd like to make oral health management as an integral part of health care. We will be engaged in a business, which will make preventive dentistry as a part of your daily routine. To achieve this, we will build POHR as a business foundation and a hub that connects us with all stakeholders. We will create such a database. This should help us to combine the existing business and the new business models. I believe this is going to be quite important. We will pursue an industry-government-academia collaboration with both public health care institutions and private businesses to promote the uptick of preventative dentistry in social trends and systems. I'm delighted to introduce here in the details well-being support business, top right, and health literacy improvement projects. Allow me here first to explain the well-being support business, the first phase initiatives. In response to the growing importance of oral health in communities around the world, we will launch a new business for businesses and local municipalities. We will first launch an oral care information service for businesses and local municipalities in March this year. Ministry of Economy, Trade and Industry, METI, is now emphasizing health education for workers and employees as indicated in its health and productivity management survey. We'll offer oral care seminars, then we'll analyze their impact on awareness and changes in behavior. Then we will produce our reports, looking into its benefit on health and productivity management. We plan to have 2 services providing feedback to users within 2022. Next, I want to explain the project to improving health literacy of citizens. We plan to utilize digital technologies to make preventive dentistry a routine habit. This is going to be a social experiment we conduct in partnership with Koshi City, Kumamoto Prefecture. This is going to be a collaborative initiative together with local municipalities, dental associations and businesses. We would like to find a new way to revitalize regional communities. We would like to leverage our knowledge on preventive dentistry as well as in our apps. We would like to collect data from citizens and oral health. We would accelerate our new behavioral habit. As shown here, we have those goals and actions planned to carry out this social experiment, and we will study its effectiveness. Here now, we are looking at not only an improved health and literacy support business, but this is going to be a starting point of this new professional care services, which was explained earlier. Lion has an aspiration to raise oral health into the health care context. The biggest challenge for Lion is how we can make preventive dentistry a daily routine of your everyday life. By doing so, we would like to find diverse opportunities to make profit. Next is the first stage goals. Net sales in 3 years is JPY 420 billion, CAGR, 4.7%, and we'll aim at the record-high EBITDA of JPY 52 billion. This shows changes in EBITDA up until 2024. As explained earlier, first key takeaway here is for this 3-year period. While we continue to make investment for growth, at the same time, we will make sure Lion will continue to grow its business. We would like to [indiscernible] such a cost. We intend to increasing core gross profit by developing our firm business growth. This is going to be quite important to have such a spiral for us. As for 2022, EBITDA shows a temporary decline, but this is due to the expected increase of raw materials as much as JPY 6 billion. We will make steady progress in business growth while we make growth investments. With all this done, we are going to aim at record-high EBITDA in 2024 based upon the sure growth efforts. This shows the sales by the business segment. Please pay attention to the growth Overseas. We will aim at a CAGR of 4% or more for the consolidated net sales. Next on cash allocation. We put cash obtained from upfront investments into strategic future-oriented investments and multi-stakeholder returns, powering further growth and cash generation to enhance corporate value. Being more specifically now, we forecast to make approximately JPY 80 billion for strategic investment and approximately JPY 30 billion for shareholder returns. Shareholder returns. For the first stage, we aim to increase dividends annually and flexibly buyback and cancel treasury stock. By doing so, we will aim at continuous and stable returns. Lastly, I will touch upon our FY '22 performance forecast. First, I will now explain our projection of the external environment and its impact on Lion's operating results. First about COVID-19 pandemic. We are assuming here that the pandemic will not be contained until the second quarter or later in Japan. Stay-at-home demand will continue, and health awareness will grow stronger. This will result into higher values to be offered, including oral care and others. Demand related to treating the side effects of the booster shots may result in increased sales of antipyretic and analgesics. As for hand soaps and other hygiene-related products, they are expected to be on par with 2021. As for Overseas, in Southeast Asia, consumption is expected to be robust, thanks to the expected economic recovery. We assume raw materials costs will remain high. So we are expecting manufacturing costs will substantially increase. Now FY '22 consolidated financial forecast. Net sales, JPY 375 billion; core operating income, JPY 23 billion; operating profit, JPY 27.5 billion; profit for the period attributable to owners of the parent, JPY 20 billion; EBITDA, JPY 40 billion. We are forecasting year-on-year increase in sales and decrease in profit. I will explain later the factors for this declined profit. This shows the results by business segment forecast. All segments show our forecast of growth in sales, except for other. This shows change factors affecting core operating income. As has been already explained in the EBITDA-related profit increase and decrease, here the big factor of the decline in profit is having to do with the increase in raw materials price of JPY 6 billion. On top of that, we have an increased investment for growth as well as the increased depreciation and amortization associated with the investments executed in the past year. It resulted in minus JPY 7.9 billion in profit forecast. Lastly, I will explain shareholder returns. As of today, we resolved to acquire and cancel up to a total of JPY 10 billion in treasury stock, together with the financial results announcement. Acquisition and cancellation of treasury stock is going to be done for the first time in 16 years since 2006. Based on our dividend policy, return profit to shareholders on a continuous and stable basis, we are scheduled to increase annual per share dividend JPY 1 to JPY 25. This is going to be the seventh consecutive year of increase. This concludes my presentation.

Now we'd like to start taking questions. The question is from Ms. Miyasako from Jefferies Securities.

Miyasako from Jefferies Securities. Can you hear me?

Yes.

There are so many questions I want to ask, but you said one person can ask only one question. I'm interested to know what your thoughts are for price hikes in the domestic market. As you know, Kao has been referring to price increases. Could you share with us your approach toward price hikes given the rise in raw materials costs?

Thank you very much for your question. To give you the conclusion first, currently, we do not assume, plan or incorporate into our plans the price increases in the sense of substantive increases in shipping prices. However, as you saw in the breakdown of the decline in the core operating income for this fiscal year, we are already expecting an impact of JPY 6 billion to push down the profit due to rising raw materials costs. For the time being, our basic stance is to absorb rising costs through accelerated total cost reduction efforts. However, if this heightened raw material costs remained at the current level for an extended period of time or if the yen continues to depreciate further exacerbating the rise in actual raw materials cost, in some cases, we want to consider taking initiatives that would result in a de facto price hikes initiatives such as reducing the frequency of special discount sales.

If that is the case, as Kao said, it was going to start rising -- raising prices in March. Is it your intention not to follow suit?

Yes. Our basic stance is not to follow suit.

Then what will the criteria for you to decide to follow suit or not to? Would it be raw materials price levels?

Yes. Though we are not yet in a position to say at what prices of crude oil or to what levels of foreign exchange rates we will take actions. But if the current level, which is $90 per barrel in crude oil prices, is to be maintained throughout the year, raising the shipping prices should be the last resort. We may start to take actions such as reduction in frequency of discount offers through special sales. Does that answer your question?

Yes.

The next question is from Mr. Hirozumi of Daiwa Securities.

Can you hear me?

Yes.

Hirozumi of Daiwa Securities. I have only one question. I would like to know the change factors for consolidated forecast going forward. Since the depreciation expense is already known, how much of further downside can we expect from the current forecast of JPY 23 billion in core operating income? Would it be a bottom? Will there be an upside? Any such guidance?

Thank you. As you said, we would diligently follow the value of depreciation expenses and additional growth investments just as they have been incorporated into the plan. And therefore, there should be no upside or downside from the current forecast. However, the raw materials costs have already been increased from the levels that we had assumed when we put together the current budget. And so how far this cost increase will go will be a downside risk for the profit. However, we are assuming slightly conservative or slower recovery in demand associated with the economic recovery in Southeast Asia. And therefore, if the demand recovery turns out to be faster than we had expected, this should become an offsite factor for performance. So we would like to act in an agile manner.

Does that mean that the forecast for Japan is reasonable?

Obviously, there is going to be always a plus or minus margin of error in the forecast for demand, but we do not believe there will be a major upside or downside.

The next question is from Ms. Kuwahara from JPMorgan Securities.

Kuwahara from JPMorgan Securities. Can you hear me?

Yes.

I would like to ask about your philosophy behind the investment returns under the medium-term management plan or over the longer term. In the current medium-term management plan, there will be a significant increase in depreciation burden, and you said you're going to make more investments. But if you look at Page 22, it says there will be a contribution to EBITDA from business growth of JPY 18 billion. How much investment return has been assumed in this JPY 18 billion? Would the investments scheduled under the medium-term management plan be expected to generate return more in the second stage? So do enlighten us with your thoughts on investment returns since you said you have proper ROIC management as well.

Thank you. I'd like to ask Sakakibara to add more details but let me give you the overview first. Our plan is to make proactive capital investments to some extent during the first stage as well. More than JPY 30 billion in investments at Sakaide factory, for example, is one of them. But investments like that, which is an ultra-large investment to our company, is beginning to end more or less, and we do not expect the capital investment to keep increasing going forward. Accordingly, depreciation expenses, though they may continue to rise a bit longer, the amount of increase should become milder. On the other hand, we're making investments at Sakaide factory and in IT systems, whose returns started to be generated gradually from late last year. However, we believe we still have a lot of room to generate more returns. And therefore, I would like you to expect that the payback on the growth investments will start to materialize on a full scale basis from the second half of this year.

Sakakibara speaking. I would like to add some comments to what Kikukawa said. During the first stage, as shown in the appendix, while we expect to obtain JPY 120 billion in cash flow, we will make investments of more than JPY 80 billion. On top of that, we're going to gradually start recovering returns from investments made last year and the year before last in late first stage. And then we will be recovering returns and increasing asset efficiency on a full scale basis in the second and third stage. Based on that, we are planning to implement ROIC management.

The next question is from Ms. Kawamoto from UBS Securities.

Can you hear me?

Yes.

You were asked about your approach towards price increases. Could you let us know the reason why you do not assume price increases? Since the earnings announcement by Kao 10 days ago, could you tell us how the distributors and retailers and the industry have been responding? And how P&G is reacting, if you happen to know? You have incorporated a negative factor of JPY 6 billion from raw materials cost. If you divide it -- this into the part attributable to crude oil and palm oil, how much would it be for each?

Thank you. There are 2 reasons why we do not raise prices. Originally, our basic approach was to focus on continuously raising unit prices over a mid- to long term by enhancing added values for the products. That is because we believe it would not be necessarily desirable for consumer products used on a day-to-day basis to see their selling prices go up and down, depending on the rise and fall of the raw materials costs. Incidentally, in almost all markets where we have been operating our business, we have succeeded in raising the unit prices by 20% to 30% on the average by shifting toward more added-value products over the past decade. So we have this track record, and we'll continue with this. However, JPY 6 billion rise in raw materials costs for a short term does have a major impact. So shifting to more value-added products aside, since the second half of the last fiscal year, we have been accelerating our initiative of total cost reduction compared to the past. And our hope is to achieve a total cost reduction of JPY 8 billion by 2024. With regard to the question on the breakdown between crude oil and palm oil for the rise in raw materials costs, I'm afraid I don't have the specific numbers off the top of my mind. So we will get back to you later if we find them. But roughly speaking, based on the current business mix of our company, the rise in the crude oil prices must have much more impact.

I do understand the shift to more value-added products over the mid- to long term in oral care and pharmaceutical products. But in fabric care products, the competition seems to be very intense. I wonder what your thoughts are on this.

That is exactly what I had in mind when earlier I said almost all markets. In main markets where we do business, excluding fabric care products, we have successfully raised unit prices by 20% to 30% in products, including dishwashing and household detergents. But we have been unsuccessful in raising unit prices for the past 10 years only for laundry detergents and fabric softeners. With the adoption of larger pouches, for example, if you simply divide the total sales value by the number of units sold, the so-called unit price derived from such equation did go up, but we have not succeeded in increasing the unit prices in a substantive sense, which we have taken as a serious challenge for us. We are hoping to bring about major innovation into this field as soon as possible.

Next question is from Ms. Sato from Mitsubishi UFJ Morgan Stanley Securities.

Sato from Mitsubishi Morgan Stanley Securities. I have a question. Some of what you explained and what you said in the medium-term management plan do not make sense to me, honestly speaking. You're saying you will implement ROIC management and yet on Page 41 for the 3 years of the medium-term management plan, though I am aware that there will be a drop in this fiscal year due to raw materials cost, ROIC is expected to fall. As I listen to you, when you were talking about rising raw materials costs, here's what I thought. From a long-term perspective, in countries other than Japan, there is major inflationary trend with rises in salaries and given that commodity markets are going to move globally in a synchronized manner, no one should run their business basically assuming that the raw material costs will drop down the road. I do understand there is a logic unique to Japanese market, but when competitors are trying to pass the rise in raw materials costs to their prices, if you are not, unless you can only get the return through increased sales volume, I can't agree that you are implementing ROIC management. So I was thinking your story didn't make sense. Isn't it the time to transform the industry, especially in oral care products and hand soaps, where you are the largest player into the one to be able to pass the rising raw materials costs on to the product prices? That, I believe, would be exactly what the ROIC management is about. The medium-term management plan is relatively disappointing as well. If your mindset is if the market prices go down at some point in time, your profitability will also recover. And if that is the assumption, that in and of itself is quite unsatisfactory to me. I'm interested to know what Mr. President would think.

Our assumption is that current rise in raw materials costs is expected to be prolonged. Though we do not believe that there is no possibility that they will go down, but there is no major expectation for the cost to go down incorporated. However, we don't expect the cost to keep going up indefinitely either. And we believe that we're almost close to the upper limit this year. Therefore, our assumption is that due to gross profit increase and top line growth based on our gross investments, our profitability will start to improve. As for ROIC management, we do not plan to use this for a short-term management. If the investment that we have made is generating right return, what will be the most appropriate allocation of the limited amount of cash available? In answering those questions, as we put together our business portfolio, ROIC management will be most useful. So that is how we want to use ROIC management.

Yes, this is Sakakibara. In regard to ROIC management on the mid-term and long-term perspectives, Mr. Kikukawa has just explained. There are 2 factors for us to use ROIC. As Mr. Kikukawa already explained this, here now, we need to look at the business portfolio. We need to fully understand where we should allocate our management resources. Another point. Earlier, we talked about investment. Last year as well as the year before last, we made investments, we are also going to invest in this very fast stage. Here, we need to look at efficiency of capital invested. With these aspects, we decided to introduce ROIC management. Hope this answers your question.

If I may now, I would like to add one more point. As Sato-san has just indicated, we do not believe the current situation is the best. If possible, now we would like to challenge ourselves in setting our prices, which do reflect our true values. But I don't think now is the right timing for us to do so in light of the current situation surrounding us. That said, there is no change on our side as to our basic stance to try to increase our unit price going forward.

I understood it. Just to double check, back in the '80s, there was a 10-year long war between Kao and Daiei. Back then, for Lion to go for volume, you reduced your price. I believe in this time, it is not going to be the case, right?

Well, what you said is right.

Well, let's assume just for the sake of this argument, Kao raised its price, and if you say then, Lion is going to lower its price in order to increase volume?

No, we do not have such an intention.

Next, I would like to have Ms. Yamaguchi from Goldman Sachs Securities.

Yes. This is Yamaguchi of Goldman Sachs. Can you hear my voice?

Yes, we can hear you.

You explained that you will expand your Overseas business in the medium-term management plan. But this year, it is limited to 3% in growth. So I appreciate if you could further expand on the risk factors, China and other risk factors, respectively. You explained a growth plan for China on a midterm to long-term basis. I think it was either on Page 22 or 23. I appreciate if you could share more information what are the resources you would like to deploy and where? I am asking this question because it looks as if you go for everything because those markets seem to be growing. But correct me if I'm wrong, I believe you have more specific ideas based upon your own specific strength. So be specific, please.

Thank you for your question. First, in regard to China, we have a track record of 16% level of growth per year. For the next 10 years, we plan to aim at 22% and we achieved this last year. So we're going to challenge ourselves vis-à-vis this number. Going forward, there is no doubt oral care is going to be in our core business in China. But at the same time, we need to better understand opportunities in terms of business portfolio. We believe we have good opportunities to expand our business areas. With our operations in China, our Systema and Clinica helped Lion to strengthen our Lion brand in China. Lion is now appreciated as Japan's #1 oral care manufacturing company among our customers. This perception is extending one by one, and this can be used our strength going forward. With this being accomplished, now Lion is planning to move into midsized inland local cities in China. So far, we have little operations in these areas. Well, actually, they are rather big in size. So we would like to challenge ourselves in those areas. On top of that, we are planning to further expand the business area. For example, pets business, yes, we launched this pet business last year. We'd like to expand this business as much as possible. Talking about the pet business, Lion has no intention doing pets food business. Yet it is going to be oral care for pet animals. The idea is whether or not we can make a good profit. And if we can make a profit, then it should be treated as one of the important pillars for our business activities. Then we should be able to grow 6% higher over the current 16% on average. As for the 3% growth this year, as I briefly touched upon this in the first half of my presentation, yes, we believe Southeast Asia is now gradually recovering in the economy. The situation, of course, varies from country to country. Well, as for the time to come back to the pre-COVID-19 level, we believe we have to wait until quite late in the second half of this year. So the 7% growth we used to enjoy is not going to be realized this year. That is why we are planning to have a growth of about 3%.

Could you further expand on China forecast this year? The operating profit is going to decline about JPY 8 billion. Could you also kindly give me a rough idea between the domestic and the overseas markets?

Well, I think I can have Mr. Sakakibara to explain this in details. But we believe China is going to grow smoothly in sales this year as well. And in terms of operating margin, it is going to be almost on par to the last year's performance. We are rather on a positive here because sales are growing, making us rather positive. The business portfolio centers around oral care products, so we have not been much affected by the increased cost of raw materials. We are actually having negative impacts in Southeast Asia and South Korea, where our major business has been centering around laundry detergents.

For FY '22, as has been just pointed out, we are now forecasting a decline of JPY 7.9 billion in profit year-on-year. Though I simply cannot give you specific numbers here as to the breakdown between Japan and the overseas, but we believe the increased raw materials costs will give us a negative impact as much as JPY 6 billion on profit. It is about 50-50 between Japan and overseas. We also intentionally book the cost of about JPY 3 billion for competition. This does include the sales promotion cost for China opportunities. We plan to do the same this year as well.

Time is running out, but I see 2 hands raised, and so I'm happy to entertain those questions. Mr. Narikiyo from Nomura Securities, please.

Yes, I have a question. I'd like to know when you believe you can become profitable. According to your plan for December 2022, operating profit is forecasted to be up 40%. But if I'm not wrong in my calculation, profit continues to go down in the second half as well. That means you are going to have a big jump in profit starting from the next year. So I appreciate if you could further expand on the details behind this. What are the reasons why you believe you can have such a growth? And when is going to be the timing?

May I remind you that our plan for next fiscal year 2023, it is not the case. We have produced a rigid plan. So I'd rather not make a specific comment when we become profitable. That said though, well, I may be repeating the same comment here. But there are 3 major reasons behind the decline in profit for the current fiscal year: increase in cost of raw materials; increased depreciation; and amortization and increased investment for growth. These are the 3 reasons. As I have explained at this point earlier, the cost increase is going to last until the end of this year. It will stay at the current level next year and onward. So we do not believe this cost continues is going to become a more negative factor going forward. As for the amortization and depreciation and investment for growth, yes, we will increase these costs going forward, but the pace of increase compared with the past is believed to slow down to some extent. So if we could grow our sales above those cost factors, we should be able to go back to a rather big profit level next year.

Am I right that major driver for the sales increase is coming to be Overseas, particularly China?

Yes, as for this year, we are already forecasting China to be about 20% in growth. So we are expecting China to make edge contributions to gross profit at a certain level.

So am I right China is going to be the major driver for the profit for the first stage?

If you're talking about profit, top line growth will come back in the Southeast Asian countries in 2023 and 2024, even though the raw materials costs stay at high level, but the scale is rather large. So naturally, they will make their contributions in [indiscernible] proportions.

Next, Mr. Saji from Mizuho Securities, please.

I have just 1 point, and I would like to confirm with President Kikukawa. About the product pricing, you told us that the raw materials price hit the ceiling and raw materials price will come down going forward. So instead of having a leadership here, you believe maintaining the status quo. This is going to be a better solution. Yes, I understand the point here very well. But if we look at the fabric situation globally, the price structure itself has become rather irregular. Here I am particularly looking at commodity inside. Now the world is trying to increase the flexibility in price. I think such a trend is going to be rather important on a long-term basis, if I may say so. I wonder if you could share your views vis-à-vis domestic fabric situation over and above the industry situation on midterm as well as the long-term basis.

Mr. Saji, when you were talking about increasing flexibility, are you talking about our capability to fluctuate price?

Yes. For example, cost increase, I believe, is going to continue going forward. Japan compared with the world. Well, the prolonged deflation in fabric has now changed. Well, this itself is going to be a big factor. But what do you think when the cost goes up, you should be able to increase your price. Such a new and flexibility could be a good thought instead of sticking to the low price maintained.

Of particular interest here is going to be detergents and softeners. If you kindly take a close look at the range of retail price of those products, I think you can well understand this point. The so-called regular items, say, the regular price is about JPY 300. But during the special discount days, the price is going to come down almost 1/2. This happens quite frequently. Here, the price is fluctuating by JPY 200 or up to JPY 300 range. With this point in mind, even if we raise our price, at the time of shipment, say, by JPY 10 or JPY 20, is it really going to be an effective measure for us to take? Or would we be better off if we tried and succeed in reducing the frequency of the special discount as much as JPY 100? It is going to be an effort on our side to try to control the average price of our products, which is going to be more realistic. Well, it all depends on the person, how he or she feels about it. But as far as I'm concerned, I would say the latter approach is going to be more realistic as of now. Particularly in our own case, we have a wholesale involved at the midpoint in our business. There are 2 stages involved. I think we should be talking to our wholesalers and the retailers as for the impact coming from the deep discount as well as the price itself. I think such an approach is going to be more realistic.

Understood. Yes, you have a history of negotiating about the issues such as half the price as well as the rebates adjusted. All in all, there could be a negative factor, not knowing which price is the right price. You don't believe such an approach will be necessary in the current retail and distribution environment?

I would say, if you're talking about the current retail and distribution price, if the price is going to be JPY 250 throughout the entire process, I don't think that is going to be realistic.

I would like to thank you for the many questions we have received from you. We are somewhat behind the schedule. But with this, I'd like to announce the closure of Lion's financial results briefing. I would like to thank you again for your precious time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]