Lion Corporation (4912) Earnings Call Transcript & Summary

Thank you for taking time out of your busy schedules to join us for our financial results briefing today. I will explain our consolidated financial results for the second quarter of fiscal 2022, and the overview by segment based on the materials disclosed today. I will proceed on the assumption that you have the presentation material and the summary financial statements at hand. This is the content of today's presentation. Next, please. First, I explain our financial results for the second quarter of fiscal 2022. This is the summary of consolidated results. First, for both sales and profits, we have achieved our forecast. Net sales increased year-on-year, while core operating income decreased. Domestic sales of consumer products increased year-on-year, led by hand soap, toothpaste, toothbrushes and antipyretic analgesics. Overseas in Southeast Asia, sales of detergents were strong in Malaysia and in Northeast Asia, sales of hand soaps and detergents increased in South Korea, resulting in an overall increase in sales. In Industrial Products, sales for Chemicals increased and overall sales were up year-on-year. Core operating income, on the other hand, exceeded the forecast but was lower year-on-year due to higher raw material prices and an increase in depreciation and amortization despite price increase measures and total cost reduction efforts. Operating profit and quarterly profit attributable to owners of the parent increased due to a gain on the sale of land owned by a consolidated subsidiary in January of this year. This shows the trends in the domestic consumer products market in which we operate. In the January to June period, except for certain categories like antipyretic analgesics, the impact of the reversal of COVID-related demand increase has subsided and overall, the trend was strong. Let me explain in more detail by category. In oral care, the toothpaste market continues to expand due to rising unit prices resulting from heightened awareness about hygiene. Toothbrushes also continued to outperform the previous year due to higher value-added products, raising the unit price, and it's back to almost the same level as in the pre-COVID year of 2019. In Beauty Care, the market for hand soap has been stabilizing recently as the impact of COVID demand reversal is subsiding, and it maintains a size of about 1.3x that of 2019. In Fabric Care, laundry detergents and fabric softness saw product size enlargement reflecting bulk buying and also a shift to higher value-add and higher-priced products leading to the continued expansion of the market. In Living Care, sales of dish-washing detergents declined slightly from a year ago due to more people going out, while the market for household cleaners continue to expand, driven by new products from various companies for toilet and bath use. For pharmaceuticals, the antipyretic analgesics market expanded due to increase in demand related to treating COVID-19 vaccine side effects. Page 6, shows the overseas market by country and category. The category of toothbrushes is newly added this time. With Malaysia as an exception, its market has shrunk from the pre-COVID year of 2019. However, recently, the market is improving, helped by economic support measures in each country, so the market is trending stronger. In the hand soap market, sales in both Southeast and Northeast Asia are slightly below previous year levels, but compared to 2019, the market has expanded significantly in each country, and we expect this trend to continue stably into the future. For laundry detergents, it was a very tough environment from January to March, except in Malaysia. But as with toothbrushes, the market is recovering in tandem with the economic recovery. From Page 7, I will explain our consolidated business performance figures. Deviation from forecast are differences from the forecast announced at the beginning of the year. Net sales were JPY 185.1 billion, up 6.9% or JPY 11.97 billion year-on-year. Excluding the effect of exchange rate fluctuations, it was up 4.6%. Core operating income was JPY 9.09 billion, about JPY 4.9 billion less than the previous year, and its percentage of net sales was 4.9%, down 3.2 percentage points. Operating profit increased due in part to a gain on the sale of land in January of this year. EBITDA was JPY 16.83 billion, down JPY 3.47 billion year-on-year, and EBITDA margin was 9.1%, down 2.6 percentage points. This year, in the first medium-term management plan aiming for expanded presence outlined in Vision2030, our theme is geared change towards accelerated growth we believe we have made a good start despite the difficult conditions in terms of sales growth. On the other hand, on the profit side, we have been strongly affected by the soaring cost of sales. So in the short term, we will take measures to cope with soaring costs while we continue to promote measures to expand our presence. This is Page 8. This shows year-on-year changes in core operating income. Factors increasing income totaled JPY 1.5 billion. For change in sales, product mix and others, while gross profit increased due to sales increase, it decreased due to segment composition change and higher depreciation costs, resulting in a net increase of JPY 0.5 billion. Total cost reduction was JPY 1 billion, coming mainly from cost of sales reductions. Factors reducing income, on the other hand, totaled JPY 6.5 billion. As you can see, the main factor was the increase in raw material prices, both in Japan and abroad. As a result of all of these, core operating income fell by JPY 5 billion year-on-year. This shows the breakdown of differences from the initial forecast. This is Page 9. The impact of raw material prices, which was estimated at negative JPY 5 billion at the beginning of the year actually amounted to minus JPY 5.5 billion, JPY 0.5 billion larger. Since the beginning of the year, we have been working to improve the efficiency of promotional expenses by revising the frequency of special sales, raising prices for some pet products, detergents for professional use and chemicals and also promoted additional cost reductions and cost streamlining and achieved a combined effect of JPY 3.3 billion in the direction of increasing profits. Even after factoring in a JPY 1.3 billion negative impact from segment composition changes, the first half results exceeded the forecast by about JPY 1.5 billion. By continuing to promote these measures, we will try to absorb the impact of raw materials cost increases, which will become more apparent in the second half of the year and beyond and aim to achieve our full year financial forecast. Page 10 shows the business performance by segment. As usual, sales are shown in 2 columns. The upper column is total sales and the lower column is sales to external customers. In the Consumer Products business, the reversal of COVID demand increase has subsided for hand soaps and antipyretic analgesics was strong, leading to higher net sales. Segment profit was lower due to higher raw material prices and an increase in depreciation and amortization. The Industrial Products business saw its net sales increase led by the Chemicals segment with strong sales of carbon for automotive batteries, but segment profit remained almost unchanged. Although we are working on cost pass-through, we saw impact of the rising raw material prices. In the overseas business, overall sales increased, but profit decreased. I will explain the situation by region later. Next, I explain the Consumer Products business net sales by product category. Oral Care sales increased by 4.7%. Sales of toothpaste, toothbrushes and mouthwash grew and led the overall growth. In Beauty Care, sales of hand soaps rebounded with reversal of the COVID-led increased subsiding and overall sales increased year-on-year. In Fabric Care, both laundry detergents led by the Nanox brand and fabric softness led by the Aroma Rich brand, both increased, leading to an overall year-on-year increase in sales. In Living Care, sales of household cleaners, led by bathtub cleansing and Awa-Pita increased, but dish-washing detergents struggled, resulting in a year-on-year decline in overall sales. In Pharmaceuticals, sales of mainstay in antipyretic analgesics increased due to demand for adverse reactions to vaccines and the effect of new products, but sales of acne and skin medications declined, resulting in an overall decrease in sales. Next, I explain the performance of our overseas business by region. In Southeast Asia, sales increased 14.3%, 7.1% after the effect of exchange rate is removed. In Thailand, where market recovery has been slow, we strengthened sales promotions in rural areas, especially for detergents. And in Malaysia, where COVID restrictions have been eased, the market has recovered, and we secured exposure through in-store events, leading to significantly higher sales. Core operating income was down with a big impact from raw material price rises. Next, overall sales in Northeast Asia increased 14% or 4.2%, excluding the effect of exchange rates. In China, total sales were lower due to a change in an EC distributor, resulting in temporary decline in sales and the impact of urban lockdowns, but external net sales were higher than the previous year. In South Korea, sales were significantly higher year-on-year due to rising coal with infections, increasing sales of hand soaps as well as strong sales of laundry detergent. I will now explain our full year forecast. First, we have not changed our consolidated earnings forecast for fiscal 2022. However, the impact of raw material market conditions have greatly exceeded our expectations at the beginning of the year. So I will explain the details of our response in the following slides. As I mentioned earlier when explaining the first half results, this page shows in detail the impact of the raw materials and price hikes as well as the measures taken to cope with diversions from the initial forecast. The numbers and the full year forecast within forecast figures in parenthesis for the second half of the year. We expect the impact of raw material price hikes to be approximately JPY 7 billion higher than the initial forecast, and we will implement measures to counter this impact, including JPY 5.2 billion from controlling sales promotion expenses by reviewing the frequency of special sales and implementing price hikes continuing since the first half and JPY 3.5 billion from promoting additional cost reduction measures and improving cost efficiency. We will absorb the cost increase and the deterioration in the mix of products due to changes in the competition of our business segments and aim now to achieve our full year forecast. In particular, with regard to policy-based price increases, we are currently passing on prices to some of domestic affiliates and to overseas long lead detergents, et cetera, that we will focus on raising actual prices in some areas, such as oral care and hand soap in the domestic consumer products by reviewing special sales prices and frequency and others. Furthermore, we believe the current market conditions are not transient and that we need to respond to them on the assumption that they will continue over the medium term, and we will promote 4 major measures to achieve our midterm plan. The first is to accelerate the introduction of new high value-added products, which we have been promoting to date. In the second half of the year, we have already launched Clinica Pro, a high value-added line of oral care products from Clinica, which has been selling well. In addition, we will launch a major new product next year in the area of Fabric Care, which has been a challenge for us. Details will be given later, but we are now steadily preparing for the launch. And second, now we will review our earnings structure by reorganizing our business portfolio. We will use an ROIC, an indicator that was introduced fully in this fiscal year to shift to a more efficient business structure and to promote the investment of expenses in a more balanced manner as well as to promote consolidation and elimination of unprofitable businesses. Third, we will pass on the impact of raw materials price hikes through price increases. If it is immediately difficult to pass on prices, we will control sales promotion expenses and others by reviewing the special sales prices and the frequency of sales promotions. Fourth, we will promote additional cost reductions. We will work toward our target of JPY 10 billion in cost reduction over the 3-year period of the medium-term management plan. By continuing to promote these measures, we will build a business foundation that is resilient to changes in the business environment and achieve our medium- and long-term goals. Shareholder returns. Based on our basic dividend policy of continuous and stable return of profits, we plan to increase the annual dividend for this fiscal year by JPY 1 from the previous fiscal year to JPY 25, making the seventh consecutive year of dividend increase. Finally, I would like to explain the progress of Vision2030 1st STAGE. Our management theme for Vision2030 is to enhance our market economic and social presence. We will accelerate growth through aggressive investment and create a spiral flow of cash generation, which will be reinvested and returned to shareholders, thereby enhancing our corporate value and aiming for net sales of JPY 600 billion in 2030. Today, I would like to explain the progress and the direction of 3 of these 4 key themes that will be important in working JPY 600 billion in 2030. New businesses, expansion into new countries and the areas and existing domestic businesses. First, I will explain the status of new businesses. Here, I want to explain the Lion Oral Health Initiative. As part of this effort, we are developing all of our corporate activities in the field of oral health while moving toward 2030 under the umbrella name of Lion Oral Health Initiative. These corporate activities will be developed upon the basic concept of making preventive dentistry a habit by connecting all points of contact related to oral health, including not only in homes but also dental clinics, companies, local governments and the local communities. We will realize this as an innovative approach to build POHR business to utilize all health data and collaborating with external partners. Through the corporate activities of developed as the Lion Oral Health Initiative, we will work to create a positive preventive dental habits among people by further growing existing businesses and developing new businesses that provide functional as well as experiential values to consumers going beyond our manufacturing function. We have been accelerating the development of these new businesses by establishing a PMO since last year. And progress so far has been generally good with some business concepts already in the implementation stage, albeit on a small scale. Today, I would like to introduce our well-being support services for our corporate customers and the newly established Lion Oral Health Fund. The first is Okuchi Plus You, a corporate well-being support service launched on July 29 this year. This service is a part of the Lion Oral Health Initiative, which was launched in March this year. This service is part of Lion Oral Health Initiative, a service to support corporate well-being management. The addition of saliva test to visualize oral health conditions and oral care and support content that can be learned quickly and easily helping employees raise their oral health awareness and practice healthy behaviors. We intend to further enhance our services to help people achieve oral health and improve their quality of life and to quickly establish a business model with a new revenue base as a service provider. Next, I would like to introduce the Lion Oral Health Fund we established. The Lion Oral Health Fund was established on August 8 today in order to create business opportunities by accelerating collaboration with new partners. The fund targets investments of JPY 3 billion in venture companies and cutting-edge research institutions in Japan and overseas. The fund will be invested in the oral health field, the core of our business to accelerate the creation of business opportunities that contributed to the development of better habits among customers. Through this investment, we intend to directly invest in venture companies and research institutions with innovative businesses and technologies, both at home and abroad. That share the group's purpose and the management division and to develop new businesses that provide function and experiential values to consumers going beyond the domain of manufacturing company. Next, I will then explain the second point on expansion of new countries and areas. We are considering M&As mainly in Asia, where the competition of the middle class, the center of consumption in the future is expected to expand significantly. By 2030, we plan to invest into 4 or more countries by 2030 and aim at 2 or more countries during the current medium-term management plan. In line with this plan, we will first establish a joint venture company in Bangladesh by the end of September this year. Bangladesh, as you know, has a young average age and is expected to achieve very high growth over the medium to long term, and its GDP is expected to grow to the same level as that of Indonesia by 2030. We decided to establish this joint venture because we believe that it is important to take an initiative in developing this large market as quickly as possible. In Bangladesh, the main sales channel is what's called street stores or traditional trade. We will work with Kallol, which is both a distinct distribution network and sales force that covers all of Bangladesh to promote our products along with educational activities that will lead to the creation of better habits, and we hope to improve the quality of life of people living in Bangladesh and expand the market. This method of winning through a localization strategy by combining the local distribution network with Lion's R&D, production technology and marketing is a successful scheme that Lion has cultivated in Malaysia, Thailand, Indonesia and other countries in the past. We are confident that our entry into Bangladesh market with high economic growth potential will be of great value to Lion in the near future. Finally, I would like to explain the direction of our existing businesses in Japan. As I mentioned earlier, even in a situation where the raw material prices are rising sharply, the first thing we need to do is to add value to the market. On the other hand, as I have always told you, in the field of fabric care, we have not been able to create enough innovations, and we have been relatively behind in value-added products compared to other fields. Finally, our innovation here is getting ready. In the Fabric Care business, we are planning to launch a major product action in 2023. We believe that this action will definitely be a major turning point. As you can see, we have scheduled the presentation of our management strategy and new products on November 28 this year. And we do hope that you will join us. This concludes my portion. Thank you indeed.

We will now begin the question-and-answer session. First from Daiwa Securities, Hirozumi-san, please.

This is Hirozumi from Daiwa Securities. Can you hear me?

Yes, we hear you.

I appreciate this precious opportunity. On Page 15 and elsewhere, you explained the impact of the segment composition change, which is quite large. So I'd like to ask for an explanation. On Page 9, we see the impact of raw material prices was JPY 0.5 billion compared to the initial plan. We also see that the change in segment composition is JPY 1.3 billion, which is larger than the raw material impact. And this is JPY 1.7 billion for the full year plan. So tell me what this is? Since you're talking about segment composition, I'd like to know mainly what is happening in Japan and overseas in the area of consumer products, please?

Thank you for the question. We have written changes in segment composition, et cetera. Over time, changes occur in the composition between segments that we disclose or even within a segment to take the example of consumer products in Japan. The composition may change between fabric care and oral care. So it includes a variety of elements. But the JPY 1.3 billion decrease this time is due to mainly an increase in the composition of the overseas and Industrial Products segments and a decrease in the composition of domestic consumer products. The profit margin of domestic consumer products is the highest amongst those 3. So despite the increase in sales, there was a small negative impact on the profit side.

Can you give us some background on this, if possible? Why was the Japanese consumer product lower? And why was it higher for overseas? I'm interested to learn because I have high hopes for the overseas business in the long term.

Yes, as we've been explaining for the past 3 years, economic activity had stagnated, especially in Southeast Asia due to the impact of COVID, which has had a major impact on the markets we serve, bringing about negative growth. But as I mentioned earlier, although the situation is still mixed by country, in general, growth is starting to turn positive and Malaysia, for example, has shown a very sharp recovery. As a result, when compared to the previous year, the growth of the overseas market was larger than expected. On the other hand, the domestic market has been growing only slightly along our assumptions. So that is the background to this effect.

Sorry to press this point, overseas was better than expected. Domestic business was in line with the forecast. So overseas ratio increased and that led to the deterioration of the segment composition?

Yes, growth overseas. And I forgot to mention that industrial products also grew stronger than expected. Those have had impact on composition change.

But it seems a bit strange that profits would drop by JPY 1.2 billion, JPY 1.5 billion -- it's JPY 1.3 billion. I thought it's strange that profits would drop so much owing to a change in composition.

When there is an increase in net sales gross profit would increase in different ways. For example, if net sales increases by JPY 5 billion, in some cases, there is a large increase in profit. And in some cases, there is not. The composition change shown here removes such impact of net sales increases and purely expresses what has been the impact of the segment composition being different from our expectation. So this does not include the impact of the increase in gross profit.

I'll make this my last comment, but with all you said, I still don't understand the cause of the JPY 1.3 billion decrease in profit compared to the initial projection.

Maybe I'm not explaining it well enough. Fukuda-san, could you follow up?

Yes, this is Fukuda. What this is calculating is if the profit margin of each segment was exactly the same as last year, how much profit would have increased or decreased due to the change in the composition.

I see.

So first of all, there is an increase in overall sales. Furthermore, there are other factors such as cost increases and sales composition changes. Such impact has been eliminated, and we have extracted only the impact arising from the change in the composition of the segments. Therefore, as we aim to increase the ratio of overseas business, it's expected that this figure will likely be consistently negative in the years to come.

I see. So as the overseas segment grows, the change in composition will continue to deteriorate?

Yes, that's correct.

Thank you for the question. Now we continue with Jefferies Securities, Miyasako-san.

I hope you can hear me.

Yes, we hear you.

This is Miyasako from Jefferies Securities. I was called earlier than I had expected. So my question might be a little bit out of place but I want to know a little bit about your perspective for the next fiscal year, and I'm assuming that raw material prices will continue to fall steadily and that depreciation will also decrease because this year, there was Sakaide. So maybe we can expect profit increases next year. But then you have been cutting back expenses and sales promotions substantially in the past several years. So are you going to be aggressive on that front? So I'd like to know how you plan to use costs and what your profit expectation is for the next fiscal year?

I'd like to respond. First, to talk about raw material prices. As you know, crude oil prices have been on a downward trend since the beginning of July, and natural oils and fats have also been declining significantly since a little earlier. So these effects should materialize to a certain extent from early next year, and we would like to consider this as a positive factor. But on the other hand, the exchange rate continues to be bad in yen-dollar terms. And so we cannot allow ourselves to be optimistic. In particular, the impact of raw material price hikes during the January-June period will begin to emerge in full-fledged fashion from July. So next January to June compared to a year before, would most likely remain at an elevated level, and so the impact should be negative.

And Miyasako-san, you mentioned that depreciation and amortization expenses will decrease, but that will actually remain at a certain level, they will not decrease in any way.

Poor choice of words on my part. I meant that it will not be significantly higher than this year.

Yes. So the current situation is we believe that depreciation at Sakaide will remain at a certain level. So we would like to try to increase gross profit through the effect of increased sales, a point Hirozumi-san raised earlier and also achieve an increase in profits by controlling costs. That is what we'd like to challenge ourselves to achieve.

I'm sorry, I'm a bit confused, but the yen has been appreciating a bit recently. So raw material cost may be down year-on-year. And that would mean you have more money to spend next year than last year or this year. But then you have this large-scale action.

Yes.

If that is the case, I think the profit would increase if you did not have such items, but I have a feeling that there will be bigger costs. So what's your take on those things?

We are aiming to add value and increase the unit price through this action, so we believe that this is a necessary measure. The cost status for the January to June period, broadly speaking, reflects the raw material prices for the period from July to December last year. So the cost for the period from January to June next year will reflect the prices for the period from July to December. Therefore, the current forecast is for an increase in the cost of goods sold during the first half of next year. So we cannot be very optimistic about this situation.

Excuse me, are you saying that happens because it shows up with some delay?

Yes. To put it very roughly, I think it would be correct to say there is a time lag of about 6 months.

So you're saying that the cost impact will be alleviated starting from the second half of next year?

In terms of year-on-year comparisons, yes, from the second half of the year, that is assuming that the current situation continues.

Sorry to dwell on this. If the current situation continues, first half next year is still negative in terms of raw materials year-on-year?

Yes, the first half this year roughly reflects the cost situation in the July, December of last year, it's still very high. So if we compare the cost situation in the first half next year with 1 year ago, we expect an increase in cost.

I'm sorry. But to summarize, if we expect a high increase in profit next year, that may not happen, could you repeat that one more time?

Yes.

So we should not expect a big profit increase for your company. Is that correct?

Of course, we'd like to make this year's core operating income, the bottom and strive to increase profits next year and thereafter. But the current environment, including cost of goods sold is not something we can be optimistic about. Therefore, to increase profits, we must realize an increase in gross profit through a solid increase in sales and at the same time, to accelerate the implementation of the 4 measures I mentioned at the end of my presentation.

Thank you. Thank you very much. Now from JPMorgan Securities. Kuwahara-san, please. Thank you.

I'd like to ask you a few questions focusing on consumer products in Japan. In response to Hirozumi-san question earlier, you said that the first half is in line with expectations. So unfortunately, it's not contributing to this JPY 1.5 billion upward swing. What about for the full year? Is it that chemicals and industrials and overseas will outperform and absorb the material cost? And as a result, you will not change the forecast. I want to hear particularly about your measures in terms of sales. Your comments about raising prices seem to have become a little stronger recently. So update us on the current status of raw material price pass-through in Japan and the market acceptance, please.

To explain how the surge in costs for consumer products in Japan are being absorbed in the first half of this fiscal year, we implemented measures that led to prices being increased in effect for some products such as pet supplies. But for the group as a whole, the price increases were mainly in the overseas and industrial goods fields. That is the situation in the first half. As I explained earlier, from the second half of this fiscal year onward, especially Q4 onward, we will implement measures that will lead to price increases in actual terms for domestic consumer products. In particular, we'd like to raise prices in the oral care segment. Therefore, sales of consumer products, which was up 1.3% in the first half with external sales should increase by a bit more if these price increase measures are successful to a certain extent. So I believe that the balance between overseas and domestic growth will go in the direction of being corrected. The point raised by Hirozumi-san earlier about the negative profit impact due to the composition ratio among segments, we assume that to be a little lower in the second half due to the reasons that I outlined.

So let me confirm. I believe that sales exceeded the forecast for the first half of the fiscal year, but the sales forecast for the full year remains unchanged. Listening to what you said, is it correct to think that essentially, the core operating income is your priority target and for sales due to ForEx and price hike situation, you are running with the intention of attaining higher than forecasted sales?

Yes. This time, there are many uncertainties such as whether the price hikes for domestic consumer products will be accepted according to our expectations and what will happen to the exchange rate, as you just pointed out. So we have not revised the absolute sales figures, but we do hope to see sales to increase at the same pace as in the first half of the year. So it is, as you mentioned.