Lion Corporation (4912) Earnings Call Transcript & Summary

And this is Kikukawa, President and CEO of the Lion Corporation. I would like to express my appreciation for your precious despite a business schedule to attend this financial briefing. I would also like to undertake this opportunity to express our many thanks for your continued support for our IR activities. These are the 4 points I'd like to cover today. So allow me to go one by one from the top. First, fiscal year 2022 financial results. For FY '22, we achieved our targets in net sales and profit vis-a-vis the forecast that we announced back in February last year. Net sales were driven mainly by overseas and Industrial Products businesses. Core operating income, though impacted by the increased cost of raw materials grew in gross profit, thanks to the growth in sales. We conducted a variety of measures to absorb the impact, and we are able to go above the forecast we made. As for year-on-year basis, we grew in sales but declined in profit. Consumer products overseas and Industrial Products business grew respectively in net sales. In Consumer Products, oral care and beauty care grew in sales. Overseas business were driven by Malaysia and South Korea. In Industrial Products business, we had a strong business in electroconductive carbon for secondary batteries as well as in hygiene-related products. Core operating income was down, reflecting the rising raw materials prices as well as the increased depreciation and amortization despite our efforts to increase sales price and total cost reduction. Operating profit and profit for the period attributable to owners of the parent went down, mainly due to the drop in the core operating income. This slide shows the domestic market trends for consumer products [ Linparticipatin ]. I will not go into details, but some highlights. The market expanded for laundry detergent whose price went up and antipyretic analgesics whose demand further expanded moving toward the end of the year, but other markets as a whole were on par to the previous year. This slide shows the major products categories overseas. toothbrushes and laundry detergents show a recovery in line with the economic recovery in each country. They were up for the full year, year-on-year basis. Hand soap market was down in each country year-on-year. But may I remind you that this market is still expanding significantly compared with FY '19. From this page onwards, I will go through the consolidated financial results for Lion Corporation. We achieved both net sales and profit in each business against our forecast. Net sales being JPY 389.9 billion, up 6.5% or JPY 23.6 billion year-on-year. Excluding foreign exchange fluctuations, it grew 3.4% in substance. Core operating income was JPY 23.5 billion, down JPY 3.7 billion year-on-year. It was 6% in terms of percentage of net sales, down 2.4 points year-on-year. Operating profit does include the proceeds from the land transfer owned by a consolidated affiliate. EBITDA was JPY 39.9 billion, down JPY 5.2 billion year-on-year. EBITDA margin was 10.2%, down 2.1 points. Here, I will explain the factors behind the changes year-on-year in core operating income. The total growth factors became JPY 9 billion. The impact from the changes in sales, product-mix and others, gross profit was JPY 10.3 billion due to the changes in sales, but the increased depreciation and amortization, segment competition changes, et cetera, have the impact of negative JPY 3.8 billion. All in all, it went up JPY 6.5 billion. Product cost reduction was JPY 2.4 billion, mainly driven by reduced cost of goods. As for the declining factors, added up to JPY 16.4 billion, as shown in the graph, the major factors go to the rise in raw material’s prices, both at home and abroad. This impact became larger, particularly in the second-half. The launch of the new digital infrastructure systems increased the depreciation and amortization, resulting in the growth in other expenses. All in all, core operating income was down JPY 7.4 billion year-on-year. This slide shows the impacts of raw materials market much bigger than we had assumed in the beginning and how we responded to them with the results. Each number shows the deviation from the original assumptions. In regard to the impact coming from the rising raw materials prices, we try to absorb the impact by increasing selling prices and controlling the special sales as well as improving efficiency of expenses. All in all, our core operating profit was up JPY 500 million over the forecast. Next, results by segment. The sales in the upper line shows net sales and the lower line shows sales to external customers. Consumer Products sales was above the previous year, but the segment profit was down due to the impact coming from the price hike in raw materials as well as increased depreciation and amortization. I will explain the specific numbers for each segment with the next slide. Industrial Products business. In the chemical field, our carbon business for the secondary batteries was firm pushing up sales over the previous year. Though this business was also affected by the rising prices of raw materials, thanks to the progress we made in terms of the price pass-through, overseas business as a whole, sales was up, but profit was down. I will cover these situations by region later. Here, I will go through the consumer products business, net sales by product category. Oral care and beauty care enjoyed growth in sales, thanks to the foreign business we had with our new high value-added toothpaste and hand soap products. In contrast, living care was down in sales. This is a repercussion coming from the rise in demand from the state at home stations. So fabric care and pharmaceuticals were down slightly in sales year-on-year. In Pharmaceuticals, antipyretic analgesics grew further in demand towards end of the year, resulting into a growth over the previous year, but acne related products, et cetera, were down year-on-year. The revenue growth in other was driven by the increased initial sales among the manufacturing subsidiaries in the group. Next is on overseas business results by region. Southeast Asia as a whole, net sales was up 18.1%, excluding the FX impact, it grew 7% in substance. Laundry detergents market continued to grow in Malaysia, pushing up its sales number in a big way, driving the top-line. And in Thailand, we control the special sales resulting in the increased sales. Core operating income was down due to the great impact coming from the increased prices of raw materials. Northeast Asia as a whole, up 18.9% in sales, excluding FX impact it went up 7.2% in substance. In the meantime, as for China, thanks to the good business and the store sales in the third quarter onward, the substantial sales was up year-on-year on a full year basis, excluding the FX impact. In South Korea hand soap grown in sales. On top of that, the price increase advanced rather smoothly resulted in the overall increase in the sales year-on-year. As for the segment profit, thanks to the small price increase and the cost reduction in Korea, both Asia as a whole, enjoyed a growth in profit. Now I would like to review the fiscal year 2022. Even though we were faced with a tough business environment, we were able to grow our top-line firmly, which is particularly important for our Vision2030. We are affected last year by the cheaper Yen, but overseas accounted for more than 30% in net sales for the first time. We are making a smooth progress towards the 50% target in overseas business in 2030. In Japan, we made a favorable result with the newly launched high-value products, particularly in oral care. In overseas, partly due to the recovery from COVID-19, our laundry detergent business in Malaysia and South Korea grew in sales and the industrial products on top of the growth we enjoyed in the carbon sales driven by the growing demand for batteries for EVs, we had recovery in this segment market, which helped to expand our sales for hygiene-related products. And in this field, we are able to make a good progress in terms of price pass-through efforts in light of the rising raw materials cost. That said, as for the Chinese business, which we had a high expectation had a decline for the full year basis, though we had a growth in the second-half. Due to the backlog from the demand for state at home, living care business in Japan declined slightly. Our fabric care business was behind the market growth, both businesses were lower in sales than the forecast. Next, I would like to expand on the impacts we had from the business environment last year and how we responded to these impacts. Last year, we were affected by the inversion of Ukraine by Russia and the depreciation of the Japanese Yen. Price of raw materials went up much higher than we had expected in the beginning. In the beginning of the year, we had assumed a negative impact of JPY 6 billion in profit year-on-year, but it turned out to be much worse, and it became a negative impact of as much as JPY 14 billion on a full year basis year-on-year. Against such a backdrop, Lion made further efforts in our strategy for higher added value. We made an effort in controlling promotional expenses by reducing special sales and raise the wholesale prices. In some categories, we made further cost reduction efforts. We were engaged in our company-wide efforts in order to absorb those impacts, and we are able to now achieve the profit we officially have forecasted. Going forward, Lion needs to address such an essential transformation so that we, as a company, can be quite resilient against those environmental changes. Here now like to explain the progress we are making for Vision2030 first stage. As I have already explained, we have made a firm progress in our top-line last year. We also made progress in oral health care, launching new businesses, moving into new countries. These activities are like planting, so to speak, for our future growth opportunities, transform our business foundations for growth and generate dynamism to realize innovative change. We made progress in these themes as well. Today, do allow me to expand on these 2 points underlined. Lion established in last August, Lion Oral Health Initiative. Here now we launch new business operations centering around services. Last year, we launched new businesses, including oral fitness service at home, wellbeing support service for the corporate customers and others. We are contributing to the improved public health through the formation of positive, preventive dentistry habits, where we'll continue to expand new business opportunities so that we can help people to develop positive preventive dentistry and habits. For further expanded presence in Asia, we decided to go into Bangladesh, and we established a joint venture company in September last year, together with Kallol, our local partner. Food business activities are yet to come, but we would very much like to leverage the experiences and the product development capabilities, the Lion Group has accumulated in Asia as well as the distribution network Kallol has. We are here to offer a better lifestyle habit to the consumers in Bangladesh. We now like to go through the key themes for FY 2023 based upon the review I have just made for last year. The key theme for this year is to accelerate the top-line expansion and reform the revenue structure to be resilient to changes in the external environment. We succeeded to expand our top-line last year and will further accelerate it. On top of it, we will transform our revenue structure to be much stronger so that Lion can be truly resilient to changes in the still ongoing uncertainties in our business environment. With this key theme defined, we will work on those 4 key measures: expand markets by proposing new habits, optimize our portfolio from a variety of views including businesses and product categories, accelerate growth in China, which is positioned as the most important country overseas and create the foundations for future growth. These are the 4 points. Allow me first to explain expand markets by proposing new habits. Lion announced positive habits idea last year. Lion would accelerate its growth by expanding our market with this positive habit as a lever. Let me share a specific example in fabric care market. Value-added products to change laundry habits positive, we should be able to increase the unit price for laundry and to expand the usage of fabric care products. According to our calculation, it could be as big as JPY 80 billion to be generated. And the very first impactful product to be launched in April this year is [ Softlines ] With this, we would like to transform the [ laundry ] as positive, creating positive habit and aim to expand the fabric care market. We are already engaged in a series of dialogues for potential business opportunities. There is a bipolarization in the fabric softness market between the high scent products and [ drone ] products. And this new product is going to offer a new value. So we are receiving a big expectation from retailers. Going forward, we plan to launch additional new products, the second and the third round. This is going to be continuing actions to expand our markets, starting from positive habits. The second initiative is to optimize the portfolio. We do believe that the business environmental change, such as the big price increase of raw materials we had last year could happen again going forward. We were able to absorb these impacts by resorting to a series of measures, including ad hoc ones. What is needed here is our efforts to transform our revenue structure, becoming a lot more resilient. So it is important for us to try to optimize our portfolio in every aspect, including business categories and products. First, for Japan, we will accelerate our efforts in launching and developing value-added products in a variety of business fields. In oral care, our newly launched [ Clinical pro ] last year and it was highly appreciated. There is a [ clear shifting ] to products and higher prices, we should be able to do the same thing in other areas. We'd like to allocate the best possible competitive cost so that we can succeed to launch and develop more profitable products going forward. In overseas business, we will further advance our efforts to transform our business portfolio. In our Southeast Asian business, fabric care business is enjoying a strong position in the market. Its ratio in the overall revenue in each country is becoming high. This category is definitely making a big contribution to our top-line but at the same time, it is isn't affected by price fluctuations in raw materials. So going forward, we will strengthen the personal care area. Lion is quite strong. With this done, we would like to grow our profitability overseas. As for the direction for us to follow, in personal care category, we will explore a new category and strengthen our efforts to expand business operations. In fabric care category we’ll shift toward higher value-added products such as liquor detergents and efforts to reduce costs to improve profit. The third key measure is to accelerate the growth of our business in China, which we position as a top priority country. Last year, our Chinese business grew toward the second-half of the year, but did not reach the growth rate we had expected at the beginning of the year. On the other hand, there were some positive results, such as strong in-store sales of toothpaste well suited to local needs. Our policy for the current fiscal year is, first of all, quickly redevelop and utilize the e-commerce customer base, which is an important channel. Also, we will reinforce Japanese brands for which we have cultivated a high level of trust and also accelerate local product development to meet the needs of Chinese consumers. To this end, we have decided to establish an R&D subsidiary in Shanghai to further strengthen local product development. By cultivating the needs of Chinese consumers deeper and increasing the speed of product development, we will strengthen the competitiveness of our business in China. The fourth key measure is to create the foundations for future growth. As we announced on January 16th, we have decided to make a full-scale entry into the Vietnamese market by investing in [ Meru] In the Vietnam market, ongoing economic development is expected, reflecting overall population growth and the expansion of the middle class. However, there still remain issues in health and welfare, and we believe we can make contributions through our business activities. The aim of this investment is to expand our business in the Vietnamese market in the personal care field, including oral care and beauty care, where we have strength. Meru has powerful brands in the health care field, such as eye drops and nasal drops and also has a distribution and sales network covering hospitals and pharmacies nationwide. We hope to create synergies, leveraging Lion's product development capabilities and Meru's distribution network, thus contributing to create a better living habit among Vietnamese consumers. Finally, I would like to talk about our approach to investment for future growth. With our entry into Vietnam, we have achieved the goals set out in our Vision2030 first stage in terms of entering new countries and areas. Going forward, we will continue to explore every opportunity both domestically and internationally to expand our presence and make investments to create foundations for future growth, including M&A for entry into new countries and areas and new business development. Meanwhile, large-scale investments to expand domestic production capacity will be completed for now once the construction of the new pharmaceutical product factory at the Odawara plant announced last November proceeds as planned. Going forward, we will advance growth investments to evolve and expand better living habits such as providing new value through the positive habits and entering new countries and areas to approach more consumers. Finally, I will explain our consolidated financial forecast for 2023. Here is the consolidated financial forecast for 2023. The forecast is for net sales of JPY 410 billion, core operating income of JPY 25 billion, operating profit of JPY 25 billion, profit attributable to the owners of the parent of JPY 17.5 billion and EBITDA of JPY 42 billion. Overall, we're planning for year-on-year increases in sales and core operating income. The factors behind the increase in core operating income will be explained later. The forecast for operating profit and profit for the period attributable to the owners of the parent is lower due to a gain on the transfer of land in the previous year. Here is the forecast for external sales by segment. We plan to increase sales in all segments, except the others segment. Next, I would like to explain the forecast of business environment and its impact on performance. The financial forecast that I explained is premised on these assumptions. First, raw material prices have peaked out from the 2022 levels and are expected to remain lower than in 2022 going forward. As for exchange rate trends, volatility may increase due to the monetary policies of various countries and geopolitical risks, but rates over the year are expected to average out largely around current levels. As for consumer sentiment, we expect that as inflation trend from end of last year continues, consumers will take a defensive stance and we need to keep a close eye on the trends in the daily commodities market in which we participate. The rise in health consciousness and the return of demand from inbound international tourists are factors we see as opportunities as we pursue our business. Next, I present the change factors affecting annual core operating income. Core operating income for the year is planned to increase by JPY 1.5 billion, year-on-year to JPY 25 billion. In addition to an increase in gross profit due to higher sales and cost reductions, the impact of raw materials is expected to be positive for the full year, although some negative impact will remain in the first-half of the year. These positive factors are expected to outweigh the increase in competition related expenses and other expenses. On the other hand, these are the change factors affecting annual core operating income in the first-half. The biggest negative factor is the increase in other expenses, which is mainly due to head office relocation costs and the amortization of the new core system that went live May last year. As for competition-related expenses, we will aggressively conduct major initiatives, especially around the launch of the major new product areas. So we expect that to have a negative JPY 2 billion impact year-on-year. These negative factors will outweigh the positives such as increased gross profit due to higher sales and total cost reductions, so we forecast a JPY 3.5 billion year-on-year decline in profits for the first-half. Finally, I'd like to discuss shareholder returns. In accordance with our basic dividend policy of returning profits to shareholders on a continuous and stable basis, we plan to increase the dividend for the current fiscal year by JPY 1 year-on-year to an annual dividend of JPY 26, making it the eighth consecutive year of dividend increases. That concludes our presentation. Next, Kikukawa will explain the change in corporate management, and then we will have comments from Takemori on his appointment as President but before that, we'd like to introduce one of our attendees, Mr. Hitoshi Suzuki, Director and Executive Officer. He's in charge of the overseas business and will assume the position of Vice President as of March 30. As we mentioned, we are aiming to aggressively expand our overseas business. So please ask questions about that to him. Now President Kikukawa, will explain the changes to the corporate management structure, please. As you may have seen in the press release issued at 3 p.m. today, Mr. Takemori sitting here will be newly appointed as Representative Director, President and Executive Officer and Chief Operating Officer. I will serve as a Representative Director, Chairman and the Chief Executive Officer. As of March 30, [ Mr. Rama ] who has been Chairman of the Board, will assume the position of Executive Adviser. As for the background to the new corporate management, during my 4-year tenure as President, I believe that we have been able to realize many changes towards business growth and company growth. We have established a new corporate philosophy, developed new human resource management, including a renewed HR system, built a new head office and a new core system and built and started operations of new plants in Japan. Also, decisions were made to enter new countries, Bangladesh and Vietnam and most recently to establish a new research company in China. I believe that the foundations for Lion to make a great leap forward are now in place and that we need to make the most of this and have the driving force to strongly promote our strategy. We believe that we are now in top gear, and we are at a stage when we need to step on the accelerator. In such a management environment, I rate Mr. Takemori as a person who has a very strong driving force and at the same time, a personality that can bring people together as a team and lead them. At this stage, I consider him to be the most suitable person to further speed up the promotion of the strategy and strongly drive it forward. As for the division of roles between myself and Mr. Takemori, Mr. Takemori will be responsible for the overall promotion of the business at hand as Chief Operating Officer. As Chair of the Senior Executive Committee, I would like to focus on steering mid- to long-term business strategies. So that is how we will divide our roles. Finally, Mr. Takemori and I have been working together for a long time since our days at the business division, and I can say that we are kindred spirits. We have a relationship in which we can speak to each other without reservation, and I'd like to continue this relationship and together, I would like to further develop the Lion Group's overall business to ensure the success of that endeavor. That is all from me. Now we'll have comments from Mr. Takemori who will be newly appointed as President.

I'd like to thank you all for your continued support. Once again, I am Takemori assuming the role of President. I feel a great responsibility to take up the baton of management of a company that boasts 132 years of history. On the other hand, it is also true that I am filled with a sense of excitement for the future that we are going to create. Today, as the new President, I'd like to talk about what kind of company Lion aims to become and what I would like to achieve as top management. Before that, let me first introduce myself a little bit. I joined the company in 1993. This is my 30th year with the company, and I'm 53 years old. Unlike Mr. Kikukawa, I started my career in sales and spent much of my 30-year career doing marketing in the domestic market. There, I started as a product planning member, then I became Brand Manager and Business Manager, and now I've been running the health and home care products divisions for almost 2 years as its Executive General Manager. There are 3 things that have been important to me in my work in this company. One is that small is big. Since I was young, I've always been thinking about how the small can win over the big. Secondly, in order to create new ideas to win, I have never shied away from seeking knowledge from outside from my subordinates and sometimes by juniors and to relate that information to my work. Finally, thirdly, I think this is more about organizational theory. I've always believed that the experience of visible success is the quickest way for people and organizations to change aggressively. These 3 things I still hold dear and in other words, they are what define me. With the personality I have just described, what kind of company do I want Lion to become and what kind of company do I want society to see in us? In a word, it would be Lion. Like a lion in zoo that has popularity, sense of closeness to all stakeholders, including our customers. If we were to say it in English, it would be summed up in this phrase, close to you. The Lion as a company and its products, we are here closest to you. We want to be the company that excels in this respect more than any other. On the other hand, in the eyes of our rivals, our competitors, we will be a fierce and strong wild Lion. You never know what they would do next. They come in waves one after another and hunt in groups; that kind of Lion. So I want our company to have those 2 faces of a Lion. So how do we become a Lion with those 2 faces? This is where a clear strategic design is essential. As Mr. Kikukawa mentioned earlier, in November last year, we announced positive habits as our new management strategy to realize our purpose. These positive habits is the management strategy itself. It is a proposal to bring about behavioral changes in our customers and create new demand. It is, so to speak, innovation itself. Therefore, its realization is extremely difficult and will, therefore, require a transformation of the business processes that generate added value as well as a reallocation of management resources. By achieving this and by unleashing the power of our group members who have become lions and focusing thoroughly on the formation of positive habits for our customers and by investing management resources in those areas and by always moving fast, we will be Lion. I'd like to talk about what I would like to achieve as President toward this be Lion. In 4 years, Mr. Kikukawa has laid the foundation for our corporate transformation. I have experienced those 4 years of foundation building up close and personal. And as Executive Officer, I have been working to realize it mainly in the area of marketing. What I want to achieve and what I must do is to fully utilize this foundation to set up a powerful fusion of products and services ahead of anyone else and to fill the lives of people in Japan and Asia with positive habits at an accelerated pace. The most important KPIs would be top-line growth and high average growth rate, which is proof of sustainable growth. We will make Lion products and services accessible and familiar to Asian consumers and industrial customers, and we will offer new forms of products and services that are difficult for competitors to imitate by continuously launching them first. As President, I will vigorously pursue this implementation. Lastly, by iterating on these steps, we would like to generate funds for growth and create positive habits with high probability of success, increase the number of customers as much as possible and as a result, achieved an extended reproduction toward a positive spiral. I ask for your support. That concludes our explanation of the changes to the management structure.

Now I would like to move on to the Q&A session. I would like to have Ms. Wakako Sato.

This is Sato from Mitsubishi UFJ Morgan Stanley Securities. Can you hear me?

Yes, I can hear you.

My first question is about the performance. And the second one is about the change in the President. The first question, I would like to ask you to expand on the changes in net sales from FY '22 to FY '23. In FY '22, you actually landed at plus JPY 6.5 billion from the original forecast of JPY 3 billion. And now you are forecasting FY '23 to be JPY 5 billion. With COVID-19, hygiene products like hand soaps were quite strong in your sales. And the fourth quarter this year, there may be antipyretic analgesics and could drive the revenue significantly. As a rather strong number of JPY 5 billion for FY '23 as well. Your assumption for raw materials are price. You are assuming high price in the first-half, but you're assuming a lower price in the second-half. May I remind that the [ car and Unicom ]are assuming the raw material prices would stay at high in the second-half as well. In this regard, Lion seems to be having a big advantage, if I may say so. So I appreciate if you could further expand on these points. This is my first question.

Yes. I'm happy to respond to your first question. We assume a change of JPY 5 billion in revenue this fiscal year coming from the change in the product-mix. First, we are now assuming growth in net sales as much as JPY 20 billion. And from this, we are also assuming the gross margin percent would be the same as this year. But we are not assuming antipyretic analgesics would sell a lot more than the past. Rather now, we are assuming the new product [ areas ] to be launched in April and [ other ] products would be selling at the same level, resulting on the same growth in net sales as this year. This is our view. As for the impact from raw materials price compared with the first-half of the last year, this year, we are assuming high prices in the first-half. So we are expecting to have a major negative impact in the first-half. And as for the second-half, we are now assuming the current situation is to stay. But compared to the situation in the last year second-half, we are expecting the price will somewhat come down as a trend. With this point in mind, we produce this waterfall chart, as you see there.

Understood. Then could you tell me what kind of percentage you see for antipyretic analgesics for FY '23 year-on-year?

You are asking specific numbers. So if Frasen has numbers at hand, would you please respond to the question?

We are not disclosing specific numbers here, but we are expecting to have a growth on the order of several percentage points or vantage level percent. For your further information, antipyretic analgesics last year grew 120%, and we believe the demand for it this year is going to be rather firm. But we and other companies as well, due to the supply capacity, we simply cannot expect to have a big growth in net sales.

I understood it. And now allow me to move to the second question in regard to the change in management. I was really surprised because based on the conventional practice, your term as present, seems to be a bit too short. I'm just wondering why you are making such a transition. You feel the transition time is truly good now. What I mean to say is you could have stayed a little bit longer to get to see the actual outcomes out of your own efforts?

Well, at this point of time, well, since I took up the present position, I made it my personal goal to work on foundations or transformation in the first-half of Vision2030. And when that was done, I was telling myself, I should have someone who can truly drive and accelerate the process as President or COO. I am believing that it will be more appropriate if such a person could accelerate the speed of its execution. I am actually sharing what I have been thinking about deep in my mind and this has been my mindset. So actually, I do not intend to just work just for 4 years, that has not been the case.

If the vision is up until 2030, well, you could have until 2025. Well, just a thought. Are you telling me that the first-half of the vision had gone much faster than you had anticipated?

I won't say faster than anticipated rather than I would say it went as high as anticipated to be exact. But may I remind you again, I have not determined in advance, I will do it in 4 years or 5 years.

So you're telling me that just went as you had anticipated. I got it. Thank you.

Next, I would like to have Mr. Kuwahara.

This is Kuwahara, JPMorgan Securities. Thank you indeed for your presentation. Can you hear me?

Yes, I am hearing you.

I have 2 questions as well. My first question is having to do with the net sales change points and ask a question by Ms. Sato. I am looking at pages 8, 31 and 32. First, Page 8, showing the result for the finished fiscal year. If I'm not wrong, the changes in the product-mix and others had a positive impact on net sales. I don't believe there were big changes between up to the third quarter and in the fourth quarter in terms of the revenue weight, in the domestic consumer products. So now I would like to inquire what's the background behind these numbers? And also, Page 31, 32 for FY '23, first-half and full year numbers, JPY 5 billion and JPY 1.4 billion, what are the breakdowns, product-mix and growth in net sales? If I remember it correctly, Mr. Kikukawa, you mentioned to the effect that as time goes by net sales will be less affected by changes in product-mix and others. I hope you with me. So let me pause here. Would you please help me?

Yes, you are right. Just looking at the fourth quarter only, the changes in the product mix had a positive impact on net sales. Yes, you're right. And as for FY '23, the fiscal year, the number is plus JPY 5 billion. As for details, to the extent we can explain, here now like to have Mr. Fukuda, our director to respond.

Yes, I'm happy to do so. Net sales had a bigger positive impact on the gross profit, particularly saw in the fourth quarter. This was driven by the price increase or the price pass-through. We had a cost increase as much as JPY 8 billion, which we had not anticipated in the beginning. In the second-half, we revised the promotion side in Japan. And in the industrial product business, we increased the wholesale price in certain areas, which became unit price increase taking place in the fourth quarter. And we believe this trend is going to continue in the fiscal year. So we have had a strong anticipation for improved gross profit, driven by increased net sales. But all in all, I believe that this trend is going to continue in this fiscal year as well. So on the gross profit, it's going to be improved, thanks to the increase in net sales. Simply stated, the impact from the increased sale is going to be about JPY 8 billion, and we have other being minus JPY 3 billion. They are the specific numbers as for the changes in the product-mix and the increased depreciation and amortization from the CapEx.

Thank you, indeed. Is it okay for me to assume that the first half is going to have the same trend? You mean the first half this year?

Yes. In terms of the trend, it is going to be the same. But vis-a-vis the range of changes, the burden for fixed manufacturing cost is somewhat big. So the range of change is not going to be exactly 1 half.

Understood. And therefore, is it fair for me to say that in the second-half of the FY '23 around, you may be able to get back on to the growth path fully right?

Yes, that is right. Mr. President?

Well, year-by-year, depreciation and amortization would go up gradually for the increase in CapEx on an annual basis, but the slope is coming down. Well, it is not finished yet, but it is coming down against net sales. With this in [ destruction ] with the revenue going up, it will have a more positive impact on the profit. So growth is coming back gradually.

In this sense, what you said is right. Now allow me to ask the second question. You said earlier, now you have planned, this for the transformation. So from now on, you would like to drive execution. Here now I would like to inquire your thoughts, what kind of time line you have in mind for your growth in overseas regions. I would like to inquire particularly about 2 regions. First, as for the Southeast region, what kind of time line you have in mind for the structural reform? Then as for China, how are you are now seeing revenue growth opportunities in the current fiscal year and onward?

Yes, actually, I really wanted to expand on our overseas business, particularly today. That is why I truly wanted to have Mr. Suzuki Director to participate in this meeting. So now I'd like to have Mr. Suzuki to respond to your 2 questions directly. Mr. Suzuki, please.

Yes, this is like happy to do so. First, in regard to the reform for the Southeast Asian market, we have already started our review and discussion. In particular, we are starting our portfolio reform, transformation centered around oral care. Another consideration is having to lower the skin care for sensitive skins, which we do not have in Japan. This is going to be a totally different business model from what we had so far. This is what we call a doctor recommended model. We are going to get recommendations by skin factors. We would like to launch products to take customers with sensitive skin problems, including care services based on the doctor's recommendation. We are now doing this already in Singapore and plan to extend this to other countries. We would like to now get certain results within the 3 years. At the stake is the structural reform or becoming less dependent on detergents. So this is what we would like to do going forward. As for China, in the fourth quarter last year, the business in China is moving into a recovery phase. Revenue in oral care coming back. As we have already explained how we changed our distributor, which resulted in a drop in sales, but it was temporary. And it is actually coming back already. We believe now we can come back to the normalization in the second half of this year. Next, I would like to talk about the off-line business, which still accounts for as much as 70% of all our business. We are already engaged in our efforts to further expand this offline portion. We are already getting its results last year slowly but steadily. So those transformation efforts are underway, particularly in our pet business is underway. And also, would like to further work on the hygiene-related products. Also, the population is aging so rapidly. So this is another area and we would like to be engaged in. We'd like to expand the business core. We'd like to be a lot more active for future growth.

Thank you. Just one point I need to clarify. Is it fair for me to expect that the profitability of the overseas business would improve significantly in 3 years to come?

Yes, with we had been seriously damaged and we are trying to get back to the level prior to the COVID-19. Well, as of now, we have not only fully recovered, but we are making a steady progress to the situation prior to have it and would like to go above the pre-covid level. As for the China business, we have announced the R&D affiliate in Shanghai. And there is a strong demand for the local development and local production. So we expect this affiliate will contribute to our growth in a relatively short period of time. Now let us hear from Mr. Hirozumi.

Yes. This is Hirozumi from Daiwa Securities. I have just one question. But I have to say I'm going to miss President Kikukawa because I have been so impressed with the way you made a presentation and have dialogues. I thought it would be rather impossible for us to have competition like this for the past 3 years. Thank you indeed Well, the new president, amor, would you please imply on us? Just one question. Well, actually, on the growth number there for the first-half is only 2.6%. Of course, the raw material is going up in the first half and the second year. Actually, I'm not quite sure why it is going to be 2.6%. On Page 26, you are showing to us our forecast. Overseas 6.7%, whether this is a profit or not but for the first-half on Page 29, actually, you have those assumptions. Why the consolidated number is going to be only 2. I wonder if you could clarify this.

I would like to have Mr. Fukuda to explain this.

This is Fukuda. You are now telling us compared with the full year number, the first-half is way too small. It all depends on new product-mix for the particular year. So those factors are rather big. Looking at the period of 6 months. For example, as we have already announced this year, we will launch a new soft own product. That means that we will spend promotion costs for that product. Another factor for overseas business is on foreign exchange fluctuations. The cheaper Yen is recovering to some extent. With these factors in place, the growth appears to be somewhat restricted. As for profit, since we are to launch a major new product, we would like to have a major promotion activities and raw materials and costs will be somewhat heavy on us, particularly in the first-half. This is going to be a matter of fact we have to live with. Another cost item is for reallocation of the head office. So all in all, we have to live with the loss in profit for the first-half.