Earth Corp

TSE:4985

Earnings Call Transcript

[Katsunori Kawabata, executive]

Good afternoon, everyone. My name is Katsunori Kawabata, Representative Director, President, and CEO at the Earth Corporation. A few minutes ago, we announced the company's results for the second quarter of the fiscal year ending December 2025, coupled with a revision to the full fiscal year and dividend forecast. Today's briefing therefore covers the topics I just mentioned, and we will then conclude with an overview of the progress made so far to further unlock corporate value.

First are the financial result highlights for sales and each income line item. We registered JPY 102.66 billion in sales and JPY 13.55 billion in operating income for a year-over-year increase in both sales and profits. Sales weren't uniform across all product categories, but overall realized results exceeded company forecasts, in part thanks to the results from PROTOLEAF, Inc., which became a group subsidiary. We delivered gross margin improvements, and SG&A expenses were kept within an acceptable range, and these factors translated into a significant operating income overperformance versus the forecast.

Next is our business portfolio expressed by the group's medium-term business plan and growth strategy. As you can see, we position operations in Japan and overseas, the general environment and sanitation business, and MA-T as our 4 key business pillars. Looking at each pillar individually, we position our operations in Japan as the group's current profit engine and the overseas market as our core growth driver going forward. We are working to grow the scale of the general environment and sanitation business, and lastly, we continue investment in MA-T.

Next is an overview of portfolio results on a management accounting basis. Following the acquisition of PROTOLEAF, Inc., we now show gardening products as a discrete product category. Because of the timing of consolidation, we only get 9 months' worth of results from PROTOLEAF this year—, corresponding to the period between April and December. I will be going over the results of our operations in Japan in a moment, but, in broad strokes, higher sales and a steady lift from price revisions have led to a profit improvement. In the first half, the overseas segment, which we position as the key driver of the Earth Group's growth strategy, saw a slight worsening in profitability. We have successfully identified the cause of this, so we will be applying corrective measures to reverse this trend in the second half and into next fiscal year. Lastly, the general environment and sanitation business continued delivering stable growth.

I would now like to give you a status update on the category of insecticides & repellents in the domestic Japanese market. The market for insecticides and repellents was off to a very weak start in 2025, with relatively low temperatures continuing all the way through to the start of the Golden Week holiday season in late April and early May. Because of this, using June 30th as the cutoff date, the overall market was down 1% on a year-over-year basis. This was not the case for the Earth Corporation, as we pulled ahead of our competitors and delivered a year-over-year growth of 2.3% in the first half of the year. In other words, our competitors brought down the overall market average.

We are very much market share oriented, since this number reflects consumer opinion about our products, and so we develop and bring to market products that we think reflect and are capable of addressing the needs of our customers. Earth Corporation works closely with its business partners to grow the market in Japan, and we were able to grow our market share by close to 2% in the first half of the fiscal year. This was a very positive development for us.

Looking toward the second half, and without wanting to sound overly optimistic, we do expect the ongoing heat wave to linger, as this has been the case going back to 2023, with high temperatures continuing well into the months of September, October, and even into the early weeks of November. We expect this to result in market growth, and we intend to drive the overall market through our position as top manufacturers with a loyal customer base.

We have made a number of key new product releases. For example, we released HADAMAMO, a new mist-type insect repellent for personal application. This product has been well received by consumers, as have our other product lineups. As we have discussed on previous occasions, the home care products category continues facing a number of challenges. Case in point, while we have the largest share in the market of bath salts, we have been losing share, which we view as a barometer of consumer opinion and purchaser loyalty.

In light of the planned merger between the Earth Corporation and BATHCLIN, over the past year, we have taken it upon ourselves to review SKU numbers and reevaluate the way we carry out product releases. As such, while some challenges remain, we have been able to put in place a stable structure that we believe will allow us to turn things around over the course of the second half and into next fiscal year. In summary, we expect to have positive results for stakeholders during the next earnings briefing covering the full fiscal year results, or perhaps during the earnings briefing for the second quarter of next year.

Furthermore, we grew market share in the category of oral hygiene products, with our results outpacing the overall market growth. That said, the numbers— the consumers are telling us that we need to make changes to Mondahmin. We will be going over the details later on, but in the second half, we are executing a full scale revamp of our Mondahmin lineup. Through the steady execution of initiatives and measures within this scope, we want to breathe new life into this category and boost sales.

I would now like to discuss the overseas segment. As I stated earlier, we position the overseas market as our core growth driver going forward. In 2023, the Earth Corporation was the third largest company in the global market for insecticides and repellents by market share, behind SC Johnson and Reckitt Benckiser. As of fiscal year 2025, the Earth Corporation is now the second largest player in this space by market share. Naturally, we are gunning for the pole position, but as we work to secure a global market share of 10%, we are now the second largest player in this industry, which is great news.

Our overseas portfolio is concentrated around our core business in ASEAN, so allow me to drill down on the results from our local subsidiaries in this region. We are seeing strong results from our operations in Thailand, where we are making steady progress in securing the largest market share after Japan. In fact, I don't think it will take too long before we can proudly report to stakeholders that the Earth Corporation now has the largest market share in Thailand. We want to continue the steady and careful execution of efforts to this end.

Alongside Thailand, Vietnam is another core market within the overseas business. We have plans to accelerate a number of initiatives over the course of the ongoing fiscal year. We have different product offerings and employ different sales methods in Vietnam compared to Thailand, and we are currently making changes to the sales structure, capitalizing on the relative strength of this business. These changes took place starting in the first quarter and so far have led to an underperformance versus the sales targets. In the third and fourth quarters, we will be working to catalyze sales against the backdrop of this new structure.

Next is an update on our operations in Malaysia and China, as well as our export business. While the scale of our operations in Malaysia is still small, we are making great strides as clients adopt more and more of our products, underscoring strong growth. We built our presence in Malaysia from scratch, rather than going the M&A route, and we are seeing very strong demand in this market. On the other hand, the Philippines is a market we expanded into via M&A, and we ended up having some inventory shortages this fiscal year during the post-M&A transition period. These shortages came as a surprise and prompted us to rethink a series of initiatives going forward. We recorded a sales underperformance in the Philippines as of the end of the second quarter, but as is the case with Vietnam, we want to regain some ground in the third and fourth quarters.

Another market where sales fell short of the forecast was China, but this underperformance is of a qualitatively different nature. The overall market in China has seen some weakness. While this was a factor, delays in the execution of initiatives in the country were a cause of this underperformance. Our market share in China is still relatively low, so we will be further advancing efforts to review our sales structure in the country, while also prioritizing an overseas sales organization that doesn't rely on China. In summary, our efforts pertaining to China will take into account this market's positioning within our overall overseas business.

In the export business, we saw some market weakness in our core areas of Saudi Arabia and Hong Kong. Conversely, we recorded strong results in Taiwan, where we grew our market share. The export business is very important in helping us determine which countries and markets to create new local subsidiaries in. All in all, I'd say things are going fairly well in the overseas business, and I've just given you a bird's eye view of each core section of this business, which we need to grow further. In the second half, we will be reforming areas that need improvements and leaning into areas that are working well. We have very ambitious targets, and we will work to make good on these commitments.

Next is the general environment and sanitation business. As I stated earlier, this business posted strong results, and, furthermore, over time, we expect this business to become the Earth Group's second core business pillar. Demand for hygiene control solutions is growing, prompted by reports of foreign material contamination, among other factors, and this has allowed us to grow our annual contract numbers. In fact, we are the top player in this industry and boast considerable proprietary expert knowledge and high service quality. Going forward, we want to build upon our strengths here and offer even better service, allowing us to secure an even greater number of contracts. This business has been showing strong results, so we will continue carrying out successful operations in this business.

Next is the MA-T business, which we position as our fourth business pillar. We expect this business to go through a number of phases, starting with upfront investment, efforts to build brand recognition for this new technology, and then the gradual adoption of MA-T in a real-world setting. This is phase 1, and I think we've made considerable progress in this area, including through the creation of the Japan MA-T Industrial Association. In fact, single-year profitability is now in sight.

While cumulative profitability is still some ways out, we are making progress in the right direction. We continue spreading the word about MA-T and its value proposition, and have been able to start a number of initiatives and collaborations in this area. For example, we have a partnership with Anicom Insurance, Inc.—, Japan's #1 provider of pet insurance, offering them exclusive rights to the sale of an oral care gel that uses MA-T.

This partnership is ongoing, and a more recent initiative is a partnership with SIRIUS Co. Ltd. The details of this partnership can be found on the next page. This partnership centers around Switle BODY, which is a portable bedside shower system used in a nursing care setting. In light of its usefulness, Switle BODY has been certified for discounts under the Caregiving Technology Adoption Support Program. This shower system uses an MA-T liquid formulation, slated for release in August, and this initiative is a great step forward in the mainstream adoption of MA-T, as well as in terms of revenue generation associated with this business pillar.

Next is our partnership with ATAM GIKEN, which started using MA-T in its mattress washing machines. Incorporating MA-T allows for the reduction of cleaning times, improves throughput per machine, and makes it less likely that the material gets damaged during the washing process. These are just a couple of examples, as we keep expanding our deal pipeline with other companies in other areas as well. Things have been going well, and single-year profitability is now in sight, meaning we are on track to turn MA-T into another key portfolio pillar for the Earth Group, —in line with what I have been promising over the years. The MA-T business now moves on to phase 2.

This page shows the operating income change factors versus the forecast. As previously mentioned, PROTOLEAF, Inc. became a consolidated subsidiary, and, furthermore, we also carried out price revisions. This led to a change in the sales composition, and, as you can see here, profit increase factors dominated alongside benefits from price revisions. Lastly, some expenses associated with structural reform and advertising expenses for TV ads will end up falling into the second half, but we expect overall full fiscal year expenses to be in line with the forecast.

This concludes my review of second quarter results. I would now like to discuss the revision to fiscal year 2025 result and dividend forecasts, as announced by the Company today. We have raised sales guidance by JPY 3 billion, to JPY 178 billion, on account not just of the sales boost from the consolidation of PROTOLEAF, Inc., but also that the home care products category and our business overseas will also be able to deliver results in line with the forecasts. In light of this, we believe the addition of PROTOLEAF, Inc., to the scope of consolidation will boost sales by JPY 3 billion.

While we had initially opted for a more conservative profit margin forecast, margins have improved, and, furthermore, even including the costs incurred in the consolidation of PROTOLEAF, Inc., we nevertheless expect SG&A results in line with the initial forecast, so we are now guiding for JPY 8 billion in operating income. In other words, we are now guiding for an operating income overperformance of JPY 1.5 billion versus the initial plan. In light of these factors, we are now guiding for a net income overperformance and a higher ROE of 7.6%. As a result of these various revisions, we expect to be able to meet the profit target for the final year of the ongoing medium term business plan one year ahead of schedule.

Next is the profit outlook within the scope of COMPASS 2026—, the ongoing medium term business plan. As we went over earlier, we have already achieved the original profit target one year ahead of schedule, so we have opted to raise guidance for the 2026 fiscal year. Specific quantitative targets will be disclosed at a later date, but the main gist is that we will be raising the profit target.

Normally, we would raise our dividend guidance in the third or fourth quarter. However, given the vital importance of our dividend policy to stakeholders, we have announced a special dividend of JPY 5 per share in the second quarter. Our simulation on the basis of the revised consolidated results forecast indicates a DOE of 3.9% in 2025—, in line with our DOE target of around 4%. We expect a dividend payout ratio of 51.5%.

If you'll forgive us for the somewhat grandiose title, let us now go over initiatives to improve corporate value. We have designed a new logo for MONDAMIN to reflect this product's new slogan of “improve your oral health for a younger look and a more vibrant and healthier you.” Our key strategy is to establish MONDAMIN as a global brand, which is why we now boldly display the product name in Roman letters alongside the katakana spelling. The new branding also reflects our efforts to appeal to a younger demographic.

Coupled with the release of MONDAMIN's revamped lineup, we will be launching this product's largest TV ad campaign to date in Japan. Building a brand isn't a single-player game and thus requires a team effort together with our retail partners and other entities. Having completed our preparations, we are now poised to get things started on this front, with the first shipments taking place after the Obon holiday season. In fact, there's a good likelihood you'll see our new MONDAMIN lineup at your local store of choice. This is a fundamental renewal of a brand with a long track record going back 38 years, so there's a lot of history and dedication behind the new lineup.

Naturally, improving profitability is one of the key drivers of this brand renewal effort. We revisited and reevaluated the product formulation from scratch, revisited the product lineup, and focused on reducing costs, including packaging costs. So we now expect to be able to enjoy better margins. These efforts require a bit in terms of upfront investment, but the new MONDAMIN boasts better margins, so we hope to drive volume on this front and for this new lineup to make a good results contribution next fiscal year and beyond.

We continue our group reorganization efforts. As I've shared with you on previous occasions, we have two key reorganizational milestones we want to accomplish over the course of COMPASS 2026. The ongoing MTBP. The first milestone is the planned merger of BATHCLIN into the Earth Corporation, and this merger is in the final stages of completion, as we believe we will be able to start PMI once the process is finalized in January of next year. We are making very good progress overall.

The second milestone is the transition to a holdings structure, and we will now start seriously reviewing our options here, in the process of moving forward with this transition. We have already started discussions, including with the C-suite and Directors at each of our group companies. So all in all, we are making steady progress in the execution of the comprehensive group reorganization efforts we have talked about over the past number of quarters. In summary, the first milestone is near completion, and we now want to move on to the second milestone. We are making good progress.

I would now like to discuss our blueprint for the future. The Earth Corporation is a product manufacturer. Fundamentally, we offer products to help customers overcome certain pain points, and this has allowed us to build a loyal customer base over time. That said, one thing that sets us apart from other product manufacturers is the fact that we also operate businesses outside of manufacturing. Case in point is the general environment and sanitation business, which, like I stated earlier, is an area we want to grow in. There is growing market demand for these types of services, so, in addition to our manufacturing arm focusing on home care consumer goods, we want to grow the general environment and sanitation business. In other words, our blueprint for the future involves a two-pronged business structure containing these two disparate core businesses. Our operations in Japan cover these two core businesses, as does the overseas business, which we position as a growth driver for the group.

Lastly, we have MA-T as a future fourth portfolio pillar. This covers the outline of our blueprint for the Earth Group’s future, which we will be incorporating into the next medium term business plan and in communicating to stakeholders our growth strategy for the company.

This concludes today’s overview of the financial results for the second quarter of the fiscal year ending December 2025, together with a discussion of initiatives to be carried out in the second half. The 2026 fiscal year is the final year of the ongoing MTBP, so I also used this opportunity to share with you our thoughts in terms of things like the profit targets.

This concludes today's presentation.