Earth Corporation (4985) Q2 2026 Earnings Call Transcript

My name is Yoshiyuki Furuya, Board Director, Senior Executive Vice President and COO at the Earth Corporation. Allow me to walk you through our results, starting with the impact of the situation in the Middle East on our performance. As you are aware, amid escalating tensions in the Middle East, costs for raw materials, packaging and other inputs have been rising. Should current conditions persist through year-end, we currently expect a negative impact of approximately 1 billion yen on operating income this fiscal year. Breaking this down, the main drivers are rising prices for organic assets, which are the key raw material in bath salts, along with LPG, a raw material used in aerosols for our insecticides and repots. In response to this, we will implement price adjustments on approximately 150 products, primarily home care products such as bath salts, beginning in early fall. We expect to fully offset this impact through a combination of price adjustments and adjustments to SG&A expenses. Because we built inventory for insecticides and repellents during the fall and winter ahead of next year's shipments, we expect this cost impact to carry over into the next fiscal year and beyond. Going forward, we will continue to monitor the situation in the Middle East as closely as possible, while evaluating both additional price adjustments and the use of alternative raw materials. Turning to the second quarter results overview, this slide shows the Earth Group's medium-to-long-term concept. Fiscal Year 2026 marks the final year of our current medium-term business plan. Our business portfolio targets remain consistent with our previous briefings. In other words, we will leverage the four pillars of our operations, Japan, overseas, the general environment and sanitation business, and MAT, to drive profit growth. Here are the highlights of our second quarter results. We recorded 109 billion yen in sales, with operating income reaching 13.2 billion. Yen. While sales rose year-on-year, operating income, ordinary income, and net income declined due to a higher cost of sales ratio and increased SG&A expenses. That said, we beat our operating income target as sales met expectations, and thanks to disciplined SG&A spending. Turning to the progress of our operating income on both a quarterly and cumulative basis, let me walk you through the assumptions behind the plan for fiscal 2026. As a reminder, our costs were heavily concentrated in the fourth quarter of last fiscal year. This was due to normal business seasonality, major promotional campaigns tied to the Mondamin renewal, and unbudgeted employee bonuses. To adjust for this, we are front-loading our SG&A spending into the first half of this fiscal year to support continued aggressive advertising investments. Against this backdrop, second quarter sales tracked roughly in line with our plan, while gross profit came in slightly below target due to rising raw material prices and other factors. However, by keeping SG&A expenses within budget, standalone second quarter operating income reached 6.88 billion yen, coming in just shy of our 7.27 billion yen target. Combined with strong momentum in the first quarter, cumulative operating income for the first half reached 13.21 billion yen, exceeding our plan of 12.25 billion yen by 960 million yen, or 7.9%, marking a solid result overall. Looking ahead to the fourth quarter, operating income declined sharply last year due to one-time costs, including unbudgeted employee bonuses. This year, however, we have fully incorporated these elements into our baseline plan from the outset. We will continue to keep you fully informed of our full-year progress. Now let me walk you through each portfolio on a management accounting basis. In domestic insecticides and repellents, sales rose, supported by strong market trends and solid shipments of new products. In domestic home care products, oral hygiene products and air fresheners performed well, but bath salts faced some headwinds, leaving the category down slightly overall. Gardening products came in below plan, but still achieved year-on-year growth. Overseas, results varied by region, but sales rose overall. Finally, the general environment and sanitation business continued delivering stable growth. Turning specifically to insecticides and repellents in Japan, as of the end of June, the domestic market was up 3% year-on-year, with 49.9% of the year's volume behind us. Both shipments and sell-through remained strong, and sales of our new product, O-NOMAT, exceeded our forecast by 21.6%. On top of a favorable market environment, strong customer support for our products pushed our market share to 60.2%, putting us above the 60% mark and up one percentage point year-on-year. Looking at the market outlook, while June brought a few cooler spells compared with last year, we expect the market to recover from July onward in line with the five-year average, pointing to steady momentum continuing into the second half. Turning next to home care products, let me start with oral hygiene products. The overall mouthwash market grew 5.9% year-on-year, and our market share rose to 18.8%, up 0.2 percentage points from the previous year. The Mondaman series, which we relaunched last fall, has continued to perform well, with sell-through up 10.2% year-on-year, and shipments also came in ahead of the prior year, rising 3.4%. Next, let me turn to our bath salts business. While performance varied somewhat by product type, the overall market was up slightly year-on-year. Enjoy-type, that is, experience-driven formats, are gaining market share, whereas traditional powder formats, an area of historical strength for us, continue to decline. Among our core products, our flagship Ompo grew 9.6% year-on-year, and Barth, a high-value-added product, grew 12.1%. Hakugen Earth's variety packs, such as IU Tabidachi, also achieved significant year-on-year growth. Even with this growth in our core products, and partly reflecting shifts in market composition, our overall share came in at 41.8%, down 0.7% year-on-year. We recognize this decline in our bath salts share as a primary challenge. We'll discuss this in greater detail later in today's presentation, but one of the primary ways we are addressing this is through the BathClean integration. We are now accelerating a range of initiatives on this front, working as a unified organization to unlock synergies. Next, let's review our overseas business in local currency terms. Fundamentally, overseas expansion remains our single most important strategic priority, though the phase of that expansion differs from country to country. In Thailand and Vietnam, the core of our ASEAN operations, our approach is to prioritize growth in net sales and market share while still delivering profit. Malaysia and the Philippines are smaller markets, so for now, we are prioritizing top-line growth. In China, however, we are focusing on expansion that emphasizes the revenue-profit balance. In Thailand, despite a significant broader market downturn, we maintained solid performance and delivered positive year-on-year growth. That said, we fell short of our first half plan. In the second half, we aimed to hit our targets by accelerating new product rollouts and strengthening our regional sales presence to expand our distribution network. In Vietnam, results came in below both the prior year and our plan, mainly because we prioritized the maintenance of product brand value and curbed promotional spending in order to correct market selling prices. However, ahead of the Tet holiday, our peak demand season, we are rolling out targeted promotional campaigns earlier than in previous years, including new participation-based initiatives tied to product purchases, as part of a broader push to grow sales. Next, let's turn to Malaysia and the Philippines. In Malaysia, both insecticides and repellents and air fresheners performed well. We significantly outperformed year-on-year and versus the plan, driven by expanded inline SKU listings at multiple key accounts. In the Philippines, sales exceeded both prior year and plan levels, driven by strong performance in the large aerosol market. Next, let's turn to China and our export business. In China, some of our key accounts fell short of targets in the first half. Going forward, we will continue to focus on expanding into emerging channels, such as Fresh Hippo, while carefully monitoring our revenue balance. This has no direct impact on our sales trends, but I'd also note that the closure of our Suzhou plant, announced this past May, is proceeding as planned. Turning to exports, sales to Saudi Arabia fell short of both the previous year's figures and our targets, due to escalating tensions in the Middle East. Meanwhile, sales remained strong in Hong Kong, Taiwan, and other countries, driving our overall export results above the previous year. The general environment and sanitation business continues to deliver stable growth. Amid a rising demand for highly specialized, technology-driven hygiene services, clients continue to recognize our expertise in high quality service, which has led to an increase in total contracts. We are also working to further improve service quality by expanding our testing facilities and making greater use of AI. Next is a progress update on the MAT business. Our solution-driven marketing initiatives using the MAT system in the nursing care sector received the Special Jury Award at the Nikkei Cross-Trend B2B Marketing Awards 2026, hosted by Nikkei BP. In the MAT business, we began by carefully mapping the industry landscape, clarifying the labor shortages and margin pressures in the nursing care sector, the operational efficiency needs of sanitation providers, and the competitive differentiation needs of cleaning equipment manufacturers. On that basis, we have built a win-win-win ecosystem attuned to the position of each player. As a result, we are already seeing concrete outcomes, including a 30% reduction in cleaning time and an 80% drop in mattress disposal rates, and we will continue our brand and trust-building initiatives. Let's now turn to the operating income change factors versus our forecast. Factors weighing on profits include changes in the sales mix, a rise in the cost-to-sales ratio due to escalating tensions in the Middle East and exchange rate fluctuations. On the other hand, factors contributing to profit growth are primarily the reduction and non-utilization of fixed costs, such as advertising and promotional expenses. Let me briefly walk you through the synergies resulting from our absorption-type merger with BathClean this past January. Because the payment of one-time expenses has now been largely completed, we expect to generate cost synergies for fiscal year 2026 that will exceed the one-time expenses incurred. Going forward, we aim to realize further synergies through the sharing and utilization of knowledge and expertise. Turning to the full-year plan, the impact of the escalating tensions in the Middle East is expected to be offset by measures such as passing on price increases. Therefore, we are maintaining our initial guidance and remain committed to achieving the full-year targets. To achieve our targets of 188 billion yen in net sales and 9 billion yen in operating income, we will work on sustaining stable growth in our domestic and general environment and sanitation businesses and target revenue growth on a local currency basis in our overseas business, prioritizing market share expansion across all regions. At the same time, we will drive margin improvement by focusing on high-value added products and by lowering procurement costs while unlocking integration synergies with Bath Clean. This concludes my prepared remarks. My name is Katsunori Kawabata, Representative Director, President and CEO at the Earth Corporation. Allow me to take you through our strategic initiatives for the second half of fiscal year 2026. Let's start with home care products. As we enter the second half, we anticipate managing some seasonal returns for insecticides and repellents, especially given the extended season, but our primary focus is firmly on home care products. Our goal is to transform this business into a highly profitable, sustainable growth model driven by the dual engines of premiumization and market share expansion. Looking at oral hygiene products, we completed a full relaunch of our lineup last August, and we fully recognized that our execution in the second half needs to be strong. Performance has been strong so far, but we aim to drive high growth through the development of new customer segments and a shift toward premium products. Specifically, we will accelerate promotional efforts, create opportunities for experiences, and increase average revenue per customer. Turning to bath salts and circling back to what Senior Executive Vice President Furia touched on earlier, we have taken the decline in our market share very seriously and we are committed to fully realizing the integration synergies with BathClean. The second half will be the key battleground. As we work through it, we intend to keep evolving under our vision to become the creator of completely new bath life value. Our main initiatives will be generating new demand, positioning and strengthening key brands, and maximizing synergies from integration. I would now like to go a little deeper into our oral hygiene products. In terms of our results so far, both the sales volume and the sales value of the Mondamin series have grown substantially since the renewal. In particular, the Mondamin Premium Care Series has been strongly driving growth across the entire category. To sustain this momentum, we will expand our product lineup, including new large-capacity pouches, to prevent existing customers from switching brands, while promoting continued use and a higher average revenue per customer. Taking last fall's rebranding as an opportunity, Mondamin has successfully targeted new customer segments. The Premium Care series is performing well, but it has even greater potential for brand awareness growth and new customer acquisition. We will ramp up our advertising investment here and focus on creating more real-world experience opportunities to accelerate this momentum. Turning to bath salts and circling back to what Senior Executive Vice President Furuya touched on earlier regarding the quantitative side of our synergies with BathClean, I'd like to go a bit deeper into the qualitative aspects. As a manufacturer, while revenue and profit are always crucial, we have consistently prioritized market share because it is the true measure of customer support for our brands. The integration with BathClean unlocks a range of synergies, but our primary focus is market share. Our mid- to long-term goal is to capture a 50% share of the Bath Additives market, and everything we are doing is ultimately in service of that objective. For example, BathClean and Earth historically operated as separate companies within the same group, meaning that this personnel exchange had been fairly limited. We are already addressing this through aggressive personnel rotations, bringing together our collective expertise and fostering closer communication between the organizations. We are executing this with confidence that these efforts will translate directly into our financial results. Looking at the specific areas highlighted on the slide, we are leveraging perfumer expertise and insights into botanical ingredients and, as I touched on earlier, the cross-fertilization of talents. Marketing spend is another key area. Previously, managing these budgets independently meant our spending was often spread too thin. In the second half, we will consolidate these efforts to maximize marketing spend efficiency. First, I want to emphasize that the former BathClean Corporation holds tremendous value, both tangible and intangible. Specifically, its expertise in bath additives and product development know-how alongside highly popular brands like BathClean, Kikiyu, and Nihon no Meito. To deliver this value to a broader audience, we plan to draw on Earth Corporation's proven messaging capabilities and expertise to unlock potential brand value. Making this our central focus will ultimately drive broader synergies. Furthermore, by leveraging BathClean's experience and expertise, we intend to consistently create new value and opportunities for bathing. One concrete initiative already underway is our participation as a founding member in the Industry Government Academia Consortium for Heat Stroke Prevention. We are working to implement evidence-based initiatives related to bathing and heat stress prevention in society, and we have launched the Heat Care website to promote heat stroke prevention through bathing habits. This is a prime example of our efforts to unlock our latent brand value. Turning to our brand-strengthening initiatives, we want to shift our attention to Kikiu and concentrate our efforts there. The Kikiu series commands a high market share and is a highly profitable brand. Before the integration, BathClean simply lacked the resources to fully support the brand. Moving forward, we are prioritizing the allocation of management resources to maximize Kikiu's advertising impact and realize its latent brand value. Let's now move to our next key topic. As discussed earlier, we are facing higher costs for raw materials and packaging materials due to the situation in the Middle East. Because we deal in seasonal products, mid-year price increases have been difficult. However, in the second half, we are finally implementing these changes. Of the approximately 1 billion yen profit headwind expected this fiscal year, we aim to offset approximately 560 million yen through pricing actions. With this process already underway, our focus now is to secure these gains. For this second half, these adjustments are limited to home care products. But from fiscal 2027 onward, we plan to extend them to insecticides and repellents to ensure a balanced approach to profitability. Next, I'd like to touch on recent M&A activity within the general environment and sanitation business, which serves as a core pillar of Earth Corporation's portfolio. Earth Environmental Service has acquired a 100% stake in Singapore-based Marvel Clean Private Limited and Marvel Home Private Limited. As previously announced, the transaction closed on June 22, 2026. Marvel Clean has a stable earnings base anchored in annual contracts and is already established as one of Singapore's leading cleaning and environmental sanitation service providers. By using their established operations as a foundation and combining them with our own expertise, our primary objective with this acquisition is to drive further growth within Singapore while strengthening our business presence across the broader ASEAN region. Let's now turn to the final section. Page 27 outlines our overarching vision, which we have also shared in previous briefings. Our operating environment continues to present changes that we must respond to, but our core framework remains clear. At a high level, within our domestic household products business, our core manufacturing division, we will maintain our focus on market share to secure a stable earnings base. We will build the general environment and sanitation business into a core revenue stream, and going forward, we will continue cultivating the overseas business and MAT as our primary growth drivers. Turning to our medium-term business plan, fiscal 2026 marks the final year of our current framework. We achieved our targets a year ahead of schedule last fiscal year and, circling back to what the Vice President touched on earlier, we remain fully committed to achieving our full-year targets for 2026. That said, our sights are already set on 2027. We plan to lay out the specifics of the next MTBP at our full-year results briefing next February, and internally, we are actively developing those details. Framing this positively, the fact that external factors, like the situation in the Middle East, surfaced ahead of our next plan means we can fully build them into our upcoming strategy to drive further growth. We cannot get into the specifics today, but we look forward to sharing more with you soon. That concludes our review of the second quarter of the fiscal year ending December 2026. We appreciate your time today, and thank you for joining us.