This is Fukuda. Thank you very much for your continued understanding and support for our activities, including our IR activities. Thank you also for joining our Q3 financial results briefing despite your busy schedule and with a somewhat late start today. At the beginning of today's briefing, we summarize the points we would like to convey to you most as highlights.
First, in the first nine months of this year, sales and profit continue to increase. The shift to high value-added products in Oral Care is advancing in Japan and overseas, and the key countries overseas are also recovery trend. At the time of the first half results briefing, we said that July to September would see the largest impact from cost increases, so Q3 on a standalone basis could see a decline in profit.
However, with progress in high value-added products, such as improved mix and in cost efficiency, we were able to secure an increase in profit in July to September as well. On a core operating income basis, this is 12 consecutive quarters of increase in profit since October-December 2023 quarter. Taking into account our future capital outlook and other factors, today we decided to acquire and cancel treasury stock totaling JPY 20 billion.
Now, let me move on to the content. Today, there are three points. First, I will explain consolidated financial results for the first nine months. In this nine months, consolidated net sales were JPY 325.4 billion, up 6.7%. On a real basis, excluding the impact of exchange rate fluctuation, net sales increased 2.7%. Core operating income was JPY 25.7 billion.
The increase in profit in July to September continued, and the core operating income rose JPY 3.4 billion year-on-year. EBITDA margin was 12.5%, up 0.8 points year-on-year. As for the decline in profit for the period attributable to owners of the parent, this is due to higher tax expenses associated with the transfer of shares of subsidiaries in the chemical product business at the end of June this year, but this was already factored into our annual guidance.
Next, I will explain the factors behind the JPY 3.4 billion year-on-year increase in core operating income. On this bridge chart, as always, the figures shown in bracket below are the contribution from July to September. The large arrow at the bottom showed an increase in gross profit of JPY 11.7 billion and a reduction in profit of JPY 8.3 billion due to higher selling, general, and administrative expenses.
This time, among the factors in two items, on the leftmost yellow bar, quantitative effects, product mix, and others, plus JPY 10.9 billion, and the largest of the selling, general, and administrative items on the right, the increase in other expenses, minus JPY 6.3 billion, impacts of business portfolio reforms are shown separately.
Because they were business transfers, divestitures, acquisitions, namely the newly consolidated subsidiaries from the M&A in Vietnam last July and M&A in Australia this January, together with transfer of shares of subsidiaries in the chemical products business at the end of June this year. The increase in SG&A expenses also includes one-time expenses associated with acquisition in Australia.
Looking at this, of the quantitative and product mix changes, JPY 2.7 billion came from business in existing markets, and the breakdown of that into changes in sales and the changes in product and segment mix is as you see here. Business portfolio reforms contributed JPY 2.9 billion, and the effect of overseas exchange rate fluctuation was JPY 5.3 billion.
Next, the gray bar in the middle, the impacts of raw material cost, JPY 4.7 billion on a cumulative basis, of which Q3 was JPY 3.2 billion cost increase. As we have told you previously, we had expected impact of the Middle East situation to be JPY 5 billion in the second half, of which roughly JPY 3 billion would be in July to September quarter, so the cost increase occurred broadly as expected.
However, on the other hand, we advanced a shift to high value-added products within the segments and the greater efficiency in competition-related expenses, and we consider upward price revisions in Japan in Q4. But before that, some wholesalers increased their purchases, so we were able to keep profit increase in July to September quarter as well. Next, results by segment.
As always, the upper line of net sales shows net sales, and the lower line shows the sales to external customers, but I will explain using net sales. Consumer products and net sales increased 3.9%, and the core operating income increased 3.7%. July to September has slowed down slightly compared with the first half. I'd like to add some comments on this later by category. In industrial products, no sales from the chemical products subsidiaries was booked since July, so the segment sales shrunk significantly from the previous year.
Overseas net sales increased 19%, with the consolidation of two new subsidiaries and the recovery trend in key countries. In addition, with the effect of exchange rate fluctuation, we saw significant increases in both sales and profit. Also, the one-time expenses associated with acquisition in Australia are recorded under the adjustment this time, so this year, the adjustment is larger than in regular year.
Next, regarding the consumer products business in Japan, I will explain net sales by product category. Oral Care grew 9.6% in the first half versus 8.1% for the January to September cumulative period, so growth appears to have slowed slightly in July to September. However, this is a pullback from the launch and shipment of Dent Health's toothpaste in the highest price range at the end of Q3 last year.
In substance, we believe that sales growth and the shift to the high-end price range are progressing smoothly. On the other hand, top lines in fabric care and living care are running below the previous year. However, in Q4, for fabric softeners, we launch a high value-added product to recover, so we will take product actions shortly. Excluding the impact of last year's transfer of the Reed brand, the actual year-on-year net sales change for the total was an increase of 2.2%.
Next, let me turn to the performance of our overseas business by region. In Southeast, South Asian, and Oceania, we have added two new subsidiaries in Vietnam and Australia. In Thailand, exports to Cambodia had been negatively affected since the second half of last year, but the decline has moderated.
Combined with a recovery in the Thai domestic business, this resulted in a higher revenue and profit. In Northeast Asia, revenue increased, accompanied by significant improvements in profit, partly driven by the recovery in China, which is still in the process of returning to a growth trajectory. Furthermore, let me briefly touch on the performance trends in our four major countries.
I will skip the details of each country, but as I mentioned earlier, Thailand and China, which are established markets, accounted for a significant share of our overseas business, are both showing signs of recovery in July-September, as you can see from the year-on-year comparison for January-June and July-September shown in the comments column. Both countries have been trending toward recovery in July through September period.
Moving on, I would like to discuss our earnings forecast and shareholder returns as we work toward achieving our full-year targets for the current fiscal year. Based on our progress to date, we believe there are three key factors that will be critical to achieving our full-year targets. The first key factor is offsetting the impact of the situation in the Middle East. The major driver will be the revision of domestic shipment prices in the fourth quarter.
So far, we believe things are progressing largely as planned. However, we will need to continue to closely monitor consumer trends and the competitive environment toward year-end. On top of that, the second key factor is the contribution of new products in the fourth quarter, which will support and underpin our growth. These products are also progressing well so far. However, the success of these value-added products will be another important factor in achieving our full-year earnings target.
The third key factor is our overseas business. As I explained earlier, overall growth is on a recovery trajectory. The key will be to further develop our Oral Care business and shift the product mix toward higher value-added products in each market, thereby achieving sustainable growth. Let me provide some additional details on our overseas Oral Care business, focusing on the current situations in our key markets and our initiatives going forward.
First, in Thailand, as we have explained previously, we are now strengthening our targeted marketing initiatives, starting with our local brands. In China, as shown on the right, we are also rolling out cross-brand marketing campaigns, and these initiatives are already delivering positive results. In China, we are also now looking to review our distribution arrangements with the distributors going forward, with a view to improving profitability.
Moving to Vietnam, shown in the bottom right, although the preparations took somewhat longer than initially anticipated, we plan to leverage Merap Lion's expert recommendation business model to incorporate our Oral Care offerings. By expanding the product categories covered by this model, we aim to further develop the dental clinic channel going forward. As you can see, our Oral Care growth initiatives, which we began implementing across these markets last year, are starting to deliver the results.
We intend to further accelerate these initiatives going forward. We will steadily implement the initiatives that I have just outlined, both in Japan and overseas, and remain committed to achieving our full-year earnings targets as originally planned. While the third-quarter profit came in above our initiative expectations, we are also now seeing ongoing challenges, including persistently high raw materials costs and renewed price increases.
We recognize that offsetting and reducing cost pressures will not be easy. Therefore, although we are maintaining our full-year earnings forecast unchanged at this point, our confidence in achieving the targets has increased compared with the second quarter, as we believe the likelihood of successfully exceeding our plans had improved. In addition, alongside today's earnings announcement, we have also disclosed a plan to repurchase and retire our own shares.
As we embark on the 2nd STAGE, we would like to reiterate the cash allocation policy we recommended to shareholders. While disciplined growth investment remains our top priority, we also intend to enhance shareholder returns. As part of this policy, we have decided to repurchase and retire treasury stocks. First, regarding the dividend, which we previously announced as part of our earnings forecast, we are maintaining our initial projection of a JPY 4 increase, bringing the annual dividend to JPY 34 per share.
This will mark our 11th consecutive year of dividend increases. In addition, now that we have gained a clearer understanding of the funding requirements for the 2nd STAGE, we have decided to conduct a share buyback. The total amount will be up to JPY 20 billion. The buyback will serve as a vehicle for absorbing shares related through the sales of cross-shareholdings.
We plan to allocate JPY 10 billion to an off-auction purchase through ToSTNeT-3 and the remaining JPY 10 billion to purchases in the open market. Going forward, from the perspective of improving capital efficiency, we intend to strengthen our balance sheet management further. We also plan to review and clarify our thinking on the optimal level and structure of capital, as well as our shareholder return policy.
We intend to provide an update on these matters in February next year, alongside with our earnings targets for the final year of the 2nd STAGE, rather than wait until the third stage begins the following year. Finally, I would like to discuss the initiatives we will pursue to achieve our targets for the 2nd STAGE, which enters its final year next fiscal year, while also looking beyond that to our long-term growth.
Throughout the 2nd STAGE, we have remained firmly focused on strengthening our earnings power and building a more resilient earning structure. With regard to our EBITDA margin target, we have been able to further improve profitability while absorbing approximately JPY 6 billion in additional costs this year resulting from the situation in the Middle East, an impact that was not anticipated at the beginning of the year.
As a result, our full-year EBITDA margin forecast for this year has improved to 12.8%, bringing us close to achieving our medium-term management plan target of over 13%, approximately one year ahead of schedule. In January this year, we transitioned to a business unit structure based on an integrated end-to-end value chain.
We believe that this organizational change has enhanced our agility, enabling us to make faster decisions on matters such as raw material procurement and price pass-through in responding to the situation in the Middle East. This demonstrates the benefits of greater organizational flexibility. Looking ahead, we believe that our growth initiatives in Oral Care will become increasingly important.
In an inflationary environment, these initiatives were critical not only to drive growth but also to further improving margins and profitability. We therefore believe it will be important to present concrete action plans in 2027. Finally, on this point, as we announced at the interim results briefing, we have made a limited partner investment in a U.S.-based venture capital fund specialized in startups in the Oral Care sector.
As we also announced recently, beginning in 2027, we will participate as a global partner in the world's largest oral health awareness campaign promoted by the FDI World Dental Federation. As we outlined when announcing our medium-term management plan, these initiatives reflect our intention to expand our business beyond self-care products and broaden our presence across the wider fields of dental care and oral health.
To achieve this goal, we are currently considering several plans and engaged in concrete discussions with potential partners, both in Japan and overseas, regarding business alliances and other forms of collaboration. We look forward to sharing further updates with you as soon as we have meaningful progress to report, and we hope you will stay tuned. This concludes my presentation today. Thank you indeed for your kind attention.
We now move on to the question-and-answer session. Ms. Miyasako, over to you.
This is Miyasako of Mizuho Securities. Thank you. Since I'm first, let me start with the overall picture. You said that despite the expectation of profit decline, actually profit increased. How large was the upside in core operating income, and how large was the gap by segment, and the reason for the upside? I would appreciate it if you could explain these by segment. Thank you.
Overall, we had thought that July to September would see a slight decline in core operating income, but it turned out to be an increase of JPY 0.7 billion, so the upside was about JPY 1 billion. This relates to both Japan and overseas. In Japan, in terms of mix, the share of high value-added Oral Care products was higher than we had expected.
As for overseas, we have been reviewing promotions and other measures in China, aiming at profitable growth, and as a result of that, profit increased. Overseas exchange rate also contributed more than we had expected. Through the combination of these factors, the overall picture is an upside of about JPY 1 billion. Does that answer your question?
Thank you. How should I view the Q4 or for the rest of the year? Will this situation continue, or will you spend on cost or anything?
Since we'll have new products in Q4, I think there will be the cost for strengthening efforts to nurture those products. Also, we began domestic price pass-through in October, but before that, we heard that there was some last-minute purchase, although only a small portion. Some of that will have a phasing impact on Q4.
So, I do not think we can expect the momentum of Q3 will be sustained. Even so, the fact that the profit is higher than we expected is something that has deepened our confidence.
Regarding the impact of that last-minute purchase, how much was it in terms of net sales and core operating income approximately?
In terms of net sales, this is just a few hundred million JPY. When wholesale purchase, there are no promotion costs paid, so to speak. As the purchased products go from store shelves to customers in Q4, sales promotion expenses and other promotion costs will be incurred. So, Q3 booked the full profit, and in Q4, there will be a slight increase in promotion expenses. But it has no impact on overall picture.
I see. Would you give us any colors about the level of promotion-related profit?
Well, I think it is really in the range of JPY 100 million or JPY 200 million.
Thank you. Can I ask two questions? Up to two questions each time. Thank you. One more thing. On the revision in shipment prices, Mr. Fukuda said earlier that so far things have been in line, but you need to keep a close eye on year-end consumption trend and the competitive environment and so on. Could you comment more in detail, for example, on potential risk in year-end consumption trend and the current competitive environment?
Well, so far, the price pass-through is going well, and we expect the profit to be in line. However, competition at store tends to intensify toward the end of the year every year. As the price pass-through proceeds across the board and in-store prices rise, we cannot say there will be no cooling of consumption or that some competitor will not adopt a competitive strategy that turns this to their advantages. We are operating day by day with those possibility in mind. That is what I meant. I believe you have been raising prices since July.
Is it correct to understand that you have not seen any cooling of consumption or competitors turning it to their advantages so far?
That is right. So far, we have not seen any dramatic moves. Anything that significantly changes the in-store environment has not occurred.
Thank you very much.
Thank you. Next, Ms. Kuwahara, over to you.
This is Kuwahara from JPMorgan. Can you hear me?
Yes, go ahead, please.
Thank you. I would also like to ask about Q4. Regarding Ms. Miyasako's question, you mentioned that price increases, and I would like to ask about it, how you see volume. To begin with, price increases at your company started in full swing from October, and I believe you have an approach in which it is important to raise in-store prices and shipment prices at the same time. I looked at confirm whether this is progressing as you expected.
Referring to the factors in the change in Q3 core operating income, the quantitative effects and product mix and others includes a variety of things. You have specified +JPY 3.4 billion as changes in sales. Is that a figure that excludes the impact of new consolidation? On a pure basis, excluding such new consolidation or excluding divestment, how do you see the volume impact in Q3 and Q4? Quantitative comments are fine. That is my first question. Thank you.
First, regarding price pass-through, at present, when we raise our shipment prices, we are able to pass that on simultaneously to retailers and to the selling prices to customers in stores. As for the impact on volume, in total, that is within our expectations.
For example, in a category where our competitive position is strong, such as Oral Care, we initially thought volume would fall, but there were products where it has not fallen that much. Depending on the category, there were also products where volume has fallen more than expected. Partially, we saw plus and minus, but in total, we consider it to be as expected. That's the first point. Then on changes in gross profit. New consolidation and the divestment of businesses are put together in a single line as business portfolio reforms.
The overall exchange rate impact of plus JPY 5.3 billion is also shown separately. So the remaining plus JPY 2.7 billion from the business in existing market is a change in gross profit accompanying changes in sales on real basis, excluding the exchange rate impact. Against the JPY 3.4 billion increase in gross profit, because the segment mix shift with the share of overseas segment rising relative to consumer products, there is a negative impact of JPY 0.7 billion.
In Q4, October to December, this will probably look somewhat weaker. In Japan, because we are revising shipment prices and with that volume falls, I think overseas will be proportionally increasing in the segment mix, and that will lead to the weakening impact. The negative impact of changes in product and segment mix will be bigger in Q4. Does that make sense to you?
Yes, thank you. So in practice, having raised prices, volume has not fallen as much as you expected. But because of the year-end sales season mentioned earlier, you are keeping a careful eye on that risk. Is that right?
Yes, exactly. Ideally, we'd like to exceed our full-year forecast as well on the momentum of this Q3. But since our full year will be played out amid such major changes, at present, we are keeping that risk in view.
Understood. Thank you. My second question. Regarding next year, thinking about achieving the medium-term management plan, you mentioned earlier about the raw material cost rising again. I understand that growing Oral Care with high margin is a high priority. I'd like to ask about other categories. For example, if raw materials rise again, is there anything that needs to be done outside Oral Care? Are there any issues or challenges in Japan or overseas?
You were able to accelerate EBITDA margin beyond the expectation. What differed from your initial forecast? Is that something that can be expected next year and beyond as well? I would like to ask you, Mr. Fukuda, to explain from a financial perspective what needs to be done, what has been achieved better than you thought until now, and how sustainable they are.
Full-year cost increase forecast that we had not anticipated at the beginning of the year is JPY 6 billion. Furthermore, since this cost increase tilted to the second half in this year, the year-on-year cost increase will be larger in the first half of the next year. If the current elevated level continues as it is in the next year, we see the cost increase of around JPY 6 billion next year as well.
Anticipating this, we have been working since last year on price revisions, effective increases in in-store prices through greater efficiency in sales promotion expenses, and improvements in mix. This year, we have been able to implement measures sufficient to offset the additional cost increase. We are in a position to aim for our initial target.
Furthermore, for next year, if we sell at the same revised price next year, the year-on-year effect will show up. Including that, we will definitely offset the effect of these cost increases. What has changed greatly from before is that as business units, we are now able to manage purchasing, production, and sales end-to-end. If we were unable to do that properly before, it is a bit embarrassing to say, but I think the biggest result this year is that they are now linked flexibly.
Therefore, we will be able to achieve the EBITDA margin target we set two years ago, almost one year ahead of schedule. Until now, to generate profit, we had to strengthen promotions in order to sell. Profit increased, but sales increased more than that, and the profit margin fell. We had that kind of dilemma. By being able to manage the value chain end-to-end, we are able to escape from that, and I think that is significant. Is that all right?
Understood. Thank you.
Thank you. Let us now take the next question. Mr. Hirozumi, over to you.
This is Hirozumi from Daiwa Securities. Can you hear me? Yes. My first question is about overseas. Overseas profits seemed quite strong, so I would like you to explain that. On core operating income, Merap Lion has been recognized since Q3 last year, and PNB since the beginning of this year. Even with the seasonality, this quarter is quite strong, even compared with Q2. Was there some factor in Q3 that lifted overseas profit? Could you tell that?
Thank you. Well, I think your question is about excluding the effect of new consolidation in existing market, right?
For one thing, the product mix in Thailand has changed. Right now, because of the Middle East situation, it is detergent that are most affected by the high price of naphtha. If we sell them hard, the mix deteriorate in terms of profit. The mindset has become to secure the profit margin by deliberately not selling detergent with discount prices.
In China, compared with the previous year, in Q3 and Q4 last year, we were aggressively pursuing growth. In contrast to that, we are now normalizing distributing inventory levels, and in the process of returning to profitable growth. I think the profit increase year-on-year is a major factor in the profit increase.
I see. In that case, can we expect such high overseas profit in Q4 and next year as well? Including new consolidation as well?
We need to bring overseas to a profit margin equivalent to that of Japan. Otherwise, if the overseas share grows, it will worsen the overall margin structure. I think we are entering a phase of raising a profit margin overseas as well.
I see. Very clear.
In the short term, in China too, because we tried too hard in Q4 last year and expanded sales too much, we had to compress distribution inventory in January this year. I think there may be up and down by quarter.
I am looking forward to that. Another question, I would like to deep dive in my second question, the waterfall chart on page six. In the bracket for competition-related expenses on page six, it says JPY 1.1 billion. I wonder how I should interpret it. It may simply mean that you cut cost, but is the Q3 plus JPY 1.1 billion in changes in competition-related expenses something I do not need to read too much into it? If it means nothing special, I will take so. How should I view the Q3 plus JPY 1.1 billion changes in competition-related expenses, please?
In fact, talking about the breakdown, this is mostly advertising expenses in Japan. The reason for that is the new products are concentrated in Q4. So, looking at the full year, this is offset. It is not that we are cutting cost by any reason. In other words, it is not that you suddenly did that in Q3. It was planned as such from the start? Exactly.
Understood. Thank you.
Thank you.
Next, Ms. Kawamoto, over to you.
Thank you very much. I am Kawamoto from Jefferies Securities. I would also like to follow up on the previous question on the improvement in overseas profitability. You have just explained it. For example, looking at the figures for the three months of Q3 alone, if we split them into gross profit factors and SG&A factors, what is the breakdown? How much was the lift to margin from the growth of Oral Care specifically?
It is also written that in Thailand, you have the renewal of the Shokubutsu Monogatari, and I think the impact of that was good as well. I think several things have changed, so I was wondering if you could give us specific examples. Regarding Oral Care, there are new channels being developed, such as hospitals and pharmacies, and I was wondering if you could also give the data, such as number of stores, please.
Thank you. Sorry, but I do not have the individual specific figures on hand, so I would like to respond later, perhaps through the IR. Overall, as you, Ms. Kawamoto, mentioned earlier regarding Shokubutsu Monogatari in Thailand, I think the basic reason for the increase in overseas profit margin is that we are shifting product actions toward those that generate profit more easily. Even within detergent, we are shifting from powder to liquid.
In South Korea and elsewhere, we are doing tablet as well. So, we are shifting to such a higher-margin product. We are also raising the share of beauty care and Oral Care in the overall mix. That is something we are pursuing in each country.
In addition, in Vietnam business, which originally has a higher profit margin than our company as a whole, if we try to earn volume through mass, we will break a direct sales model called the expert-recommended model. So, in addition to the expansion in the clinics, pharmacies, and so on that we currently deal with, we are expanding into local dental clinics as well.
Looking at page 33, I'm now looking at the numbers only for July. Given how difficult it is these days to achieve more than 10% top-line growth overseas, this is quite impressive. My understanding is that with Vietnam now having stabilized, this growth is being driven by the genuine underlying growth rather than simply a recovery from a previous weakness. Is that correct?
I understand that you are planning to hold an Oral Care briefing, so perhaps some of these points will be covered there. I'm just wondering if you plan to cover potential issues such as, though Japan has the universal health insurance, that is not necessarily the case in overseas markets. I would like to know if you intend to cover those details in Oral Care.
Yes, we would like to explain as much as possible about the new initiatives, as well as the efforts we are making within our existing business. That said, the overall trend is that our major overseas markets are becoming increasingly solid. Rather than simply pursuing high growth as we have in the past, we are shifting toward a more balanced approach where we aim to grow while also improving profitability.
If you look at the July-September period, or on a quarterly basis, you may see some markets where sales have declined. For example, Malaysia was down year-on-year. However, this was largely due to the situation in the third quarter last year when the Malaysian government implemented economic and stimulus measures.
If you look at the business over a very short time frame, you may feel that the actual results do not fully align with what I have just described. But if you take a longer term, I think it is fair to say that your understanding is correct.
Thank you very much. That's all from me. Thank you.
Next, I would like to have Ms. Yamanaka.
This is Yamanaka from SMBC Nikko Securities. My first question is regarding the overseas business. At the small meeting in August, you mentioned that inflation in markets such as Thailand and China was allowing you to offer fairly deep discounts, and the actual results since then have turned out somewhat different.
I understand that there can be some quarter-to-quarter fluctuations, but given the actual results we have seen, would it be fair to conclude that the issue you have highlighted in August as something that warranted close attention is now looking manageable? In other words, is it correct to say that the concern that inflation could have a broader impact on consumer spending across Asia has not, in fact, materialized in the actual business results so far?
Yes, that's correct. At this point, we don't see any clear signs that the issue has materialized in a significant way. Let me clarify. You continue to monitor this as a potential risk, but it has not materialized so far. In fact, in Thailand, for example, local competitors have eased their pricing pressure, which has actually turned into a tailwind for you.
However, it is becoming increasingly difficult to talk about the market in terms of an average, because we are seeing greater polarization, including in Japan. For example, in some markets, consumers who are particularly price-sensitive are becoming the largest segment of the market. I think this is something that could happen in any country.
So at this point, I would say that we have been able to hold our ground without following the trend toward down trading. We will continue to monitor these developments closely and take them into account as we move forward.
That's very helpful. If I may, I would like to further inquire about the impact of price increases. On page six of the materials, the contribution from price increases to operating profit for the July-September quarter is shown as JPY 1.6 billion, correct? At the previous earnings briefing for the third quarter, my understanding was that the expected benefit from price increases for the second half was JPY 3 billion, comprising JPY 0.5 billion in Q3 and JPY 2.5 billion in Q4.
So JPY 0.5 billion becoming JPY 1.6 billion appears to be very upswing. Appreciate if you could expand on these points between Japan and the global markets. The upside was largely driven by the overseas markets in terms of the breakdown for the July-September quarter, approximately 60% from Japan and 40% from overseas, if you are to look at the entire situation.
We had not originally expected the price increases to have such a significant impact in overseas markets, and this stronger-than-anticipated contribution was the main factor behind this upside. Given that these previously unanticipated benefits from price increases are now materializing in overseas markets, and taking the competitive environment into account, do you think this trend is going to continue in the next fiscal year?
Yes. This is not simply about increasing shipment prices. The price increases implemented through the third quarter also include shifting our sales mix toward higher value-added product lines. We intend to continue this effort.
Thank you. In that case, regarding your plan to broadly offset the JPY 6 billion in cost inflation next fiscal year through price increases, my understanding is that pricing in Japan is currently progressing in line with your plan, while the impact of price increases overseas is coming in stronger than expected. Would it therefore be reasonable to expect some additional upside or the positive contribution beyond your current assumptions?
I think we have to wait and see how the actual results develop before making a judgment. At this point, it is rather difficult to say whether the outcome will be above or below our current expectations. That said, we'll continue to make every effort in order to offset the cost increases through price adjustments.
Fully understood. Thank you indeed.
Thank you indeed. Shall we move on to the next question? Mr. Miyazaki, please.
This is Miyazaki from Goldman Sachs. I have two questions. First, regarding page six of the presentation you are showing now, specifically the change in other expenses shown in the far right column. Based on the full-year plan, my understanding is that this item is expected to make a positive contribution in the fourth quarter. Is that correct?
Alternatively, based on the progress so far, should we expect this item to remain somewhat more negative than originally anticipated? Could you walk through the factors behind the movements in this item? My second question is regarding overseas growth, particularly in Oral Care. I recall that at the previous small meetings, you mentioned that you would be investing more in promotional services in order to drive overseas growth.
My understanding at that time was that while you were on track to achieve the EBITDA margin target under the medium-term management plan, you were not necessarily aiming for further margin expansion beyond that level, as you intend to invest in expenses to drive sales growth. Has anything changed in these regards? Or should we still assume that you intend to maintain a certain level of investment in expenses in order to support growth going forward?
So these are the aspects I'd like to ask you to expand on.
Thank you for your questions. First, regarding the increase in other expenses, the increase in expenses in the third quarter was JPY 1 billion. However, the actual impact was even larger due to the purchase price allocation related to the acquisition in Australia. Specifically, following the acquisition, the entire purchase price had initially been recorded as goodwill.
We subsequently conducted a more detailed assessment and reallocated a portion of the purchase prior to amortizable intangible assets. In the third quarter, we recognized amortization expenses for the first, second, and third quarters all at once. This resulted in a larger-than-usual increase in expenses during the third quarter. Accordingly, you can expect this expense burden to ease somewhat in the fourth quarter.
Turning to competitive spending, there are certain brands where we need to continue strengthening our brand positioning. And we intend to concentrate our investments in those areas. However, our overall priority remains strengthening profitability. You can therefore assume that we'll manage these expenses within a framework that allows us to exceed our EBITDA margin target. Does that answer your questions?
Thank you. Regarding your second point, perhaps I had somewhat overstated my interpretation of what you said in August. So even while continuing to invest in competitive spending, you're also working to further improve EBITDA margins in overseas markets, rather than simply aiming to meet the targets set out in your medium-term management plan. Would it be fair for me to say that further margin improvement remains your objective and that you are currently on track to achieve it?
You're absolutely right. With that as our fundamental premise, we intend to allocate funds and make growth investments within those parameters.
Yes, I fully understood. Thank you.
Thank you.
Next, Mr. Ohana, please go ahead.
This is Ohana from Nomura Securities. I would like to ask one question. Regarding your outlook on raw materials and your approach to price increases, I believe that during your second quarter earnings announcement for the first half of the fiscal year, you projected raw materials prices for the second half at $80 per barrel.
However, even allowing for some volatility, I'm thinking prices might hover around $100 for the second half. Could you please explain the expected impact of cost increases relative to your current forecast? Also, you mentioned earlier that the costs for the next fiscal year are projected to be around JPY 6 billion. Would that figure remain largely unchanged?
Also, if the impact of raw materials and costs turns out to be greater than anticipated, is it correct to understand that the price increases implemented this October provide some buffer, so the impact can be largely offset? Or would you need to raise prices on the other items at some point before the next full cycle begins next year? Could you please explain your thinking on those aspects?
Yes, thank you for your questions. As you can see right now, we believe that the current raw material prices, be it crude oil or naphtha, are strengthening slightly higher than our annual projections. While we view this as a risk, we do not expect it to impact our earnings in the fourth quarter results.
Since this will likely affect raw material costs starting next year and beyond, we plan to move forward toward next year while carefully assessing whether additional measures are necessary beyond the efforts we are currently undertaking to increase value-added products and pass on price increases. We believe the impact on this year's costs will be somewhat limited.
Thank you for the details. So next year, the raw materials costs are expected to be JPY 6 billion. What's the outlook there? Is my understanding correct that for now, you don't need to change your perspective on that too much?
That's right. We are preparing for the possibility that it might go higher a little bit more. I hope to be able to discuss that as a part of our assumptions when we announce our next year's performance targets.
Yes, I understood.
Thank you. Thank you.
Next, I'd like to have Mr. Oogaki, please.
Th ank you for this opportunity. This is Oogaki from Okasan Securities. Thank you for this opportunity. Thank you. I have actually two questions. First, regarding the situation in your major overseas markets, especially Thailand, as shown on page 10 of the materials. The situation in Thailand appears to have improved, with the decline in exports moderating. My understanding is that the negative impact started to emerge around the second half of last year.
So I would like to clarify whether the improvement is simply due to a less unfavorable year-on-year comparison or whether exports themselves have started to recover. In addition, could you provide an update on the situation in the domestic Thai market?
Yes, thank you again for your questions. Regarding Thailand, as you mentioned, exports to Cambodia began in the second half of last year. So broadly speaking, this cycle has now run its course compared to the previous year. As a result, it's no longer having a significant impact on year-over-year changes. I think the first point to note is that we are not yet in a situation where exports have fully recovered.
On the other hand, while domestic consumption in Thailand isn't particularly strong, we began implementing targeted promotional campaigns with clearly defined objectives as part of our company's efforts. As a result, Oral Care, Beauty Care, and Shokubutsu Monogatari lines are performing well.
Thank you. Allow me to confirm the following points. About Thailand, you previously mentioned that the strategy was to expand higher-margin businesses such as oral healthcare and beauty care, rather than detergents. However, if the impact of the situation in the Middle East persists, could lower utilization rates at the detergent factories become a risk, potentially putting downward pressure on the overall profitability? How are you assessing such a risk?
Yes, thank you for your questions. As you pointed out, the breakdown of liquid and powder detergents in Thailand is currently roughly 50/50. However, since powder detergent production is particularly capital-intensive, it is important to maintain consistent utilization of our facilities. Therefore, while we do anticipate that if costs rise too much and the business environment deteriorates, we may have no choice but to downsize some of our facilities, we do not believe the situation has reached that point at this point in time.
Understood. Sorry, I have one more quick question. Regarding the China segment, specifically the e-commerce portion, I believe you mentioned that it had grown. That is on page 18 of the materials. On the other hand, I am wondering how the in-store sales fared, and I also recall hearing something about reviewing transactions with the distributors. Could you please provide more details on these aspects?
Yes, thank you. We are now re-evaluating our in-store operations. I understand that partly because we expanded our distributor contracts too rapidly last year, we are currently working with about 150 distributors. We lost control, particularly in the second half of last year, due to excessive expansion. This led to a backlog of inventory in the intermediate distribution channels. Additionally, while the product development and the retail distribution strategies are stipulated in each contract, we found it increasingly difficult to manage these details effectively. There are simply too many distributors.
Given this situation, we are currently exploring whether we can revise our contracts to a system where we provide a fixed margin, leave the operations to the distributors, evaluate their performance, and then select or eliminate them based on those results. We are also in the midst of negotiating with major distributors regarding these points.
Yes, understood. That is all from me. Thank you indeed for your contributions.
Thank you.
Since the time is running out, now allow me to receive the last question. Mr. Watanabe, please.
Thank you for this opportunity. This is Watanabe from Citigroup Securities. I have just one question regarding the next fiscal year ending December 2027. President Takemori has conveyed a strong message that this will be a very important year, as it marks the final year of the 2nd STAGE. Although the outlook for raw materials prices remains uncertain, I understand that progress on the October price revisions has been going very smoothly.
Therefore, as told at our previous small meeting, may I interpret this to mean that you are making excellent progress toward achieving the 2nd STAGE business profit target, JPY 40 billion? Do you have confidence?
We simply do not know what is going to happen in the end. But as of today, what you said is right. Regarding the situation in the Middle East this year, we have been addressing it since the start of the fiscal year, and we have been able to manage to turn things around and are now on track to meet our initial goals. So, we are working with the conviction that we will definitely achieve those goals next year as well.
Fully understood. Thank you indeed.
Thank you.
Thank you.
I would like to add just one point regarding the price increases mentioned earlier. We've seen the results in the third quarter, July, September, amount to JPY 1.6 billion. May I remind you that it is not necessarily coming entirely from the Middle East. At the beginning of the year, we had originally planned for price increases totaling JPY 3 billion. So, the JPY 1.6 billion figure includes progress on that plan as well.
As for the price increases in response to the situation in the Middle East, they are progressing smoothly so far. Overseas markets seems to be ahead of the schedule. Please keep these points in mind.
Again, I would like to thank you for the many questions we have received. We are a little over the scheduled time, and this concludes Lion Corporation's third quarter earnings briefing. I would like to thank you for your precious time and participation.