Management’s Discussion and Analysis

Market Environment

The market in the Lion Group’s main business domain, the domestic toiletries industry, was steady, as unit prices rose and some product categories benefitted from demand generated by tourists visiting Japan from overseas. During fiscal 2015 (January 1, 2015–December 31, 2015), the Japanese economy as a whole gradually recovered, with corporate profits and hiring continuing to improve despite some weakness in production and exports in the latter half of the year.

Overseas, although the slowdown in the Chinese economy had an impact on the surrounding countries in Asia, overall, market growth continued against a background of the rising desire among the middle-income classes to increase their quality of life. Amid these conditions, demand for value-added products is expanding, and Lion assesses the potential for growth in those regions where it has a presence to be extremely high.

Consolidated Results

The Lion Group launched its new medium-term management plan, “Vision 2020 Part-2 (V-2 Plan).” The V-2 Plan positions strengthening profitability as the Company’s highest priority goal and centers on four strategies: (1) Qualitative Growth of Domestic Businesses; (2) Quantitative Expansion of Overseas Businesses; (3) Development of New Business Value; and (4) Enhancement of Organizational Learning Capabilities. Domestically, Lion launched such new, high-value-added products as toothpastes, toothbrushes, fabric softeners and dishwashing detergents and worked to cultivate markets for these products using aggressive marketing. Furthermore, the Lion Group reorganized its chemicals business to enhance functionality and make more efficient use of management resources by unifying operations.

Overseas, focusing mainly on the personal care field, including oral care and beauty care products, the Group sought to cultivate markets for its key brands as part of efforts to expand its business. As of the end of the third quarter of 2015, Southern Lion Sdn. Bhd. was made a consolidated Lion subsidiary. Consequently, consolidated results for the period under review are as follows: Net sales amounted to ¥378,659 million, a year-on-year increase of 3.1% (or an increase of 1.4% in terms of real net sales, which exclude the influence of exchange rate conversions). The Company recorded operating income of ¥16,374 million, up 32.0% compared with the same period of the previous fiscal year, and net income stood at ¥10,680 million, up 44.9% compared with the previous fiscal year. As a result, Lion reported the highest figures in its history for operating income, which rose for the second consecutive fiscal year, and ordinary income, which rose for the third consecutive fiscal year. Return on equity (ROE) rose to 8.5% (compared with 6.2% in the previous fiscal year), and earnings per share (EPS) was ¥39.35 (compared with ¥27.47 in the previous fiscal year).

Graph: Net Sales and Cost of Sales Ration
Graph: SG&A Expenses to Net Sales
Graph: Operating Income and Operating Margin

Performance by Segment

The Lion Group’s three reportable segments (distinguished by products, services, and regions) that therefore comprise Lion Corporation’s operations are: Consumer Products Business, Industrial Products Business, and Overseas Business.

SG&A Expenses Breakdown
  2015 2014 2013
Amount
(Millions
of yen)
% of
net sales
Amount
(Millions
of yen)
% of
net sales
Amount
(Millions
of yen)
% of
net sales
Selling, general and administrative expenses 199,848 52.8 194,312 52.9 187,849 53.4
Sales commission expenses 8,198 2.2 8,290 2.3 11,960 3.4
Sales promotion expenses 87,380 23.1 86,430 23.5 78,384 22.3
Advertising expenses 26,222 6.9 24,517 6.7 24,273 6.9
Freight and storage expenses 17,011 4.5 16,723 4.6 15,979 4.5
Salaries and allowances 14,721 3.9 14,241 3.9 13,665 3.9
R&D expenses 9,808 2.6 9,439 2.6 9,618 2.7
Other 36,506 9.6 34,669 9.4 33,966 9.6

Factors Accounting for Changes in Operating Income

Conditions by Reportable Segment

In fiscal 2015, there was a year-on-year decline in the domestic economy in the first quarter compared with the surge in demand in the first quarter of 2014 prior to the increase in the consumption tax. As a consequence, sales for the full year 2015 decreased from 2014. Nevertheless, Lion’s business mix and profitability both improved. In Overseas Business, sales expanded and segment income increased 159.9% year on year.

Consumer Products Business

The Consumer Products Business segment is divided into the Oral Care Products, Beauty Care Products, Fabric Care Products, Living Care Products, Pharmaceutical Products, and Other Products businesses.

In fiscal 2015, net sales in the Consumer Products Business segment decreased 0.3% compared with the previous fiscal year. Segment income increased 18.7% due to focused efforts to cultivate markets for high-value-added products and decreases in raw materials costs.

  Millions of Yen
FY2015 % of
segment
sales
FY2014 % of
segment
sales
Change
(Amount)
Change
(%)
Net sales 273,486 274,427 (940) (0.3)
Operating income 10,108 3.7 8,516 3.1 1,591 18.7
Net Sales by Business
  Millions of Yen
FY2015 FY2014 Change
(Amount)
Change
(%)
Oral Care business 59,414 55,344 4,070 7.4
Beauty Care business 19,885 20,468 (583) (2.9)
Fabric Care business 77,985 83,540 (5,554) (6.6)
Living Care business 20,971 20,179 791 3.9
Pharmaceutical business 38,754 38,156 598 1.6
Other 56,475 56,738 (262) (0.5)
Oral Care Products

In the oral care field, sales of high-priced products are favorable, and Lion is securing sales growth that is higher than overall market growth. In toothpastes, sales of Lion’s mainstay CLINICA series were firm. Lion added new hypersensitivity prevention and tooth whitening products to the SYSTEMA Haguki (the Gums) Plus series, which saw sales grow to three times their level in the previous fiscal year. As a result, overall sales were up year on year. In toothbrushes, sales of CLINICA ADVANTAGE Toothbrush were favorable, and Lion’s newly launched products, including the SYSTEMA Arch Fit Toothbrush and Between Zeitaku Care, received favorable consumer reviews, leading to a substantial year-on-year increase in overall sales.

Beauty Care Products

In the Beauty Care Products field, in hand soaps, sales of KireiKirei Medicated Foaming Hand Soap were steady, and Lion released new KireiKirei Medicated Foaming Hand Soap for the Kitchen, a product that effectively removes even meat grease as well as fish odors that linger on hands after food preparation. Consequently, overall sales increased year on year. In antiperspirants and deodorants, sales of Ban Sweat-Blocking Roll-On were favorable, and Lion worked to develop the market for new Ban Odor-Blocking Roll-On, which features a nano ion antibacterial agent that helps prevent odors all day long. Sales of Ban Deodorant Powder Spray, however, were sluggish. Overall sales decreased year on year.

Fabric Care Products

In the Fabric Care field, in laundry detergents, Lion focused on cultivating demand for super-concentrated liquid laundry detergents TOP NANOX and TOP HYGIA, but overall sales were down year on year due to such factors as the shrinkage of powder detergent markets. In fabric softeners, sales of the Kaori to Deodorant no SOFLAN (SOFLAN with Fragrance and Deodorant) Aroma Natural series were firm, and those of the new-and-improved SOFLAN Aroma Rich series were strong. Overall sales grew year on year.

Living Care Products

In dishwashing detergents, new CHARMY Magica, featuring nano cleansing action that makes stubborn grease slide like water off dishes for faster cleanup, garnered favorable consumer reviews, and overall sales were up significantly year on year.

With the LOOK brand of household cleansers, Lion focused on nurturing the bathroom fungicide LOOK Bath Antimold Fogger and LOOK Mame-Pika Toilet Cleaner, but overall sales were below those of the same period of the previous fiscal year.

Pharmaceutical Products

In antipyretic analgesics, although sales of BUFFERIN PREMIUM were firm, sales of BUFFERIN A were stagnant, leading to overall sales that were down year on year.

In eyedrops, sales of Smile40 Premium and Smile40 EX GOLD Mild were favorable. Overall sales increased year on year.

Lion also endeavored to capture demand generated by tourists visiting Japan from overseas, and sales of externally applied preparations for treating acne and elastic pads for cooling the legs increased significantly.

Other Products

In direct-to-consumer sales products, at the end of June, Lion re-launched Nice rim essence Lactoferrin which is classified as a Food with Function Claims, that helps reduce visceral fat and brings down high BMI, and sales following the re-launch were favorable. Overall sales, however, fell year on year.

In pet supplies, sales of oral care products were strong, but sales of Nioi wo Toru Suna (Deodorizing Cat Litter) were stagnant, and overall sales were virtually equivalent to those in the previous fiscal year.

Industrial Products Business

  Millions of Yen
FY2015 % of
segment
sales
FY2014 % of
segment
sales
Change
(Amount)
Change
(%)
Net sales 56,104 59,793 (3,688) (6.2)
Operating income 1,612 2.9 1,759 2.9 (147) (8.4)

The Industrial Products Business segment comprises businesses in such product categories as electro-conductive carbon, surfactants and detergents for institutional use. In 2015, Lion realigned and integrated its three Group companies in this business into a single, newly established company. As a result, within the Chemical Products Business, management functions are becoming stronger and efficiency is improving.

In electro-conductive carbon, sales of KETJENBLACK for use in lithium-ion and other secondary batteries were steady, and overall sales increased year on year.

In surfactants, sales of raw materials for detergents were sluggish, and overall sales fell year on year.

In detergents for institutional use, sales of alcohol sanitizers for kitchen use were favorable, while those of hand soaps were firm, and overall sales increased significantly year on year.

As a result, in the Industrial Products Business, overall sales declined 6.2%, and segment income decreased 8.4%.

Overseas Business

  Millions of Yen
FY2015 % of
segment
sales
FY2014 % of
segment
sales
Change
(Amount)
Change
(%)
Net sales 102,077 86,202 15,875 18.4
Operating income 2,983 2.9 1,147 1.3 1,835 159.9
[Sales by Region]
  Millions of Yen
FY2015 FY2014 Increase/
decrease
Change
(%)
Southeast Asia 67,614 56,950 10,663 18.7
Northeast Asia 34,463 29,251 5,211 17.8

The Overseas Business segment comprises mainly Consumer Products business operations located in Southeast Asia, including Thailand and Malaysia, and Northeast Asia, including South Korea and China. Performance in the personal care field, including the oral care and beauty care fields, held firm, with sales in personal care expanding over 20% and rising to account for 31% of overall sales in Overseas Business.

By region, in Southeast Asia, overall sales were up 18.7% year on year. In Thailand, sales of oral care products reported double-digit growth, and the sales of the KODOMO brand oral care series and Shokubutsu-Monogatari body wash were favorable. Overall sales after yen conversions increased substantially compared with the same period of the previous fiscal year. In Northeast Asia, sales, as a whole, increased 17.8% year on year. In South Korea, sales of Systema toothpaste were firm, and those of KireiKirei hand soap were favorable. Consequently, overall sales after yen conversions increased significantly year on year. In China, e-commerce business showed major expansion, and rose to account for 35% of sales in that country. Sales of Systema toothbrushes were firm, and sales of imported Japanese products increased. Overall sales after yen conversions increased substantially year on year.

As a result of these developments, overall segment sales in Overseas Business increased 18.4% year on year (or in terms of real net sales, which exclude the influence of exchange rate conversions, increased 10.9%). Segment income increased 159.9% year on year due in part to growth in sales of personal care products.

Other

  Millions of Yen
FY2015 % of
segment
sales
FY2014 % of
segment
sales
Change
(Amount)
Change
(%)
Net sales 29,166 28,682 483 1.7
Operating income 956 3.3 597 2.1 358 60.0

Financial Position

  Millions of Yen
FY2015 FY2014 Change
Total assets (millions of yen) 282,434 283,352 (918)
Total net assets (millions of yen) 142,730 127,434 15,296
Shareholders’ equity to total assets*1 (%) 47.6 42.6 5.0
Net assets per share*2 (yen) 469.05 449.94 19.11

*1 Shareholders' equity to total assets = (Net assets Subscription rights to shares and Minority interests)/Total assets

*2 Subscription rights and minority interests were excluded from calculation of net assets per share.

Graph: Total Assets
Graph: Current Ratio
Graph: Capital Expenditures and Depreciation and Amortization

In 2015, the Company’s total assets decreased, but, on the other hand, cash flow increased.

Total assets fell ¥918 million compared with the previous consolidated fiscal year-end, to ¥282,434 million. This is primarily attributable to a decrease in property, plant and equipment.

Total liabilities decreased ¥16,215 million in comparison with the end of the previous fiscal year, to ¥139,703 million, mainly due to decreases in bonds with subscription rights to shares and the Company’s net defined benefit liability. Current liabilities decreased ¥5,170 million, to ¥121,247 million, and the liquidity rate stood at 137.6%.

Total consolidated shareholders’ equity rose ¥15,876 million, to ¥131,077 million due to the decline in the balance of treasury stocks and increase in retained earnings. Net assets increased ¥15,296 million, to ¥142,730 million. Shareholders’ equity to total assets stood at 47.6%

Cash Flows

Consolidated Cash Flows
  Millions of Yen
FY2015 FY2014 Change
Net cash provided by (used in) operating activities 35,539 11,738 23,800
Net cash provided by (used in) investing activities (6,974) (16,838) 9,864
Net cash provided by (used in) financing activities (5,062) (6,520) 1,458
Effect of exchange rate changes on cash and cash equivalents (374) 829 (1,203)
Net increase (decrease) in cash and cash equivalents 23,128 (10,791) 33,919
Cash and cash equivalents at end of the period 61,278 38,150 23,128

Net cash provided by operating activities totaled ¥35,539 million, due mainly to income before income taxes.

Net cash used in investing activities amounted to ¥6,974 million, and consisted of purchases of property, plant and equipment and other items.

Net cash used in financing activities totaled ¥5,062 million. Major components of this outflow included cash dividends paid and repayment of short-term loans payables.

As a result of the above, cash and cash equivalents as of December 31, 2015 increased ¥23,128 million compared with the consolidated fiscal year ended December 31, 2014, to ¥61,278 million.

Outlook for Fiscal 2016

  Millions of Yen
FY2016 FY2015 Change
(Amount)
Change
(%)
Net sales 390,000 378,659 11,340 3.0
Operating income 18,000 16,374 1,625 9.9
Profit attributable to owners of parent 11,000 10,680 319 3.0

In the domestic toiletries industry, the Lion Group’s main business domain, despite anticipated expansion in the market for high-value-added products, competition is expected to remain fierce. Amid these circumstances, the Lion Group will steadily implement the V-2 Plan (Vision 2020 Part-2), its three-year medium-term management plan launched in 2015, and work to improve its corporate structure, aiming to boost corporate value.

In the Consumer Products Business segment, the Lion Group will work to further develop its brands in the oral care field as well as release new, high-value-added products in its mainstay businesses, including toothpastes and laundry detergents, as it works to improve its market position and strengthen profitability. The Group will also work to expand its direct-to-consumer sales business by reinforcing the development of products that offer unique value, particularly in the area of functional foods, and through aggressive marketing.

In the Industrial Products Business segment, Lion will focus management resources on key areas, such as automotive and electrical and electronics products, to reinforce its business foundation. Furthermore, Lion will continue to cultivate new customers in its detergents for institutional use business.

With regard to the Overseas Business segment, the Lion Group will continue its aggressive marketing activities, primarily in the area of personal care, seeking to expand its business.

As a result of the above, consolidated results forecasts for fiscal 2016 are as follows: net sales of ¥390,000 million (up 3.0% year on year), operating income of ¥18,000 million (up 9.9% year on year), ordinary income of ¥19,000 million (up 5.0% year on year), and net income of ¥11,000 million (up 3.0% year on year).

The forecast of fiscal 2016 consolidated cash flows is as follows:

In cash flows from operating activities, Lion projects income before income taxes of approximately ¥17,000 million. Depreciation and amortization is estimated to total about ¥11,000 million.

In cash flows from investing activities, Lion plans to undertake capital expenditures of around ¥11,000 million during fiscal 2016.

The cash flows from financing activities are expected to yield an outflow of about ¥4,000 million mainly due to cash dividends paid and the repayment of loans payable.

Based on these projections, Lion estimates that cash and cash equivalents at the end of fiscal 2016 will be up approximately ¥13,000 million year on year.

Basic Policy on the Distribution of Earnings and Cash Dividends

Lion considers returning profits to shareholders on a permanent and stable basis by increasing its consolidated earnings capacity as one of its most-important management issues. To this end, the Company strives to ensure the payment of continuous and stable cash dividends and bases the acquisition of treasury stock on comprehensive reviews of the appropriate levels of internal reserves required to secure medium- and long-term growth.

Lion allocates internal reserves to making investments aimed at reinforcing the Company’s growth potential and developing a sustainable business foundation. In the area of investment in innovation, Lion is stepping up the pace of its R&D, mainly to strengthen its position in healthcare and life sciences, including the pharmaceutical field and functional food products. In its marketing-related investments, Lion is accelerating the expansion of its brands that have No. 1 positions in their respective markets in Japan and speeding up its expansion of global brands. Regarding capital investments, Lion is investing in the domestic oral care business and taking steps to upgrade its production systems to meet rising demand in overseas countries, principally in Thailand, with a view to exporting from that country to supply regional demand.

Taking into consideration the Company’s cash dividend payment record, as well as its dividend payout ratio target, the Company decided to pay an interim dividend of ¥5 per share and a year-end dividend of ¥5 per share for fiscal 2015. With regard to dividends to be paid for fiscal 2016, in accordance with its basic policy on the distribution of earnings and cash dividends, Lion plans to pay an interim dividend of ¥5 per share and a year-end dividend of ¥6 per share, for a total annual dividend of ¥11 per share.

Business Risk Information

The Lion Group’s management performance and financial status may be adversely affected by various risks as business activities are pursued in the future. Of these risks, the following items, in particular, may have a material impact on the decisions of investors.

(1) Product quality and value

The Lion Group plans, develops, produces, and sells products under management based on international quality standards while strictly following related laws and regulations, such as the Pharmaceutical Affairs Law, to provide worry-free, safe, convenient, and environmentally conscious products to consumers. In addition, we use consumers’ opinions received through our Consumer Service Office to improve our products and packaging as well as respective displays and text. In the event of an unforeseen and serious problem with product quality, however, the affected product and all products made by the Lion Group may lose their perceived value. This may adversely affect the Lion Group’s management performance and financial status.

(2) Changes in raw material prices

The Lion Group’s products use petrochemical and vegetable oils and fats as basic materials. Since these materials are easily affected by international market prices, we have measures in place to reduce costs and diversify the range of materials used. However, an increase in raw material prices may adversely affect the Lion Group’s management performance and financial status.

(3) Exchange rate fluctuations

The Lion Group translates into yen the financial statements of overseas subsidiaries when preparing consolidated financial statements. For items denominated in foreign currency, their yen values may be affected by prevailing foreign exchange rates when translated into yen. The Lion Group has taken steps to minimize the risk of an increase in raw material costs by hedging against exchange rate fluctuations. However, short-, medium-, and long-term changes in foreign exchange rates may adversely affect the Lion Group’s management performance and financial status.

(4) Major lawsuits

As of December 31, 2015, Lion is not involved in any lawsuits that may have significant impact on its business. However, if the Lion Group were to be successfully sued for significant damages, these could adversely affect the Lion Group’s management performance and financial status.

(5) Earthquakes and other natural disasters

In the product manufacturing process, the Lion Group has put in place safety measures against earthquakes and other natural disasters. In the event of a major disaster, however, our production equipment may be damaged, or a suspension of raw materials procurement or distribution activities may cause business activities to cease, adversely affecting the Lion Group’s management performance and financial status.

For more-detailed IR information on the Lion Group, please access the following site.

http://www.lion.co.jp/en/ir/