Management’s Discussion and Analysis

Market Environment

During fiscal 2016 (January 1, 2016–December 31, 2016), the Japanese economy as a whole gradually recovered, backed by continued improvement in employment and personal consumption, despite less than robust improvement in corporate profits and capital expenditure in the latter half of the year.

The market in the Lion Group’s main business domain, the domestic toiletries industry, was steady, as unit prices continued to rise and sales volumes increased.

In overseas markets, the personal care market (combined oral care and beauty care) continues to expand with the growing middle class in major Asian countries, and greater demand for a higher quality of life among consumers.

Consolidated Results

The Lion Group advanced initiatives under its 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. In its domestic operations, Lion introduced such new high-value-added products as toothpastes, body soaps, laundry detergents, and fabric softeners and worked to cultivate markets for these products through aggressive marketing. Furthermore, Lion launched a new business structure for its direct-to-consumer sales business, aiming to expand sales. In its overseas operations, the Group sought to cultivate markets for its key brands as part of efforts to expand its business, focusing mainly on the personal care field, including oral care and beauty care products. Judging that it would be difficult to quickly achieve profitability in its business in the Philippines, Lion dissolved the joint venture contract with its local partner and withdrew from the business.

Consolidated results for the period under review are as follows:
Net sales during the period under review amounted to ¥395,606 million, a year-on-year increase of 4.5% (or an increase of 7.7% in terms of real net sales, which exclude the influence of exchange rate conversions). The Company recorded operating income of ¥24,502 million, up 49.6% compared with the previous fiscal year. Profit attributable to owners of parent stood at ¥15,951 million, up 49.4% compared with the previous fiscal year. As a result, Lion achieved a record high of operating income for a third consecutive fiscal year, and ordinary income for a fourth consecutive fiscal year. Return on equity (ROE) was 11.2% (compared with 8.5% in the previous fiscal year), and earnings per share (EPS) of ¥55.13 (compared with ¥39.35). Earnings reached the target levels for the V-2 Plan a year ahead of plan.

Target in Fiscal 2017 and Results in Fiscal 2016
  Millions of yen
2017 Target 2016 2015
Net sales 405,000 395,606 378,659
Operating income 27,000 24,502 16,374
Operating income margin ratio 6.7% 6.2% 4.3%
ROE 10% or above 11.2% 8.5%
BEP 90% or less 89% 92%
Net Sales and Cost of Sales Ratio
SG&A Expenses to Net Sales
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
  2016 2015 2014
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 209,110 52.9 199,848 52.8 194,312 52.9
Sales commission expenses 8,623 2.2 8,198 2.2 8,290 2.3
Promotion expenses 90,107 22.8 87,380 23.1 86,430 23.5
Provision for promotion expenses 2,060 0.5 1,618 0.4 894 0.2
Advertising expenses 30,976 7.8 26,222 6.9 24,517 6.7
Transportation and warehousing expenses 17,829 4.5 17,011 4.5 16,723 4.6
Salaries and allowances 14,721 3.7 14,721 3.9 14,241 3.9
Research and development expenses 10,084 2.5 9,808 2.6 9,439 2.6
Other 34,707 8.8 34,888 9.2 33,775 9.2

Factors Accounting for Changes in Operating Income

Conditions by Reportable Segment

Profitability in Japan increased significantly during 2016 as a result of higher unit sales prices from high-value-added items, and improvement in the business mix. Overseas, sales rose in principal markets, with segment earnings increasing 53% 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. Segment net sales increased 5.0% compared with the previous fiscal year. Segment income increased 56.5% due to growth in sales and decreases in the cost of sales ratio.

  Millions of yen
2016 Ratio to
net sales
2015 Ratio to
net sales
Increase /
decrease
Change
Net sales 287,028   273,486   13,541 5.0%
Segment income 15,817 5.5% 10,108 3.7% 5,708 56.5%
Note: Net sales include internal net sales within and among segments, which amounted to ¥25,722 million in 2016 and ¥25,508 million in 2015.
Net Sales by Products Segment
  Millions of yen
2016 2015 Increase /
decrease
Change
Oral Care Products 63,596 59,414 4,182 7.0%
Beauty Care Products 22,333 19,885 2,447 12.3%
Fabric Care Products 80,240 77,985 2,254 2.9%
Living Care Products 20,763 20,971 (207) (1.0)%
Pharmaceutical Products 40,958 38,754 2,204 5.7%
Other Products 59,135 56,475 2,660 4.7%
Oral Care Products

Consumer preferences in the oral care market are divided between high-value-added products and commodities. Sales of Lion’s mid- to high-priced items were positive, exceeding market growth.

2016 year-on-year growth, sales basis (%)
  Lion products Entire market
Toothpastes +6 +3
Toothbrushes +5 +2
Dental rinse +14 +9
Dental products +11 +9
 
Oral care products total +6 +4
(Lion Survey)

In toothpastes, Lion released new and improved CLINICA ADVANTAGE Toothpaste, which combines the three preventive dentistry essentials of removing plaque, helping fluoride remain on teeth and reducing bacterial growth. Sales of the SYSTEMA Haguki (the Gums) Plus series were favorable, and overall sales were up year on year.

In toothbrushes, sales of the CLINICA ADVANTAGE Toothbrush and SYSTEMA Haguki (the Gums) Plus Toothbrush were favorable. Overall sales were up year on year.

In mouthwashes, Lion released new and improved CLINICA ADVANTAGE Dental Rinse, which features a new antibacterial coating function to fight bacteria and suppress the growth of problem-causing germs, helping to prevent cavities, inflamed gums, and bad breath. Overall sales were substantially higher than in the previous fiscal year.

In addition, sales of dental care products, including CLINICA ADVANTAGE Dental Floss Y-Type, were up substantially year on year.

Beauty Care Products

Lion focused on establishing new habits for everyday hygiene, mainly offering hand soap, antiperspirants, and body soap.

In hand soaps, sales of KireiKirei Medicated Foaming Hand Soap, featuring a new antimicrobial pump head, were favorable, and overall sales increased significantly year on year.

In antiperspirants and deodorants, new Ban Sweat-Blocking Roll-On Premium Label received favorable consumer reviews. However, sales of Ban Deodorant Powder Spray were down compared with the previous fiscal year. Overall sales were flat year on year.

In addition, new hadakara Body Soap, which is highly moisturizing thanks to a moisture-adsorbing formula that ensures moisturizer is not washed away, received favorable consumer reviews

Fabric Care Products

Lion promoted a shift from powdered laundry detergents to high-value-added super-concentrated liquid laundry detergents.

In laundry detergents, new TOP SUPER NANOX, a super-concentrated liquid laundry detergent that thoroughly cleans grime off every fiber with super-nano washing for excellent detergency, received favorable consumer reviews. Sales of ACRON laundry detergent for fashionable clothing, including new varieties featuring mild scents, were firm. Overall sales were up year on year.

In fabric softeners, Soflan Queen’s Silk, a new product that gives clothing a luscious, smooth feel on the skin, received favorable consumer reviews, and sales of Kaori to Deodorant no SOFLAN (SOFLAN with Fragrance and Deodorant) were firm. Overall sales were up year on year.

Living Care Products

Lion continued to develop the market for high-value-added products, aiming to regain its market position for dishwashing detergents.

In dishwashing detergents, Lion added a new scented antibacterial version to its CHARMY Magica lineup, which saw favorable sales. Overall sales were up year on year.

In household cleaners, sales of bathroom fungicide LOOK Bath Antimold Fogger were favorable, and those of LOOK MamePika Toilet Cleaner were firm. However, sales of bath cleaners were sluggish, and overall sales were flat year on year.

Pharmaceutical Products

Lion continued to develop the market for high-value-added products, achieving gains in antipyretic analgesics and eyedrops that exceeded market growth.

In antipyretic analgesics, sales of BUFFERIN A were firm, and those of BUFFERIN PREMIUM were strong. Overall sales were up significantly year on year.

In eyedrops, new Smile Whitéye, which alleviates bloodshot eyes and helps keep the whites of the eyes healthy and clear, received favorable consumer reviews, and sales of Smile 40 Premium were firm. Overall sales increased year on year.

Other Products

In direct-to-consumer sales products, sales of Nice rim essence Lactoferrin and Gussumin Yeast NO CHIKARA were favorable. Overall sales were significantly higher compared with the previous fiscal year.

In pet supplies, sales of oral care products were strong, and sales of Nioi wo Toru Suna (Deodorizing Cat Litter) were firm. Overall sales were higher than in the previous fiscal year.

Industrial Products Business

  Millions of yen
2016 Ratio to
net sales
2015 Ratio to
net sales
Increase /
decrease
Change
Nete sales 54,330   56,104   (1,774) (3.2)%
Segment income 2,560 4.7% 1,612 2.9% 948 58.9%
Note: Net sales include internal net sales within and among segments, which amounted to ¥22,934 million in 2016 and ¥25,298 million in 2015.

The Industrial Products Business segment includes the Electrical and Electronics, Lifestyle-Related Industry, and Detergents for Institutional Use Products. These businesses handle products including electro-conductive carbon, surfactants, and detergents for institutional and kitchen use, respectively. Segment net sales decreased 3.2% compared with the previous fiscal year, but segment income increased 58.9%, mainly because of the improvement in profitability of high-value-added products in chemical products.

In Electrical and Electronics, sales of adhesives for liquid crystal films used in smartphones and other applications were sluggish, and overall sales were flat year on year.

In the Lifestyle-Related Industry, sales of raw materials for fabric softeners were firm, but sales of raw materials for laundry detergents were sluggish. Overall sales were flat year on year.

In the Detergents for Institutional Use Products, sales of alcohol sanitizers for kitchens were favorable, while those of hand soaps were steady, and overall sales increased year on year.

Overseas Business

  Millions of yen
2016 Ratio to
net sales
2015 Ratio to
net sales
Increase /
decrease
Change
Net sales 110,933   102,077   8,856 8.7%
Segment income 4,566 4.1% 2,983 2.9% 1,582 53.0%
Note: Net sales include internal net sales within and among segments, which amounted to ¥11,648 million in 2016 and ¥8,174 million in 2015.
Sales by Region
  Millions of yen
2016 2015 Increase /
decrease
Change
Southeast Asia 75,544 67,614 7,930 11.7%
Northeast Asia 35,389 34,463 925 2.7%

The Overseas Business segment comprises business operations located in Southeast Asia, including Thailand and Malaysia, and Northeast Asia, including South Korea and China. Due in part to firm sales in Thailand and other mainstay countries as well as the consolidation of Southern Lion Sdn. Bhd. of Malaysia at the end of the third quarter of fiscal 2015, segment net sales increased 8.7% year on year (or in terms of real net sales, which exclude the influence of exchange rate conversions, increased 22.2%).

Segment income increased 53.0% year on year, due in part to growth in sales of personal care products.

In Southeast Asia, overall sales were up 11.7% year on year. In Thailand, sales of SYSTEMA toothbrushes were firm, and those of Shokubutsu-Monogatari body wash were favorable. However, due to exchange rate fluctuations, overall sales after yen conversions were down year on year.

In Northeast Asia, overall sales were up 2.7% year on year. In South Korea, sales of KireiKirei hand soap and liquid Beat laundry detergent were strong. However, due to exchange rate fluctuations, overall sales after yen conversions were level year on year. In China, the e-commerce business expanded considerably, accounting for 47% of sales. Sales of SYSTEMA toothpaste were firm, and sales of imported Japanese products increased. Overall sales after yen conversions were up year on year.

Other

  Millions of yen
2016 Ratio to
net sales
2015 Ratio to
net sales
Increase /
decrease
Change
Net sales 26,867   29,166   (2,299) (7.9)%
Segment income 915 3.4% 956 3.3% (41) (4.3)%
Note: Net sales include internal net sales within and among segments, which amounted to ¥23,247 million in 2016 and ¥23,194 million in 2015.

Financial Status

  2016 2015 Increase /
decrease
Total assets (millions of yen) 298,510 282,434 16,075
Net assets (millions of yen) 157,879 142,730 15,148
Shareholders’ equity to total assets*1 (%) 50.0 47.6 2.4
Net assets per share*2 (yen) 513.76 469.05 44.71

*1 Shareholders’ equity to total assets = (Net assets – Subscription rights to shares and non-controlling interests) / Total assets

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

Total Assets
Current Ratio
Capital Expenditures and Depreciation and Amortization

Total assets rose ¥16,075 million compared with the previous consolidated fiscal year-end, to ¥298,510 million. This is primarily attributable to an increase in securities.

Total liabilities increased ¥927 million in comparison with the end of the previous fiscal year, to ¥140,630 million, mainly due to increases in accounts payable-other and accrued expenses; and provision for bonuses; offsetting decreases in short-term loans payable and bonds with subscription rights to shares. Current liabilities increased ¥2,193 million, to ¥123,440 million, with the liquidity rate at 150.3%.

Total consolidated shareholders’ equity rose ¥15,565 million, to ¥146,642 million, due mainly to an increase in retained earnings. Net assets increased ¥15,148 million, to ¥157,879 million. Shareholders’ equity to total assets stood at 50.0%

Cash Flows

Consolidated Cash Flows
  Millions of yen
2016 2015 Increase /
decrease
Net cash provided by (used in) operating activities 32,269 35,539 (3,269)
Net cash provided by (used in) investment activities (7,845) (6,974) (871)
Net cash provided by (used in) financing activities (7,437) (5,062) (2,374)
Effect of exchange rate change on cash and cash equivalents (526) (374) (151)
Net increase (decrease) in cash and cash equivalents 16,461 23,128 (6,667)
Cash and cash equivalents at end of period 77,739 61,278 16,461

Net cash provided by operating activities totaled ¥32,269 million, due mainly to income before income taxes.

Net cash used in investing activities totaled ¥7,845 million, due in part to the purchase of property, plant and equipment.

Net cash used in financing activities totaled ¥7,437 million. Major components of this outflow included cash dividends paid.

As a result of the above, cash and cash equivalents as of December 31, 2016 increased ¥16,461 million compared with the consolidated fiscal year ended December 31, 2015, to ¥77,739 million.

Outlook for Fiscal 2017

  Millions of yen
2017
forecast
2016 Increase /
decrease
Change
Net sales 405,000 395,606 9,393 2.4%
Operating income 27,000 24,502 2,497 10.2%
Ordinary income 28,000 26,290 1,709 6.5%
Profit attributable to owners of parent 17,000 15,951 1,048 6.6%
EPS (yen) 58.50 55.13 3.37 6.1%

During fiscal 2017, although gradual continued recovery is forecast for the Japanese economy, the outlook going forward is expected to remain unclear, reflecting shifts in raw material prices and currency exchange rates, geopolitical risks, and other factors.

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 even more forcefully implement the V-2 Plan (Vision 2020 Part-2), its three-year medium-term management plan, now entering its final year, aiming to boost corporate value.

In the Consumer Products Business segment, the Lion Group will cultivate markets for high-value-added products in its mainstay businesses, working 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/electronic, to reinforce its business foundation. Furthermore, Lion will continue to cultivate new customers in its Detergents for Institutional Use Products.

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 2017 are as follows: net sales of ¥405,000 million (up 2.4% year on year), operating income of ¥27,000 million (up 10.2% year on year), ordinary income of ¥28,000 million (up 6.5% year on year), and profit attributable to owners of parent of ¥17,000 million (up 6.6% year on year).

(Preconditions for the Estimated Figures in Outlook for Fiscal 2017)
Lion adopted the following foreign exchange rates in the calculation of the aforementioned estimated figures:
¥112 = US$1.00
¥3.2 = 1.00 baht

The forecast of fiscal 2017 consolidated cash flows is as follows:

In cash flows from operating activities, Lion projects income before income taxes of approximately ¥26,000 million. Depreciation is estimated to total about ¥10,000 million.

In cash flows from investment activities, Lion plans to undertake capital expenditures of around ¥14,000 million during fiscal 2017.

The cash flows from financing activities are expected to yield an outflow of about ¥9,000 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 2017 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 continuous and stable basis by increasing its consolidated earnings capacity to be one of its most-important management issues. To this end, the Company strives to ensure the payment of continuous and stable cash dividends, aiming for a consolidated payout ratio of 30%, and bases the acquisition of treasury stock on comprehensive reviews to ensure that it maintains levels of internal reserves required to secure medium- and long-term growth. Lion allocates internal reserves to research and development, capital investment in production facilities, and the acquisition of external resources, aiming to reinforce the Company’s growth potential and to develop a sustainable business foundation.

Taking into consideration the Company’s cash dividend payment record, as well as its dividend payout ratio target, Lion’s Board of Directors resolved to pay an interim dividend of ¥5 per share and a year-end dividend of ¥8 per share for fiscal 2016.

With regard to dividends to be paid in fiscal 2017, in accordance with its basic policy on the distribution of earnings and cash dividends, Lion plans to pay an interim dividend of ¥7 per share and a year-end dividend of ¥8 per share, for a total annual dividend of ¥15 per share.

Business Risks

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.

Note that forward looking statements are based on judgments made at the time of the issuance of this report, and that business risks may not be limited to the items listed below.

(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 and Medical Device Act, 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, 2016, Lion is not involved in any lawsuits that may have significant impact on its business. However, if the Lion Group were to be sued and found liable 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/