Earth Corporation manufactures and sells household insecticides, oral hygiene products, and bath salts. It boasted the top share of the domestic markets for insecticides and bath salts.
Earth Corporation manufactures and sells household insecticides, oral hygiene products, and bath salts. It boasted the top share of the domestic markets for household insecticide products (55.8% in 2021; company estimates) and bath salts.
In the Household Products segment, household insecticides are the biggest earnings driver. Despite being a late entrant, Earth Corporation has emerged as the industry leader for the following two reasons. First, the company introduced original products such as Gokiburi Hoy Hoy (cockroach trap) and Earth No-Mat (liquid mosquito killer) that expanded the market previously comprised of anti-mosquito incense coils and aerosol sprays. Second, the company bet early on drugstore sales routes—an emerging industry at the time—and thus differentiating from major competitors who up until the 1980s had mainly used resellers that focused on mass retailers such as general merchandise stores. The company increased salespeople and strengthened direct tie-ups with sales outlets, thereby boosting product exposure.
The Japanese household insecticide market faces headwinds from a projected decline in the Japanese population and the number of households and adverse effects from unusual weather patterns including heavy rainfall and intense heat. However, there are also tailwinds such as the emergence of exotic pests amid globalization, the geographical spread of pests stemming from climate change, and creation of demand through introduction of new products.
The company aims to cultivate insecticide sales as a second earnings pillar, and to that end made Bathclin Corporation, Hakugen Earth Co., Ltd., and Earth Corporation Vietnam (formerly A My Gia Joint Stock Company) consolidated subsidiaries.
In the General Sanitary Management segment, the company provides quality control consulting services, such as contamination prevention at food production plants, thus establishing a business model that differs from the Household Products business.
In the medium-term business plan spanning the three years from FY12/21 to FY12/23, the company will work to expand its Asian earnings base, among other initiatives (see the latter part of this report). Moreover, as a long-term earnings pillar, the company will develop the MA-T System (Matching Transformation System)®*, an oxidation control technology and system for which it holds the technology license, manufacturing rights, and intellectual property rights. New solutions for the prevention of infectious diseases will be developed by 2030 by leveraging MA-T technology, which will be developed through open innovation. The project will entail the development of a procurement business for the United Nations and public institutions to control the spread of viruses, microorganisms, and multi-drug resistant bacteria not only in Japan but also in Southeast Asia, which is home to 220 million people in low- and middle-income countries such as Thailand, Vietnam, and Myanmar. The company aims for social implementation through the provision of inexpensive and simple solutions.
*MA-T System (Matching Transformation System)®: Oxidation control technology. By generating the necessary amount of aqueous radicals from chlorite ions when necessary, it enables the breaking down of viruses, including epidemic viruses, and the sterilization of various germs (bacteria). Furthermore, by controlling the degree of activity, it is possible to develop highly difficult chemical reactions, as well as a wide range of applications. This includes the functionalization of polymers, device applications, and applications in agricultural chemicals and pharmaceuticals.
Trends and outlook
In FY12/21, the company reported sales of JPY203.8bn (+3.9% YoY), operating profit of JPY10.7bn (-6.6% YoY), recurring profit of JPY11.4bn (-2.6% YoY), and net income attributable to owners of the parent of JPY7.1bn (+101.4% YoY). Factors contributing to sales growth included sustained customer demand amid the spread of COVID-19 and introduction of new products in the Household Products business, and increase in the number of contracts in the General Sanitary Management business. Although gross profit was up YoY thanks to new products and sales growth, operating profit declined YoY due to an increase in household insecticide product returns and higher SG&A expenses due to aggressive spending on marketing and human resources and a rise in distribution costs.
The company's FY12/22 forecast calls for sales of JPY155.0bn (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition), operating profit of JPY10.8bn, recurring profit of JPY11.2bn, and net income attributable to owners of the parent of JPY7.3bn. The annual dividend is JPY118.00 (flat YoY). Excluding the adoption of the new standard, sales increased 3.5% YoY to JPY211.0bn.
The company forecast for FY12/22 calls for sales of JPY155.0bn (no YoY comparison due to adoption of Revenue Recognition Standard from FY12/22; same for profit at all levels), operating profit of JPY10.8bn, recurring profit of JPY11.2bn, and net income attributable to owners of the parent of JPY7.3bn. The annual dividend forecast is JPY118.0 (flat YoY).
The company forecasts sales of JPY137.8bn and operating profit of JPY9.3bn in FY12/22 in household product segment. The company projects sustained high levels of demand for its product lines amid lifestyle changes brought on by the pandemic. That being said, the company assumes that it may not fully absorb through management efforts the impact of rising raw material prices. It aims to secure reasonable profit by growing earnings in categories where sales are growing and its has large market share, optimizing the allocation of management resources, and improving cost efficiency.
The company forecasts sales of JPY27.7bn and operating profit of JPY1.4bn in FY12/22 in general sanitary management segment. Prevention of product contamination and food poisoning are essential in services for the food manufacturing sector. Consequently, there is a growing need for the quality sanitary management services that the Earth Group provides, underpinned by its specialist knowledge, technologies, and know-how. The company is progressing R&D and human resource training as well as providing services that harness IoT and a range of AI systems, expanding its food safety-related auditing business, and strengthening its life science business to increase the number of contracts per year and achieve stable earnings growth.
The company positions overseas expansion as its primary growth driver. It aims to improve profitability and build an earnings base by establishing subsidiaries in the main areas where it operates, such as ASEAN and China, and aggressively allocating management resources in these areas. The company aims to increase the earnings contribution of exports and cross-border e-commerce by developing and selling products that fulfill the needs of each country and focusing on profitable products.
The next three-year (FY12/21–FY12/23) medium-term business plan is as follows. Following FY12/20 sales of JPY196.0bn, operating profit of JPY11.4bn, recurring profit of JPY11.7bn, net income attributable to owners of the parent of JPY3.5bn, and ROE of 7.4%, the company is targeting FY12/23 sales of JPY213.0bn, operating profit of JPY14.0–16.0bn, net income attributable to owners of the parent of JPY10.0bn, and ROE of 13.0%.
Strategic plans call for 1) expanding its earnings base in Asia, including the use of M&A; 2) active promotion of ESG and open innovation initiatives, including measures aimed at reducing product returns and greater use of sustainable raw materials; and 3) generation of additional cost savings by rethinking its entire value chain.
Strengths and weaknesses
Strengths: innovative product ideas, a sales strategy of approaching retailers directly, and its long-term relationships with drugstore chains with strong sales capabilities. Weaknesses: high seasonality of mainstay household insecticide products, demand for which is affected by seasonal weather patterns; relatively low profitability of household products; and late and slow overseas expansion due to the legacy of a domestic focus.
Key financial data
Income statement
FY12/12
FY12/13
FY12/14
FY12/15
FY12/16
FY12/17
FY12/18
FY12/19
FY12/20
FY12/21
FY12/22
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Est.
Sales
125,499
135,737
145,858
159,739
168,505
179,738
181,104
189,527
196,045
203,785
155,000
YoY
13.1%
8.2%
7.5%
9.5%
5.5%
6.7%
0.8%
4.7%
3.4%
3.9%
-
Gross profit
46,731
50,758
54,707
58,498
63,634
68,102
67,376
70,418
78,951
82,334
Gross profit margin
37.2%
37.4%
37.5%
36.6%
37.8%
37.9%
37.2%
37.2%
40.3%
40.4%
-
SG&A expenses
42,605
45,311
49,864
54,481
58,085
63,645
66,340
66,501
67,535
71,666
YoY
17.8%
6.4%
10.0%
9.3%
6.6%
9.6%
4.2%
0.2%
1.6%
6.1%
SG&A ratio
33.9%
33.4%
34.2%
34.1%
34.5%
35.4%
36.6%
35.1%
34.4%
35.2%
R&D expenses
1,847
2,037
2,227
2,328
2,682
2,695
2,900
2,663
2,673
3,172
YoY
19.9%
10.3%
9.3%
4.5%
15.2%
0.5%
7.6%
-8.2%
0.4%
18.7%
R&D ratio
1.5%
1.5%
1.5%
1.5%
1.6%
1.5%
1.6%
1.4%
1.4%
1.6%
Operating profit
4,125
5,446
4,843
4,016
5,549
4,456
1,036
3,916
11,416
10,667
10,750
YoY
-32.5%
32.0%
-11.1%
-17.1%
38.2%
-19.7%
-76.8%
278.0%
191.5%
-6.6%
-
Operating profit margin
3.3%
4.0%
3.3%
2.5%
3.3%
2.5%
0.6%
2.1%
5.8%
5.2%
6.9%
Recurring profit
4,689
6,469
6,020
4,260
5,991
4,987
1,382
4,326
11,661
11,362
11,150
YoY
-29.4%
38.0%
-6.9%
-29.2%
40.6%
-16.8%
-72.3%
213.0%
169.6%
-2.6%
-
Recurring profit margin
3.7%
4.8%
4.1%
2.7%
3.6%
2.8%
0.8%
2.3%
5.9%
5.6%
7.2%
Net income attributable to owners of the parent
1,721
2,986
1,705
1,165
3,364
2,205
-142
1,250
3,547
7,142
7,280
YoY
-48.2%
73.5%
-42.9%
-31.7%
188.8%
-34.5%
-
-
183.8%
101.4%
-
Net margin
1.4%
2.2%
1.2%
0.7%
2.0%
1.2%
-0.1%
0.7%
1.8%
3.5%
4.7%
Per-share data (adjusted for splits; JPY)
Shares issued (year-end; '000)
20,200
20,200
20,200
20,200
20,200
20,200
20,220
20,238
22,058
22,078
EPS (JPY)
85.22
147.86
84.47
57.69
166.60
109.20
-7.06
61.80
170.65
323.76
330.30
EPS (fully diluted; JPY)
-
-
-
-
-
-
-
-
-
-
Dividend per share (JPY)
95.00
105.00
110.00
110.00
115.00
115.00
115.00
100.00
115.00
118.00
118.00
Book value per share (JPY)
2,048.28
2,151.52
2,192.88
2,151.82
2,154.95
2,225.30
1,989.93
1,978.86
2,507.62
2,720.37
Balance sheet (JPYmn)
Current assets
48,268
49,431
56,255
55,701
57,884
57,123
54,460
54,710
70,747
74,018
Cash and cash equivalents
12,123
13,127
12,626
11,391
11,979
10,453
6,044
7,312
23,716
21,027
Trade receivables
14,801
15,817
17,242
17,400
19,429
20,661
21,969
22,610
21,236
21,210
Inventories
18,208
16,863
22,227
23,215
23,158
22,628
23,782
22,506
22,178
27,501
Other current assets
3,136
3,624
4,160
3,695
3,318
3,381
2,665
2,282
3,617
4,280
Fixed assets, deferred assets
36,796
36,365
45,343
48,747
49,482
61,044
54,119
52,715
49,122
46,696
Tangible fixed assets
16,754
17,727
23,879
26,761
28,431
29,643
29,215
28,220
28,030
27,551
Intangible assets
16,182
14,596
14,450
12,703
12,132
19,256
16,180
13,143
6,268
4,276
Other assets
3,860
4,042
7,014
9,283
8,919
12,144
8,723
11,351
14,823
14,868
Total assets
85,064
85,796
101,598
104,448
107,366
118,167
108,579
107,425
119,869
120,714
Current liabilities
31,791
32,270
41,309
43,749
47,165
53,024
55,061
56,997
54,884
52,300
Trade payables
19,161
18,661
24,394
24,640
25,925
27,960
27,684
26,778
22,498
22,617
Short-term debt
3,271
2,738
4,446
7,117
7,664
11,900
15,954
17,166
3,070
2,497
Other current liabilities
9,359
10,871
12,469
11,992
13,576
13,164
11,423
13,053
29,316
27,186
Fixed liabilities
7,230
5,119
10,708
11,707
11,008
14,614
9,146
6,105
5,161
3,818
Long-term debt
4,167
2,826
7,006
8,030
7,838
10,354
6,809
3,550
2,218
1,200
Other
3,063
2,293
3,702
3,677
3,170
4,260
2,337
2,555
2,943
2,618
Net assets
46,043
48,406
49,580
48,991
49,192
50,529
44,372
44,322
59,823
64,596
Capital stock
3,377
3,377
3,377
3,377
3,377
3,377
3,432
3,478
9,829
9,895
Capital surplus
3,168
3,168
3,168
3,168
3,168
2,923
3,463
3,509
9,859
9,928
Retained earnings
34,724
35,792
35,377
34,441
35,566
35,449
32,984
31,798
33,322
37,929
Treasury stock
-10
-11
-11
-12
-13
-14
-15
-16
-17
-215
Accumulated other comprehensive income
106
1,124
2,374
2,482
1,420
3,204
361
1,267
2,304
2,421
Share subscription rights
-
-
-
-
-
-
-
-
-
-
Non-controlling interests
4,675
4,954
5,293
5,533
5,672
5,588
4,145
4,285
4,524
4,638
Total liabilities and equity
85,064
85,795
101,598
104,448
107,366
118,167
108,580
107,425
119,870
120,715
Cash flow statement (JPYmn)
Cash flows from operating activities
3,317
7,026
6,380
3,791
8,089
9,175
369
10,022
24,590
4,814
Cash flows from investing activities
-15,677
-1,419
-10,422
-5,969
-5,501
-13,995
-1,515
-3,990
-3,168
-3,220
Cash flows from financing activities
2,039
4,058
3,489
1,180
-2,216
3,262
-3,203
-4,768
-4,938
-4,610
Financial ratios
Interest-bearing debt
7,438
5,564
11,452
15,147
15,502
22,254
22,763
20,716
5,288
3,697
Net cash
4,685
7,563
1,174
-3,756
-3,523
-11,801
-16,719
-13,404
18,428
17,330
ROA (RP-based)
6.0%
7.6%
6.4%
4.1%
5.7%
4.4%
1.2%
4.0%
10.3%
9.4%
ROE
4.2%
7.0%
3.9%
2.7%
7.7%
5.0%
-0.3%
3.1%
7.4%
12.4%
Current ratio
152%
153%
136%
127%
123%
108%
99%
96%
129%
142%
Fixed ratio
80%
75%
91%
100%
101%
121%
122%
119%
82%
72%
Equity ratio
48.6%
50.6%
43.6%
41.6%
40.5%
38.0%
37.0%
37.3%
46.1%
49.7%
Source: Shared Research based on company data
Note: Figures may differ from company data due to differences in rounding methods.
Note: Accounts receivable are adjusted for deduction of allowance for doubtful accounts. Note: No YoY comparisons are stated, because the company adopted the new Revenue Recognition Standard from FY12/22.
Performance by segment
FY12/12
FY12/13
FY12/14
FY12/15
FY12/16
FY12/17
FY12/18
FY12/19
FY12/20
FY12/21
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Sales
125,499
135,737
145,858
159,739
168,505
179,738
181,104
189,527
196,045
203,785
Household Products Business
111,098
122,582
133,125
145,010
154,404
164,616
165,572
173,022
179,374
188,493
Household Insecticide Products
45,899
49,857
53,174
52,673
54,850
59,588
56,719
59,394
65,990
69,000
Oral Care, Bath Powder and Other Household Products
59,075
65,251
72,225
84,010
90,647
96,771
100,922
105,369
104,164
110,154
Pet-related Products and Others
6,123
7,473
7,726
8,326
8,905
8,256
7,930
8,258
9,220
9,338
General Sanitary Management
17,862
18,338
19,129
20,914
21,935
23,519
24,421
25,571
26,420
27,234
Sum of reportable segments
128,960
140,920
152,254
165,924
176,339
188,135
189,994
198,593
205,794
215,727
Adjustments
-3,461
-5,183
-6,396
-6,184
-7,834
-8,398
-8,890
-9,066
-9,749
-11,942
YoY
13.1%
8.2%
7.5%
9.5%
5.5%
6.7%
0.8%
4.7%
3.4%
3.9%
Household Products Business
13.6%
10.3%
8.6%
8.9%
6.5%
6.6%
0.6%
4.5%
3.7%
5.1%
Household Insecticide Products
-1.4%
8.6%
6.7%
-0.9%
4.1%
8.6%
-4.8%
4.7%
11.1%
4.6%
Oral Care, Bath Powder and Other Household Products
29.6%
10.5%
10.7%
16.3%
7.9%
6.8%
4.3%
4.4%
-1.1%
5.8%
Pet-related Products and Others
8.4%
22.0%
3.4%
7.8%
7.0%
-7.3%
-3.9%
4.1%
11.6%
1.3%
General Sanitary Management
2.7%
2.7%
4.3%
9.3%
4.9%
7.2%
3.8%
4.7%
3.3%
3.1%
% of sales
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Household Products Business
86.1%
87.0%
87.4%
87.4%
87.6%
87.5%
87.1%
87.1%
87.2%
87.4%
Household Insecticide Products
35.6%
35.4%
34.9%
31.7%
31.1%
31.7%
29.9%
29.9%
32.1%
32.0%
Oral Care, Bath Powder and Other Household Products
45.8%
46.3%
47.4%
50.6%
51.4%
51.4%
53.1%
53.1%
50.6%
51.1%
Pet-related Products and Others
4.7%
5.3%
5.1%
5.0%
5.0%
4.4%
4.2%
4.2%
4.5%
4.3%
General Sanitary Management
13.9%
13.0%
12.6%
12.6%
12.4%
12.5%
12.9%
12.9%
12.8%
12.6%
Operating profit
4,125
5,446
4,843
4,016
5,549
4,455
1,036
3,916
11,416
10,667
Household Products Business
2,455
3,937
3,841
2,173
4,058
3,291
-507
2,373
9,980
9,944
General Sanitary Management
1,454
1,475
1,529
1,547
1,275
1,349
1,374
1,366
1,419
1,114
Sum of reportable segments
3,909
5,412
5,370
3,720
5,333
4,641
866
3,739
11,399
11,058
Adjustments
215
33
-527
295
216
-185
170
175
16
-391
YoY
-32.5%
32.0%
-11.1%
-17.1%
38.2%
-19.7%
-76.7%
278.0%
191.5%
-6.6%
Household Products Business
-48.5%
60.4%
-2.4%
-43.4%
86.7%
-18.9%
-
-
320.6%
-0.4%
General Sanitary Management
1.5%
1.4%
3.7%
1.2%
-17.6%
5.8%
1.9%
-0.6%
3.9%
-21.5%
OPM (unadjusted)
3.3%
4.0%
3.3%
2.5%
3.3%
2.5%
0.6%
2.1%
5.8%
5.2%
Household Products Business
2.2%
3.2%
2.9%
1.5%
2.6%
2.0%
-0.3%
1.4%
5.6%
5.3%
General Sanitary Management
8.1%
8.0%
8.0%
7.4%
5.8%
5.7%
5.6%
5.3%
5.4%
4.1%
% of operating profit (unadjusted)
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.1%
100.0%
100.0%
100.0%
Household Products Business
62.8%
72.7%
71.5%
58.4%
76.1%
70.9%
-58.5%
63.5%
87.6%
89.9%
General Sanitary Management
37.2%
27.3%
28.5%
41.6%
23.9%
29.1%
158.7%
36.5%
12.4%
10.1%
Source: Shared Research based on company data
Note: Figures may differ from company data due to differences in rounding methods.
Recent updates
Expansion of Business Development in the Philippines (progress of disclosure items)
2022-04-04
Earth Corporation has announced that on April 1, 2022, it completed its acquisition of shares in Earth Homecare Products (Philippines), Inc. in accordance with the share transfer agreement and accompanying agreements. Through a previous release entitled "Notice regarding the Expansion of Business Development in the Philippines" (dated September 7, 2021), the company had announced its decision to acquire 66.7% of shares in Earth Homecare Products (Philippines), Inc. (established on October 7, 2021), which had inherited the business of selling items such as insect care products, household products, and pet care products from Neumann & Mueller Philippines, Inc. (NMPI) with the aim of accelerating business development in the Philippines.
The sales business acquired from NMPI has been performing well during the COVID-19 pandemic. Moving forward, the company aims to increase earnings generated through this business by introducing daily necessities such as insect care products, as well as other additional products, in the Philippines.
Earth Corporation projects that this acquisition's impact on results in FY12/22 will be negligible.
Number of shares acquired, acquisition price, and shares held before and after acquisition
Number of shares held before the acquisition: none
Number of shares acquired: 1,077,205 shares (number of voting rights: 1,077,205 [66.7% of total voting rights])
Acquisition price: Undisclosed in accordance with agreements between involved parties
Parties from which shares were acquired: Six individuals whose names have not been disclosed in accordance with nondisclosure agreements
Disposal of treasury stock as restricted stock compensation
2022-03-25
Earth Corporation announced the disposal of treasury stock as restricted stock compensation.
At a meeting held on March 25, 2022, the company’s Board of Directors resolved to dispose of treasury stock as restricted stock compensation.
Overview of disposal
Disposal date: April 22, 2022
Class and number of shares to be disposed of: 41,200 common shares of the company
Disposal price: JPY5,440 per share
Total value of shares to be disposed of: JPY224,128,000
Planned allottees: 17,500 shares to six directors (excluding outside directors), 6,100 shares to 22 executive officers who are not directors, and 17,600 shares to 14 directors of its subsidiaries
Trends and outlook
Quarterly trends and results
Cumulative
FY12/20
FY12/21
FY12/22
FY12/22
(JPYmn)
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
% of Est.
1H Est.
Sales
45,441
110,634
158,247
196,045
49,278
115,821
165,167
203,785
38,603
42.2%
91,500
YoY
4.3%
6.3%
3.6%
3.4%
8.4%
4.7%
4.4%
3.9%
-
-
Gross profit
19,194
47,777
65,886
78,951
21,780
51,603
70,631
82,334
17,367
Gross profit margin
42.2%
43.2%
41.6%
40.3%
44.2%
44.6%
42.8%
40.4%
45.0%
SG&A expenses
14,034
31,753
47,929
67,535
13,729
33,036
50,278
71,666
12,043
YoY
-10.4%
-7.1%
-3.7%
1.6%
-2.2%
4.0%
4.9%
6.1%
-
SG&A ratio
30.9%
28.7%
30.3%
34.4%
27.9%
28.5%
30.4%
35.2%
31.2%
Operating profit
5,159
16,024
17,957
11,416
8,050
18,566
20,353
10,667
5,323
40.0%
13,300
YoY
246.0%
116.5%
103.3%
191.5%
56.0%
15.9%
13.3%
-6.6%
-
-
Operating profit margin
11.4%
14.5%
11.3%
5.8%
16.3%
16.0%
12.3%
5.2%
13.8%
14.5%
Recurring profit
5,143
16,138
18,093
11,661
8,206
18,907
20,815
11,362
5,648
42.1%
13,400
YoY
225.9%
114.1%
100.2%
169.6%
59.6%
17.2%
15.0%
-2.6%
-
-
Recurring profit margin
11.3%
14.6%
11.4%
5.9%
16.7%
16.3%
12.6%
5.6%
14.6%
14.6%
Net income attributable to owners of the parent
3,387
10,949
11,977
3,547
5,575
12,759
13,838
7,142
3,766
40.6%
9,280
YoY
337.6%
135.5%
119.0%
183.8%
64.6%
16.5%
15.5%
101.4%
-32.4%
-
Net margin
7.5%
9.9%
7.6%
1.8%
11.3%
11.0%
8.4%
3.5%
9.8%
10.1%
Quarterly
FY12/20
FY12/21
FY12/22
FY12/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
% of Est.
FY Est.
Sales
45,441
65,193
47,613
37,798
49,278
66,543
49,346
38,618
38,603
24.9%
155,000
YoY
4.3%
7.8%
-2.4%
2.9%
8.4%
2.1%
3.6%
2.2%
-
-
Gross profit
19,194
28,583
18,109
13,065
21,780
29,823
19,028
11,703
17,367
Gross profit margin
42.2%
43.8%
38.0%
34.6%
44.2%
44.8%
38.6%
30.3%
45.0%
SG&A expenses
14,034
17,719
16,176
19,606
13,729
19,307
17,242
21,388
12,043
YoY
-10.4%
-4.3%
3.9%
17.1%
-2.2%
9.0%
6.6%
9.1%
-
SG&A ratio
30.9%
27.2%
34.0%
51.9%
27.9%
29.0%
34.9%
55.4%
31.2%
Operating profit
5,159
10,865
1,933
-6,541
8,050
10,516
1,787
-9,686
5,323
49.5%
10,750
YoY
246.0%
83.8%
35.0%
-
56.0%
-3.2%
-7.6%
-
-
-
Operating profit margin
11.4%
16.7%
4.1%
-
16.3%
15.8%
3.6%
-
13.8%
6.9%
Recurring profit
5,143
10,995
1,955
-6,432
8,206
10,701
1,908
-9,453
5,648
50.7%
11,150
YoY
225.9%
84.5%
30.4%
-
59.6%
-2.7%
-2.4%
-
-
-
Recurring profit margin
11.3%
16.9%
4.1%
-
16.7%
16.1%
3.9%
-
14.6%
7.2%
Net income attributable to owners of the parent
3,387
7,562
1,028
-8,430
5,575
7,184
1,079
-6,696
3,766
51.7%
7,280
YoY
337.6%
95.1%
25.7%
-
64.6%
-5.0%
5.0%
-
-
-
Net margin
7.5%
11.6%
2.2%
-
11.3%
10.8%
2.2%
-
9.8%
4.7%
Source: Shared Research based on company data
Note: Figures may differ from company data due to differences in rounding methods. Note: No YoY or QoQ comparisons are stated, because the company adopted the new Revenue Recognition Standard from FY12/22.
By segment
By segment (cumulative)
FY12/20
FY12/21
FY12/22
FY12/22
(JPYmn)
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
% of Est.
FY Est.
Sales
45,441
110,634
158,247
196,045
49,278
115,821
165,167
203,785
38,603
24.9%
155,000
Household Products Business
41,476
102,668
145,785
179,374
46,354
109,224
153,816
188,493
35,669
Household Insecticide Products
16,315
48,937
63,808
65,990
19,114
51,569
67,072
69,000
17,684
Oral Care, Bath Powder and Other Household Products
23,100
49,002
74,920
104,164
24,921
52,587
79,368
110,154
15,834
Pet-related Products and Others
2,061
4,729
7,055
9,220
2,318
5,067
7,375
9,338
2,150
General Sanitary Management
6,250
13,075
19,877
26,420
6,334
13,546
20,650
27,234
6,414
Sum of reportable segments
47,726
115,743
165,662
205,794
52,688
122,770
174,466
215,727
42,083
-
-
Adjustments
-2,285
-5,109
-7,415
-9,749
-3,410
-6,949
-9,299
-11,942
-3,480
-
-
YoY
4.3%
6.3%
3.6%
3.4%
8.4%
4.7%
4.4%
3.9%
-
-
Household Products Business
2.9%
5.9%
3.5%
3.7%
11.8%
6.4%
5.5%
5.1%
-
Household Insecticide Products
3.6%
11.4%
10.1%
11.1%
17.2%
5.4%
5.1%
4.6%
-
Oral Care, Bath Powder and Other Household Products
1.4%
0.8%
-1.9%
-1.1%
7.9%
7.3%
5.9%
5.8%
-
Pet-related Products and Others
14.9%
8.1%
8.9%
11.6%
12.5%
7.1%
4.5%
1.3%
-
General Sanitary Management
4.5%
4.3%
3.4%
3.3%
1.3%
3.6%
3.9%
3.1%
-
Operating profit
5,159
16,024
17,957
11,416
8,050
18,566
20,353
10,667
5,323
49.5%
10,750
Household Products Business
4,773
15,144
16,574
9,980
7,968
17,870
19,151
9,944
4,960
General Sanitary Management
387
844
1,289
1,419
332
898
1,237
1,114
299
Sum of reportable segments
5,160
15,988
17,863
11,400
8,300
18,768
20,388
11,059
5,259
-
-
Adjustments
-1
36
94
16
-250
-202
-35
-391
64
-
-
YoY
246.0%
116.5%
103.3%
191.5%
56.0%
15.9%
13.3%
-6.6%
-
-
-
Household Products Business
271.7%
127.0%
121.5%
320.6%
66.9%
18.0%
15.5%
-0.4%
-
General Sanitary Management
20.9%
21.1%
14.8%
3.9%
-14.2%
6.4%
-4.0%
-21.5%
-
OPM (unadjusted)
11.4%
14.5%
11.3%
5.8%
16.3%
16.0%
12.3%
5.2%
13.8%
-
Household Products Business
11.5%
14.8%
11.4%
5.6%
17.2%
16.4%
12.5%
5.3%
13.9%
General Sanitary Management
6.2%
6.5%
6.5%
5.4%
5.2%
6.6%
6.0%
4.1%
4.7%
By segment
FY12/20
FY12/21
FY12/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Sales
45,441
65,193
47,613
37,798
49,278
66,543
49,346
38,618
38,603
Household Products Business
41,476
61,192
43,117
33,589
46,354
62,870
44,592
34,677
35,669
Household Insecticide Products
16,315
32,622
14,871
2,182
19,114
32,455
15,503
1,928
17,684
Oral Care, Bath Powder and Other Household Products
23,100
25,902
25,918
29,244
24,921
27,666
26,781
30,786
15,834
Pet-related Products and Others
2,061
2,668
2,326
2,165
2,318
2,749
2,308
1,963
2,150
General Sanitary Management
6,250
6,825
6,802
6,543
6,334
7,212
7,104
6,584
6,414
Sum of reportable segments
47,726
68,017
49,919
40,132
52,688
70,082
51,696
41,261
42,083
Adjustments
-2,285
-2,824
-2,306
-2,334
-3,410
-3,539
-2,350
-2,643
-3,480
YoY
4.3%
7.8%
-2.4%
2.9%
8.4%
2.1%
3.6%
2.2%
-
Household Products Business
2.9%
8.1%
-1.8%
4.4%
11.8%
2.7%
3.4%
3.2%
-
Household Insecticide Products
3.6%
15.7%
6.1%
51.5%
17.2%
-0.5%
4.2%
-11.6%
-
Oral Care, Bath Powder and Other Household Products
1.4%
0.3%
-6.8%
1.0%
7.9%
6.8%
3.3%
5.3%
-
Pet-related Products and Others
14.9%
3.3%
10.7%
21.6%
12.5%
3.0%
-0.8%
-9.3%
-
General Sanitary Management
4.5%
4.2%
1.5%
3.2%
1.3%
5.7%
4.4%
0.6%
-
Operating profit
5,159
10,865
1,933
-6,541
8,050
10,516
1,787
-9,686
5,323
Household Products Business
4,773
10,371
1,430
-6,594
7,968
9,902
1,281
-9,207
4,960
General Sanitary Management
387
457
445
130
332
566
339
-123
299
Sum of reportable segments
5,160
10,828
1,875
-6,463
8,300
10,468
1,620
-9,329
5,259
Adjustments
-1
37
58
-78
-250
48
167
-356
64
YoY
246.0%
83.8%
35.0%
-
56.0%
-3.2%
-7.6%
-
-
Household Products Business
271.7%
92.5%
76.5%
-
66.9%
-4.5%
-10.4%
-
-
General Sanitary Management
20.9%
21.2%
4.5%
-46.5%
-14.2%
23.9%
-23.8%
-
-
OPM (unadjusted)
11.4%
16.7%
4.1%
-17.3%
16.3%
15.8%
3.6%
-25.1%
13.8%
Household Products Business
11.5%
16.9%
3.3%
-19.6%
17.2%
15.7%
2.9%
-26.6%
13.9%
General Sanitary Management
6.2%
6.7%
6.5%
2.0%
5.2%
7.8%
4.8%
-1.9%
4.7%
Oral Care, Bath Powder and Other Household Products
FY12/20
FY12/21
FY12/22
FY12/22
(JPYmn)
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
% of Est.
FY Est.
Sales
23,098
49,002
74,920
104,164
24,921
52,587
79,368
110,154
15,834
Oral Care Products
10,255
20,852
32,264
45,222
10,142
21,549
33,587
46,935
1,769
Bath Powder
4,838
10,305
16,517
26,334
6,824
13,124
19,686
29,915
6,201
Other Household Products
8,005
17,844
26,138
32,606
7,953
17,913
26,094
33,303
7,863
YoY
1.4%
0.8%
-1.9%
-1.1%
7.9%
7.3%
5.9%
5.8%
-36.5%
Oral Care Products
8.9%
2.6%
-0.9%
1.9%
-1.1%
3.3%
4.1%
3.8%
-
Bath Powder
2.0%
8.9%
7.9%
9.3%
41.1%
27.4%
19.2%
13.6%
-
Other Household Products
-7.0%
-5.2%
-8.5%
-11.7%
-0.6%
0.4%
-0.2%
2.1%
-
Oral Care, Bath Powder, and Other Household Products
FY12/20
FY12/21
FY12/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Sales
23,098
25,904
25,918
29,244
24,921
27,666
26,781
30,786
15,834
Oral Care Products
10,255
10,597
11,412
12,958
10,142
11,407
12,038
13,348
1,769
Bath Powder
4,838
5,467
6,212
9,817
6,824
6,300
6,562
10,229
6,201
Other Household Products
8,005
9,839
8,294
6,468
7,953
9,960
8,181
7,209
7,863
YoY
1.4%
0.3%
-6.8%
1.0%
7.9%
6.8%
3.3%
5.3%
-36.5%
Oral Care Products
8.9%
-2.9%
-6.6%
9.6%
-1.1%
7.6%
5.5%
3.0%
-
Bath Powder
2.0%
15.9%
6.4%
11.7%
41.1%
15.2%
5.6%
4.2%
-
Other Household Products
-7.0%
-3.6%
-14.9%
-22.5%
-0.6%
1.2%
-1.4%
11.5%
-
Source: Shared Research based on company data
Note: Figures may differ from company data due to differences in rounding methods.
Note: No YoY or QoQ comparisons are stated, because the company adopted the new Revenue Recognition Standard from FY12/22.
Q1 FY12/22 results (out May 11, 2022)
Overview
Q1 FY12/22 results: Sales were JPY38.6bn (+4.5% YoY excluding the impact of a change in accounting method), operating profit was JPY5.3bn (-10.6% YoY), recurring profit was JPY5.6bn (-8.4% YoY), and net income before income taxes was JPY5.6bn (-8.7% YoY).
Attainment rates
Q1 attainment rates versus the 1H FY12/22 forecast were 42.2% for sales, 40.0% for operating profit, 42.1% for recurring profit, and 40.6% for net income attributable to owners of the parent. Q1 attainment rates versus the full-year FY12/22 forecast were 24.9% for sales, 49.5% for operating profit, 50.7% for recurring profit, and 51.7% for net income attributable to owners of the parent.
Sales
Sales were JPY38.6bn (+4.5% YoY excluding the impact of a change in accounting method). By segment, Household Products recorded sales of JPY35.7bn (+4.8% YoY), while General Sanitary Management saw sales of JPY6.4bn (+0.8% YoY). Sales growth reflected ongoing customer demand in Household Products associated with lifestyle changes during the COVID-19 pandemic, and expansion in the General Sanitary Management business.
Operating profit
Operating profit was JPY5.3bn (-10.6% YoY excluding the impact of a change in accounting method). By segment, Household Products posted operating profit of JPY5.0bn (-14.0% YoY), and General Sanitary Management JPY299mn (-15.9% YoY).
Household Products segment
Sales were JPY35.7bn (+4.8% YoY excluding the impact of a change in accounting method), and segment profit (operating profit) was JPY5.0bn (-14.0% YoY).
Although early sales of insecticides were lackluster owing to temperatures that were lower than the previous year and intermittently inclement weather, there were contributions to segment sales from bath salts, which experienced market expansion following the launch of new products with high value-added and aided also by changes in consumer demand triggered by resurgence in COVID-19 infections. At the profit level, an altered sales mix and change in the CoGS ratio stemming from the effect of a weaker yen on overseas procurement combined with stronger controls to ensure that sales promotion spending was more in tune with actual sales.
Household Insecticide Products
Sales were JPY17.7bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). In Japan, the household insecticide market was sluggish in Q1 owing to temperatures that were lower than the previous year and intermittently inclement weather, but there were contributions to sales from the launch of new products with high value-added, such as Mamo Room and Iyana Mushi Zero de Knight. On overseas markets, sales were upbeat in Vietnam and Thailand, amid signs of some recovery in economic activity.
Oral Care, Bath Powder and Other Household Products
Sales were JPY15.8bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22).
Bath salt sales were JPY6.2bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). Sales of the tablet type Onpo and individual packet-type Nihon no Meito and Iiyu Tabidachi bath salts remained strong, as the market expanded on the back of pandemic-induced changes in customer needs.
Oral hygiene product sales were JPY1.8bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). Although sales of the all-in-one mouthwash Mondahmin Premium Care Sensitive remained brisk, sales of Mondahmin NEXT Gum Care were weak.
Sales of other household products were JPY7.9bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). Owing to a reduction in the stay-at-home demand observed in FY12/21, sales were downbeat for the Aller Block Germ & Virus Removal Room Spray. There were contributions, though, from new offerings in the Sukki-ri! family of deodorizers, including Sukki-ri! CORK+STICK Puriture and Kuruma no Sukki-ri!.
Pet-related Products and Others
Sales were JPY2.2bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). An increase in customers acquiring new pets and those developing a closer relationship with their pets because of spending more time at home during the pandemic resulted in sales growth in pet-related products such as towels, and cleaning products.
General Sanitary Management segment
In the General Sanitary Management segment, sales were JPY6.4bn (+0.8% YoY excluding the impact of a change in accounting method) and segment profit (operating profit) was JPY299mn (-15.9% YoY). Amid a trend toward international harmonization in safety standards for food, pharmaceuticals, and medical care, and revisions to domestic laws, companies increasingly are bringing hygiene management in-house. As a result, the company is seeing greater demand for its high-quality hygiene management services, drawing on its specialized knowledge, technology, and know-how, from the food-related, pharmaceutical-related, and packaging-related plants that are its main customers.
Faced with this operating environment, the company actively made investments with an aim to developing an internal system that can quickly respond to customer needs, including recruitment and development of human resources and development of software to improve operational efficiency. The company also maintained and expanded its contracts through the provision of differentiated quality assurance services. In particular, the company enhanced initiatives targeting pharmaceutical and regenerative medicine industries and its food safety management inspection and consulting business.
Company forecast for FY12/22
Earnings
FY12/20
FY12/21
FY12/22
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Act.
FY Act.
1H Est.
2H Est.
FY Est.
Sales
110,634
85,411
196,045
115,821
87,964
203,785
91,500
63,500
155,000
YoY
6.3%
-0.1%
3.4%
4.7%
3.0%
3.9%
-
-
-
Operating profit
16,024
-4,608
11,416
18,566
-7,899
10,667
13,300
-2,550
10,750
YoY
116.5%
-
191.5%
15.9%
-
-6.6%
-
-
-
Operating profit margin
14.5%
-
5.8%
16.0%
-
5.2%
14.5%
-
6.9%
Recurring profit
16,138
-4,477
11,661
18,907
-7,545
11,362
13,400
-2,250
11,150
YoY
114.1%
-
169.6%
17.2%
-
-2.6%
-
-
-
Recurring profit margin
14.6%
-
5.9%
16.3%
-
5.6%
14.6%
-
7.2%
Net income attributable to owners of the parent
10,949
-7,402
3,547
12,759
-5,617
7,142
9,280
-2,000
7,280
YoY
135.4%
-
183.8%
16.4%
-
101.4%
-
-
-
Net margin
9.9%
-
1.8%
11.0%
-
3.5%
10.1%
-
4.7%
By segment
FY12/20
FY12/21
FY12/22
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Act.
FY Act.
1H Est.
2H Est.
FY Est.
Sales
110,634
85,411
196,045
115,821
87,964
203,785
91,500
63,500
155,000
Household Products Business
102,668
76,706
179,374
109,224
79,269
188,493
137,763
Household Insecticide Products
48,937
17,053
65,990
51,569
17,431
69,000
61,431
Oral Care, Bath Powder and Other Household Products
49,002
55,162
104,164
52,587
57,567
110,154
66,489
Pet-related Products and Others
4,729
4,491
9,220
5,067
4,271
9,338
9,842
General Sanitary Management
13,075
13,345
26,420
13,546
13,688
27,234
27,700
Sum of reportable segments
115,743
90,051
205,794
122,770
92,957
215,727
165,463
Adjustments
-5,109
-4,640
-9,749
-6,949
-4,993
-11,942
-10,463
YoY
6.3%
-0.1%
3.4%
4.7%
3.0%
3.9%
-
Household Products Business
5.9%
0.8%
3.7%
6.4%
3.3%
5%
-
Household Insecticide Products
11.4%
10.4%
11.1%
5.4%
2.2%
5%
-
Oral Care, Bath Powder and Other Household Products
0.8%
-2.8%
-1.1%
7.3%
4.4%
6%
-
Pet-related Products and Others
8.1%
15.7%
11.6%
7.1%
-4.9%
1%
-
General Sanitary Management
4.3%
2.3%
3.3%
3.6%
2.6%
3.1%
-
Operating profit
16,024
-4,608
11,416
18,566
-7,899
10,667
13,300
-2,550
10,750
Household Products Business
15,144
-5,164
9,980
17,870
-7,926
9,944
9,320
General Sanitary Management
844
575
1,419
898
216
1,114
1,430
Sum of reportable segments
15,988
-4,588
11,400
18,768
-7,709
11,059
10,750
Adjustments
36
-20
16
-202
-189
-391
-
YoY
116.5%
-
191.5%
15.9%
71.4%
-6.6%
-28.4%
-
-
Household Products Business
127.0%
-
320.6%
18.0%
53.5%
-0.4%
-
General Sanitary Management
21.1%
-
3.9%
6.4%
-62%
-21%
-
OPM (unadjusted)
14.5%
-
5.8%
16.0%
-9.0%
5.2%
14.5%
-
6.9%
Household Products Business
14.8%
-
5.6%
16.4%
-10.0%
5.3%
6.8%
General Sanitary Management
6.5%
-
5.4%
6.6%
1.6%
4.1%
5.2%
Oral Care, Bath Powder, and Other Household Products
FY12/20
FY12/21
FY12/22
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Act.
FY Act.
1H Est.
2H Est.
FY Est.
Sales
49,002
55,162
104,164
52,587
57,567
110,154
66,489
Oral Care Products
20,852
24,370
45,222
21,549
25,386
46,935
8,280
Bath Powder
10,305
16,029
26,334
13,124
16,791
29,915
27,219
Other Household Products
17,844
14,762
32,606
17,913
15,390
33,303
30,989
YoY
0.8%
-2.8%
-1.1%
7.3%
4.4%
5.8%
-
Oral Care Products
2.6%
5.2%
4.0%
3.3%
4.2%
3.8%
-
Bath Powder
8.9%
10.1%
9.6%
27.4%
4.8%
13.6%
-
Other Household Products
-5.2%
-18.7%
-11.8%
0.4%
4.3%
2.1%
-
Source: Shared Research based on company data
Note: Figures may differ from company data due to differences in rounding methods.
Note: From FY12/17, the company changed part of its sales classifications of the Household Products segment. Figures for FY12/16 onward reflect the new classifications. Note: No YoY comparisons are stated due to the adoption of the new Revenue Recognition Standard from FY12/22.
Company forecast for FY12/22
The company forecast for FY12/22 calls for sales of JPY155.0bn (no YoY comparison due to the adoption of the Revenue Recognition Standard from FY12/22; same for profit at all levels; excluding the new standard, sales are expected to increase 3.5% to JPY211.0bn), Operating profit was JPY10.8bn, recurring profit JPY11.2bn, and net income attributable to owners of the parent JPY7.3bn. The annual dividend forecast is JPY118.0 (flat YoY). Although the
company will be affected by soaring raw material prices and will appropriately
invest necessary expenses for growth, including R&D and core system
upgrades, it aims to achieve operating profit in excess of JPY10.0bn and a record high in net income attributable to owners of the
parent.
Planned dividend per share for FY12/22: JPY118.0 (dividend
on equity (DOE) ratio of 4–5%; DOE of 4.2%, expected consolidated payout ratio
of 35.8%). The company targets an equity ratio of 50% (49.7% in FY12/21), ROE in the 12% range (12.4% in FY12/21), and a cash to total
assets ratio of around 15% (17.4% in FY12/21).
Quarterly operating profit company forecast
Q1: JPY5.2bn (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition)
Q2: JPY8.1bn
Q3: JPY7mn
Q4: -JPY3.3bn
Impact of Accounting Standard for Revenue Recognition
The company estimates that the adoption of the Accounting Standard for Revenue Recognition will reduce sales by JPY56.0bn compared to the previous standard. The reason for this change is that the
portion of sales that corresponds to intermediary transactions (purchases
and sales) is recorded net of cost of sales, and sales promotion expenses,
which were previously recorded in SG&A expenses, are deducted directly from sales after the adoption of the new accounting standard. The company
estimates that the impact of these expenses will be JPY37.8bn for
purchases and sales, and JPY18.2bn in sales promotion expenses deducted
from sales. The impact on operating profit and other profit levels and on the
balance sheet will be negligible.
Premise of company forecast
Sales
Market trends: The company assumes that the market for household insecticide products will remain essentially the same as in 2021 (flat YoY; down 5.4% YoY in 2020) and that the market for bath salts will continue to grow (up about 3% YoY; repeat use is well-established and this is not a one-time boost).
Return rate: 6.0% (-0.5pp YoY). Thee company's efforts to reduce returns while balancing opportunity losses are ongoing.
Introduce new products: Respond promptly to changing consumer needs associated with changes in lifestyle.
Expenses
Cost of sales: The company expects a total impact of JPY1.3bn from soaring prices of raw materials such as product and packaging materials, but will also promote measures including cost efficiency improvement.
Personnel expenses: JPY20.9bn (+0.1% YoY); the company will continue to invest in human resources.
Logistics expenses: JPY4.4bn for transportation (+4.0% YoY) and JPY25.1bn for storage (+5.5% YoY). The company expects to be affected by rising logistics costs, but will promote inventory control and logistics efficiency.
Advertising: JPY8.1bn (-3.2% YoY); invested in line with actual results.
R&D expenses: JPY3.4bn (+6.6 YoY); aggressive investment in human resources to bring open innovation to fruition.
Amortization of goodwill: JPY450mn (-JPY1.4bn or 75.4% YoY). Amortization of goodwill of subsidiary Bathclin will be completed in Q1 FY12/22.
Advisory fees: Budgeted consulting fees for core system renewal, M&A exploration, etc.
New business-related expenses: Continue to explore and be proactive, keeping in mind the cost and return on investment capital.
Breakdown of company forecast by segment
Household Products segment
The company forecasts sales of JPY137.8bn and operating profit of JPY9.3bn in FY12/22.
The company projects sustained high levels of demand for its product lines amid lifestyle changes brought on by the pandemic. That being said, the company assumes that it may not fully absorb through management efforts the impact of rising raw material prices. It aims to secure reasonable profit by growing earnings in categories where sales are growing and its has large market share, optimizing the allocation of management resources, and improving cost efficiency.
General Sanitary Management segment
The company forecasts sales of JPY27.7bn and operating profit of JPY1.4bn in FY12/22.
Prevention of product contamination and food poisoning are essential in services for the food manufacturing sector. Consequently, there is a growing need for the quality sanitary management services that the Earth Group provides, underpinned by its specialist knowledge, technologies, and know-how. The company is progressing R&D and human resource training as well as providing services that harness IoT and a range of AI systems, expanding its food safety-related auditing business, and strengthening its life science business to increase the number of contracts per year and achieve stable earnings growth.
Overseas expansion
The company positions overseas expansion as its primary growth driver. It aims to improve profitability and build an earnings base by establishing subsidiaries in the main areas where it operates, such as ASEAN and China, and aggressively allocating management resources in these areas. The company aims to increase the earnings contribution of exports and cross-border e-commerce by developing and selling products that fulfill the needs of each country and focusing on profitable products.
Management strategies
Medium-term business plan
Earth Group philosophy
Vision: Make the Earth a pleasant home.
Business philosophy: Act to live in harmony with the Earth.
Value provided by Household Products: Educate about infectious diseases and risk reduction, promote maintenance of physical and mental health, create a comfortable living environment
Value provided by General Sanitary Management: Provide original and innovative general environmental and hygiene services and safe, secure products by leveraging our expertise
Enhancement of corporate value
Corporate value from Earth's perspective
The company believes that its corporate value is the sum of
the book value of its shareholders' equity (including capital increases), increases in total assets including the expansion of retained
earnings due to profit generation, and the added value that the company has
created to date. This value includes that generated by intangible assets such as human capital, business know-how,
R&D capabilities, brand strength, customer base, and ESG.
Key elements of corporate value
The company regards non-financial capital*, including human
resources, as the foundation of business growth and an important element in
increasing corporate value.
*Non-financial capital: the credit account equivalent of assets that are not normally recorded on the balance sheet, such as human capital, business know-how, R&D capabilities, brand strength, customer base, and ESG initiatives. Self-created goodwill is not permitted to be recognized on the balance sheet.
SDG initiatives
Basic sustainability policy
The company's basic sustainability policy is as described below.
Based on its management policy, “We act to live in harmony
with the Earth,” Earth Corporation will work with its stakeholders to address
issues surrounding sustainability and contribute to the sustainable enhancement
of corporate value and the building of a sustainable society.
Five materiality issues
Realization of a workplace that supports the success of diverse human resources
Provision of products and services that contribute to a safe, comfortable lifestyle
Response to climate change
Promotion of sustainable procurement
Consideration for global environmental issues
The company views sustainability as a key element of
management. The bottom-up approach is adopted because it is important for each
employee to be proactively involved and, as a result, to align their ideas
with those of management. The company has established working groups and conducted group studies. It believes that incorporating
sustainability into its basic policies and ensuring that all employees are aware of the importance of sustainability will further strengthen the
company's management and lead to future value creation.
FY12/22 initiatives
Design of nonfinancial KPIs: Design and operate KPIs in line with the five identified materiality issues, aiming to set KPIs during 1H FY12/22
Disclosure based on TCFD framework: The Sustainability Promotion Committee is taking the lead in discussing disclosure items and required data, etc. Scheduled to take place by March 2023.
Medium-term business plan: Act for SMILE- COMPASS 2023 (revised February 2021)
Overview
COVID-19Earth Corporation had established the next three-year (FY12/21–FY12/23) medium-term business plan, called "Act For SMILE-COMPASS 2023." The company upwardly revised its management targets of the plan in February 2021. Following FY12/20 sales of JPY196.0bn, operating profit of JPY11.4bn, recurring profit of JPY11.7bn, net income attributable to owners of the parent of JPY3.5bn, and ROE of 7.4%, the company targets FY12/23 sales of JPY213.0bn, operating profit of JPY14.0–16.0bn, net income attributable to owners of the parent of JPY10.0bn, ROE of 13.0% or above, and DOE of 4.0% or above. The final year targets were upwardly revised from the previous targets calling for sales of JPY200.0bn, operating profit of JPY7.5bn, net income attributable to owners of the parent of JPY5.0bn, and ROE of 11.0%. The company sees changes in the external environment, such as the lifestyle changes associated with the impact of COVID-19, as opportunities for growth.
Progress
Sales
The company's FY12/2022 sales forecast (announced on February 14, 2022) is JPY155.0bn due to the adoption of The Accounting Standards for Revenue Recognition (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition from the beginning of FY12/22). However, excluding the adoption of the new standard, the figure would be JPY211.0bn (+3.5% YoY).
Operating profit
The company's operating profit forecast for FY12/22 (announced on February 14, 2022) is JPY10.8bn (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition from the
beginning of FY12/22). The company has assumed a cost increase of JPY1.3bn resulting from soaring raw material prices. This will be an element that was not
included when Act For SMILE-COMPASS 2023 was formulated. Excluding
this factor, the company believes that FY12/22 profits will be in line with
plans.
The company's assumptions (as of February 14, 2022)
for achieving its operating profit target of JPY14.0-16.0bn for
FY12/23 are as follows. To achieve the operating profit target of
the medium-term business plan, the company will need to increase the profit
factor by more than JPY3.3bn compared to its forecast for
FY12/22.
The impact of raw material price hikes (assumed to be JPY1.3bn) will be covered by cost efficiencies and price pass-through.
Reduction of goodwill amortization burden: JPY400mn
Increase in sales due to market expansion and share increase in domestic market, overseas growth, etc.: JPY1.6bn
Upside of expected market scale due to weather and other factors: +
Outline of Medium-term business plan
Under the medium-term plan (2021–2023), the company aims to promote standards and infrastructure reforms as part of its structural reform with strategies focused on 1) expanding its earnings base in Asia, 2) promoting ESG and open innovation, and 3) creating cost synergies.
1) Expand earnings base in Asia: Gain market share and support in countries of operation and develop new business areas.
2) Promote ESG and open innovation: Take on the challenge of solving issues that contribute to the achievement of SDGs. Achieve open innovation through collaboration with external organizations.
3) Create cost synergies: Rationalize and increase efficiency of operations through joint implementation of multiple measures. Realize synergies and value-added throughout the value chain.
Profitability and capital efficiency KPIs
Marginal operating profit: Evaluate earnings from sales activities based on marginal operating profit (gross profit – [sales promotion expenses + logistics expenses]).
Contribution margin: Evaluate the profitability of businesses and categories by measuring contribution margin (operating profit + indirect costs).
Cost of capital: Use cost of capital as an indicator for investment decisions.
Earth Corporation seeks to use operating profit as the company's
most important management indicator while aiming to manage the cost of capital.
It promotes platforms of Redefining Revenue Management Standards, Systemic
Reform, and ICT Infrastructure Reform and Digital Transformation (DX).
Redefining standards
Lower hurdles to investment, business appraisal, and launching products
Organize non-core, unprofitable businesses, and assets including factories and restructured businesses
Set targets for non-financial indicators from an ESG perspective
Systemic reform
Improve labor productivity by promoting work style reform
Review management of factors like costs and foreign exchange, as well as comply with the accounting standard for revenue recognition
ICT infrastructure reform and digital transformation (DX)
Reform of communication infrastructure as well as core systems such as supply chain management and accounting
Promote integration of the Group's ICT infrastructure
Standardize business processes, aggressively promote digital transformation
Expand earnings base in Asia
The company's key areas are ASEAN and China. The company plans to boost market share in each country by developing and introducing products that meet local needs. It will further improve its earnings structure by positioning overseas expansion as one of the drivers of profit growth. Additionally, the company will consider M&A opportunities to expand its business. As for ASEAN, the company was unable to expand as
expected in FY12/21 due to the impact of COVID-19, but the
potential for growth remains the same, and the company will promote growth,
especially in Thailand and Vietnam. Furthermore, Earth Home Products (Malaysia) Sdn. Bhd. and Earth Homecare Products
(Philippines), Ltd. in Malaysia and the Philippines, which will be consolidated
in FY12/22, will grow as an ASEAN base following Thailand and Vietnam
(including these two companies, the number of overseas consolidated
subsidiaries will total seven).
Existing areas of operation: Thailand, Vietnam, China, Saudi Arabia
New areas for development: Malaysia, Philippines, CLM (Cambodia, Laos, Myanmar)
Overseas strategies in ASEAN countries
Thailand: The company will steer again from the earnings structure improvement phase to the business expansion phase (profits increased
in FY12/21 due to cost control). It will endeavor to expand its presence in the Thai
domestic market, increasing its market share (3rd place with around 13%, according to the company). Since the suburbs are not well developed, the company
will steadily develop traditional trade (TT) through the Depot business by
establishing a large number of small distributors and other mobile small-scale
offices in rural areas, as it believes there is considerable room for growth.
The strategy is to develop suburban areas while introducing the
Depot business in urban areas to capture market share through meticulous sales
activities. The reason for focusing on the suburbs first is that the company has
already done a certain amount of work in developing modern trade in urban
areas. Focus categories include household insecticides, air fresheners, and mouthwash products. It aims to achieve sales of JPY4.9bn in FY12/23, compared to sales of JPY4.1bn in FY12/20.
Earth (Thailand) Co., Ltd. sales: JPY4.9bn in FY12/19, JPY5.0bn in FY12/20 (+0.8% YoY), JPY5.2bn in FY12/21 (+4.0% YoY), JPY4.9bn in FY12/22 (forecast; no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition), JPY5.1bn in FY12/23 (+4.7% YoY)
Interest rate: 3.1% in FY12/19, 5.8% in FY12/20, 10.4% in FY12/21, 8.7% in FY12/22, 8.8% in FY12/23
Vietnam: Although the company was affected
by the COVID-19 lockdown in FY12/21, it aims to sustain
stable management from FY12/22 onward. The focus channels are MT and e-commerce. It will fortify sales on the southern region, centered on Ho Chi Minh
City, increase the number of deliveries, build an OEM production system that
leverages geographical advantages. In the future, the company plans
to establish a production base and supply products and materials to Japan. Profit contributions are expected from drastic reductions in
manufacturing costs. The focus categories are household insecticide products, mouthwash,
and disinfectant-related products, and the company's aim is to develop the top products in Vietnam's domestic market. It aims to achieve sales of around JPY4.3bn in FY12/23, compared to JPY2.8bn in FY12/20.
Initiatives for FY12/22 and beyond: Improve profitability (raise product prices, review promotional measures), expand presence of household insecticide products (increase sales composition within local subsidiaries to 50%, aim for 10% market share)
Earth Corporation Vietnam sales: JPY2.7bn in FY12/19, JPY3.0bn in FY12/20 (+12.1% YoY), JPY2.9bn in FY12/21 (-2.7% YoY), JPY3.9bn in FY12/22 (forecast; no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition), JPY4.8bn in FY12/23 (+23.0% YoY)
Interest rate: 9.9% in FY12/18, 8.9% in FY12/19, 11.0% in FY12/20, 7.2% in FY12/21, 7.7% in FY12/22 (forecast), 10.3% in FY12/23
China and exports/cross-border e-commerce
China: The company aims to achieve both sales scale growth and steady profit contribution, primarily in household insecticide products. It will leverage its strengths as a limited liability investment company, centralize management of production and sales, facilitate access to financing within China, invest management resources in developing e-commerce channels, and carry out sales promotions using carefully selected products. It aims to achieve sales of JPY3.2bn in FY12/23, compared to sales of JPY2.6bn in FY12/20. The Chinese sales company turned profitable in FY12/21, and aims to gradually
build up profits from FY12/22 onward.
Key channel: E-commerce
Focus categories: Household insecticides (cockroach control: according to the company, it is already number one in e-commerce) (mites, insect repellents, fly control products), household products (mouthwash, dehumidifiers)
Initiatives for FY12/22 and beyond: Specialize in e-commerce channel (increase e-commerce sales ratio to 75% or more), contribute to profits as a sales base (reduce impact of raw material price hikes by developing new suppliers, reducing manufacturing costs, etc.)
Earth Chemical (Shanghai) Management Co., Ltd. sales: JPY2.7bn in FY12/19, JPY2.8bn in 12/20 (+3.3% YoY), JPY3.2bn in FY12/21 (+14.4 YoY), JPY2.6bn in FY/22 (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition), JPY2.8bn in FY12/23 (+8.6% YoY)
OPM: -3.5% in FY12/19, -1.3% in FY12/20, 0.0% in FY12/21, 0.4% in FY12/22 (forecast), 1.0% in FY12/23
Today
Earth Chemical (Shanghai) Management Co., Ltd.
Exports and cross-border e-commerce: The company will strengthen sales mainly in Saudi Arabia and Taiwan, while launching products tailored to each country's needs. For cross-border e-commerce, the company will focus on Black Cap and mothball products. It aims to achieve sales of JPY4.0bn in FY12/23, compared to sales of JPY3.0bn in FY12/20.
Areas of new development
Malaysia: Earth Home Products (Malaysia) Sdn. Bhd.; Established a local subsidiary in 2019, but full-scale expansion was delayed by the pandemic; aims to achieve full profitability within three years from FY12/22 onward
Key channels: General trade (GT), regional modern trade (MT), e-commerce
Key categories: Household insecticide products, OASIS-brand air fresheners, fabric sprays
Initiatives for FY12/22 and beyond: Full-scale launch of household insecticide products and expansion of OASIS brand (achieve target of launching and distributing seven SKUs by end-2022), consideration of OEM production to reduce manufacturing costs
Philippines: Earth Homecare Products (Philippines), Ltd.; M&A of a local company to make it a subsidiary in FY12/21, and start new business development from FY12/22; construct business foundation
Key channels: Modern trade (MT), e-commerce
Key categories: Household insecticide products, air fresheners
Initiatives for FY12/22 and beyond: Build a foundation for starting the business (promptly acquire various licenses, transfer assets, and acquire shares)
Promote ESG and open innovation
The company will take on the challenge of solving issues that contribute to the achievement of SDGs. It will also achieve open innovation through collaboration with external organizations.
Environment: The company will reduce losses related to returns and disposals, and explore the use of sustainable materials.
Social: The company participated in WELCO Lab*. It will promote work style reforms and aim to be recognized as an outstanding company in health and productivity management.
Governance: The company will promote diversity and build a group governance system that creates synergies.
*WELCO Lab: An initiative by Japanese companies aiming to solve problems in the field of global health. It was established in October 2020 with the support of the Bill & Melinda Gates Foundation.
MA-T System
Promoting and enhancing the value of MA-T System
The Japan MA-T Industrial Association was established to promote and enhance the value of MA-T (Matching Transformation System) System, an innovative oxidation control technology developed in Japan, as well as to promote open innovation. This includes potentially promoting open innovation in collaboration with the creative strategy council by the government and academic societies.
The MA-T System is the world's first system to use oxidation control technology to control the strength of molecular activity, and can be applied in a wide range of fields. When molecular activity is weakened, disinfectants, deodorants, and agricultural chemicals can be produced. When molecular activity is strengthened, oxidation reactions (small molecules) and surface oxidation (macromolecules) can be carried out. See below for details (the lower in the order, the stronger the activation):
Disinfection and deodorization: On-demand chlorite ion solution
Agriculture (ex. pesticides): Sterilization of spore fungi, seed disinfection
Food additives: Food and tableware disinfection, food factory sanitation
Surface oxidation: Improvement of polymer surfaces and adhesives
Oxidation reactions: Highly difficult oxidation reactions such as methanol production (small molecules)
The company plans to develop new solutions for the
prevention of infectious diseases by 2030 through applying MA-T technology
created via open innovation. This will involve setting up a procurement business for the
United Nations and public organizations to help contain the spread of viruses,
microorganisms, multi-drug resistant bacteria, etc. Beyond Japan, the project
will target the Southeast Asian region with its population of 220 million
people in low- and middle-income countries such as Thailand, Vietnam, and
Myanmar. The goal is to provide inexpensive, simple, and practical solutions.
MA-T System
The MA-T System is an oxidation control technology that controls the intensity of activation, developed jointly by dotAqua, Inc. and ACENET Inc., who discovered an on-demand
chlorite ion aqueous solution. The system was analyzed and proven effective by
Osaka University. A basic patent application was filed in
2015 (international patent publication number: WO/2018/230743 A1). The company
holds the technology license as well as manufacturing and intellectual property
rights.
By generating the necessary amount of aqueous radicals from chlorite ions when necessary, it enables the breaking down of viruses, including epidemic viruses, and sterilization of various bacteria
(germs). Furthermore, by controlling the degree of activity (generating
activated radicals), it is possible to pioneer highly difficult chemical
reactions and develop a wide range of applications. These include the
functionalization of polymers, device applications, and applications in
agrochemicals and pharmaceuticals. Products employing the MA-T
System are used in many public transportation systems and their
restrooms, as well as hospitals and hotels.
According to Earth Corporation, the aqueous solution
used for the MA-T System produces the active constituent of aqueous radicals in
water only in the presence of bacteria or viruses, and only in the amount
needed to break them down. Since it is more than 99.9% water, it is safer than
standard chlorine-based and concentrated alcohol products, and can be safely
used for tableware, cooking utensils, and items that come in contact with the
mouth. It's not flammable, so it can be used safely in the kitchen while
cooking, and will not corrode metal, discolor plastics, or irritate the
hands.
Business model
Organizations must be part of the Japan MA-T
Industrial Association to utilize the MA-T System, and Earth Corporation is the
sole supplier. According to the company, the system was slow to catch on
despite its benefits, but they recognized it's potential and became a partner
in its promotion. More than 70 companies have joined the Japan MA-T Industrial
Association since its launch. The company is collaborating with organizations
participating in the association to conduct research on new ways of applying the MA-T
System. The Japan MA-T Industrial Association was established, and 80 companies, mainly top firms in the industry, have joined (as of December 31, 2021). The company's profits will grow as the system is utilized in various
fields and its value becomes more widely known.
Contribution to SDGs
Organic compounds composed of covalent carbon-carbon and carbon-hydrogen bonds, such as household insecticide products, detergents, and
synthetic resins (plastics), have the advantage of being flexible and stable,
but also have the disadvantage of being difficult to decompose. They must be combusted, which generates CO2. The MA-T System enables decomposition without combustion. Combustion is required, for instance, to convert methane gas from livestock manure into methanol, but with the MA-T
System, it can be converted into methanol at room temperature and pressure
without combustion, using high temperature and energy at 1,200°C. The company
and the Japan MA-T Industrial Association believe that it can resolve issues such
as CO2 emissions and thermal efficiency.
Utilization for recycling-oriented dairy farming: Osaka University's Institute for Open and Transdisciplinary Research Initiatives succeeded for the first time in the world in producing methanol and formic acid from air and methane gas at room temperature and pressure, and announced the achievement in February 2018. The Institute and the town of Kobe, Hokkaido, signed a collaboration agreement in June 2019 and achieved a world's first by producing methanol and formic acid from biogas derived from livestock manure at room temperature and pressure. The methanol produced is liquid at room temperature and pressure, and can be used as fuel for methanol fuel cells both permanently and in emergencies (as a low-carbon fuel source derived from biomass). Furthermore, formic acid, which is produced at the same time, is characterized as a hydrogen carrier and is also liquid at room temperature and pressure, enabling the factoring of hydrogen into city planning. Formic acid is also self-sufficient because it is always used as an additive in livestock feed.
Responding to infectious disease and climate change risks
According to the 2021 edition of the Global Risks Report
published by the World Economic Forum, infectious diseases such as COVID-19 rank first among the top 10* most imminent global risks over the next decade. The company will contribute to addressing risks
such as infectious diseases and climate change through its MA-T System, household insecticide products, household products, and General Sanitary Management business, thereby enhancing the company's corporate value.
*Top 10 global risks with the greatest impact over the next 10 years according to the 2021 edition of the Global Risks Report published by the World Economic Forum: 1) infectious disease, 2) climate change failure, 3) weapons of mass destruction, 4) biodiversity loss and ecosystem collapse, 5) natural resource crisis, 6) human environmental damage, 7) livelihood crises, 8) extreme weather, 9) debt crises, and 10) IT infrastructure breakdown
Growth investment
The company will make free cash flow-conscious investments and achieve returns that exceed cost of capital over a three year investment period.
Use of funds
Investment to expand earnings base in Asia: The company plans to invest JPY7.0bn, mainly for product development and marketing. This also includes funds reserved for future M&A.
ESG and open innovation investment: The company plans to invest JPY6.0bn, mainly for MA-T related investments.
Investment in ICT infrastructure and digital transformation (DX): The company plans to invest JPY4.0bn, primarily to renew core systems. It also plans to promote digital asset management.
New capital investment (excluding maintenance capex): The company plans to invest JPY3.0bn to expand facilities in core categories.
Overseas expansion
Earth Corporation’s top long-term goal is expanding overseas.
Overseas sales and overseas sales ratio
Overseas sales
FY12/12
FY12/13
FY12/14
FY12/15
FY12/16
FY12/17
FY12/18
FY12/19
FY12/20
FY12/21
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Sales
3,430
4,710
5,290
5,780
6,720
9,190
9,980
11,860
12,730
13,970
Thailand and neighboring countries
2,190
2,710
3,280
3,070
3,510
4,240
3,580
3,780
4,110
4,060
China
470
680
870
970
1,520
2,030
2,180
2,740
2,830
3,280
Vietnam
-
-
-
-
-
1,250
2,650
2,930
2,840
3,450
Other
780
1,330
1,150
1,750
1,700
1,680
1,580
2,420
2,960
3,190
YoY
27.5%
37.3%
12.3%
9.3%
16.3%
36.8%
8.6%
18.8%
7.3%
9.7%
Thailand and neighboring countries
42.2%
23.7%
21.0%
-6.4%
14.3%
20.8%
-15.6%
5.6%
8.7%
-1.2%
China
51.6%
44.7%
27.9%
11.5%
56.7%
33.6%
7.4%
25.7%
3.3%
15.9%
Vietnam
-
-
-
-
-
-
112.0%
10.6%
-3.1%
21.5%
Other
-8.2%
70.5%
-13.5%
52.2%
-2.9%
-1.2%
-6.0%
53.2%
22.3%
7.8%
% of sales
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Thailand and neighboring countries
63.8%
57.5%
62.0%
53.1%
52.2%
46.1%
35.9%
31.9%
32.3%
29.1%
China
13.7%
14.4%
16.4%
16.8%
22.6%
22.1%
21.8%
23.1%
22.2%
23.5%
Vietnam
-
-
-
-
-
13.6%
26.6%
24.7%
22.3%
24.7%
Other
22.7%
28.2%
21.7%
30.3%
25.3%
18.3%
15.8%
20.4%
23.3%
22.8%
Overseas sales ratio
2.7%
3.5%
3.6%
3.6%
4.0%
5.1%
5.5%
6.3%
6.5%
6.9%
Source: Shared Research based on company data
Note: Rounded down to the nearest multiple of JPY10mn.
Core overseas markets: Thailand, Vietnam, China
Earth Corporation plans to expand into Asia, particularly Thailand, Vietnam, and China—where it has production bases. In May 2017, the company acquired Earth Corporation Vietnam (formerly A My Gia Joint Stock Company). Of the JPY14.0bn in overseas sales in FY12/21 (6.9% of overall sales), Thailand and neighboring countries accounted for 29.1%, Vietnam 24.7%, China 23.5%, and other countries 22.8%.
Thailand
The group holds only about 10% share of the Thai household insecticide market (according to the company’s survey). Major overseas companies dominate the market with the primary products being cost-competitive anti-mosquito incense coils and aerosols. As a follow-up to mosquito coils and aerosols, the company aims to develop locally competitive and marketable non-insecticide products such as oral care products and air fresheners. The shakeup of the company’s distributor network in 2019 worked to good effect, strengthening its distribution capabilities within the country and providing a significant boost to sales.
Vietnam
In May 2017, the company acquired all outstanding shares of Vietnam-based Earth Corporation Vietnam (ECV), making it a wholly owned subsidiary. Founded in 2003, ECV manufactures and markets various household-use products in Vietnam. Most of its sales come from household detergents, but ECV also manufactures and sells deodorizing air fresheners and household insecticides. Its popular “Gift” brand household detergent and “Ami” brand air fresheners have carved out prominent positions in the Vietnamese market. With the acquisition of ECV, Earth Corporation is looking to take advantage of the brand strength and marketing capabilities that ECV has built up over the years, fine-tune its marketing approach, and establish a larger market presence.
China
The company’s subsidiaries in China play an important role as manufacturing hubs for goods that are sold in Japan, and also sell some of these same products in China, especially Gokiburi Hoy Hoy cockroach traps and Earth Red no-flame fumigators. The business was expanded in 2014 to include the Hakugen Earth mask and dehumidifier. The e-commerce channel is expanding sharply in China and the company aims to tailor sales promotion and product development to this sales channel.
M&A strategy
Maximizing group synergies with Bathclin and Hakugen Earth
Earth Corporation acquired and consolidated Bathclin and Hakugen Earth, and these two subsidiaries have been cooperating to make material procurement more efficient, optimize production, share expertise, and streamline distribution.
Performance of Bathclin and Hakugen Earth
FY12/13
FY12/14
FY12/15
FY12/16
FY12/17
FY12/18
FY12/19
FY12/20
FY12/21
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Bathclin
Sales
13,366
14,005
13,594
13,610
13,926
14,222
14,241
15,174
17,105
Operating profit
1,202
1,419
996
1,003
1,107
888
924
945
1,227
Operating profit margin
9.0%
10.1%
7.3%
7.4%
7.9%
6.2%
6.5%
6.2%
7.2%
Hakugen Earth
Sales
3,211
14,430
15,672
15,939
15,795
16,590
18,610
19,025
Operating profit
-1,593
-1,043
83
217
263
283
797
882
Operating profit margin
-49.6%
-7.2%
0.5%
1.4%
1.7%
1.7%
4.3%
4.6%
Goodwill amortization
1,707
1,765
1,908
1,908
1,908
1,908
1,908
1,908
1,908
Source: Shared Research based on company data
Bathclin: History and overview
October 2006: Household business of Tsumura & Co. (TSE PRM: 4540) spun off into Tsumura Lifescience Co., Ltd.
August 2008: With support from Wise Partners, Inc., became independent from the Tsumura Group.
February 2012: Earth Corporation acquired 100% of the company’s shares for JPY19.2bn. Goodwill totaled JPY16.9bn (10-year amortization; completed in Q1 FY12/22).
Bathclin’s main brands are Bathclin and Kikiyu (bath salts).
Hakugen Earth: History and overview
May 2014: Hakugen Co., Ltd., applied for civil rehabilitation. Total liabilities were around JPY25.5bn.
July 2014: Through a sponsor tender offer, Earth Corporation concluded a business transfer agreement with Hakugen.
August 2014: Earth Corporation established Hakugen Earth Co., Ltd. as a wholly owned subsidiary.
September 2014: Hakugen Earth acquired businesses from Hakugen for JPY7.7bn. Goodwill totaled JPY1.5bn (amortization was completed in August 2021).
Hakugen Earth’s main brands are the insect repellant Mrs. Lloyd and Kaiteki Guard Pro, a face mask for household use.
Financial strategy
Company issues No. 2 Series warrants
On July 28, 2020, the company issued No. 2 Series moving strike warrants via a private placement.
The warrants are exercisable between July 29, 2020 and July 28, 2023.
The company issued a total of 18,000 warrants at a price of JPY3,700 per warrant, bringing the proceeds from the warrant issue to JPY66,600,000.
With each warrant giving the holder the right to buy 100 common shares of Earth Corporation at the specified strike price, the warrant issue if fully exercised would mean the issuance of 1,800,000 new shares (representing potential dilution of 8.89%, as of July 7, 2020).
The warrants have a so-called moving strike price, with no upper limit but a fixed minimum strike price of JPY5,649 per share. Even if all of the warrants were exercised at the minimum strike price, the total number of common shares issued upon exercise of the warrants would be 1,800,000.
Assuming all of the warrants are exercised at the initial strike price of JPY8,070, total proceeds from the issuance will be JPY14,582,600,000 (net of expenses).
On and after July 29, 2020, the exercise price shall be set at a price equal to 92% of the closing price of common stock on the trading day immediately prior to the day on which the notification requesting the exercise of warrants is received. In cases where the adjusted exercise price calculated in this manner is lower than the minimum exercise price, the adjusted exercise price shall be set at the minimum exercise price of JPY5,649 per share.
Earth Corporation may, at its own discretion, place limits on the number of warrants that may be exercised during a specified period of time and may also, at its own discretion, specify periods during which the warrants cannot be exercised.
Background to financing through warrant issue
The company’s decision to raise new equity capital via a warrant issue was motivated by its desire to maintain the liquidity to fund growth initiatives at a time when the economic outlook has been clouded by the COVID-19 pandemic.
Under the terms of the new warrant issue, the maximum number of new common shares issued as a result of exercise of the current warrant issue is capped at 1,800,000 shares.
Possible dilution notwithstanding, the company has kept its target for ROE in FY12/20 at 6.4%.
Impact on company’s financial position
As of the end-December 2020, the company had total borrowings of JPY26.0bn for a debt-to-equity ratio of over 2.0x.
Under its medium-term business plan, the company is looking to bring its debt-to-equity ratio down to 1.0x.
Planned use of proceeds (The company plans to use the roughly JPY14.5bn in proceeds for capital investments and repayment of outstanding debt during the timeframe running from August 2020 to July 2023)
Some JPY5.5bn for product development and marketing to help expand the company’s earnings base in Asia
JPY3.0bn for ESG/innovation investments to support its expansion into new business areas (including infection prevention products/services)
JPY1.5bn for investments in ICT infrastructure
JPY4.5bn for repayment of outstanding debt and further improvement of the company’s financial position
Business
Description
Earth Corporation’s core business is the manufacture and sale of household insecticide products, oral hygiene products, bath salts, deodorizing air fresheners, home garden supplies, and pet-related products. The Household Products segment accounted for 87.4% of sales in FY12/21. The company boasts the top share of the Japanese market for household insecticide products (55.8% share in 2021 by company estimates) and bath salts. Within the Household Products segment, household insecticide products are the biggest contributor to earnings.
The General Sanitary Management segment accounted for 12.6% of sales in FY12/21. Most of segment sales come from its Total Health Care business, which offers consulting services to food production plants on preventing foreign substances and other contaminants. This segment also includes a Pest Control business and Building Maintenance business.
FY12/21 Consolidated sales composition
Source: Shared Research based on company data
FY12/21 Consolidated operating profit composition
Source: Shared Research based on company data
Expanding through M&A
Earth Corporation is a long-established company with now more than 125 years having passed since its founding in 1892. It found itself in deep trouble in the late-1960s but was able to make it through this crisis thanks to financial backing of Otsuka Pharmaceutical and the rest of the Otsuka Group, who came to the rescue with new capital.
Earth Corporation has stepped up M&A. In 2001 it took over the Vapona*1 brand of pest control products from Shell Chemical (now Shell Chemicals Japan Ltd.) and now sells products utilizing this brand.
*1 Vapona is one of the brands of household insecticide products sold by Earth Corporation. Earth Corporation acquired the Vapona brand from Shell Chemical (now Shell Chemicals Japan) when it agreed to take over Shell Chemical’s entire Japanese pest control business. Vapona is an insecticide strip that is coated with dichlorvos, a widely used insecticide that gradually permeates the surrounding air and drives out and keeps out not only flies but also mosquitoes and cockroaches. Shell Chemical sold its pesticide business owing to concerns about the sales of products containing organic phosphate.
Earth Corporation has also undertaken a number of mergers and acquisitions during the past ten years, including the February 2012 acquisition of Bathclin Corporation, a former competitor in the market for bath additives.
In November 2012, consolidated subsidiary Earth Biochemical Co., Ltd. acquired Nikke Pet Care Co., Ltd.*2 (formerly The Japan Wool Textile Co., Ltd.), a subsidiary of Nikke Group (TSE PRM: 3201).
In November 2012, through its consolidated subsidiary Earth Biochemicals Co., Ltd. the company acquired through M&A Nikke Pet Care Co., Ltd., which was a subsidiary of Nikke (formerly The Japan Wool Textile Co., Ltd.; TSE PRM: 3201) *2 (now Earth Pet Co., Ltd.).
In 2014, the company established Hakugen Earth Co., Ltd. to take over some of the businesses run by Hakugen Co., Ltd. In July 2016, Earth Corporation entered into a capital and business alliance agreement with Taiko Pharmaceutical Co., Ltd. (TSE PRM: 4574)*3.
In November 2016, Earth Corporation acquired Johnson Trading Co., Ltd.*4, which has a pet-related products business, making it a subsidiary that has since become part of Earth Pet.
In March 2017, Earth Corporation entered into a capital and business alliance with Protoleaf, Inc., acquiring a 34.1% stake in the company, and formed a business alliance with Hyponex Japan Co., Ltd., both for the purpose of creating a new market in home gardening products.
*2 Nikke Pet Care Co., Ltd. M&A: In October 2014, Earth Biochemical merged with Nikke Pet Care and then dissolved it. After running the pet food business it had acquired, Earth Biochemical then merged with Johnson Trading to form Earth Pet.
*3 Business and capital alliance with Taiko Pharmaceutical Co., Ltd.: Earth Corporation acquired a stake in Taiko Pharmaceutical through a private placement of newly issued shares, acquiring 5.8% stake in Taiko Pharmaceutical (5.66% as of the end of FY03/17). Taiko Pharmaceutical is a pharmaceutical manufacturer known especially for its two main product lines, Seirogan and Seirogan TOI A digestive aids and Cleverin anti-viral and anti-bacterial hand gels (main active ingredient chlorine dioxide).
*4 Merger with Johnson Trading Co., Ltd., making it a subsidiary: In July 2017, Earth Biochemical spun off its environmental business, health & beauty business, and all other businesses except for its pet business as well as its Tokushima manufacturing plant to newly established Earth Pharmaceuticals. Earth Biochemical then merged with Johnson Trading. As this left Earth Biochemical with only its pet business, it changed its company name to Earth Pet.
In September 2017, Earth Pet Co., Ltd. established Pet Food Kitchen Co., Ltd., and took over the pet food business from Dog Food Kitchen Co., Ltd. the following month (making it a consolidated subsidiary from FY12/19).
Earth Corporation engaged in M&A of a non-Japanese company. In May 2017, the company acquired all outstanding shares of Vietnam-based Earth Corporation Vietnam (ECV)*5, a manufacturer and seller of household products in Vietnam, making it a wholly owned subsidiary.
*5 Founded in 2003, ECV manufactures and markets various household-use products in Vietnam. Most of its sales come from household detergents, but ECV also manufactures and sells deodorizing air fresheners and insecticides. Its popular “Gift” brand household detergent and “Ami” brand air fresheners have carved out prominent positions in the Vietnamese market.
M&A policy
When accessing potential M&A targets, Earth Corporation looks for companies that will help increase the group’s enterprise value by merging the target company’s good practices that will open up new sales channels.
Long-term earnings trends
In FY12/21, consolidated sales grew to JPY203.8bn on increased market share and acquisitions. The consolidated recurring profit margin, however, after reaching a peak at 6.4% in FY12/07, fell to 0.8% in FY12/18 and has only improved since then to 5.6% in FY12/21. This was due to goodwill amortization from acquisitions, a shift in the product mix stemming from the rise in the proportion of company-wide sales accounted for by Oral Care, Bath Powder and Other Household Products, intensifying competition, and an increase in the sales promotion expense ratio due to product development. The goodwill amortization burden ended in August 2021 for Hakugen Earth and in Q1 FY12/22 for Bathclin (goodwill amortization expense for FY12/21 will be reduced to JPY1.8bn vs. JPY2.6bn for FY12/19). Additionally, amid these changes, the company strives to improve profitability by reforming its cost structure.
Consolidated sales
Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.
Recurring profit before goodwill amortization
Source: Shared Research based on company data Note: Figures may differ from company data due to differences in rounding methods.
Strategies
Earth Corporation has two main strategies:
Creating new markets with innovative product ideas
Tailoring sales promotions to meet local markets at the individual store level
Earth Corporation was a late entrant to household insecticide products, now the biggest contributor to earnings. Even so, the strategies above have enabled it to win the top share of the domestic insecticide market (55.8% in 2021 by company estimates).
Creating new markets with innovative product ideas
The company’s motto is to “create things the world has never seen before.” In 1970, when Earth Corporation’s share of the household insecticide product market was only 2%, capital participation by Otsuka Pharmaceutical and a directive from that company’s president, Masatomi Otsuka, led to Earth Corporation’s first success: Gokiburi Hoy Hoy, a cockroach trap. Since that time, Earth Corporation has created new markets with a variety of proprietary products generated from technological innovation and numerous original ideas aimed at expanding applications based on a customer’s perspective, such as Earth Red (no-flame fumigator), Earth No-Mat (liquid mosquito killer), and Mondahmin (mouthwash).
The company has developed a number of products based on innovative ideas:
Executive summary
Core businesses
Earth Corporation manufactures and sells household insecticides, oral hygiene products, and bath salts. It boasted the top share of the domestic markets for household insecticide products (55.8% in 2021; company estimates) and bath salts.
In the Household Products segment, household insecticides are the biggest earnings driver. Despite being a late entrant, Earth Corporation has emerged as the industry leader for the following two reasons. First, the company introduced original products such as Gokiburi Hoy Hoy (cockroach trap) and Earth No-Mat (liquid mosquito killer) that expanded the market previously comprised of anti-mosquito incense coils and aerosol sprays. Second, the company bet early on drugstore sales routes—an emerging industry at the time—and thus differentiating from major competitors who up until the 1980s had mainly used resellers that focused on mass retailers such as general merchandise stores. The company increased salespeople and strengthened direct tie-ups with sales outlets, thereby boosting product exposure.
The Japanese household insecticide market faces headwinds from a projected decline in the Japanese population and the number of households and adverse effects from unusual weather patterns including heavy rainfall and intense heat. However, there are also tailwinds such as the emergence of exotic pests amid globalization, the geographical spread of pests stemming from climate change, and creation of demand through introduction of new products.
The company aims to cultivate insecticide sales as a second earnings pillar, and to that end made Bathclin Corporation, Hakugen Earth Co., Ltd., and Earth Corporation Vietnam (formerly A My Gia Joint Stock Company) consolidated subsidiaries.
In the General Sanitary Management segment, the company provides quality control consulting services, such as contamination prevention at food production plants, thus establishing a business model that differs from the Household Products business.
In the medium-term business plan spanning the three years from FY12/21 to FY12/23, the company will work to expand its Asian earnings base, among other initiatives (see the latter part of this report). Moreover, as a long-term earnings pillar, the company will develop the MA-T System (Matching Transformation System)®*, an oxidation control technology and system for which it holds the technology license, manufacturing rights, and intellectual property rights. New solutions for the prevention of infectious diseases will be developed by 2030 by leveraging MA-T technology, which will be developed through open innovation. The project will entail the development of a procurement business for the United Nations and public institutions to control the spread of viruses, microorganisms, and multi-drug resistant bacteria not only in Japan but also in Southeast Asia, which is home to 220 million people in low- and middle-income countries such as Thailand, Vietnam, and Myanmar. The company aims for social implementation through the provision of inexpensive and simple solutions.
Trends and outlook
In FY12/21, the company reported sales of JPY203.8bn (+3.9% YoY), operating profit of JPY10.7bn (-6.6% YoY), recurring profit of JPY11.4bn (-2.6% YoY), and net income attributable to owners of the parent of JPY7.1bn (+101.4% YoY).
Factors contributing to sales growth included sustained customer demand amid the spread of COVID-19 and introduction of new products in the Household Products business, and increase in the number of contracts in the General Sanitary Management business. Although gross profit was up YoY thanks to new products and sales growth, operating profit declined YoY due to an increase in household insecticide product returns and higher SG&A expenses due to aggressive spending on marketing and human resources and a rise in distribution costs.
The company's FY12/22 forecast calls for sales of JPY155.0bn (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition), operating profit of JPY10.8bn, recurring profit of JPY11.2bn, and net income attributable to owners of the parent of JPY7.3bn. The annual dividend is JPY118.00 (flat YoY). Excluding the adoption of the new standard, sales increased 3.5% YoY to JPY211.0bn.
The company forecast for FY12/22 calls for sales of JPY155.0bn (no YoY comparison due to adoption of Revenue Recognition Standard from FY12/22; same for profit at all levels), operating profit of JPY10.8bn, recurring profit of JPY11.2bn, and net income attributable to owners of the parent of JPY7.3bn. The annual dividend forecast is JPY118.0 (flat YoY).
The company forecasts sales of JPY137.8bn and operating profit of JPY9.3bn in FY12/22 in household product segment. The company projects sustained high levels of demand for its product lines amid lifestyle changes brought on by the pandemic. That being said, the company assumes that it may not fully absorb through management efforts the impact of rising raw material prices. It aims to secure reasonable profit by growing earnings in categories where sales are growing and its has large market share, optimizing the allocation of management resources, and improving cost efficiency.
The company forecasts sales of JPY27.7bn and operating profit of JPY1.4bn in FY12/22 in general sanitary management segment. Prevention of product contamination and food poisoning are essential in services for the food manufacturing sector. Consequently, there is a growing need for the quality sanitary management services that the Earth Group provides, underpinned by its specialist knowledge, technologies, and know-how. The company is progressing R&D and human resource training as well as providing services that harness IoT and a range of AI systems, expanding its food safety-related auditing business, and strengthening its life science business to increase the number of contracts per year and achieve stable earnings growth.
The company positions overseas expansion as its primary growth driver. It aims to improve profitability and build an earnings base by establishing subsidiaries in the main areas where it operates, such as ASEAN and China, and aggressively allocating management resources in these areas. The company aims to increase the earnings contribution of exports and cross-border e-commerce by developing and selling products that fulfill the needs of each country and focusing on profitable products.
The next three-year (FY12/21–FY12/23) medium-term business plan is as follows. Following FY12/20 sales of JPY196.0bn, operating profit of JPY11.4bn, recurring profit of JPY11.7bn, net income attributable to owners of the parent of JPY3.5bn, and ROE of 7.4%, the company is targeting FY12/23 sales of JPY213.0bn, operating profit of JPY14.0–16.0bn, net income attributable to owners of the parent of JPY10.0bn, and ROE of 13.0%.
Strategic plans call for 1) expanding its earnings base in Asia, including the use of M&A; 2) active promotion of ESG and open innovation initiatives, including measures aimed at reducing product returns and greater use of sustainable raw materials; and 3) generation of additional cost savings by rethinking its entire value chain.
Strengths and weaknesses
Strengths: innovative product ideas, a sales strategy of approaching retailers directly, and its long-term relationships with drugstore chains with strong sales capabilities. Weaknesses: high seasonality of mainstay household insecticide products, demand for which is affected by seasonal weather patterns; relatively low profitability of household products; and late and slow overseas expansion due to the legacy of a domestic focus.
Key financial data
Note: Figures may differ from company data due to differences in rounding methods.
Note: Accounts receivable are adjusted for deduction of allowance for doubtful accounts.
Note: No YoY comparisons are stated, because the company adopted the new Revenue Recognition Standard from FY12/22.
Note: Figures may differ from company data due to differences in rounding methods.
Recent updates
Expansion of Business Development in the Philippines (progress of disclosure items)
Earth Corporation has announced that on April 1, 2022, it completed its acquisition of shares in Earth Homecare Products (Philippines), Inc. in accordance with the share transfer agreement and accompanying agreements. Through a previous release entitled "Notice regarding the Expansion of Business Development in the Philippines" (dated September 7, 2021), the company had announced its decision to acquire 66.7% of shares in Earth Homecare Products (Philippines), Inc. (established on October 7, 2021), which had inherited the business of selling items such as insect care products, household products, and pet care products from Neumann & Mueller Philippines, Inc. (NMPI) with the aim of accelerating business development in the Philippines.
The sales business acquired from NMPI has been performing well during the COVID-19 pandemic. Moving forward, the company aims to increase earnings generated through this business by introducing daily necessities such as insect care products, as well as other additional products, in the Philippines.
Earth Corporation projects that this acquisition's impact on results in FY12/22 will be negligible.
Number of shares acquired, acquisition price, and shares held before and after acquisition
Disposal of treasury stock as restricted stock compensation
Earth Corporation announced the disposal of treasury stock as restricted stock compensation.
At a meeting held on March 25, 2022, the company’s Board of Directors resolved to dispose of treasury stock as restricted stock compensation.
Overview of disposal
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company data due to differences in rounding methods.
Note: No YoY or QoQ comparisons are stated, because the company adopted the new Revenue Recognition Standard from FY12/22.
Note: Figures may differ from company data due to differences in rounding methods.
Note: No YoY or QoQ comparisons are stated, because the company adopted the new Revenue Recognition Standard from FY12/22.
Q1 FY12/22 results (out May 11, 2022)
Overview
Q1 FY12/22 results: Sales were JPY38.6bn (+4.5% YoY excluding the impact of a change in accounting method), operating profit was JPY5.3bn (-10.6% YoY), recurring profit was JPY5.6bn (-8.4% YoY), and net income before income taxes was JPY5.6bn (-8.7% YoY).
Attainment rates
Q1 attainment rates versus the 1H FY12/22 forecast were 42.2% for sales, 40.0% for operating profit, 42.1% for recurring profit, and 40.6% for net income attributable to owners of the parent. Q1 attainment rates versus the full-year FY12/22 forecast were 24.9% for sales, 49.5% for operating profit, 50.7% for recurring profit, and 51.7% for net income attributable to owners of the parent.
Sales
Sales were JPY38.6bn (+4.5% YoY excluding the impact of a change in accounting method). By segment, Household Products recorded sales of JPY35.7bn (+4.8% YoY), while General Sanitary Management saw sales of JPY6.4bn (+0.8% YoY). Sales growth reflected ongoing customer demand in Household Products associated with lifestyle changes during the COVID-19 pandemic, and expansion in the General Sanitary Management business.
Operating profit
Operating profit was JPY5.3bn (-10.6% YoY excluding the impact of a change in accounting method). By segment, Household Products posted operating profit of JPY5.0bn (-14.0% YoY), and General Sanitary Management JPY299mn (-15.9% YoY).
Household Products segment
Sales were JPY35.7bn (+4.8% YoY excluding the impact of a change in accounting method), and segment profit (operating profit) was JPY5.0bn (-14.0% YoY).
Although early sales of insecticides were lackluster owing to temperatures that were lower than the previous year and intermittently inclement weather, there were contributions to segment sales from bath salts, which experienced market expansion following the launch of new products with high value-added and aided also by changes in consumer demand triggered by resurgence in COVID-19 infections. At the profit level, an altered sales mix and change in the CoGS ratio stemming from the effect of a weaker yen on overseas procurement combined with stronger controls to ensure that sales promotion spending was more in tune with actual sales.
Household Insecticide Products
Sales were JPY17.7bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). In Japan, the household insecticide market was sluggish in Q1 owing to temperatures that were lower than the previous year and intermittently inclement weather, but there were contributions to sales from the launch of new products with high value-added, such as Mamo Room and Iyana Mushi Zero de Knight. On overseas markets, sales were upbeat in Vietnam and Thailand, amid signs of some recovery in economic activity.
Oral Care, Bath Powder and Other Household Products
Sales were JPY15.8bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22).
Bath salt sales were JPY6.2bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). Sales of the tablet type Onpo and individual packet-type Nihon no Meito and Iiyu Tabidachi bath salts remained strong, as the market expanded on the back of pandemic-induced changes in customer needs.
Oral hygiene product sales were JPY1.8bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). Although sales of the all-in-one mouthwash Mondahmin Premium Care Sensitive remained brisk, sales of Mondahmin NEXT Gum Care were weak.
Sales of other household products were JPY7.9bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). Owing to a reduction in the stay-at-home demand observed in FY12/21, sales were downbeat for the Aller Block Germ & Virus Removal Room Spray. There were contributions, though, from new offerings in the Sukki-ri! family of deodorizers, including Sukki-ri! CORK+STICK Puriture and Kuruma no Sukki-ri!.
Pet-related Products and Others
Sales were JPY2.2bn (no YoY comparison owing to adoption of the new Revenue Recognition Standard from FY12/22). An increase in customers acquiring new pets and those developing a closer relationship with their pets because of spending more time at home during the pandemic resulted in sales growth in pet-related products such as towels, and cleaning products.
General Sanitary Management segment
In the General Sanitary Management segment, sales were JPY6.4bn (+0.8% YoY excluding the impact of a change in accounting method) and segment profit (operating profit) was JPY299mn (-15.9% YoY). Amid a trend toward international harmonization in safety standards for food, pharmaceuticals, and medical care, and revisions to domestic laws, companies increasingly are bringing hygiene management in-house. As a result, the company is seeing greater demand for its high-quality hygiene management services, drawing on its specialized knowledge, technology, and know-how, from the food-related, pharmaceutical-related, and packaging-related plants that are its main customers.
Faced with this operating environment, the company actively made investments with an aim to developing an internal system that can quickly respond to customer needs, including recruitment and development of human resources and development of software to improve operational efficiency. The company also maintained and expanded its contracts through the provision of differentiated quality assurance services. In particular, the company enhanced initiatives targeting pharmaceutical and regenerative medicine industries and its food safety management inspection and consulting business.
Company forecast for FY12/22
Note: Figures may differ from company data due to differences in rounding methods.
Note: From FY12/17, the company changed part of its sales classifications of the Household Products segment. Figures for FY12/16 onward reflect the new classifications.
Note: No YoY comparisons are stated due to the adoption of the new Revenue Recognition Standard from FY12/22.
Company forecast for FY12/22
The company forecast for FY12/22 calls for sales of JPY155.0bn (no YoY comparison due to the adoption of the Revenue Recognition Standard from FY12/22; same for profit at all levels; excluding the new standard, sales are expected to increase 3.5% to JPY211.0bn), Operating profit was JPY10.8bn, recurring profit JPY11.2bn, and net income attributable to owners of the parent JPY7.3bn. The annual dividend forecast is JPY118.0 (flat YoY). Although the company will be affected by soaring raw material prices and will appropriately invest necessary expenses for growth, including R&D and core system upgrades, it aims to achieve operating profit in excess of JPY10.0bn and a record high in net income attributable to owners of the parent.
Planned dividend per share for FY12/22: JPY118.0 (dividend on equity (DOE) ratio of 4–5%; DOE of 4.2%, expected consolidated payout ratio of 35.8%). The company targets an equity ratio of 50% (49.7% in FY12/21), ROE in the 12% range (12.4% in FY12/21), and a cash to total assets ratio of around 15% (17.4% in FY12/21).
Quarterly operating profit company forecast
Impact of Accounting Standard for Revenue Recognition
The company estimates that the adoption of the Accounting Standard for Revenue Recognition will reduce sales by JPY56.0bn compared to the previous standard. The reason for this change is that the portion of sales that corresponds to intermediary transactions (purchases and sales) is recorded net of cost of sales, and sales promotion expenses, which were previously recorded in SG&A expenses, are deducted directly from sales after the adoption of the new accounting standard. The company estimates that the impact of these expenses will be JPY37.8bn for purchases and sales, and JPY18.2bn in sales promotion expenses deducted from sales. The impact on operating profit and other profit levels and on the balance sheet will be negligible.
Premise of company forecast
Sales
Expenses
Breakdown of company forecast by segment
Household Products segment
The company forecasts sales of JPY137.8bn and operating profit of JPY9.3bn in FY12/22.
The company projects sustained high levels of demand for its product lines amid lifestyle changes brought on by the pandemic. That being said, the company assumes that it may not fully absorb through management efforts the impact of rising raw material prices. It aims to secure reasonable profit by growing earnings in categories where sales are growing and its has large market share, optimizing the allocation of management resources, and improving cost efficiency.
General Sanitary Management segment
The company forecasts sales of JPY27.7bn and operating profit of JPY1.4bn in FY12/22.
Prevention of product contamination and food poisoning are essential in services for the food manufacturing sector. Consequently, there is a growing need for the quality sanitary management services that the Earth Group provides, underpinned by its specialist knowledge, technologies, and know-how. The company is progressing R&D and human resource training as well as providing services that harness IoT and a range of AI systems, expanding its food safety-related auditing business, and strengthening its life science business to increase the number of contracts per year and achieve stable earnings growth.
Overseas expansion
The company positions overseas expansion as its primary growth driver. It aims to improve profitability and build an earnings base by establishing subsidiaries in the main areas where it operates, such as ASEAN and China, and aggressively allocating management resources in these areas. The company aims to increase the earnings contribution of exports and cross-border e-commerce by developing and selling products that fulfill the needs of each country and focusing on profitable products.
Management strategies
Medium-term business plan
Earth Group philosophy
Vision: Make the Earth a pleasant home.
Business philosophy: Act to live in harmony with the Earth.
Value provided by Household Products: Educate about infectious diseases and risk reduction, promote maintenance of physical and mental health, create a comfortable living environment
Value provided by General Sanitary Management: Provide original and innovative general environmental and hygiene services and safe, secure products by leveraging our expertise
Enhancement of corporate value
Corporate value from Earth's perspective
The company believes that its corporate value is the sum of the book value of its shareholders' equity (including capital increases), increases in total assets including the expansion of retained earnings due to profit generation, and the added value that the company has created to date. This value includes that generated by intangible assets such as human capital, business know-how, R&D capabilities, brand strength, customer base, and ESG.
Key elements of corporate value
The company regards non-financial capital*, including human resources, as the foundation of business growth and an important element in increasing corporate value.
SDG initiatives
Basic sustainability policy
The company's basic sustainability policy is as described below.
Based on its management policy, “We act to live in harmony with the Earth,” Earth Corporation will work with its stakeholders to address issues surrounding sustainability and contribute to the sustainable enhancement of corporate value and the building of a sustainable society.
Five materiality issues
The company views sustainability as a key element of management. The bottom-up approach is adopted because it is important for each employee to be proactively involved and, as a result, to align their ideas with those of management. The company has established working groups and conducted group studies. It believes that incorporating sustainability into its basic policies and ensuring that all employees are aware of the importance of sustainability will further strengthen the company's management and lead to future value creation.
FY12/22 initiatives
Medium-term business plan: Act for SMILE- COMPASS 2023 (revised February 2021)
Overview
COVID-19Earth Corporation had established the next three-year (FY12/21–FY12/23) medium-term business plan, called "Act For SMILE-COMPASS 2023." The company upwardly revised its management targets of the plan in February 2021. Following FY12/20 sales of JPY196.0bn, operating profit of JPY11.4bn, recurring profit of JPY11.7bn, net income attributable to owners of the parent of JPY3.5bn, and ROE of 7.4%, the company targets FY12/23 sales of JPY213.0bn, operating profit of JPY14.0–16.0bn, net income attributable to owners of the parent of JPY10.0bn, ROE of 13.0% or above, and DOE of 4.0% or above. The final year targets were upwardly revised from the previous targets calling for sales of JPY200.0bn, operating profit of JPY7.5bn, net income attributable to owners of the parent of JPY5.0bn, and ROE of 11.0%.
The company sees changes in the external environment, such as the lifestyle changes associated with the impact of COVID-19, as opportunities for growth.
Progress
Sales
The company's FY12/2022 sales forecast (announced on February 14, 2022) is JPY155.0bn due to the adoption of The Accounting Standards for Revenue Recognition (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition from the beginning of FY12/22). However, excluding the adoption of the new standard, the figure would be JPY211.0bn (+3.5% YoY).
Operating profit
The company's operating profit forecast for FY12/22 (announced on February 14, 2022) is JPY10.8bn (no YoY comparison due to the adoption of the Accounting Standard for Revenue Recognition from the beginning of FY12/22). The company has assumed a cost increase of JPY1.3bn resulting from soaring raw material prices. This will be an element that was not included when Act For SMILE-COMPASS 2023 was formulated. Excluding this factor, the company believes that FY12/22 profits will be in line with plans.
The company's assumptions (as of February 14, 2022) for achieving its operating profit target of JPY14.0-16.0bn for FY12/23 are as follows. To achieve the operating profit target of the medium-term business plan, the company will need to increase the profit factor by more than JPY3.3bn compared to its forecast for FY12/22.
Outline of Medium-term business plan
Under the medium-term plan (2021–2023), the company aims to promote standards and infrastructure reforms as part of its structural reform with strategies focused on 1) expanding its earnings base in Asia, 2) promoting ESG and open innovation, and 3) creating cost synergies.
1) Expand earnings base in Asia: Gain market share and support in countries of operation and develop new business areas.
2) Promote ESG and open innovation: Take on the challenge of solving issues that contribute to the achievement of SDGs. Achieve open innovation through collaboration with external organizations.
3) Create cost synergies: Rationalize and increase efficiency of operations through joint implementation of multiple measures. Realize synergies and value-added throughout the value chain.
Profitability and capital efficiency KPIs
Marginal operating profit: Evaluate earnings from sales activities based on marginal operating profit (gross profit – [sales promotion expenses + logistics expenses]).
Contribution margin: Evaluate the profitability of businesses and categories by measuring contribution margin (operating profit + indirect costs).
Cost of capital: Use cost of capital as an indicator for investment decisions.
Earth Corporation seeks to use operating profit as the company's most important management indicator while aiming to manage the cost of capital. It promotes platforms of Redefining Revenue Management Standards, Systemic Reform, and ICT Infrastructure Reform and Digital Transformation (DX).
Redefining standards
Systemic reform
ICT infrastructure reform and digital transformation (DX)
Expand earnings base in Asia
The company's key areas are ASEAN and China. The company plans to boost market share in each country by developing and introducing products that meet local needs. It will further improve its earnings structure by positioning overseas expansion as one of the drivers of profit growth. Additionally, the company will consider M&A opportunities to expand its business. As for ASEAN, the company was unable to expand as expected in FY12/21 due to the impact of COVID-19, but the potential for growth remains the same, and the company will promote growth, especially in Thailand and Vietnam. Furthermore, Earth Home Products (Malaysia) Sdn. Bhd. and Earth Homecare Products (Philippines), Ltd. in Malaysia and the Philippines, which will be consolidated in FY12/22, will grow as an ASEAN base following Thailand and Vietnam (including these two companies, the number of overseas consolidated subsidiaries will total seven).
Overseas strategies in ASEAN countries
Thailand: The company will steer again from the earnings structure improvement phase to the business expansion phase (profits increased in FY12/21 due to cost control). It will endeavor to expand its presence in the Thai domestic market, increasing its market share (3rd place with around 13%, according to the company). Since the suburbs are not well developed, the company will steadily develop traditional trade (TT) through the Depot business by establishing a large number of small distributors and other mobile small-scale offices in rural areas, as it believes there is considerable room for growth. The strategy is to develop suburban areas while introducing the Depot business in urban areas to capture market share through meticulous sales activities. The reason for focusing on the suburbs first is that the company has already done a certain amount of work in developing modern trade in urban areas. Focus categories include household insecticides, air fresheners, and mouthwash products. It aims to achieve sales of JPY4.9bn in FY12/23, compared to sales of JPY4.1bn in FY12/20.
Vietnam: Although the company was affected by the COVID-19 lockdown in FY12/21, it aims to sustain stable management from FY12/22 onward. The focus channels are MT and e-commerce. It will fortify sales on the southern region, centered on Ho Chi Minh City, increase the number of deliveries, build an OEM production system that leverages geographical advantages. In the future, the company plans to establish a production base and supply products and materials to Japan. Profit contributions are expected from drastic reductions in manufacturing costs. The focus categories are household insecticide products, mouthwash, and disinfectant-related products, and the company's aim is to develop the top products in Vietnam's domestic market. It aims to achieve sales of around JPY4.3bn in FY12/23, compared to JPY2.8bn in FY12/20.
China and exports/cross-border e-commerce
China: The company aims to achieve both sales scale growth and steady profit contribution, primarily in household insecticide products. It will leverage its strengths as a limited liability investment company, centralize management of production and sales, facilitate access to financing within China, invest management resources in developing e-commerce channels, and carry out sales promotions using carefully selected products. It aims to achieve sales of JPY3.2bn in FY12/23, compared to sales of JPY2.6bn in FY12/20. The Chinese sales company turned profitable in FY12/21, and aims to gradually build up profits from FY12/22 onward.
Today
Earth Chemical (Shanghai) Management Co., Ltd.
Exports and cross-border e-commerce: The company will strengthen sales mainly in Saudi Arabia and Taiwan, while launching products tailored to each country's needs. For cross-border e-commerce, the company will focus on Black Cap and mothball products. It aims to achieve sales of JPY4.0bn in FY12/23, compared to sales of JPY3.0bn in FY12/20.
Areas of new development
Malaysia: Earth Home Products (Malaysia) Sdn. Bhd.; Established a local subsidiary in 2019, but full-scale expansion was delayed by the pandemic; aims to achieve full profitability within three years from FY12/22 onward
Philippines: Earth Homecare Products (Philippines), Ltd.; M&A of a local company to make it a subsidiary in FY12/21, and start new business development from FY12/22; construct business foundation
Promote ESG and open innovation
The company will take on the challenge of solving issues that contribute to the achievement of SDGs. It will also achieve open innovation through collaboration with external organizations.
MA-T System
Promoting and enhancing the value of MA-T System
The Japan MA-T Industrial Association was established to promote and enhance the value of MA-T (Matching Transformation System) System, an innovative oxidation control technology developed in Japan, as well as to promote open innovation. This includes potentially promoting open innovation in collaboration with the creative strategy council by the government and academic societies.
The MA-T System is the world's first system to use oxidation control technology to control the strength of molecular activity, and can be applied in a wide range of fields. When molecular activity is weakened, disinfectants, deodorants, and agricultural chemicals can be produced. When molecular activity is strengthened, oxidation reactions (small molecules) and surface oxidation (macromolecules) can be carried out. See below for details (the lower in the order, the stronger the activation):
The company plans to develop new solutions for the prevention of infectious diseases by 2030 through applying MA-T technology created via open innovation. This will involve setting up a procurement business for the United Nations and public organizations to help contain the spread of viruses, microorganisms, multi-drug resistant bacteria, etc. Beyond Japan, the project will target the Southeast Asian region with its population of 220 million people in low- and middle-income countries such as Thailand, Vietnam, and Myanmar. The goal is to provide inexpensive, simple, and practical solutions.
MA-T System
The MA-T System is an oxidation control technology that controls the intensity of activation, developed jointly by dotAqua, Inc. and ACENET Inc., who discovered an on-demand chlorite ion aqueous solution. The system was analyzed and proven effective by Osaka University. A basic patent application was filed in 2015 (international patent publication number: WO/2018/230743 A1). The company holds the technology license as well as manufacturing and intellectual property rights.
By generating the necessary amount of aqueous radicals from chlorite ions when necessary, it enables the breaking down of viruses, including epidemic viruses, and sterilization of various bacteria (germs). Furthermore, by controlling the degree of activity (generating activated radicals), it is possible to pioneer highly difficult chemical reactions and develop a wide range of applications. These include the functionalization of polymers, device applications, and applications in agrochemicals and pharmaceuticals. Products employing the MA-T System are used in many public transportation systems and their restrooms, as well as hospitals and hotels.
According to Earth Corporation, the aqueous solution used for the MA-T System produces the active constituent of aqueous radicals in water only in the presence of bacteria or viruses, and only in the amount needed to break them down. Since it is more than 99.9% water, it is safer than standard chlorine-based and concentrated alcohol products, and can be safely used for tableware, cooking utensils, and items that come in contact with the mouth. It's not flammable, so it can be used safely in the kitchen while cooking, and will not corrode metal, discolor plastics, or irritate the hands.
Business model
Organizations must be part of the Japan MA-T Industrial Association to utilize the MA-T System, and Earth Corporation is the sole supplier. According to the company, the system was slow to catch on despite its benefits, but they recognized it's potential and became a partner in its promotion. More than 70 companies have joined the Japan MA-T Industrial Association since its launch. The company is collaborating with organizations participating in the association to conduct research on new ways of applying the MA-T System. The Japan MA-T Industrial Association was established, and 80 companies, mainly top firms in the industry, have joined (as of December 31, 2021). The company's profits will grow as the system is utilized in various fields and its value becomes more widely known.
Contribution to SDGs
Organic compounds composed of covalent carbon-carbon and carbon-hydrogen bonds, such as household insecticide products, detergents, and synthetic resins (plastics), have the advantage of being flexible and stable, but also have the disadvantage of being difficult to decompose. They must be combusted, which generates CO2. The MA-T System enables decomposition without combustion. Combustion is required, for instance, to convert methane gas from livestock manure into methanol, but with the MA-T System, it can be converted into methanol at room temperature and pressure without combustion, using high temperature and energy at 1,200°C. The company and the Japan MA-T Industrial Association believe that it can resolve issues such as CO2 emissions and thermal efficiency.
Responding to infectious disease and climate change risks
According to the 2021 edition of the Global Risks Report published by the World Economic Forum, infectious diseases such as COVID-19 rank first among the top 10* most imminent global risks over the next decade. The company will contribute to addressing risks such as infectious diseases and climate change through its MA-T System, household insecticide products, household products, and General Sanitary Management business, thereby enhancing the company's corporate value.
Growth investment
The company will make free cash flow-conscious investments and achieve returns that exceed cost of capital over a three year investment period.
Use of funds
Investment to expand earnings base in Asia: The company plans to invest JPY7.0bn, mainly for product development and marketing. This also includes funds reserved for future M&A.
ESG and open innovation investment: The company plans to invest JPY6.0bn, mainly for MA-T related investments.
Investment in ICT infrastructure and digital transformation (DX): The company plans to invest JPY4.0bn, primarily to renew core systems. It also plans to promote digital asset management.
New capital investment (excluding maintenance capex): The company plans to invest JPY3.0bn to expand facilities in core categories.
Overseas expansion
Earth Corporation’s top long-term goal is expanding overseas.
Note: Rounded down to the nearest multiple of JPY10mn.
Core overseas markets: Thailand, Vietnam, China
Earth Corporation plans to expand into Asia, particularly Thailand, Vietnam, and China—where it has production bases. In May 2017, the company acquired Earth Corporation Vietnam (formerly A My Gia Joint Stock Company). Of the JPY14.0bn in overseas sales in FY12/21 (6.9% of overall sales), Thailand and neighboring countries accounted for 29.1%, Vietnam 24.7%, China 23.5%, and other countries 22.8%.
Thailand
The group holds only about 10% share of the Thai household insecticide market (according to the company’s survey). Major overseas companies dominate the market with the primary products being cost-competitive anti-mosquito incense coils and aerosols. As a follow-up to mosquito coils and aerosols, the company aims to develop locally competitive and marketable non-insecticide products such as oral care products and air fresheners. The shakeup of the company’s distributor network in 2019 worked to good effect, strengthening its distribution capabilities within the country and providing a significant boost to sales.
Vietnam
In May 2017, the company acquired all outstanding shares of Vietnam-based Earth Corporation Vietnam (ECV), making it a wholly owned subsidiary. Founded in 2003, ECV manufactures and markets various household-use products in Vietnam. Most of its sales come from household detergents, but ECV also manufactures and sells deodorizing air fresheners and household insecticides. Its popular “Gift” brand household detergent and “Ami” brand air fresheners have carved out prominent positions in the Vietnamese market. With the acquisition of ECV, Earth Corporation is looking to take advantage of the brand strength and marketing capabilities that ECV has built up over the years, fine-tune its marketing approach, and establish a larger market presence.
China
The company’s subsidiaries in China play an important role as manufacturing hubs for goods that are sold in Japan, and also sell some of these same products in China, especially Gokiburi Hoy Hoy cockroach traps and Earth Red no-flame fumigators. The business was expanded in 2014 to include the Hakugen Earth mask and dehumidifier. The e-commerce channel is expanding sharply in China and the company aims to tailor sales promotion and product development to this sales channel.
M&A strategy
Maximizing group synergies with Bathclin and Hakugen Earth
Earth Corporation acquired and consolidated Bathclin and Hakugen Earth, and these two subsidiaries have been cooperating to make material procurement more efficient, optimize production, share expertise, and streamline distribution.
Bathclin: History and overview
October 2006: Household business of Tsumura & Co. (TSE PRM: 4540) spun off into Tsumura Lifescience Co., Ltd.
August 2008: With support from Wise Partners, Inc., became independent from the Tsumura Group.
February 2012: Earth Corporation acquired 100% of the company’s shares for JPY19.2bn. Goodwill totaled JPY16.9bn (10-year amortization; completed in Q1 FY12/22).
Bathclin’s main brands are Bathclin and Kikiyu (bath salts).
Hakugen Earth: History and overview
May 2014: Hakugen Co., Ltd., applied for civil rehabilitation. Total liabilities were around JPY25.5bn.
July 2014: Through a sponsor tender offer, Earth Corporation concluded a business transfer agreement with Hakugen.
August 2014: Earth Corporation established Hakugen Earth Co., Ltd. as a wholly owned subsidiary.
September 2014: Hakugen Earth acquired businesses from Hakugen for JPY7.7bn. Goodwill totaled JPY1.5bn (amortization was completed in August 2021).
Hakugen Earth’s main brands are the insect repellant Mrs. Lloyd and Kaiteki Guard Pro, a face mask for household use.
Financial strategy
Company issues No. 2 Series warrants
On July 28, 2020, the company issued No. 2 Series moving strike warrants via a private placement.
The warrants are exercisable between July 29, 2020 and July 28, 2023.
The company issued a total of 18,000 warrants at a price of JPY3,700 per warrant, bringing the proceeds from the warrant issue to JPY66,600,000.
With each warrant giving the holder the right to buy 100 common shares of Earth Corporation at the specified strike price, the warrant issue if fully exercised would mean the issuance of 1,800,000 new shares (representing potential dilution of 8.89%, as of July 7, 2020).
The warrants have a so-called moving strike price, with no upper limit but a fixed minimum strike price of JPY5,649 per share. Even if all of the warrants were exercised at the minimum strike price, the total number of common shares issued upon exercise of the warrants would be 1,800,000.
Assuming all of the warrants are exercised at the initial strike price of JPY8,070, total proceeds from the issuance will be JPY14,582,600,000 (net of expenses).
On and after July 29, 2020, the exercise price shall be set at a price equal to 92% of the closing price of common stock on the trading day immediately prior to the day on which the notification requesting the exercise of warrants is received. In cases where the adjusted exercise price calculated in this manner is lower than the minimum exercise price, the adjusted exercise price shall be set at the minimum exercise price of JPY5,649 per share.
Earth Corporation may, at its own discretion, place limits on the number of warrants that may be exercised during a specified period of time and may also, at its own discretion, specify periods during which the warrants cannot be exercised.
Background to financing through warrant issue
The company’s decision to raise new equity capital via a warrant issue was motivated by its desire to maintain the liquidity to fund growth initiatives at a time when the economic outlook has been clouded by the COVID-19 pandemic.
Under the terms of the new warrant issue, the maximum number of new common shares issued as a result of exercise of the current warrant issue is capped at 1,800,000 shares.
Possible dilution notwithstanding, the company has kept its target for ROE in FY12/20 at 6.4%.
Impact on company’s financial position
As of the end-December 2020, the company had total borrowings of JPY26.0bn for a debt-to-equity ratio of over 2.0x.
Under its medium-term business plan, the company is looking to bring its debt-to-equity ratio down to 1.0x.
Planned use of proceeds
(The company plans to use the roughly JPY14.5bn in proceeds for capital investments and repayment of outstanding debt during the timeframe running from August 2020 to July 2023)
Some JPY5.5bn for product development and marketing to help expand the company’s earnings base in Asia
JPY3.0bn for ESG/innovation investments to support its expansion into new business areas (including infection prevention products/services)
JPY1.5bn for investments in ICT infrastructure
JPY4.5bn for repayment of outstanding debt and further improvement of the company’s financial position
Business
Description
Earth Corporation’s core business is the manufacture and sale of household insecticide products, oral hygiene products, bath salts, deodorizing air fresheners, home garden supplies, and pet-related products. The Household Products segment accounted for 87.4% of sales in FY12/21. The company boasts the top share of the Japanese market for household insecticide products (55.8% share in 2021 by company estimates) and bath salts. Within the Household Products segment, household insecticide products are the biggest contributor to earnings.
The General Sanitary Management segment accounted for 12.6% of sales in FY12/21. Most of segment sales come from its Total Health Care business, which offers consulting services to food production plants on preventing foreign substances and other contaminants. This segment also includes a Pest Control business and Building Maintenance business.
Expanding through M&A
Earth Corporation is a long-established company with now more than 125 years having passed since its founding in 1892. It found itself in deep trouble in the late-1960s but was able to make it through this crisis thanks to financial backing of Otsuka Pharmaceutical and the rest of the Otsuka Group, who came to the rescue with new capital.
Earth Corporation has stepped up M&A. In 2001 it took over the Vapona*1 brand of pest control products from Shell Chemical (now Shell Chemicals Japan Ltd.) and now sells products utilizing this brand.
Earth Corporation has also undertaken a number of mergers and acquisitions during the past ten years, including the February 2012 acquisition of Bathclin Corporation, a former competitor in the market for bath additives.
In November 2012, consolidated subsidiary Earth Biochemical Co., Ltd. acquired Nikke Pet Care Co., Ltd.*2 (formerly The Japan Wool Textile Co., Ltd.), a subsidiary of Nikke Group (TSE PRM: 3201).
In November 2012, through its consolidated subsidiary Earth Biochemicals Co., Ltd. the company acquired through M&A Nikke Pet Care Co., Ltd., which was a subsidiary of Nikke (formerly The Japan Wool Textile Co., Ltd.; TSE PRM: 3201) *2 (now Earth Pet Co., Ltd.).
In 2014, the company established Hakugen Earth Co., Ltd. to take over some of the businesses run by Hakugen Co., Ltd. In July 2016, Earth Corporation entered into a capital and business alliance agreement with Taiko Pharmaceutical Co., Ltd. (TSE PRM: 4574)*3.
In November 2016, Earth Corporation acquired Johnson Trading Co., Ltd.*4, which has a pet-related products business, making it a subsidiary that has since become part of Earth Pet.
In March 2017, Earth Corporation entered into a capital and business alliance with Protoleaf, Inc., acquiring a 34.1% stake in the company, and formed a business alliance with Hyponex Japan Co., Ltd., both for the purpose of creating a new market in home gardening products.
In September 2017, Earth Pet Co., Ltd. established Pet Food Kitchen Co., Ltd., and took over the pet food business from Dog Food Kitchen Co., Ltd. the following month (making it a consolidated subsidiary from FY12/19).
Earth Corporation engaged in M&A of a non-Japanese company. In May 2017, the company acquired all outstanding shares of Vietnam-based Earth Corporation Vietnam (ECV)*5, a manufacturer and seller of household products in Vietnam, making it a wholly owned subsidiary.
M&A policy
When accessing potential M&A targets, Earth Corporation looks for companies that will help increase the group’s enterprise value by merging the target company’s good practices that will open up new sales channels.
Long-term earnings trends
In FY12/21, consolidated sales grew to JPY203.8bn on increased market share and acquisitions. The consolidated recurring profit margin, however, after reaching a peak at 6.4% in FY12/07, fell to 0.8% in FY12/18 and has only improved since then to 5.6% in FY12/21. This was due to goodwill amortization from acquisitions, a shift in the product mix stemming from the rise in the proportion of company-wide sales accounted for by Oral Care, Bath Powder and Other Household Products, intensifying competition, and an increase in the sales promotion expense ratio due to product development. The goodwill amortization burden ended in August 2021 for Hakugen Earth and in Q1 FY12/22 for Bathclin (goodwill amortization expense for FY12/21 will be reduced to JPY1.8bn vs. JPY2.6bn for FY12/19). Additionally, amid these changes, the company strives to improve profitability by reforming its cost structure.
Note: Figures may differ from company data due to differences in rounding methods.
Note: Figures may differ from company data due to differences in rounding methods.
Strategies
Earth Corporation has two main strategies:
Creating new markets with innovative product ideas
Tailoring sales promotions to meet local markets at the individual store level
Earth Corporation was a late entrant to household insecticide products, now the biggest contributor to earnings. Even so, the strategies above have enabled it to win the top share of the domestic insecticide market (55.8% in 2021 by company estimates).
Creating new markets with innovative product ideas
The company’s motto is to “create things the world has never seen before.” In 1970, when Earth Corporation’s share of the household insecticide product market was only 2%, capital participation by Otsuka Pharmaceutical and a directive from that company’s president, Masatomi Otsuka, led to Earth Corporation’s first success: Gokiburi Hoy Hoy, a cockroach trap. Since that time, Earth Corporation has created new markets with a variety of proprietary products generated from technological innovation and numerous original ideas aimed at expanding applications based on a customer’s perspective, such as Earth Red (no-flame fumigator), Earth No-Mat (liquid mosquito killer), and Mondahmin (mouthwash).
The company has developed a number of products based on innovative ideas: