Lion Corporation Q2 FY2026 earnings call

• Overall First Half Performance

  • Consolidated net sales increased 8.7% year-on-year, core operating income increased 21.3% year-on-year, and EBITDA margin reached 11.8% (up 1.1 percentage points year-on-year), exceeding initial projections.
  • Core operating income margin increased more than 20% year-on-year, demonstrating progress on the company's strategy to shift toward high value-added products and profitability-focused overseas management.
  • The company provided disaster relief to areas affected by the 2026 Kumamoto earthquake and hopes for early recovery.

• Business Transformation & Strategy Progress

  • The company is in the second stage of its medium-term plan, with strengthening earnings power as a core objective. It shifted to a business unit system with greater delegation of authority, improving decision-making and execution speed.
  • The consolidation of Merap Lion (Vietnam) and PNB (Australia) has materially improved gross margin and core operating income, with post-merger synergy initiatives progressing. Sukin Japan was recently established as the first step to expand the Australian Sukin brand into the Asian market.

• Priority Business Initiatives

  • Domestic Oral Healthcare (the company's highest priority business): Outgrew the overall high-end toothpaste segment in the first half. In the second half, the company will upgrade the regular Dent Health line (priced around 1,500 yen) and continue expanding its highest-priced line to capture growing demand for periodontal disease prevention.
  • Overseas Oral Healthcare: Strategies are tailored to regional market characteristics: China is launching high-end products and prioritizing growing emerging e-commerce channels; Thailand is revamping brand positioning and expanding distribution for core brands; Malaysia is adding value to mainstay brands amid rising market unit prices.
  • Home Care (Japan): The company is focusing on distinctive high value-added products rather than mass-market price competition. The NANOX washing tub antimold ball, launched via test marketing in the first half, achieved 3x planned sales. The second half will add new distinctive fabric softener and dishwasher detergent products to improve profitability despite rising raw material costs.

1. Consumer Products Segment: Net sales grew 1.6% year-on-year, with a 0.4 percentage point improvement in profit margin. Within this segment:

• Oral Healthcare: Grew 9.6% year-on-year, driven by strong performance of the renewed premium SYSTEMA toothpaste line. High-end products priced above 1,000 yen grew 131% year-on-year in the first half, outpacing overall segment growth.
• Beauty Care: Recovered growth after product renewals focused on high value-added offerings for body soap.
• Home Care: Top-line sales declined year-on-year, but the segment prioritized profitability and brand value enhancement amid intensified competition; overall segment growth (excluding the REED brand transfer) was 2.9%.

1. Overseas Business Segment: Sales and profit increased significantly, driven by newly consolidated businesses, market recovery, and profitability-focused management. Broken down by region:

• Southeast and South Asia & Oceania: Grew on the back of strong results in Malaysia, plus consolidation gains from Merap Lion (Vietnam) and PNB (Australia). Thailand saw a substantial narrowing of its sales decline in Q2 due to strengthened Oral Healthcare initiatives, after facing structural challenges of lower exports and weak domestic consumption.
• Northeast Asia: China completed inventory optimization in Q1 and returned to 14% sales growth in Q2, delivering a clear double-digit recovery trend. South Korea delivered solid sales growth led by highly profitable businesses, putting the entire region in underlying growth for both sales and profit.

• Full year FY2026 earnings guidance remains unchanged from the initial projection announced at the start of the year. Management reaffirmed strong commitment to achieving the original target, citing sufficient built-up underlying strength and resilience to offset headwinds.
• The expected full year negative impact from raw material price increases (driven by Middle East developments) was revised from negative 1 billion yen to negative 7 billion yen, with 1 billion yen of the impact already realized in the first half and 5 billion yen expected in the second half (peaking in Q3).
• Management estimates it will offset approximately 80% (4 billion yen) of the 5 billion yen second half raw material headwind through gross profit improvements: 3 billion yen from broad-based domestic price increases taking effect in October 2026, and 1 billion yen from high value-added product mix shifts and cost reductions (across both domestic and overseas operations). The remaining 1 billion yen impact will be offset via SG&A expense efficiency improvements.
• The company maintains its target of an 11th consecutive year of dividend increases.
• For FY2027, the company targets core operating income growth from 35 billion yen (FY2026 plan) to 40 billion yen, which will be supported by full-year carryover benefit from the 2026 price increases and continued product mix improvements, to hit the profitability target for the final year of the second stage medium-term plan.

• Raw material costs could vary from the current 5 billion yen negative impact projection for the second half if the Middle East situation deteriorates further, leading to larger-than-expected cost increases. The assumed Dubai crude price for the second half is $80 per barrel, after an average of $91 per barrel in the first half.
• Price increases carry inherent demand risk: expected volume declines of 3%-10% for detergents and 6%-8% for oral care could be larger than forecast, hurting overall sales and profit.
• Successful price increases depend on coordination across distribution channels to actually implement retail shelf price changes. While management has timed price hikes to coincide with regular retailer October merchandising resets and has coordinated closely with stakeholders, execution risk remains.
• Structural macroeconomic challenges persist in some overseas markets, such as Thailand's weak domestic consumption and low exports, which could pressure performance even after recent sales improvement.
• Intensified competition in Japanese Home Care categories (particularly fabric softeners) could hurt sales and market share if planned product initiatives do not resonate with consumers.

Q: With the 6 billion yen increase in expected raw material cost headwinds, what gives management confidence in fully offsetting the impact and hitting the full year target? / A: Of the 5 billion yen total second half negative impact, management expects 3 billion yen of the impact in Q3 and 2 billion yen in Q4. It plans to offset 4 billion yen via gross profit improvements: 3 billion yen from domestic price increases and 1 billion yen from product mix shifts and cost reductions. While not every initiative will deliver exactly 100% of projected benefits, management has strong confidence. Price increases are timed for October to align with regular retailer shelf price resets, and the company has coordinated extensively across distribution channels to ensure reliable execution. The benefits of both price increases and product mix shifts will also carry over to next year and beyond, beyond offsetting this year's headwinds. (357 words)

Q: Domestic Oral Healthcare delivered strong 9.6% first half growth. What is the growth outlook for the second half, and how does it compare to the original full year target? / A: Broad-based growth across toothpaste, toothbrushes, mouthwash, and the B2B dental professional channel (which grew double-digit in the first half). Management expects some volume decline from the October price increases and lapping of last year's new product launches, so the 9% first half growth rate will not continue unchanged. However, core operating income margin for the segment is already tracking ahead of plan, with the absolute profit increase outpacing the rest of the consumer business. Given the strong first half momentum, management now expects to exceed the original 4%-5% full year growth target for the segment, and has laid groundwork for continued growth next year. (321 words)

Q: What is the breakdown of the 0.2 billion yen negative net contribution to the second half from quantitative and mix effects, and how is the 3 billion yen domestic price increase contribution split across quarters and business segments? / A: The small negative second half contribution reflects offsetting factors: positive contributions from Australia and favorable foreign exchange are outweighed by negative gross profit impact from the divestiture of the chemicals business, the REED brand transfer, and expected volume decline from price increases. The 3 billion yen total price increase contribution will split as 0.5 billion yen in Q3 and 2.5 billion yen in Q4. In addition to the 3 billion yen from price hikes, the 1 billion yen from high value-added products comes from both domestic and overseas markets, with Oral Healthcare as the main driver, but also includes contributions from new high value-added fabric softener products in Home Care. (298 words)

Q: Why is Southeast & South Asia's core operating margin roughly flat year-on-year in Q2 despite accelerating sales growth, and can we expect margin improvement in the second half? / A: The flat margin in Q2 reflects deliberate upfront investment in Oral Healthcare growth in Thailand, which is a long-term bet on future profitability. The entire overseas segment's underlying momentum is strong: Southeast & South Asia real sales growth improved from 7.9% in Q1 to 11.9% in Q2, while Northeast Asia recovered from -7.4% growth in Q1 to 11.5% in Q2, with Northeast Asia's margin improving 2.9 percentage points year-on-year in Q2. The upfront investments in Thailand have not reduced full first half core operating margin year-on-year, and the investments are already driving significant top-line growth for Oral Healthcare there. Management expects margin improvement for Southeast & South Asia in the second half, with gains carrying over into FY2027. (302 words)