Business Conditions FY2024 and Earnings Forecast FY2025
In the fiscal year ending March 31, 2024, overall Japan’s economy remained strong due to the relaxation of Covid-19, led to the normalization of social and economic activity. On the other hand, the global economy remained uncertain due to rising geopolitical risks, including the situation in Ukraine and the Middle East, global inflation, and concerns about economic recession globally.
Despite this situation, the Takasago group's net sales increased 4.9% from the previous fiscal year, reaching a record high of 195.9 billion yen. By business segment, Flavors net sales increased 3.4% due to the strong sales of beverages in Japan and Asia while Fragrances net sales increased 11.2% due in part to strong sales of products for cosmetics, especially in Singapore and Indonesia. Regarding Aroma Ingredients, although sales of menthol-related products stagnated, net sales of high-value specialty products were strong, resulting in a 9.1% increase in overall net sales. On the other hand, in Fine Chemicals, net sales of pharmaceutical intermediates fell below the level in the previous year.
By geographic segment, sales in Japan increased due to strong sales of flavors for beverage category, partly due to the extremely hot summer, as well as strong sales of fragrances for laundry care category. In the Americas, we achieved an increase in net sales due to the strong performance of the Fragrance Division, however, when excluding the impact of foreign exchange rates, net sales decreased. Similarly, in Europe, althoug Flavor Division achieved an increase in net sales from expanding business with our African customers, net sales decreased when we excluded the impact of foreign exchange rates. In Asia, our Flavor business performed well, particularly in the focus categories of beverages and savory products while Fragrance business were robust, as we focused our management resources on multinational and major local customers, specifically targeting the air care, personal care, and fabric care categories. Both divisions also achieved strong sales in emerging markets in Asia.
In terms of profit, we focused on expanding sales of mainstay and new products both in Japan and overseas, and also made efforts to adjust the selling prices to an appropriate level to address the increased prices of raw materials and other factors. However, operating profit decreased 61.1% from the previous year due to an increase in SG&A expenses, including labor expenses.
In the fiscal year ending March 31, 2025, we need to pay close attention to uncertain factors such as prolonged geopolitical risks, the rising the prices of resources and raw materials, global monetary tightening, and unstable exchange rate fluctuations. In the flavor and fragrance industry, the competitive environment remains severe, but the market is expected to continue to grow in Southeast Asia, and solid growth is also expected in the mature markets of Europe and the United States.
NGP-1 (2021-2023) Review
The fiscal year ending March 31, 2024 was the final year of our New Global Plan-1 (NGP-1) medium-term management plan, which was based on three basic policies, growth expansion overseas, profit improvement in Japan, and sustainability. The plan included five pillars and 7 priority tasks.
Regarding the first basic policy, growth expansion overseas, we worked to enhance and revitalize the organization at each of our sites to further expand our overseas business, which has grown steadily in terms of both sales and operating income. In NGP-1, our group focused on standardizing flavor and fragrance production, especially in Indonesia. To continue to capture opportunities in potential markets, mainly in emerging countries, we need to continue to strengthen our global business foundation.
As for the second basic policy, profit improvement in Japan, our group has been working to improve the profitability of our domestic business in Japan, which has been in a difficult situation in recent years, to be a foundation for generating stable earnings.
In NGP-1, we achieved revenue growth amid stagnating market conditions by acquiring new business in areas aligned with current trends, such as health-conscious fragrance proposals, and by expanding our product offerings and making capital investments in our synthetic business.
During NGP-1, we were able to increase sales and generate business in new areas amid stagnating market conditions by proposing flavors and fragrances that meet the needs of the current trends, such as the needs related to the growing awareness of health as well as by making capital investments to expand the number of products in line with our growth strategy in Fine Chemical Division. On the other hand, profitability did not reach the target level, and we need to take further steps to improve our product mix and cost competitiveness. Although the domestic market is not expected to expand, we will continue to improve profitability as domestic sales are still accounted for approximately 40% of total sales.
To address the third basic policy on sustainability promotion, our group has been promoting the Sustainability 2030 medium- to long-term sustainability plan launched in 2021, aligning with Vision 2040, "Care for People, Respect the Environment." Our group successfully promoted our core sustainability activities, such as obtaining the SBT certification of our greenhouse gas emission reduction targets and starting human rights due diligence. We will continue to promote sustainability initiatives in accordance with Sustainability 2030 medium- to long-term plan.
In NGP-1, net sales exceeded the plan each year, with the final fiscal year ending March 31, 2024, being the largest sales ever. The basic strategy will be carried over to the new medium-term management plan, and the Group will continue to work as one to address the remaining issues.
About our new medium-term management plan
In formulating the new medium-term management plan, we first reviewed the quantitative targets of our long-term vision, Vision 2040. Our group named the new FY2024-FY2026 medium-term management plan New Global Plan-2 (NGP-2) and its quantitative targets are net sales of 220 billion yen, an operating profit margin of 5% and an ROE of 8% in FY2026, the final year of the plan. In NGP-2, our group set three basic policies, growth expansion overseas, profitability improvement in Japan, and sustainable management. We also established the key success factors for each basic policy to clarify our area of focus, allowing us to communicate to stakeholders on our efforts.
As for the growth expansion overseas, the Takasago Group will steadily expand and grow our business through growth strategies based on our business axis and competitive technologies. In the area of the profitability improvement in Japan, Japan has the biggest sales among the whole group, but it continues to struggle with profitability. of the Japanese market. We will improve profitability by optimizing our product portfolio, developing new business areas and reforming our cost structure. Regarding sustainable management, we will contribute to solving social issues through the implementation of Sustainability 2030 and strengthen our management foundation to promote sustainable management.
Under Vision 2040, we aim to become an indispensable company that constantly pursues advanced technologies by respecting people’s diverse values, living in harmony with nature and confidently taking on new challenges. The Takasago group recognizes NGP-2 as an important step to promote our transformation toward the achievement of our vision, so we will steadily implement the policies and strategies that we have established and accelerate our efforts.
Purposes and Activities of Sustainable Management
One of the Key Success Factors in our third policy, sustainable Management, is Sustainability 2030 execution. Here, I would like to explain the details of the progress of our initiatives for sustainability.
One of the themes we are currently addressing is the climate change issue. In April 2020, the Group announced its establishment of polices in line with TCFD recommendations.
In May 2021, our greenhouse gas (GHG) emissions reduction targets were certified by the international Science Based Targets initiative, setting clear numerical targets to be achieved by 2030. These reduction targets are KPI targets for managing the progress of Sustainability 2030, and we are monitoring them on a regular basis.
Regarding Scope 1 and 2 emissions, we actively engaged in discussions about renewable energy with the manufacturing sites within our group. We increased our use of electricity derived from renewable sources of energy at our synthesis manufacturing site (Iwata factory), which in our group is a large energy user, and we expect this will result in a significant reduction of GHG emissions. In addition, as a product-level initiative, the Takasago Group has long been working on product life cycle assessments. Currently, we are working with external consultants to further refine the carbon footprints of some aroma ingredients products. In the future, we plan to disclose information about carbon footprints that has been third-party certified and promote the emissions reduction activities.
With respect to Scope 3 emissions, we participated in the Ministry of the Environment Support Project for Supply Chain Decarbonization Support Project in 2022. Based on the knowledge gained from the project, we are working to decarbonize the entire supply chain through global supplier engagement activities by task forces formed for each raw material category.
Maintaining biodiversity is also a very important topic. Our group uses many natural raw materials such as citrus, mint, vanilla, coffee and myrcene, which is the starting material for synthetic menthol.
We will continue our efforts to conserve biodiversity. Our procurement division promotes the Takasago Global Procurement Sustainability Key Initiatives (TaSuKI), and one of the objectives of TaSuKI is to consider and support environmental conservation at the source. One of the TaSuKI activities is the planting of grapefruit trees in Florida, USA, which began in 2019. Florida is one of the world's leading citrus growing regions, and our group has been purchasing grapefruit and orange essential oils there for many years. We started a tree planting project in cooperation with a local essential oil processor and a neighboring citrus farm. In 2023, some grapefruit was harvested from trees planted in the initial phase of the project, and we expect to obtain essential oil from the 2023-24 crop after this year.
To reduce environmental impact, the Takasago Group is also working to reduce water consumption and the wastewater discharged. In addition to reducing the amount of wastewater discharged, we strive to ensure that it is discharged in a manner that complies with legal regulations. To us, compliance is one of the most important management issues, and we manage it with our globally certified ISO 14001 environmental management system with clear standards and requirements for application.
We are also working on the SDG-conscious development of new products and materials. As environmental issues such as climate change and deforestation have become more serious in recent years, our group believes that our low-environmental-impact products and technologies will contribute to solving the SDG issues and enable us to capture many business opportunities.
We will continue to increase our efforts to develop nature-derived ingredients with low environmental impact by utilizing our unique continuous flow and catalyst technologies and biotechnologies, which save energy and resources, and develop biodegradable and renewable aroma ingredients. In addition, to effectively use limited natural resources, we actively search for and use renewable resources, reduce the use of natural aroma ingredients through the development of alternative materials, and utilize unused resources.
Currently, the Takasago Group is working with the New Energy and Industrial Technology Development Organization (NEDO) to advance a number of technology development themes that will contribute to energy conservation. We will continue to develop more unique and superior products and technologies and contribute to the SDGs, to increasing quality of life (QOL) and well-being.
Our sustainability initiatives consist of ESG activities in various areas, but here I have focused on the environmental issues in describing our progress. There are many issues in ESG areas, and we will continue to carefully address them one by one to resolve them.
Ambitions for the first year of NGP-2
For the current fiscal year (ending March 31, 2025), we are targeting a 7% year-on-year increase in sales to 205 billion yen. The operating income target is 4 billion yen, up about 72% from the previous year.
In terms of future capital investment, our group has many projects in this year, including the construction of a facility for pharmaceutical intermediates at the Iwata factory and a new building ”QA1” at the German subsidiary of Takasago group. We will also execute the Global SAP Project (a core system integration project). I would like to ask for the continued support and understanding of our shareholders for the long-term, which enables us to expand the business and establish a strong presence in the market.