What were the business conditions in the fiscal Year ended March 31, 2023 and what is the earnings forecast for the fiscal year ending March 31, 2024?
In the fiscal year ending March 31, 2023, while the economy continued to be affected by the covid-19 infection, it gradually became compatible with socioeconomic activities and showed signs of a gradual recovery. As for the global economy, there were many causes for concern, including Russia's military invasion of Ukraine, the energy market turmoil triggered by the invasion, the impact of trade friction between the U.S. and China on the economy, global inflation, and exchange rate fluctuations.
Against this backdrop, the Takasago Group's net sales increased 15.0% from the previous fiscal year, reaching a record high.
By segment, in Japan, the Flavor Department focused on developing growth categories and new customers, and achieved steady sales growth. In the fine chemicals segment, we increased the supply capacity of existing pharmaceutical intermediates by improving production efficiency, and also acquired new commercial products.
In the Americas, the Flavor and Fragrance divisions maintained the growth by expanding sales to domestic and regional customers in addition to multi-national customers. In the fine chemicals division, sales remained strong due to aggressive marketing efforts, including sales expansion of new products.
In Europe, the fragrance division performed well by focusing on sales expansion of cosmetics and other products, and the flavor division achieved business expansion with some clients in Africa.
In Asia, sales of beverage and savory flavorings, focused categories in the Flavor division, were strong, and sales in emerging markets were also favorable. In the Fragrance division, sales were strong because of the concentration of sales workforce on multi-national and major local customers, targeting the air care, personal care, and fabric care categories.
In terms of profit, we focused on expanding sales of mainstay products and new products both in Japan and overseas, and also made efforts to adjust the selling prices at an appropriate level to cope with the higher prices of raw materials and other factors.
In the fiscal year ending March 31, 2024, although the impact of the covid-19 infection on economic activities will ease, the situation is expected to remain extremely uncertain due to the future situation in Ukraine, resource price trends, and concerns of a downturn in the economies of various countries against a backdrop of global monetary tightening and other factors.
In the flavor and fragrance industry, the competitive environment remains severe, but the market is expected to continue to grow in China and Southeast Asia, while solid growth is also expected in the mature markets of Europe and the United States. However, we anticipate a difficult environment in terms of profits, affected by soaring raw material and energy prices, supply chain disruptions, and other factors.
Please explain your medium-term management plan, which is entering its final year.
The fiscal year ending March 31, 2024 is the final year of our medium-term management plan, New Global Plan-1 [NGP-1], which is based on three basic policies, "Growth expansion overseas," "Profit improvement in Japan," and " Sustainability promotion," and has five pillars and priority tasks.
With regard to the first of these basic policies, "promoting overseas growth," we are enhancing and revitalizing the organization at each of our bases in order to further expand our overseas business, which in recent years has grown steadily in terms of both sales and operating income and has come to support the overall performance of the group. In addition, we have been deploying the implementation of a global ERP system, which was introduced to our Singapore base last fiscal year following completion of our global template. In the fiscal year ending March 31, 2024, we are deploying the system in the U.S., and after that, we will proceed with the introduction to other bases to unify management resources on a global scale. On the other hand, in Japan, with the market not expected to expand, the company has been facing a difficult situation in terms of profits in recent years. Despite remarkable growth overseas, domestic sales still account for about 40% of total sales, and we are working to improve profits in order to serve as a foundation for generating stable earnings. One of our measures is to reduce manufacturing costs by reviewing our production system, and we will continue to focus on automation and labor saving. In addition, for flavor and fragrance products, we will continue to examine this issue with a focus on business, research, and production divisions.
The third of our basic policies is "Sustainability promotion" from the perspective of realizing Vison 2040, which has the slogan "Care for People, Respect the Environment," and aiming for long-term business growth. One of these efforts is the development of products with an awareness of their contribution to the SDGs. In terms of development, we need to consider raw materials, manufacturing methods, manufacturing processes, and other aspects from multiple perspectives. Among other things, we are striving to introduce of the latest biotechnologies and the strengthening of our manufacturing infrastructure using these technologies.
Based on these three basic policies, we will make a concerted effort to achieve our numerical target of 200 billion yen in net sales and accumulate as much operating income as possible in the final year of NGP-1, the fiscal year ending March 31, 2024, by making organizational and cross-functional efforts.
Sustainability promotion is one of the basic policies of NGP-1. Can you tell us about the purpose of promoting sustainability and the progress of your activities?
Sustainability is now not only a governance code required of companies, but it is also becoming an essential part of our response to the various demands of our customers. In 2002, the Takasago Group published its Environmental Declaration, which was the starting point for our EHS activities. Currently, the entire Group is strategically promoting sustainability activities to further enhance social and governance aspects. In addition, under the slogan of Vision 2040, "Care for People, Respect the Environment," we aim to respect diverse values and coexist in harmony with nature. Through sustainability activities aimed at realizing this goal, we intend to enhance our corporate value as well as contribute to a sustainable society.
Our group is promoting sustainability activities based on "Sustainability 2030," which outlines our plan for the next nine years toward the year 2030.
In April 2020, we established and announced the Group's policies (Governance, Strategy, Risk Management, and Metrics and Targets) in line with TCFD recommendations, and in May 2021, we received the Greenhouse Gas Protocol (GHG) certification from "Science Based Targets", an international initiative, and clarified the numerical targets to be achieved by 2030. Last year, we were selected for a program supported by the Ministry of the Environment, which provided us with an opportunity to systematically learn the approach to GHG reduction in Scope 3. The Group is actively exchanging opinions on how to reduce the emission of GHGs.
In addition to our efforts to reduce GHG emissions, we also focus on manufacturing processes and products that are environmentally friendly. In our manufacturing processes, we use a continuous flow system for the production of pharmaceutical intermediates in line with the U.S. FDA's recommendation for green chemistry, and we use catalysts based on our proprietary technology to improve energy efficiency. At the same time, we are also focusing on the development of environmentally friendly flavor and fragrance materials by utilizing biochemistry. In addition to our traditional domestic production, we are expanding our range of high-yield bio-derived natural flavor ingredients by utilizing the proprietary production technology of Centre Ingredient Technology, which joined the group in 2016.
Maintaining biodiversity is a very important topic. We use many natural raw materials such as citrus, mint, vanilla, coffee and myrcene, the starting material for synthetic menthol. To preserve the natural environment, we are strengthening its partnership with local communities under the "TaSuKI Originals, Care and Comply" initiative. One of these 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 we have been purchasing grapefruit and orange essential oils there for many years. In recent years, Florida has been hit hard by hurricanes and disease, which has had a significant impact on the crop. Therefore, with a view to securing a stable supply of raw materials, a grapefruit tree-planting project was realized in cooperation with a local essential oil processor and a neighboring citrus farm. This year, about 90% of the trees have been planted, and the grapefruit planted in the early stages of the project will begin to be pressed for essential oil.
In the production of vanilla in Madagascar and lavandin in France, we are also working to reduce the concerns and burdens of production for farmers by strengthening cooperation with local communities.
On the other hand, we are also focusing on the development of biodegradable aroma ingredients. Aroma-ingredients, which are mainly used as fragrance materials in fragrance products, are required by the market to be friendly to the global environment and ecosystems, and we see this as a great opportunity.
Other activities to reduce environmental impact include reducing water consumption, reducing waste, and promoting the 3Rs (Reduce, Reuse, Recycle). Reducing plastic containers is another major issue. Plastic containers used for our products are made of multiple layers of plastic because of the importance of barrier properties. This makes recycling more difficult, but since reducing the number of plastic containers is an important issue, we will continue to study with container manufacturers to switch to containers with a lower environmental impact.
Our sustainability activities consist of ESG activities in various areas, but I have focused on the environment in describing our progress here. There are many challenges in ESG field, and we will continue to address one by one to make some progress.
NGP-1 is developing the Global SAP Project (ERP system integration project) overseas as part of its efforts to strengthen its global management foundation. Can you tell us more about the progress of the project and your future plans?
The Global SAP Project is a mid- to long-term group-wide project that began in 2020. We have started developing a common template to be used globally. It took almost two years to complete development of the template due to the Corona disaster, but at the end of last year, the system went live in Singapore, our first implementation site. This year, we are working on the implementation in the U.S., and next year we plan to introduce the system in Europe, and a few years later in Japan. While integrating the ERP system in this way, we would like to promote global integration of satellite systems as well..
Lastly, what are your ambitions for the final year of NGP-1?
For the current fiscal year (ending March 31, 2024), we are targeting a 7% year-on-year increase in sales to 200 billion yen. Operating income is budgeted at 4 billion yen, down about 30% from the previous year, due to soaring raw material and energy prices, supply chain disruptions, and other factors. The entire group is working together to implement various measures to increase operating income as much as possible.
We have also begun to consider the next medium-term management plan (NGP-2). In terms of future capital investment, we have many projects in the pipeline, including the construction of new laboratories, expansion of production capacity at domestic and overseas plants, and measures to deal with aging facilities. Although times are tough in terms of profits, even excluding the effect of the weak yen, sales have been growing very steadily over the past few years, and we intend to further solidify our internal foundation so that we can continue to meet strong demand.
I would like to ask all of our shareholders for their continued support and understanding for the long-term that enables us to expand the business and build firm presence in the market.