What were the business conditions in the fiscal Year ended March 31, 2022 and what is the earnings forecast for the fiscal year ending March 31, 2023?
For the fiscal year ended March 31, 2022, the impact of the COVID-19 pandemic gradually eased, although there was a repeated cycle of the imposition and relaxation of restrictions on economic activities. While consumer spending, employment and income conditions were still weak, on the whole, it became clear that a turnaround in corporate revenue and business sentiment was occurring. In this environment, the net sales of the Takasago Group rose 8.0% year on year, hitting a record high.
In the flavors business, sales for beverages were strong in Japan and overseas. In the fragrances business, sales for air care in the United States were solid. In the aroma ingredients business, revenue was up with strong sales of specialty items and the impact of fluctuation in foreign exchange rates. In the fine chemicals business, sales were brisk in pharmaceutical intermediates. Operating profit also hit a record high, leaping 40.1% year on year.
For the fiscal year ending March 31, 2023, there are concerns about the rising prices of resources and the destabilization of supply chains. However, as the pandemic's impact on economic activities is weakening, the upward trend will continue.
The Takasago Group's net sales are forecast to be 172,500 million yen, up 6.2% year on year. Overseas sales will grow and demand will continue rallying in Japan as well. Meanwhile, operating profit is expected to decline due to increasing expenses for raw materials, manufacturing, logistics and other factors.
There is growth overseas. What drives this growth?
We believe that the wide variety of technologies that we have accumulated since our foundation, our finely tuned sales and marketing activities, our establishment of structures for procurement, production, quality assurance, supply chain and business continuity planning (BCP) and our efforts to ensure sustainability have resulted in our customers being confident in us, and they help us achieve growth not only in Japan but also outside the country. In the perfumery business, sales are not the result of a single product or technology. We believe that incessant effort to increase our comprehensive capabilities to fulfill our supply responsibilities is the only way to ensure that customers choose our products.
Odor preferences vary from region to region. When we began full operations overseas, we needed to secure local personnel to establish sales, research and development, and manufacturing functions. Since we began our business in New York and in Paris in 1960, we have directly investing and cultivating local customers gradually. As a result of our persistent efforts to expand our business, overseas sales are now 58% of our Group's total sales.
Recent examples include the start of deliveries of products for bouillon in Africa and for instant noodles and snacks in Southeast Asia in the savory category of the flavors business. We understand our technological and response capabilities are earning recognition after years of effort approaching local customers.
Sales of soap and detergent in the fragrances business were strong following increased public awareness of hygiene triggered by the pandemic in addition to a rise in sales of air refreshers and other products like candles in the air care category. Our multinational customers have been using our products for years. While continuously delivering products, we endeavor to earn their trust as a reliable supplier.
What is the background behind and the purposes for your purchase of a business site announced on April 25, 2022?
On March 30, 2022, we concluded a real estate transaction agreement to purchase land in Kajiwara in Kamakura-shi, Kanagawa Prefecture from Chugai Pharmaceutical Co., Ltd. The goal of this is the relocation of our laboratory from Hiratsuka-shi in Kanagawa Prefecture to the newly acquired site. After taking over the vacant lot in the second half of 2025, we will construct a laboratory building and move the operation in 2028.
Since our foundation, we have consistently defined research and development as a core of corporate management and our goal has been to serve society using the technologies we have developed.
Today, it is necessary that perfumery products play a larger role amid the diversification of consumers' preferences and their growing health consciousness. In addition, the circumstances surrounding research and development are massively changing amid the great progress being made in artificial intelligence and other information technologies and through open innovation.
These changes in the external environment continue to expand our research and development domains. Thus, we found it necessary to create a new research and development environment.
Currently, we operate business in 28 countries and regions around the world and we have laboratories in many of these countries and regions. We concentrate the technical knowledge gained in these regions in our headquarters in Japan for the advancement of the technical knowledge, and to share it with all of the regions. The concentration, advancement and sharing of technologies is one of our strengths.
We will also improve the communications functions at the center of our technologies for our bases around the world. This will enable us to respond to customers' needs across the globe to achieve continued growth.
Your New Global Plan-1 (NGP-1) medium-term management plan defines sustainability promotion as one of your basic directions. What is the progress of your actions to address this issue?
We are conducting sustainability promotion activities in accordance with the Sustainability 2030 ten-year plan launched in April 2021.
One of the issues we are addressing is global climate change. In May 2021, our Group acquired its greenhouse gas emissions reduction targets certified by the Science Based Targets initiative. These targets lay out our goals of reducing Scope 1 and 2 emissions by 27.5% and Scope 3 emissions by 13% by 2030 from their levels in 2019. To achieve these targets, we will act internally (in connection with the Scope 1 and 2 targets) to increase the use of renewable energy, reduce energy consumption and improve processes in accordance with our Group's policies in the four elements of governance, risk management, strategy, and metrics and targets that conform to the TCFD recommendations. For our supply chains (in connection with the Scope 3 target), we will strive to reduce emissions in collaboration with our suppliers of raw materials and others. Regarding business opportunities that are connected to the adaptation to climate change, we will focus on green chemistry and biochemistry and innovate to develop new products.
To reduce environmental impact, we will work to reduce water consumption, reduce waste emissions and accelerate our practice of three Rs (reduce, reuse and recycle).
Human rights are another global issue. Last year, the issue of human rights in the supply chain was heavily discussed. Beginning three years ago, our Group has been implementing human rights due diligence in accordance with the Takasago Group Human Rights Policy. Human rights due diligence is a process aimed at preventing the infringement of human rights. The implementation in 2021 confirmed there was no infringement of human rights. In European and American countries, human rights regulations have become more strict. In Japan as well, there is movement regarding legislation. Keeping a close eye on trends in society, we will share values within the Group and also with suppliers in our supply chain regarding our business activities in a continued effort to deter human rights abuses.
Collaboration in the supply chain is necessary to further reduce CO2 emissions and to prevent human rights violations. To carry out business activities that help achieve continuous growth and resolve social issues, our Group is responsibly procuring raw materials and services that are necessary in our businesses in accordance with the Corporate Procurement Policy. To ensure a mutual understanding and to collaborate with our business partners, we have reviewed priority human rights issues and incorporated measures to address them into the Takasago Group Supplier Code of Conduct. We will ask our business partners to comply with the code of conduct and work to ensure that our values are properly shared with our supply chain.
Cybersecurity measures and the acceleration of digitalization are essential for the continuity of our corporate activities. The establishment of robust cybersecurity is an urgent global issue and constant reinforcement is necessary. Since cyberattacks are frequent today, as tangible measures, our Group is introducing tools, device authentication, and multi-factor authentication to prevent attackers from intruding into systems. We will also use a vulnerability examination tool to enable continuous improvement.
As intangible measures, we will regularly provide a range of training programs to raise staff awareness. Regarding the advancement of digitalization, we have created a blueprint for our actions up to 2030. From a medium- and long-term perspective, the blueprint envisions what the IT platform should be as the foundation of our Group's corporate activities.
Although there are many other issues, guided by NGP-1, we will make groupwide efforts to increase sustainability.
Currently, what progress has been made in the Global SAP Project that began in 2020? What developments do you expect in the future?
As a part of the measures to achieve One-Takasago, we began developing a Global Template in January 2020 for the global integration of mission-critical systems. Although the pandemic has made the development period longer we have successfully finished developing the Global Template. Now, global and local team members are working together to carry out a general user test at our Singapore base, which is the first base implementing the Global Template. The process for implementing the Template is coming into its final phase. We are convinced that it will be able to start full operation without trouble.
We will successively implement the Template at eight principal overseas bases by 2025. Then, we will implement it at the headquarters and then apply the Template to satellite systems related to safety laws and regulations.
This corporate project will continue for more than five years. The global team includes nearly 40 people selected from overseas offices and our headquarters, to play central roles. We will facilitate the progress of the project through effective use of human resources. Through this project, we will globally integrate work flows to be used as the best practices for the Group. We believe that this standardization will broaden the range of deployment of our global personnel and help enhance our BCP.
Last, what is the latest earnings forecast for the fiscal year ending March 31, 2023? And what are your aspirations for the second year of NGP-1?
According to our latest consolidated earnings forecast for the current fiscal year, net sales will reach 172,500 million yen, up 6.2% year on year, and operating profit will be 5,000 million yen, down 43.3% year on year. We expect net sales to rise steadily. Our overseas business will continue to play a driving role. We also expect that demand will remain on the recovery trend, following the relaxation of COVID-19-related restrictions in Japan. However, global inflation means that the market prices of raw materials and fuels will rise. This will lead to greater manufacturing costs. In addition, sales, general and administrative expenses will be higher following the increase of labor, distribution and other costs. Negative factors like these will put downward pressure on profit. In addition, the conflict in Ukraine and lockdowns in China will make it difficult to procure raw materials. Making the fulfillment of our duty to supply products our top priority, we will carry out a range of measures to minimize the adverse impact of these factors.
Despite this environment, we decided to purchase the site for our new laboratory to enable future growth. Our research and development expenses for the current fiscal year will be 10% higher than the previous fiscal year. Our corporate philosophy states, "Create new value through innovation rooted in kaori (aroma)." In line with this, we will work intensively to open up new markets. SDG-conscious development of new products and materials is one of our seven priority issues. We will actively address this issue.
Specifically, we will accelerate efforts to develop highly biodegradable aroma ingredients and technologies that can be an alternative to the separation process which involves a high amount of CO2 emissions.
Responding to sustainability issues is a must for our continuous growth. We cannot manufacture goods if we do not consider human health and the global environment. We will seriously address every single issue to expand business and increase our presence in the market. Through this, we will fulfill our responsibilities as a member of society.
We appreciate the continuing understanding and support of all of our stakeholders.