Recording of Impairment Loss related to China Business and Future Management Policy

March 25, 2026, 5:30 - 7:00 pm

Jun Hishinuma

CEO, President and Representative Director

COO of the Food Segment, Member of the Board and Executive Officer CFO, Member of the Board and Senior Managing Executive Officer

*This material has been edited to make it easier to understand some of the questions and answers.

Let me ask you one question regarding your China business. While all of the businesses have been significantly impaired this time, I am wondering if there has been much change from the past in any of the businesses as we look at future initiatives. I would like to know what kind of drastic measures will be taken, and what your approach is to a more in-depth review, including the possibility of withdrawing from certain businesses.

Yao: The chocolate business is growing rapidly. So the main reason for the impairment loss this time is Hello Panda, produced at the newly established plant in Guangzhou. This product is already doing very well in the US, but it is struggling a bit in China.

Also, we have taken an impairment loss on the newly built lines at the Shanghai plant, which will significantly reduce the fixed cost burden in the future.

Therefore, for the chocolate business, we can expect profit growth in the future as well, as the business will return to the previous level of fixed cost burden, where an increase in sales leads directly to an increase in contribution margin, which in turn leads to an increase in profit.

With regard to the dairy business, we decided to earn contribution margin commensurate with fixed costs, which we called the profitability improvement plan, or Plan A. We implemented this plan. We are able to increase the contribution margin rate on our side, and we have done that much. However, market conditions had a substantial influence, and there was a factor that led the customer to decide to purchase based on the balance of price and value. Naturally, there was competition, and to be honest, this did not go as planned.

In order to balance out what is not earned in contribution margin by reducing fixed costs, we implemented this impairment loss as one major way.

The ice cream business was initially doing quite well and supporting the profits of the China business. We had a plan to double the size of the business at once by building a new plant in Shanghai, but the Chinese market has cooled off considerably. Then, as for the competition,

the truth is that ice cream was oversupplied all at once because all the competitors were adding capacity in the same way. This means that prices continued to stagnate, and we do not expect immediate market recovery in this regard.

Therefore, we decided to temporarily suspend operations in Shanghai, thereby offsetting the costs through fixed expenses.

The products produced at the Guangzhou plant were originally profitable in China, and we expect to be able to secure sufficient profits at that level by consolidating our operations into single plant.

The B2B business is performing very well. It is true that sales of milk for coffee chain stores have been caught up in some price competition, but sales of cream is growing very strongly. While the volume in the dairy business has been sluggish, and the fixed cost burden is borne by the same plant, so the fixed cost burden is slightly higher due to the growth of the B2B business. Although the financial results have deteriorated slightly, we recognize that the business itself is growing significantly and holds great promise for the future.

However, as you say, we are still JPY800 million away from breaking even, so if the plan for growth in contribution margin is Plan A, then the plan that led to this impairment loss is Plan B. As for the additional JPY800 million, I cannot give you the details of this plan right now, but we are running it as Plan C that are within our control.

I understand that, as for chocolate, the burden of fixed costs in Guangzhou may be reduced, and we can also expect some benefits from lower cocoa beans prices.

On the other hand, I'm still concerned about the dairy and ice cream businesses. As for dairy, you are also considering a Plan C as you mentioned. I would like to ask what the timeline is for Plan C of the dairy, and whether you are in a situation where you need to do some more leveraging measures for ice cream.

However, rather than focusing on measures related to contribution margin, we are currently considering measures related to fixed costs that are within our control.

Regarding the ice cream, you're right that it's basically just a matter of reducing fixed costs and returning to the original state of something that was already made. In this regard, we are taking measures to achieve break-even in FY2026 as promised. I would like to explain at another time whether we should pursue further growth, or whether we should be content with the current level of profitability at a certain scale.

It may lead to the question as to whether it makes sense to continue the business in a small and compact manner. I'd like to address that separately and explain my thoughts on the matter at that time.

On page four of the presentation slide, out of the JPY4.8 billion increase in profit from the current fiscal year to the next fiscal year, the effect of impairment loss is JPY1.7 billion, and the remaining JPY3.0 billion of profit increase is expected during this one-year period. Could you explain this a little further?

Also, I understand the direction of consolidating management resources in the chocolate business overseas, but do you see this overseas business as a driver of profit growth again in the next medium-term business plan? Or, are you not seeing that much profit growth, as the chocolate business is in the investment phase and the dairy business is under consideration, including additional restructuring?

The same is true for Pharmaceuticals segment, where overseas challenges have progressed to a greater extent than with Food, and we are succeeding. Furthermore, we would like to actively pursue challenges related to vaccines and others, including Nacubactam, which is expected to be approved this year.

Therefore, as a group, we are committed to taking on new challenges overseas, using our past failures as lessons and approaching these challenges with renewed determination.

Could you explain the breakdown of JPY3.0 billion profit increase? Is the contribution from fixed cost reductions the main driver?

Yao: We are not merely shutting down the plant facilities in Shanghai. We are also working to reduce fixed costs including labor costs. As for nutrition, although it's only a small part of our business, we've also withdrawn from the SAVAS business we've been handling, so we'll no longer incur any expenses.

As for dairy and B2B, we can see a trend toward some increases in contribution margin. In addition, regarding confectioneries, although there are some positive effects from impairment loss, the trend in sales has continued from the past, so we counted the trend as an increase