Kao Corporation (4452.T) Earnings Call Transcript & Summary

Thank you very much for taking the time to join us today. I'd like to talk about what we aim to achieve as cosmetics business of Kao Corporation and Growth Strategy. There are three parts to my presentation. First, I will explain what we aim to achieve and K27 strategic vision and the progress of the first half of 2025. Secondly, I'd like to talk about the growth strategy for six focus brands, which will be the key, and building a business foundation for further growth. First, let's look back at our company's business characteristics, which form the basis for differentiation along with its history. Kao's Cosmetics Business is one of its major businesses accounting for about 1/5 of the total sales. Kao, KANEBO founded in 1887, have their origins in the cosmetic business of SOFINA in 1982 and KANEBO Limited in 1936. And have continued to create valuable brands that transcend the ages welcoming Curel and MOLTON BROWN into the group. Each of these histories form the foundation of our current technological capabilities and brand power. Our vision is to become a sharp top business that is the most chosen in the targeted categories, price targets and regions by combining scientifically proven benefits with emotional and sensory appeal to create a group of distinctive brand identities. The driving force behind this is Kao's comprehensive strength, including the technology and brand nurtured over a long history, extensive manufacturing technologies based on essential research on skin with human subjects, chemical, and process research that goes beyond cosmetics, emotional value born from consumer research, collaborations with the chemical business and household and personal care business and global network of basis. With these assets at the core, we aim to establish a revenue base by 2027 and achieve sustainable growth thereafter by achieving both global consistency and local flexibility. However, in reality, the environment surrounding the cosmetics industry is not an easy one and is rapidly changing. This shows our sales trends since 2017, the market environment changed dramatically in the wake of COVID-19. Until 2019, the Japanese market benefited greatly from strong consumer spending, including inbound tourists from China. However, the situation has changed dramatically since the pandemic with a decline in inbound tourists, changes in lifestyles due to digitalization caused by restrictions ongoing out and the impact of out treated water. Manufacturers who have lost their mainstay in China have entered a challenging period in terms of both sales and profits. Our company is no exception, and we decided to return to the roots of our business structure and quickly restructure our approach for the huge Chinese market. As a result, in 2025, we expect to build on the results of these structural reforms and achieve year-on-year growth without relying on the Chinese market. In light of this recovery trend, we have decided to first envision what we aim to achieve and then incorporate it into the business design for K27 medium-term financial performance targets. First, our performance target is to achieve JPY 400 billion in sales and 15% operating margin. To achieve these, we have positioned K27 as a medium-term milestone that must be achieved with targets of JPY 300 billion in sales and 7% operating margin. These figures are based on sales CAGR of 7% and 10% increase for our six focus brands and we aim to achieve them using 2025 results as a solid foothold. Next, I would like to explain our thinking on business reform, which will serve as an important starting point. We recognized that the fundamental issue was that the investments were dispersed under our previous brand-based operations and that high fixed costs were putting pressure on profits. We, therefore, focused on globally unified operations. Specifically, we focused our resources on six focus brands for global expansion, developed a scrum style operation without borders and restructured the organization to enhance execution. As a result, we gained strategic focus in our global cosmetic business investments, achieving both growth and profitability improvement in Japan, laying a foundation for global growth and making progress in China business reorganization, a virtuous cycle of capital creation and focused investments have begun. These efforts are beginning to bear fruit in the performance of 2025. Under these new business reforms, we have seen positive results in our Japan business, global growth and China business. Our six focus brands in Japan have grown 15% year-on-year. Our e-commerce business has grown 34%, and we have achieved JPY 3.8 billion reduction in fixed costs. Structural reform and growth are progressing in tandem. In global expansion, Thailand, in particular, has seen rapid growth of 27% year-on-year. ASEAN as a whole is also showing significant growth. We have also begun integrated operations which are essential for globalization and are seeing results by establishing our brand in targeted areas and increasing recognition. Even in our China business, which is susceptible to market fluctuations, sales prices have recovered through thorough management of distribution inventory. At the same time, we are steadily progressing with local development and cultivating locally produced products that are not affected by imports. We are seeing positive results not only in the numbers, but also in feedback from internal and external stakeholders. One happy feedback from a consumer with serious concerns that this product has changed my life. We also received the voices of expectation from the beauty industry. Within the company, we have enhanced our cross-divisional scrum style operation, starting with the cosmetics integrated project. This increased the sense of unity, speed and responsibility becoming a major driving force and entire business is starting to move steadily forward. Now I'd like to explain our overall business policy for achieving K27 and our growth strategy for six focus brands. As we have seen during the pandemic, the cosmetics business is susceptible to market fluctuations. So it's important to constantly monitor overall balance to control where to expand and where to tighten. However, growth cannot be expected simply by maintaining overall balance. Therefore, we need a comprehensive blueprint that visualizes the cycle of constantly generating growth and investing in growth and helps us determine when to use the accelerator or when to use the break. This diagram simply illustrates a self-sustaining cycle of capital acquisition and investment by simultaneously implementing earning power and business streamlining, leading to business expansion and improved soundness. Based on this, we can clarify the mission of each brand, monitor events affecting the entire business and quickly address any abnormalities. To simply put, growth potential is having a unique global strategy. Earning power is achieved by thoroughly implementing a category portfolio based on key technologies and business streamlining is achieved managing assets, including inventory. First, let's focus on the growth potential that drives business expansion. The six focus brands are the source of our global growth potential, including SENSAI established as a luxury brand in Europe with the philosophy of living mind-free in place. And MOLTON BROWN, a luxury brand established in London in 1971 and is a supplier to the British Royal family. They have a mission of aggressive global expansion. Each brand specializes in a specific category, price range and geographical area. By expanding into the right areas through the right channels, we can steadily achieve the top position in our targeted markets. While we won't go into the details today, we also have another group of brands separate from these globally competitive brands. These brands are deeply rooted in Japan and Asia. And by focusing on acquiring loyal consumers who generate efficient profits, they form the backbone of our entire business. In this way, all of our brands work together as one team to drive business growth. Earlier, I mentioned expansion in the right areas, but not all six brands will move in the same direction at the same time. As step one, we are dividing them into those three models and developing them sharply. By finding success patterns in areas where each brand excels. Number one is Japan origin model; second is Europe origin model; and the third is Asia model. And applying that know-how to the next brand, we aim to increase the success rate and maximize investment efficiency. Let me introduce some representative examples of those three models. The first is Curel, a Japan origin model. Curel currently operates in 12 markets worldwide, including Japan, China, Thailand, Singapore and the U.K. The strength lie in its trust as Japan's #1 derma care brand and its proven effectiveness backed by over 25 years of ceramide research and over 40 years of research on dry and sensitive skin. The truly unique product capabilities, particularly its proprietary development of ceramide functional ingredients that enhance skin's barrier function and its processing technology for fine emulsification and high concentration of easily precipitated ceramide functional ingredients underpin the brand's long-standing popularity among consumers suffering from dry and sensitive skin. We have now targeted Europe, where 40% of consumers report having dry and sensitive skin, a rate comparable to Japan's 44% as a region to expand into. This figure is significantly higher than Asia's 17%. Moving forward, we will focus on growing sales in existing markets while also pursuing new market entries in Europe where SENSAI and MOLTON BROWN have established business foundations. Our goal is to achieve a 50% overseas sales ratio by fiscal year 2027. We will enhance our global presence through two key drivers: expansion in Europe and the local optimization of our product portfolio. Second is the European origin model represented by SENSAI and MOLTON BROWN. Both brands will deploy brand value cultivated in Europe into Asia through borderless integrated operation that manages the fast-growing Asian region as one market. SENSAI, for example, is a rare brand developed by a Japanese company as a European brand. In Europe, where the use of face wash and lotion was not common, SENSAI has advocated double cleansing and double moisturizing of Japanese skin care rituals. Now the SENSAI value fostered in Europe are to be deployed back to Japan and Asia. Adopting the concept of integrated operation where Asia as a whole, not each country separately is regarded as a customer shopping forum. We will accelerate our sales plan in Asia, taking advantage of the brand's 40-year track record and the 90% of its sales coming from outside Japan. Third is the Asia model represented by KANEBO, KATE, and SOFINA. The Asia model delivers values established in Japan, taking into consideration the characteristics of each country and region. KANEBO is a brand that achieved three consecutive years of 30% growth whose strengths lie in its unique products and marketing that embody the I HOPE brand purpose as well as trust and expertise backed by a long history. KATE aims to become the #1 brand in Asia from #1 in Japan. It will accelerate its development in Asia by leveraging Japanese culture through the evolution and penetration of its core value "NO MORE RULES" and "Shadow Enhancing Makeup" for Asians. As a strategic country, we will focus on Thailand, where the number of tourists is increasing due to its affinity with Japanese culture and similarity of the national character and where inbound visitors from the countries is expected to be second only to that of China. Against the background of relatively stable economic growth among Southeast Asian countries, we will aim at successfully achieving 2.5x sales in Thailand, where cosmetics consumption is expected to increase and use the strength of brands originating in Japan and brand identity to capture the Asian market and expand sales and profits. Meanwhile, SOFINA has been restated as a Renewed SOFINA and the values of all series will be integrated into one SOFINA brand. The core of the brand is the counseling channel represented by SOFINA ip, which embodies stratum corneum care. Next spring, the first new series incorporating cutting-edge science unique to SOFINA will be launched through e-commerce. In autumn next year, we will introduce the second series, which will be the first entry into the self-selection channel in the domestic market. We will use the three channels differently according to the characteristics of each geographical area to achieve a fresh start in the Asian market. First, SOFINA Ange will be launched in September this year in the currently strong Taiwan and Hong Kong markets with the aim of increasing Asian sales by approximately 1.5x by 2027. We will increase both the presence and scale of the brand through unlocking skin's potential with science, which is common to all SOFINA series and regional optimization. So far, I have talked about three models of deployment, which are the first steps for the six global focus brands as growth potential. In the future, we will create a playbook of winning patterns in each geographical area and propagate our know-how to the next brand through cross-brand development to further increase the initial speed of launch and winning rate. We will also control prices, inventories and measures across borders through borderless integrated operations to accelerate the establishment of our business in each area of operation. Finally, with an eye to the future, let me explain how we will build a business foundation for solid growth. The design philosophy of our Cosmetics Business is the positive cycle of capital acquisition and investment, which was presented earlier. In order to maximize the efficiency of investment, it is important to achieve both growth and improved soundness. From this point onwards, we will focus on earning power and business streamlining as the means of improving soundness in order to generate capital. The key points are the product category strategy, which is the basis of earning power, maximizing the sales capabilities of people and streamlining fixed costs through data-driven SCM efficiency. First is the product category strategy, which generates earning power. The concept of product category strategy is the idea of focusing on categories with advantage such as highly differentiated core technologies and high profitability and strategically concentrating on them to gain profits efficiently, which we call earning power or winning power. As is the fate of cosmetics, there is a tendency towards offering a wide variety in order to meet diverse needs. Adapting to trends is an important consumer value. However, designing all products from scratch, simply means dispersion of investments, which is a major challenge in terms of efficiency and profitability. The solution to this challenge is the modularization of product design and shared fundamental technologies. We have accumulated fundamental technologies with exclusive uniqueness in each category. And as I said at the beginning, we can draw on the knowledge and experience from a long history. This means that the fundamental technologies of the modularized product elements are shared, while other parts such as functionality, ingredients, fragrances and packages can be easily updated by flexibly combining them in a way most suitable for the brand, so we can design products efficiently and sustainably. In other words, by sharing strong differentiating technologies among focus categories, it achieves maximum results with efficient investment. The fundamental technologies that are the source of this differentiation will make use of technology assets in a wide range of fields across the Kao Group. These are some examples. The most distinctive feature is the combination of material design from a chemical perspective and a wide range of production process technologies in addition to dermatological and biological science, which are strongly linked to cosmetics. We provide a truly unique product experience that only a general chemical manufacturer can offer. The essential elements for improving sales capabilities and SCM efficiency are the power of people with specialized skills and the power of digital and the use of AI. It is important to combine the experience and intuition unique to humans with the power of digital and AI to process vast amounts of data and derive rational and optimal solutions. The most important feature of our AI-based data-driven management is that we have data inputs from a wide range of sites and outputs for diverse applications in-house. In other words, in addition to generally available market data, we can input data from our own research, sales, production, counseling service counters, logistics systems, et cetera, and output this data not only to marketing, but also to production control and various other fields. To give an example, a challenge that cannot be ignored in maximizing cosmetics sales capability is the workload of each salesperson to acquire a vast amount of brand knowledge. The power of digital technology can reduce this workload and support salespeople so that they can deal with consumers with confidence. We have built a system that integrates vast amounts of data, converts it into intelligence through AI and extracts appropriate information when necessary. Furthermore, by accumulating information on raw materials, production and sales, it manages key asset items such as supply and demand forecast and inventory status and is expected to contribute to highly accurate data-driven management that drives SCM efficiency. Let me now summarize our growth strategy. We are taking the first steps towards the three models approach. Japan-origin, Europe-origin and Asia model. In line with the characteristics of the markets as for growth potential, Curel is leveraging the strength of its Japanese origins while also starting development from Europe. SENSAI is scaling up the value it has fostered in Europe, in Asia. Molton Brown is integrating the entire process from experience to purchase and sign conversion under the OMO strategy. KANEBO KATE are horizontally expanding the successful Thai model into Asia. SOFINA is responsible for expanding the consumer demographics in Asia with the One SOFINA Restaging based on skin science. KPIs are designed for the period of 2024 to 2027 with overseas sales ratio, Asian sales growth and country-specific expansion indicators being managed by model. The aim is to accelerate the great of growth by steadily acquiring a reproducible growth pattern and horizontally deploying the know-how to the next brand through the combination of deployment model, brand and KPI. Finally, we present our aim to achieve in K27 as a milestone. Our performance targets are JPY 400 billion in sales and an operating margin of 15%. And by 2027, we aim for JPY 300 billion in sales and operating margin of 7%, a sales CAGR of plus 7% and six focus brands growth of 10%. We will first build a solid foundation in 2025. The drivers are the concentration of resources on the six focus brands, which have growth potential, the acquisition of earning power through the cross utilization of fundamental technologies in the product category strategy. and business streamlining through SCM and asset efficiency. We aim at achieving both growth and profitability with this approach. We will work from 2025 onwards to build the foundation, establish a stable revenue base and expand growth with the aim of achieving the target as quickly as possible. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]