Kao Corporation (4452) Earnings Call Transcript & Summary

Thank you very much. This is Yoshihiro Hasebe. I will be the President and CEO in January next year. Thank you very much indeed for joining us at the Kao Group Mid-term Plan K25 announcement. I'd like to take this opportunity to thank you for your support for our business activities. Now the impact of the COVID-19 still continues, and we are having this meeting online and on-demand, I hope that all of you will place the top priority on your health as you continue to work. Now let me start my explanation on this bamboo trees on the title page. I'd like to explain the meaning of this. Bamboos, in comparison to other plants, they grow fast and tall, and they are very strong. Under these stormy conditions, they are not beaten. They are very strong and flexible and pliant because they have nodes. As we formulated K25, in addition to growing, we wanted to generate a very strong growth, just like the nodes of the bamboo trees. Today, we will be talking about our future vision and the future and aspirations, what we would like to achieve. Those are the things that I'd like to talk about. As for the business results and performances, next year, at the time of the business results announcement, I would like to give you the details. I hope you understand. First, I'd like to explain the key factors for K25, starting with the critical background. Due to the COVID-19, we have seen the major changes in the society and economy, we cannot avoid them. And also the global environmental issues are becoming more serious. At the same time, we are seeing our societies divided and self-interest principles are widespread. Now looking at the Kao situation, we have continued the profitable growth. But more recently, the growth of sales and profit has slowed down. But we have continued to have attitude to pay high dividend. Due to the rapid changes in the world, it is a fact that it has become difficult to set publicly announced targets to the stakeholders. We have focused on our existing businesses to realize the linear growth. And lack of open innovation spirit resulted in a lack of new challenges into new businesses. Under those circumstances, we have established our aspirations. I'd like to talk about those 3 aspirations and explain the directions that we would like to move forward. Enrichment of the lives of people. This is Kao's mission. For 130 years, has changed -- it has not changed and we will continue to contribute to the healthy lives of people. People living in healthy lives and this is our origin to focus on the healthy lives of people. In 2009, we have done the Kao environmental statement and promoted economic together. We want to become a good existence with nature. We wanted to be a good existence for ecology. And now we would like to focus on another thing that is life of the human beings to maintain the steady state and to maximize the steady state of human beings, to protect lives and protect people, so protecting and saving lives. This is a new focus of Kao. When you think about this, our concept is Kirei-Making Life Beautiful. The products and services that we provide can be expressed in a converged manner as Kirei-Making Life Beautiful. And now is the time for us to be very conscious of being a company that saves future lives. And we also take on the challenge of using technology as a weapon in new fields that we haven't been able to fully utilize in our previous business areas. We are starting another Kao. That's what we call. So now I want to discuss the basic concept of K25 in view of K30. The most important vision is sustainability as the only path. We refuse to take any other path than the path to a prosperous and sustainable society. So that is incorporating into our vision. And let me explain the 3 basic policies, our objectives of K25. The first is to become an essential company in a sustainable world; second, to invest in major reforms and growth of Kao and to transform Kao into a strong business heading for the next big growth. This will be an important point in the new plan; thirdly, in order to realize such a transformation of businesses, we need to have our employees' power. So maximizing the power of our employees would be the third objective. Having excited employees will encourage our company to grow stronger. So we also want to update the philosophy that we have held. So evolving the philosophy will be needed once we see changes in the society and surrounding environment. The ESG-driven Kao Way. When we started ESG department, the head of the department, Dave Muenz, tried to steer the direction into ESG and taking on a major step forward. Along with that direction, the drafted ESG-driven Kao Way, which we will start using to take a strong step from next year. And at the same time, we have grown the business focus on financial targets. But when we challenge ESG, the current KPI targets are not fully suitable. That's what we are finding. Therefore, we are starting the use of OKR, objectives and key results. The challenges are necessary and all the members will be connected. I will put more color on this later on. So to achieve those objectives, we are implementing this OKR concept. So assuming our aspirations and thinking about the major key results, then we take actions to move forward. And that is expressed in K25 with 3 objectives. First objective is to lead a sustainable ideal society. And we want to reinforce ESG investment furthermore. Just by investing into ESG, it would not allow us to live ESG longer, faster and stronger. So we need to have the structure to support as the business to sustain ESG activities in a sustainable manner. It cannot be completed just by our own efforts. It will require the efforts of many parties. We call this as the reflection of future earnings to achieve this. So when these 2 factors meet each other, then sustainable, self-driving society will start running. And Kao wants to take a lead in that effort. Secondly, we are starting Another Kao. And at the same time, we want to reinforce the current Kao, which we call as Reborn Kao. So we have those 2 Kao perspectives to be promoted in a hybrid manner. This will be the second objective. At the beginning, I mentioned about saving the lives, future lives, and that will be the basis to expand the global business. And this would be the Another Kao and will be an important factor for existing Kao. Thirdly, to double the productivity of our business activities, we will try to visualize challenges and try to create a culture to allow people to challenge. OKR will be an important tool for that. And by also utilizing the power from external parties, we will try to move forward towards the goal. And as a result, we want to achieve doubling the productivity of our business activities. The current capability we have, along with the open innovation, along with challenging spirit, will allow us to achieve a doubling the productivity for sure. Once those 3 objectives are met, as a result, we will see the K25 financial goals will be achieved, which will be the record-high sales and profit growth, to reach net sales of JPY 1.8 trillion and to reach operating income of JPY 250 billion. We have never achieved these numbers in the past. But by taking on challenges for these 3 objectives, then we will lead to the conclusion of achieving these targets. That's what we hope to see. So in order to become the essential company in a sustainable world, under key results, they are as follows: first is carbon recycling. We will convert the carbon dioxide into raw materials. We have been trying to reduce the carbon dioxide and we'll continue those activities. But there are a lot of CO2 is generated. And by using our catalyst technology, we want to convert it into oil and into surfactant and into products. So this is the true reverse innovation and carbon recycling. Second point is positive recycling. It's not just to manufacture the same thing through the recycling, but rather to create new businesses. Let me give you one example. We have a lot of plastic containers used in our business. And by using used plastic containers, we would like to manufacture the highly durable roads and pavement so we can take advantage of those waste plastic into the highly durable roads, so that the roads can last not only for 10 years, but for 100 years. In the future, the autonomous cars will be a standard. So there is no question that we would need a highly durable roads and pavements. So we want to challenge that. So the waste that we used to throw away, we can upcycle it and create a new business. So that's what we are thinking. The third is stop pandemic. In order to eradicate the source of infectious diseases, we will bring all the sanitation technologies, for example, bioscience, safety science and material science, we will bring all of those technologies to face this problem. So stop pandemic, of course, is not a domestic issue. It is a global issue. And this is a very important element to face such global issue. So those 3 key results at what we have. And keyword for that is beyond sustainable. It's not just to create a sustainable society, but to make proposals which go beyond the sustainable. Second objective is to transform to build robust business through investments. In order to create Another and Reborn Kao, we need this concept, and let me explain this. As for the new business, I would talk about this in detail later. But in one word, this is digital and precision health care business. Secondly, about existing businesses. We have various products and brands. But recently, we have fewer outstanding or leading-edge products. That is a sense of crisis that we have. We want to manufacture and produce outstanding products. We are proud to have a great monozukuri manufacturing capability. We want to create something that is needed and demanded by our customers. We want to make #1 products so that the group of our products can resolve many of the issues and realize some of the aspirations of the customers. Another thing I'd like to talk about is cosmetics and sanitary business, including diapers. In one word, we are pursuing the next innovation for those businesses. In this business area, we have steadily grown our businesses. But one of the things that we have to improve is that the category and the products are very similar to competitors, and we have improved the performance a little bit. But we will change that. We changed the values. And by doing so, we would like to make indispensable products in a particular field. So that's the pursuant of the next innovation. So keyword for that is Another Kao and the Reborn Kao. So with this hybrid management, we will create new Kao. So earlier, I mentioned about precision health care. So I want to give more details on this to give you an image. So we have 4 monitoring technologies. The study on skins, on the behaviors, many other researches to develop products. So RNA monitoring. So we don't need to give injections to get the blood. We just use a sheet of oil-absorbent paper to study on the sleep and genes to find out the health condition of now and the future in skin conditions. That's what we call genetic monitoring. So the external appearance on skins, also internal blood flow and nerves, how these are connected together is also identified through appearance monitoring. Another one would be the behavior, actions by people. Walking is identified on the smartphone itself to predict the health condition of the person, also even provide the prevention. So this will be mobility monitoring. Another area will be invisible viruses and bacteria, which will be identified to determine the homeostasis conditions. And by conducting these 4 monitoring, we can contribute to the customers. So these are the knowing technologies. And we've developed many products using these technologies. And we have protection technologies in beauty care, personal health, health and wellness and Fabric and Home Care, Beauty Care. So to product -- to making products for these areas, we have studied -- know -- trying to understand people, to understand the essence. In a Reborn Kao area, these technologies are just remaining as treasures sleeping inside the products. Utilizing on these technologies, we will try to provide the best products to the customers. If we are achieving that, then we can achieve the precision health care to the users by understanding the human body with the precision and to take the best action to protect them. This is a core of Another Kao. So we have these 4 monitoring technologies in the center. This is not just for Another Kao. These 4 monitoring technologies can be also utilized in Reborn Kao. We have various services, technologies and products. We will update them all using these technologies. Problems by the users and issues, also things that will need to be resolved and we try to make proposal to address them all. That will be the main part of Reborn Kao. And another Kao will be addressing the customers in a different field. This is to protect the people's lives using our technologies to solve issues, which are not identifiable by the customers. And we want to utilize this to be supporting the people's lives. So these 2 businesses may look for apart. However, individual's information, the parameters which are obtained from these 2 area can be combined together as the business. So we can conduct mining on personal parameters to provide the best for each user. This is actually the same, either for Another or Reborn Kao. We -- at the beginning, I mentioned, we want to avoid the waste as much as possible. We can maximize that by utilizing digital to maximize with minimum, with the minimum resources to maximize the values to the users, not making extra things or not making wasteful items and not delivering such wasteful areas. That would be our main mission. So for -- to achieve that, can we really achieve such personal parameter mining on our own? That would be difficult. Therefore, we are trying to use the external power, so that we can grow the business furthermore. And we are working on VHH antibody. This is a safe environment technology. That is one of the technology we are studying and parameter mining. So such VHH antibody and safe technology are also using digital. By using such digital, we can deliver service and products in digital manner. That's what we are starting. So now we want to introduce. So mining the personal parameters and to transform our businesses, we need a partner. Let us introduce our partner, Preferred Networks. This is a very important major partner for us. Last year, measuring the skin sebum RNA and creating new business and we started new projects. And at that time, we introduced Preferred Networks. But we have taken a step further. We'd like to collaborate with this company further. So from Preferred Networks, we have invited Dr. Maruyama, who is a fellow there, to Kao and Dr. Maruyama is going to be a corporate executive fellow at Kao. With Dr. Maruyama, we believe that we can improve the level and the speed of the digital into the next level or next stage. So this is not only close to Kao, this is an open digital strategy. So we'll be working with other companies, universities and local governments to come up with different ideas and plans. Third important objective is to maximize the power and potential of employees to double the productivity of our business activities. Key results are as follows: I have touched upon OKR. So this is different from the KPR. What we are trying to measure is what we are doing to challenge the new targets and OKR is a kind of a mechanism to enable that. And all the employees will be able to see their activities and see how much contributions that they are making toward the targets of the company. So this OKR will be implemented globally and will help us become one team. And also, this will lead to the corporate culture where we keep challenging. And this would also link to the fair compensation. But this is not going to be the basic compensation appraisal or evaluation method. We will use this as a guide to update what we have and to make it possible so that we can work as a one team toward the targets that we have set. As I mentioned, we would also actively promote talents from outside Kao. The purpose of this is to incorporate the capabilities and the knowledge that we do not have internally. And with those external talents, we would like to double the results of collaboration. In addition, 3 years ago, we have started to utilize the latest technology and we would like to end the reform to become the digital Kao completed by 2023. We would like to be able to use the digital technologies so that digital Kao will be starting in full-fledged manner. What do you think? If we can do all of the 3, I think we are confident that we can double the productivity of our business activities. The third keyword is open and fair innovation. This is a very important keyword. I strongly believe that this will change how we do our businesses. And let me also give you an image how we are changing our organization. Another Kao and Reborn Kao to reactivate existing Kao. So issues related to the everyday lives in life, ecology, so both of them are addressing those issues. But under the current organization, each different divisions and department are addressing these issues using their own brands and products. We want to combine them together. By integrating them, we can be stronger, and we can make the right investment at the right timing and right location, and we can reinforce the business at the right timing. And when integrated, Kao can create Another Kao, which will be mainly driven by life care business, which we started as a new business. So technologies, people, resources and part of some businesses created from Reborn Kao will be utilized into the life care businesses. On the left, where it says Another Kao, we believe this portion will be the core business for future Kao. So we want to promote these 2 Kao businesses in a hybrid manner. So today, I want to share one important technology which is related to the life. And this would be a very important message for running our life care business. It is a mosquito. On the earth, mosquitoes are the most dangerous living creature which could kill people. That is mosquitoes. And it still is the reality. The mosquitoes can deliver -- bring malaria, dengue fever, Zika fevers to people. People get infected, especially children are losing their lives because of such diseases. So first, we need to stop that from happening, and that is our work, to save the lives. So this September we have a new report or paper on the nature research. So we are using our surfactant technology to protect children without using insect repellents. And I have a movie about this story, so please take a look at the movie. [Presentation]

So how did you think about this movie? Kao, with mosquitoes or study on mosquitoes, you might wonder about that to save future lives. That is the direction we are moving forward. So using this technology, we are trying to face the global challenges, and that is represented in here. We have VHH antibodies, which is technology to address the COVID-19. And we have many technologies being created to address many different challenges, and they are about to be implemented. So in Another Kao, we can show our new contribution to face the global society with issues. That is our message. So lastly, this slide shows the targets for 2030. Under President Sawada, we went through K15 and K20. The objective there was to make Kao a company with a global presence. And we'd like to add another strength to that to make Kao a company with global presence and valuable to society. The first objective of K30 is, in fact, the objective of K25, that is to become an essential company in a sustainable world. And second objective is to be high-profit global company. This stays the same. But at the same time, we want to add a high-profit global company that also significantly contributes to society. So we would like to do both. Third objective is to return to the shareholders according to the level of growth. As I mentioned, as we grow more, we would like to return to the stakeholders based on the level of growth. We believe that is our responsibility. As for the financial target of the K30, if we cannot satisfy those 3 objectives, we believe that we can achieve the net sales of JPY 2.5 trillion. I strongly believe in that. And we believe that we have employees who can reach that target. Lastly, I'd like to talk about my determination for ESG. You could say that this is the determination I received from President Sawada. ESG, environment, society and governance, we decided to place importance on these 3 elements. In environment, we aim for zero waste and zero carbon. From bottom of my heart, we will be achieving them for sure. And we are not making any wasteful items, and we don't cause any wasteful consumption and try to promote unique personalization that is close to the person. So that will be another pillar for the business. To realize these 2 factors, we cannot complete these just by ourselves. And so we have been taking the right path. It's because we want to address these issues, working with other partners and working with many like-minded partners. Our governance will means a lot more to perfect the ESG, maximum value with minimum resources. This is our determination of our ESG management. Kirei-Making Life Beautiful. This is our new concept. In the dark, there is a moon, you see in the sky. So for those people looking for light in the dark, we use this as a signpost, and we want to be a company like that. And at some point, we want to show them the door -- a door. And with that, we want to start to take a step forward. Under the dark, there are many concerns and problems. And we want to have a clear, beautiful light to reach their heart. So we can show them a path to the future. That is the future image that we have in our mind. So today, thank you very much for listening to our mid-term plan K25. Thank you for your attention.