Kao Corporation (4452) Earnings Call Transcript & Summary

This is Yamauchi [ from ] accounting and finance. I'm so pleased to cover this section on the consolidated financial results for the year ended December 31, 2020. Please turn to Page 4. First, as usual, I will begin with the growth of household and personal care market in Japan. Top left shows a rather smooth growth for the past year, but this is the retail market as a whole for the household and personal care. It does not mean Kao also had a rather smooth growth in retail base. In the background, there was some special demand for expensive hand sanitizer products in the past year. In the normal years, they will not sell that many. In contrast, as shown on the right-hand side, unfortunately, the cosmetics market in Japan had a rather tough full year. There were ups and downs, particularly in the second half of 2020, partially due to the consumption of tax rate hike introduced. There is a comparison table, somewhat small, vis-à-vis 2018 just below the graph. As these numbers indicate, this cosmetics market had a rather tough year in terms of growth year-on-year. Also, the bottom graph shows the consumer purchase price in this category. Yes, the price itself started going up on year after year. This was driven by higher values offered as well as larger volumes and overhead. Next, please turn to Page 5. This shows some highlights of the financial results. Net sales was JPY 1,382 billion, down 8% year-on-year. Excluding the currency translation effect and the impact of the change in the method of recognizing sales, like-for-like growth was down 5.2%. With this, operating income was down 17.1% year-on-year, becoming JPY 175.6 billion. As for net income attributable to owners of the parent, it was JPY 126.1 billion, down 14.9% year-on-year. As for the dividends per share, as we had announced in the outset of the fiscal year, our target JPY 140 is maintained. Now on Page 6. In regard to the differentiation from the announced forecast, as written here, we had anticipated a gradual recovery moving toward Q3 and Q4, but it did not turn out to be that way here. With the second and third waves of COVID-19, we ended up with those numbers as written here. We had a tough time, particularly in our -- with Cosmetics Business. We had hoped that with the noncosmetics business, we had hoped for some recovery. Well, it did not turn out to be that way. And furthermore, we were impacted by the lockdowns due to the renewed spread of infections in the U.S. and Europe having a great impact on this business for hair salons, which has somewhat a higher profit margin. All in all, operating income was JPY 175.6 billion. We will remind you that JPY 175.6 billion does include in costs we had to spend, as much as JPY 4.5 billion, to address the challenges coming from the COVID-19 problems. As we have announced today, we decided to repurchase the company's shares for the value of JPY 50 billion, with maximum number of shares up to 7 million. As for cash flow, Kao is having stable funds at hand, no free cash flow problem at all. So we will definitely go for the planned shareholder returns. Likewise, as I said this earlier, our planned cash dividend remains at JPY 140, or JPY 70 for the second half. Turning to Page 9. This page shows net sales by segment. First of all is cosmetics on the left. It was challenging in Japan. Net sales went down by close to 30%. In the case of Kao, as the makeup ratio is high, the decline was slightly higher than the overall market. However, for e-commerce, we are currently in the middle of strengthening it, and e-commerce sales has been growing. This will be a focal area for investment this year as well, and it has been accounted for in next fiscal year's plan. The bar next to it is Asia, which went up by 7.6%. When you look at China, growth in net sales was more than 20%. And when you look at the fourth quarter alone for China, it grew by more than 40%. And so like other companies, we are dependent on China. On the other hand, as Hong Kong and Taiwan was challenging, Asia overall resulted in the numbers that you see here. For the Americas and Europe, next to Asia, Molton Brown already had been working on e-commerce, so business has been relatively strong. So although it's the Cosmetics Business, the decline was kept at this level. Next, for skin care and hair care. For skin care, because of hand sanitizers and hand soap that's included in the segment, numbers turned out to be good. But when you look at the details, it was a tough year for UV products and seasonal products as people were not going outside. It could have been better if that was not the case. Next to that is the Americas and Europe, but this is for hair salons. This part of the business was hit hard. Hair care was tough overall. Although skin care was good, hair care suffered. Regarding Human Health Care, in Q1 sanitary napkins did well, so we thought it was going to be a good year. However, then after the market contracted, and Kao's Laurier business ended up trending sideways. As for Laurier in Asia, it has been growing steadily, but the Merries business continued to struggle. However, when it comes to large expenses, as we have been controlling costs, profits should be bottoming out soon. For Fabric and Home Care, the numbers were very high. Japan grew by 5.4%. Asia grew by 3.1%. Laundry detergent performed well. But unfortunately, softeners and finishers didn't do well, so that offset the good performance. But home care performed well, resulting in these numbers. For chemicals, unfortunately, it was affected by COVID-19 as an industry. However, when you look solely at Q4 numbers, sales grew in the chemical segment. Lately, automobile and office equipment manufacturers have been announcing good numbers, so we believe that kind of impact is starting to gradually materialize. So we expect and hope that the chemical business will start to recover in advance of others. Now please turn to Page 10. The numbers that I mentioned by segment are summarized on this slide. On the left, you see net sales. On the right, you see operating income. Cosmetics was down by 22.1% year-on-year. Operating income is down by JPY 38.8 billion. But towards the end, Milano Collection sold well, and also there was a growth in China, so JPY 2.6 billion profit was secured. Skin care, hair care up by 1.4%, and up -- operating income is up by JPY 1.3 billion. We wanted to increase these numbers more. As for Human Health Care, we knew this was tough. Sales were down by 7.3%. Operating profit has hit the bottom, but it was down by JPY 4.3 billion. Fabric and Home Care was up by 4.5% in sales and operating income up by JPY 9.1 billion. Operating margin is above 20%, so it was very good. As for chemical, we were hoping that the profit would increase towards the end, but unfortunately, it stayed at the Q3 level. Going on to Page 12. This is the analysis of change in consolidated operating income. This is due mainly to the lower sales. The fluctuations in sales include the lower selling price of Merries and changes of the product mix of the cosmetics and household and personal care. Fluctuation in sales is down by JPY 67 billion. But the impact from change in raw material prices is plus JPY 7 billion. Total cost reduction is plus JPY 8 billion. As for SG&A, we have been reducing the advertising and sales promotion expenses with the lower sales, and we have reduced the unessential expenses. So also, the regular overheads were reduced at the company-wide level. So it was positive of JPY 26 billion. And as a result, consolidated operating income was JPY 175.6 billion. Now the forecast for FY 2021, this is based on the assumption of the 3.5% growth. There are a list of assumptions at the top of the slide. We expect growth, but the growth will be limited, so it's not going to be a V-shaped recovery. But despite COVID-19, we are thinking of ways to grow. Of course, we do not believe that the COVID-19 pandemic will continue forever, but we expect gradual improvement. Net sales, JPY 1,430 billion. This is a 4% growth in real terms, excluding the effect of the currency translation. The impact from change in raw material prices, we hear that the material prices are rising these days, but net impact as of now is JPY 2 billion. We can reflect some of it to the sales -- selling price of the chemical. This could increase a bit more, but we expect this level of net impact. As for the Capex, JPY 90 billion, which is quite aggressive. We should not become conservative. So we would like to be aggressive, and we have capital expenditure plans. As for the Capex, we would like to build the new business foundation which will bring us the future revenue. So it's not just a continuation of the investment into Merries. The Merries is improving and increasing in Indonesia, but other than that, we will focus more on the IT and digital. So related businesses will be the area that we invest in. Research and logistics investments are likely to increase, and also the investments in chemical will be increasing. So a total of JPY 90 billion is expected. Please turn to Page 14. So factoring in all the things I explained, our current forecast for the fiscal year is JPY 1,430 billion in net sales and JPY 177 billion in operating income. Dividends expected to be JPY 144 per share. Since profits are expected to increase slightly, the dividend will be increased by JPY 4. I'm sure someone will ask a question later saying, sales have increased by nearly JPY 50 billion, why such a small increase in profits? Actually, we are planning to invest an additional JPY 15 billion compared to last year for marketing, mainly in priority areas. In addition for expenses, we are planning to make capital investment of JPY 15 billion, mainly in digital initiatives as we discussed earlier. So we are adding about JPY 30 billion in expenditures and the profit situation reflects that. So that is how we'd like you to understand this. Page 15, from this term under the new Hasebe leadership, some organizational changes were made. And thus the reporting segments have also changed accordingly. Hygiene and Living Care Business at the top includes the former fabric care, home care and sanitary. Merries is also included here. So it's all about daily necessities. It forms the core of Reborn Kao, which Hasebe talks about. Although there are some areas where profits are declining, this is at the top and is the largest business area. Beneath that is the Health and Beauty Care Business. This includes the former skin care, hair care and personal health. This also includes oral care, bath additive, [ bath ] and other products. This is a part that deals with people's health and beauty, personal products and is also an important part of Reborn Kao. We have now the new Life Care Business commercial use products that were part of fabric have been moved here, so these commercial use products we were able to grow with hand sanitizers and whatnot. And from there, we'd like to expand our channel to elderly care facilities and hospitals and establish a business worthy of the new business segment. Then there is beverage. At the moment, it is only beverage, but there should be future developments here. As we will explain later, the Life Care Business is still very small, but it has been carved out to form a separate segment. I hope you can read into that Hasebe's determination about this business. And then the Cosmetics Business, Murakami is here today, so I'm sure he will talk about it later. Cosmetics exists as the core of our business. The last page, Page 16, here, you see the sales growth rates for each business according to the reclassified segments. Please look at the middle of the page where we show consolidated sales. Hygiene and Living Care sales are forecasted to grow by 1.6%; in health and beauty, 3.6% growth to JPY 372 billion; in Life Care, 11.1% growth to JPY 58 billion; Cosmetics to grow by 6.7% to JPY 249 billion; and chemical business to increase by 5.6% to JPY 283 billion. So that is how we aim to achieve the total of JPY 1,430 billion. That is all for me. Thank you.

This is Hasebe, Representative Director, President and CEO. Allow me first to offer my sincere appreciation for your great support for our IR activities. Thank you, indeed. I will cover the highlights of the Kao Group on the midterm plan, K20, as well as our future strategy. And first, I would like to look back. The left shows what we have achieved in K20. K20 consists of 3 pillars and in terms of commitment Kao has made, namely Kao business and stakeholders. Achievements of K20 are described here in green color. Yes, it is clear that we had those achievements. That said though, we failed to achieve the 2 points written in the black color here in the second commitment. Namely in the first bullet are continue to set new records highs in for profits. The second bullet, we aim for like-for-like net sales CAGR of positive 5% and operating margin of 15%. I, together with Sawada at the helm of the company management, feel quite regrettable for those failures. Please allow me to offer my sincere apology for this. Out of these experiences, we have now identified the specific issues we have to address are described on the right-hand side. Commitment to fostering a distinctive corporate image. If I may say, we have been highly appreciated in many activities here, but we still have a long way to go in terms of our decision to pivot forward to ESG management, which we announced back in 2019. We need to make more social contributions as well as achieving financial growth through our ESG activities. By achieving this, we believe Kao can truly become one of a kind in the entire world. Second, a commitment to profitable growth. We have come this far by believing in EVA management, but from now on, we strongly believe we need to further work on strategic business reforms. As described on the right-hand side, we need to address first in Cosmetics Business in Japan, as well as our business for hair salons in Americas and Europe, as well as Merries business in China and Japan. They are critical issues for us to address. Furthermore, we feel we did not have sufficient reinforcement of our bedrock business. This is one of the possible reasons for the latest performance we had announced. As we have communicated this point on several occasions, that we simply cannot deny the fact that we are having delays in pivoting toward digitalization and e-commerce by making needed investment. Furthermore, we are humble enough to admit we lack in fighting spirit to challenge to explore new customers and make new business investment. Now the third achievement, commitment to returns to stakeholders. Kao has an aspiration for ESG investment and to make its contributions to the society and still financially grow. Here now we have limited productivity from our activities just leveraging conventional frameworks. Here, I am talking about limitations of the so-called KPI-based performance evaluation. Yes, we are humbly in accepting the fact that here now, we hesitated to promote global and external talent and resources. We also humbly admit that in light of this principle of self-sufficiency, we simply lack in speed needed. But may I remind you that based on those achievements as well as those issues I have just explained about K20, we had a deep discussion among ourselves as to the direction for us to follow. And we announced this K25 on December 5 last year. Next page, please. The first point, Kao needs to become an essential company in a sustainable world. We need to take leadership in a self-sufficient and sustainable society. ESG investment equals to a reflection of future earnings. We have to naturally believe in this, and we have to naturally go forward on these important concepts. The second point, we believe we simply cannot have our future unless we explore and create our new customers. For this, we need to create Another Kao who would like to take leadership in creating our new digital business model. It is not against we have nothing here in this space so we like to have a strong leadership. The fact is we happen to have lots of capable core world enabling technologies. So far, we have just utilizing those capabilities just to develop the existing products. But we need to expand precision health care business using those core essential technologies where we can double down on. This new model is what we call Another Kao. For this, we need to reinforce or revitalize the current Kao. Now we know that what we are good at and what we are not good at, it is mandatory for Kao to invest strategically with a clear mindset, invest into outstanding products where now we can double down on. It is not going to be what I can call flat investment. Rather, we need to make big jumps in those quite strong and growing products. With the collection of strong products in place, we should be able to extend business opportunities covering much wider areas. As Yamauchi earlier explained this point earlier, now we will make big investments into these promising areas. Being more specifically, we keep an eye particularly on cosmetics, sanitary business and particularly next innovation for diapers. I will explain these matters later. The third ideal is to maximize employee vitality. We plan to double the productivity in our business activities. We will actively promote talent from outside of Kao if we do not have such talent inside of Kao. And if we are not effectively utilizing our own resources, we will definitely reallocate those resources somewhere else. This is going to be quite important. We will go for drastic reforms by utilizing digital capabilities as thorough as possible. We'll aim at drastic improvement here in terms of people productivity. Next slide, please. Actually, I joined the company in 1990, and this chart shows the past 30-year trends since I joined the company. The bar chart represents sales, and red is operating income, and our stock prices are also shown. As you can tell when you look at the slide, there are no phases when we saw steady linear growth. When we grew sales in the past, we made corresponding efforts so as to offer thorough services to our customer and grow profits and earnings power. By doing so, we continue to make the next investments to see another leap in our performance. And along the way, we have overcome hardships. But because we engage in EVA management, when we invest, we will ensure that it contributes to sales, so as to enhance our capacity to make more investments. I wanted to show you this in this slide to show that this is what we've demonstrated in the past. In light of COVID-19, we are in a hard situation. However, what's most important is to increase the number of new customers. This will enable us to build a new Kao, which is Another Kao and Reborn Kao. For us, we'd like to focus on creating an increased number of new customers that we value over the course of the next 2 years, and that is why we wanted to share this part. Please turn to the next slide. This is a very important slide, so I'd like to talk about it in detail. Mr. Yamauchi talked about today that we are going to change our categories. Brands that were spread out would be put into bulk, so as to be more competitive. Chemical was already like that originally. But for Hygiene and Living Care, it's about hygiene and lifestyle. So all things that fall under this theme will be bulked together to be delivered as daily goods. For Health and Beauty Care, it's about people's health as well as care for the entire body, and this bulk will address all of these things. On top of that base is Cosmetics, which will contribute to people's beauty. These are all areas Kao has been focused on. And for Life Care, when people are about to turn sick or in order to prevent illnesses, this will be the unit that we need. And we will call this bulk Life Care. We will make it easier to invest into the businesses. And as a bulk, we made it easier to understand about what the businesses are doing and made clear how the businesses should align with one another. I think this is a distinctive characteristic of Kao. And moreover, if we move on to the next component, there are some technologies that we have developed from the past. It is fundamental research. So for materials in the environment as well as people's bodies, what kind of science do we have to ensure their safety? For Hygiene and Living Care, there is research of infection transmission science related to bacteria and viruses. And moreover, how are things going to impact organisms as well as the skin or the face? What is going to happen on the surface layers? And finally, work related to defending ourselves from infections. This kind of fundamental research is what we have been doing over a long period of time. And through this process, we believe a new path can be developed. And because of that, we have decided to move forward with Life Care. So for infectious and intractable diseases, there are various types like atopic dermatitis as well as dementia. These are intractable diseases, which means it's hard to develop generic drugs. The target person changes, and there are various factors associated with it. That is the reason why. So tackling this kind of formidable enemy is an area that we need to contribute to. So we set forth the direction that will enable us to protect the lives of people by doing so. So what we need to focus upon is pathology research, medicines and testing. This is medical area. For treatment, previously we mentioned that we have monitoring and testing-related technologies. So this is a different direction from the pharmaceutical companies. So when we combine those areas, I think we can create a new model. Precision health care, here using digital, we can go into the platform. We do the research on materials, and we know people's daily lives and also the behavior of people. We know all of this. We also have the medical area. So if we can do all of these and create a database, we believe that we can have an unprecedented precision health care. This is the new element that we can become strong in Reborn Kao. Of course, we will be working in alliance with various businesses. But another factor which would make us strong is this medical area and precision health care itself. We have data and -- to provide the precise and comprehensive data. And this is the area that we would like to have in the future. We already have some partners, and we would like to increase the number of them, and I'm not going into the details today. But in precision health care, we can provide services using our data. And together with the partners, we can provide a database, and we can use it for the growth on this platform. This is a completely new platform, and this element for strength is something that we would like to realize. So blue part is mainly for the Another Kao. We would like to build a business model in which the Kao Group is a leader in both concerns about the intractable diseases and the digital age. This type of formation is very rare. There are no other companies who have such formation. So with this, we would like to build a foundation for high profitability and high growth. Please go to the next slide. For that purpose, as we mentioned, we have changed the brands and categories for our purpose. The purpose is very important. That is to protect daily lives and people and human lives. And on top of that foundation, we would also like to enrich people's mind and lives with cosmetics. This is how we would like to compete. This is my last slide. We will simultaneously conduct drastic reform of businesses with issues. I think I received a lot of questions about this in December. I'd like to use this chart to explain our battle plan in cosmetics, baby diapers and consumer products in Americas and Europe. I firmly believe that cosmetics will continue to be a growth driver for sales and profits. This is a strategy for our core brands. As Murakami, who is in charge of this business, has been saying many times over the past 3 years, we would like to promote the G11 and R8 to our customers with a clear purpose. If we achieve a valuable brand, we will see 100% loyalty. That is what we will aim for. And in order to achieve this, we will radically make bold upfront investments in digital. Beauty or cosmetics is an area where digitization can be quite effective. But don't get me wrong. This is not just about digital measures. It is interactive. We have monitoring technology. We believe that we have the ability to customize and deliver to our customers, what they want or what they are not even aware that they want. This is our strategy driven by digital. The strategy is globally applicable, especially in China, a country that is the most advanced in digital. The strategy is a good match. We have already started working in this area since last year, and we would like to move forward in unison with a major digital company and a digitally driven company. For that, we need to build the foundation. This is essential. Naturally, we will need to build the hardware infrastructure, but our focus is on software. Software is something that continues to evolve. Hardware evolves too, but unfortunately, it becomes a fixed cost. So instead of fixing our investment, we will build the foundation by updating the software. By doing so, we hope to make cosmetics a driver of further global sales and profit growth. The second business with issues is the one often talked about, and it's baby diapers. It had been a growth driver. However, we'd like to change this to a brand that generates stable sales and profits. So what are we going to do about this? Since this is a process industry, we need to think about solid equipment, generating profits. So for future investments, we want to change to a model where we make detailed plans for what we manufacture and ship, so that it can make maximum contribution with the minimum investment. One strategy is to use digital technology for design disclosure. You may think, "Isn't this what you used to call value communication?" But we give it a twist and are describing what we will do. So why are we doing baby diapers? It is because we believe that they are still unfinished products. We are heading towards a sustainable society, and baby diapers are products where customers still have dissatisfaction. With the design philosophy of how to change this, we have been working on baby diapers. And we have very important research information about baby diapers that we previously had not disclosed. We'd like to use that information for marketing. Marketing is something you do to sell, but we want our customers to know, we want to disclose to the public how much thoughts and technology we put into our diapers. In my opinion, this is equivalent to tens of billions, more than JPY 10 billion at least, of marketing expenses. We will start this disclosure from China using digital technology. This is not just for new diapers that we will launch next year, but also for our current diapers. And it's something that will eventually lead us to the new generation of diapers that we are trying to achieve. The new generation diapers is something that we have been working hard for the past 10 years with all our might. We created a completely new arena in order to approach perfection in baby diapers. All of us in the research team, including myself, have been working as one team on this project. And now the time has come to unleash it, and we are now in the preparation stage. I hope you will look forward to it with anticipation. Third, consumer products in the Americas and Europe. Here again, we'd like to expand into the health care business and improve profitability. It is not just about beauty care. Our beauty care includes health. That is our core business, but also beauty care that includes health care. This is also the case with Curel in China. Because we do not only beauty, but health as well, we are holistic. Because we have the foundation, beauty care shines. Now we think the time has come to take this one step further. Now in doing so, our business foundation is a little weak in the Americas and Europe. However, if we can utilize digital platforms, we believe we can turn the tables on the weakness of our business base. Now small and medium-sized companies in Japan are entering the digital space and making great strides in their business. We want to do the reverse of that. We'd like to create a large platform, including salons, and grow with digital. And last year's [ mass ] products in Europe and the Americas, they are taking that approach. It is actually digital, and that is why they are starting to enter a growth radically. So with that as my promise, I'd like to transform the businesses with issues, and for Reborn Kao, dramatically shift the businesses that grow the top line. And while providing such foundation, we want to grow the Another Kao part. That's all from myself. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]