Kao Corporation (4452) Earnings Call Transcript & Summary

My name is [indiscernible] , I'm in charge of the Chemical business. Thank you very much for taking the time out of the busy schedules today to attend this growth strategy briefing of Kao's chemical business. I'd like to explain Kao's chemical business in detail so that you can deepen your understanding of our business. First, I will give an overview of our Chemical business, followed by an introduction to our growth strategy and some specific actions for implementing the strategy. After the presentation, I'd like to receive your feedback in an exchange of views and a Q&A session and reflect them in our management going forward. These are the 3 topics I will be explaining today. First, the positioning of the chemical business within the Kao group, Kao has 5 business units. And in 2022, the Chemical business accounted for 23% of sales and 27% of profits. We offer a wide variety of industrial products globally while meeting the diverse needs of a broad range of industries. These include chemicals made from natural fats and oils as well as surfactants and oil derivatives, high functional polymers, fragrance that use oleochemicals as ingredients. At this point, I'd like to explain Kao's approach to value creation. By combining fundamental technology research that elucidates the mechanisms of substances and phenomenon. [And] product development research that commercializes technology, we are working to create innovative materials and products that are world-class. Centering around our core technology, precise interfacial control technology, we can combine a wide variety of technological assets to create unique products and services that grasps the needs of society, consumers and the industries. Kao is unique in that we share and maximize the use of these fundamental technologies in both our consumer products and chemical businesses. In the Chemical business, we have the vision of creating a future of [Kite] for people, society and the planet through the power of chemistry. We aim to provide value indispensable for creating the future of industry and a sustainable society and to become a clear choice of customers, the market and society. Through co-creation of integrating Kao's various strengths with those of our customers and partners, we will create new value that solves environmental and social issues and by refining our ecochemical products and offering new ecochemical solutions, we will create value for our customers, industries and society working on decarbonization and a shift to a circular economy. This slide shows the industrial fields covered by our chemical business. As you can see, we are operating in a very wide range of industrial fields. We provide distinctive materials and products to this wide range of industrial fields through 3 main businesses. The first is the Oleochemicals business, which provides oleochemical products made from Palm, Coconut and others as well as fragrances and food additives. We supply mainly to other consumer product manufacturers, wider chemical industry, agriculture and livestock industry and the processed food industry. In particular, we have the top position globally for fatty alcohols and tertiary amines. In addition to our technical strengths, our global supply system and an ability to apply a wide range of oleochemical components are our strength. The second is the Performance Chemical business, which creates various types of capabilities using interface science, including concrete chemicals, plastic additives, testing chemicals and iron and steel cleaning agents, we supply to a wide range of industries, including the construction materials, plastics guessing and steel industries. Many of our product groups are #1 in Asia. In addition to our technological strengths, our global network of sites and many products utilizing our own Oleochemicals are our strength. The third is the information materials business, including toners, toner binders and hard disk chemicals, offering next generation value through close customer collaboration. Many disination includes copper and printer manufacturers and electronic component manufacturers, and we have the top global position in toner binder and hard disk chemicals. Our core strengths include polymer molecule design, nanopigment dispersion and interface control technologies as well as analysis and evaluation capabilities and a global supply system. The sales breakdown by business in 2022 is shown here. Here are representative examples of major materials and products in the 3 businesses I have discussed. We supply materials and products that are leading the markets, both worldwide and in Japan. Tertiary amines in particular, raw materials for products used in disinfectants, personal care products, disposing deterrents and oilfields. Kao is the #1 manufacturer of tertiary amines with strength in its coverage of the total supply chain from raw materials, unique technologies in catalysts and processes and a broad product lineup. In Q3 of this year, we will start operation of an additional facility in Germany and in 2025, we'll start up and begin production at our new facility in the United States. We are working to strengthen our position by reinforcing our global supply system. We will also add facilities in Spain for MDG, Jasmine fragrance, synthetic fragrance used in toiletries and puffing starting in Q3 of this year, we will strengthen our stable supply system in Europe, the largest market to further solidify our position there. This slide shows the growth history of our chemical business to date. We have achieved business growth by creating unique product lines with proprietary technologies and at the same time, expanding our business overseas. In 2022, we had sales of [JPY 42.5 billion] and JPY 29.5 billion operating income. The bottom figure is the ratio of overseas sales to total sales, which rose to 65% in 2022. In Europe and the U.S., we have been expanding through repeated acquisitions. While in Asia, we have growth mainly centered around capital investments. On the other hand, we have also restructured withdrawing from unprofitable businesses in the past. And recently, we stopped Japanese production of fatty acids, one of the fat and all derivatives and switched to supply from a joint venture in Indonesia and integrating 2 plants in China. The chemical industry, which is a foundational industry for a wide range of industries is cyclical and impacted by economic conditions. How is chemical business is no exception. But we have been working to minimize such impact by expanding our unique niche and customized products and by further strengthening our fat and oil [deliberative] products. As a result, the business has been growing steadily over the medium to long term. This slide shows a global chemical business basis. As of the end of 2022, we have 26 subsidiaries and approximately 4,000 employees. The pie chart on the right side shows the percentage of sales by region in 2022. Japan accounted for about 35%, Asia, about 25% in Europe and the Americas, about 40%. Profits are also spread out almost evenly with Japan, Asia and Europe and the Americas, all generating profits in the ratios shown here. After here, I have given you the overview of the Chemical business. Next, I'd like to talk about our growth strategy First, I'd like to touch on the strength of Kao's Chemical business. We believe these are our 3 major strengths. First is our niche products developed with unique technology that generate added value and market-leading products with high market share. Second is our ability to deploy solutions in a wide range of industrial fields and business foundation that enables global growth. And the third is a synergy with the Consumer Products business. In particular, we believe that the expansion of niche product groups that generate high value-added and market-leading products groups with high market shares is one of the reasons we have been able to maintain a profit margin of 8% to 10% to date. Synergies with the consumer business that other companies do not have include maximum use of research assets, sharing of production equipment, raw materials and sites and sharing of technology and knowledge between the 2 businesses. For example, technology and knowledge to reinforce with industrial customers are utilized in the consumer products and technology and knowledge accumulated in the consumer products business are utilized in the chemical business. Skin Friendly detergent base developed in Germany being used for [indiscernible] and biodegradable fabric softener base developed in Spain being used for [indiscernible] are examples of how the technologies and knowledge refined in the chemical business are used in the consumer products business. The 5 business strategies are shown here. We will continue to expand our business globally and strengthen our collaboration and cooperation Also, in addition to strengthening the foundation that has supported our growth to date, we are also working to [drill] new products and solutions in areas that have high environmental and social value and where we can leverage Kao's strength. I will explain the details in the pages to follow. First, the social issues that the chemical business focuses on, there are a variety of issues surrounding society. In particular, there are 5 areas in which we believe the chemical business can contribute to their resolution and provide business opportunities. These are climate change and loss of biodiversity, heightened interest in agricultural issues, pandemics and infectious diseases in livestock, aging infrastructure in developed countries and the upgrading and expansion of use of digital technology. This slide shows the business areas just described, positioned as strategic and new businesses to achieve business growth. In existing businesses, we will focus on strong businesses to generate solid profits, use that to expand strategic businesses that will form the next profit-making business and then develop new businesses to become a new stage for future growth.

In the hygiene business, we utilize our extensive in-house expertise in disinfection and washing. In the agrichemicals business, we work to contribute to making agricultural production possible with less evochemicals, increasing food production and saving labor. In the [indiscernible] mobility business, we work to improve the durability and improve the work environment, which are required by aging infrastructure and urbanization in emerging countries. And in the Digital Solutions business, we provide solutions to respond to the increasing sophistication and use of digital technology. Typical examples of new businesses we are focusing on to create a new stage, our hydrophobic modified cellulose nanofiber compound, a new functional material and product lines that utilize [indiscernible] accumulated biotechnology expertise. Cellulose nanofiber compounds are expected to significantly improve the performance of next-generation electronic and structural materials. Biotech products include bioalcohols that aim to replace palm aromatic chemicals such as gallic acid sugar side or raw materials for biochemical products such as bioethanol, secarification enzymes for producing these sugars and other products utilizing technologies accumulated over the years. This slide summarizes the numerical targets of the midterm plan. As for KPIs, our key focus is to expand profits while maintaining ROIC of 10% or more. We aim to achieve ROIC of 12% or more in the future. We aim towards 2025, we aim to increase operating income by increasing the ratio of strategic and new businesses, which targeted a profit margin of 15%. Currently, the strategic and new businesses contributed about 9% of sales, but we plan to increase their contribution to 15% by 2025, so that they generate about 1/4 of our profits. The pie chart below shows how much we will grow strategic and new businesses in each of the 3 segments. In any case, we believe that we can continue to expand our earnings by expanding our niche, highly profitable product lines and solutions with distinctive technologies. Next, I would like to touch on the progress of K25. In 2022, the second year of K25, we have achieved 3 things. One, sales increased due in part to the contribution from selling price adjustments in mainly Oleochemicals outside Japan in line with the raw material price hikes for fats and oils. Although operating income remained at the same level as the previous year due to the impact of inventory write-downs caused by fluctuations in the oil and fat market. EBITDA, which indicates total cash generation increased by JPY 1.1 billion. The overseas sales expanded solidly, and we continued product development from a sustainability point of view. In the area of sustainability-oriented product development, last year, we invested in 2 venture companies in the agro and palm alternative materials business. In 2022, the unit sales price has increased in line with the rise in raw material prices, which led to profit margin decline. The chemical business is affected by the factors shown here. Global economic trends, market conditions for fats, oils and petrochemicals, regulations on chemical subsidies and other factors. We considered a major challenge to transform ourselves into a business entity that can minimize the impact of these factors. To this end, we are working to transform ourselves into a high value-add business entity by strengthening the 3 initiatives described here, in line with the midterm plan and growth strategy I explained earlier. Now I would like to introduce some specific initiatives in our strategic businesses to transform ourselves into a high value-add business entity. First, is an adjuvant for pesticides in agriculture. These products can promote the permeation of agricultural chemicals into leaves and improve [indiscernible] , thereby bringing out the full potential of agrochemicals and enabling a reduction in their use. The market size is estimated at JPY 100 billion, a market that is growing at more than 6%. Coal is a pioneer in Japan with a track record of more than 50 years, providing distinctive products based on its accumulated technological knowledge. Furthermore, Kao has succeeded in developing a technology to solve the problem of spray solution drift in drone spraying, which is expected to contribute to smart agriculture, expanding the potential for business growth. Overseas, we have begun deliveries through the establishment of a collaborative framework and sales network. As it may be difficult to understand in words or illustrations, we will introduce our products developed for drone spray in this video. The key point is the precise interfacial control technology that retains the moisture in the droplets after spring and ensures the ensures the agrochemical is delivered to the leaf surface. In the video on the left, you can see how the adjuvant prevents the drawing of water droplets on the glass surface. And in the video on the right, you can see how the drone spraying can be done without drifting by cross winds. Disease that causes withering when infected is currently a major problem on palm plantations. In addition to developing an adjuvant for fungicides that is effective against this disease, we are also taking on the challenge of solving this problem through our business alliance of Polar Star space, a company that excels in technology for monitoring disease by aerial images. Palm plantations have very high expectations for the solution. The graph on the bottom right is an image of adjuvant sales -- next is a highly durable asphalt modifier. Kao has successfully developed a product that improves the durability of us for paving by chemical reaction of waste PET -- we can say that we have realized upcycling of waste plastic. Currently, synthetic rubber and cellulose are used as asphalt modifiers. The modifier developed by Kao can replace some of these materials, and we believe that we can create a new market by creating new value. Asphalt Pavement is a market that is growing at 5% per year globally. Here, too, we will introduce the evaluation results of [indiscernible] reduction effect and durability improvement effect in a laboratory through video clips. Two test basis, one with modify added on the left and one without our silken warm-water at 60-degree sensing grade and wheels under a load equivalent to a 30-ton vehicle was rolled back and forth on them to compare the degree of asphalt [wear] and deformation resistance. The results show that the amount of wear degree in the warm water is reduced to 1/5 and the deformation of the asphalt is also suppressed. This technology is based on the polyester molecular design technology cultivated in the toner business. Currently, our track record in Japan is expanding, and we are also stepping up promotional activity overseas. However, since this work involves a creation of new markets, full scale expansion may take some time. We will steadily uncover potential needs in the paving market. And in addition to building a track record in Japan, we will expand to overseas markets and increase adoption in public growth in addition to private properties. Furthermore, we will expand our technology to utilize not only waste PET bottles, but also industrial waste films and waste fishing nets. The sales image is shown at the bottom right. As a final example of strategic businesses, let me introduce to you 2 digital-related solutions. First is the inkjet Inc. business, which contributes to the digitization of analog printing and the reduction of the printing industry's environmental impact. In a market that is growing at an annual rate of 8%, we specialize in the fields of commercial printing, label printing and package printing and are developing our business on the strength of our ability to develop high reliability customized inks and to respond to customers in 3 global regions. We are continuing to expand the use of our products in flagship devices of the top printer companies. We are also aiming to expand our business by strengthening our solutions such as the development of not only in but also printing modules through collaboration with our partners. The sales image is shown here. Second is the semiconductor chemicals business, which contributes to the higher-performance semiconductors by achieving high cleaning performance and low environmental impact. Semiconductor-related agents are also a market that is growing at an annual rate of 8%. We are building a robust product portfolio by focusing on agents using various processes, such as cleaning. Another strength of Kao is the proposal of optimal product and cleaning process conditions by utilizing the fine cleaning center. We are focusing on the development of one of our kind chemicals indispensable for 5G and 6G communication standards and many have been selected for use in next-generation products. Through collaboration with our partners, we will promote the development of chemicals indispensable for next-generation semiconductor processes. Finally, I would like to talk about our decarbonization initiatives in the chemical business. We are reducing our own carbon footprint with a company-wide goal of reducing CO2 emissions by 55% by 2030 compared to 2017 on Scope 1 and 2. We plan to achieve this goal through the use of low-carbon energy and more efficient production processes. In the Chemical business, we implemented RE100 at 4 plants in China and in Germany and introduced solar power generation in Wakayama, Thailand and other existing sites by 2022 and plan to use biomass fuels in Spain, Malaysia and the Philippines by 2030. In in terms of contributing to the decarbonization of society, we will strive to expand our lineup of eco chemical products, the use of which will lead to a reduction in CO2 emissions. We will focus on proposing low carbon materials and selling products that contribute to CO2 reduction by helping customers save fuel, energy and resources, achieve higher durability and longer service life and improve processes and productivity with plans to increase the ratio of these products from 72% in 2022 to 85% in 2030. Examples of our Eco chemical products are shown here. That is all for the explanation. Kao's chemical business will contribute to enhance its presence by providing value that is indispensable for the future of industry and the creation of a sustainable society through Kao's unique materials, products and solutions. We will also grow our business by firmly converting the social and environmental value we create into economic value. All members involved in the business will work as one to fulfill our aspiration to create a future of [indiscernible] for people, society and the planet through the power of chemistry. Thank you very much for your kind attention.