Kao Corporation (4452) Earnings Call Transcript & Summary

Now let me give you the overview of the financial results and forecast for fiscal 2024. Please take a look at Page 5, titled Key Highlights. In summary, the first half of the year was six months in which we achieved profit recovery through structural reforms and improved our competitive advantage by strengthening our core brands, which contributed significantly to a 68% increase in profits over the previous year. In the first half of this slide, we have outlined three important points that we are working on. By improving our earning power through first two points, we can invest in promoting the global rollout of high value-added products. We can say that this flow has now got started. We would like to further accelerate our growth toward achieving K27. I would now like to touch on the three important points shown here in more detail. First, we maintained profitability in the Sanitary business as a result of structural reforms. In addition, we have steadily improved our earning power by shifting toward high-value added products in the consumer products business in general, centering on Fabric and Home Care. In particular, core brands such as Attack and CuCute have further increased their profit margins and market shares and the competitive advantage has improved markedly. Meanwhile, we are also improving our marketing capabilities, such as by utilizing DX to visualize the repeated rate and other data to increase the ratio of loyal users. With scrum-type product development, new products were developed with new ideas while reducing the product development time. In the hair care field, we were able to enter the high premium market with our new brand, melt. I believe that this is one of the results of our human capital structure reforms. While accumulating earning power based on the above two initiatives, we've ramped up our global rollout of high value-added products such as by reinforcing marketing of UV care products in China, expanding the premium brand, ORIBE for hair salons in Europe and strengthening the business of KATE and Curel brands in Asia. In the Chemical business, the operating margin improved by 2.3 percentage points, growing as a result of expansion of high value-added products, in line with the recovery of the market. While we are making good progress overall, as described here, one of the negative factors for this fiscal year's plan was cosmetics in China. Market conditions, which had been anticipated to recover from the second half are expected to continue to slow down. Accordingly, we have begun to optimize distribution inventories in response to this from the second quarter. Although this is only a temporary measure, we expect the full year operating income for the cosmetics business to decline by about JPY 5 billion year-on-year. Regarding cosmetics, President Hasebe, will discuss our efforts to review our brand portfolio for future global growth. Thus, except for cosmetics in China, we have seen results ahead of the plan. In light of the steady progress of K27, we have made upward revision of our full year forecast at the beginning of the fiscal year to JPY 140 billion in operating income, with ROIC revised to 8.8% and EVA to more than JPY 27 billion. Please turn to Page 6, the highlights of consolidated financial results. Net sales increased 6.7% to JPY 788 billion. This represents a like-for-like growth of 1.9%, calculated by excluding the effect of currency translation. Gross margin was 38.5%, an improvement of 3.4 percentage points year-on-year. Operating income was JPY 57.9 billion, up 68.2% or JPY 23.5 billion from the same period last year. Operating margin improved to 7.4%. Net income attributable to owners of the parent was JPY 43.4 billion, an increase of 64.9% or JPY 17.1 billion year-on-year. Basic earnings per share was JPY 93.41, a significant increase of 64.9% over the same period last year. The interim dividend will be JPY 76 per share, up JPY 1 per share as planned. The payment is scheduled in September. The annual dividend forecast remains unchanged. Next, please move to Page 8, Key points of first half results, where three positive factors are listed. The first is an improvement in earning power through enhancement of the competitive advantage of core brands. And the second is the contribution to profit from the Chemical Business. And the third is a decrease in depreciation expenses due to impairment losses, especially on Merries facilities. Driven by these three factors, the gross margin improved by 3.4 percentage points, offsetting the negative impact of the cosmetic business. And as a result, Operating income increased 68.2% or JPY 23.5 billion year-on-year to JPY 57.9 billion. Let me explain a few more specifics. In Fabric and Home Care, the operating margin improved by 6.1 percentage points to 16.3% due to the introduction of new high value-added products such as Attack Zero Perfect Stick room drying and Attack Antibacterial Extra-large Easy Drying Plus. In the Sanitary products business, the operating margin improved significantly to 7.1% due to the effect of structural reforms and the gain from the transfer of the Pet Care business. In Chemical business, the operating margin improved by 2.3 percentage points to 8.3% due to the contribution of the market recovery in addition to promotion of tertiary amines chemicals for semiconductors and other high value-added parts. Domestic sales of cosmetics grew in line with the market, excluding special factors such as the absence of last year's big hit of KATE's Lip Monster and planned shipment restriction of Curel. As a key theme for the second half of 2024, we will continue to strengthen our business portfolio management and improve ROIC. We intend to effectively utilize the competitiveness of our core brands and improved profits in the Chemical business to expand our market share in the hair care high premium market and accelerate global expansion in the skin protection and cosmetics, to achieve tangible results. Next, please turn to Page 9 for consolidated net sales in the first half. Consumer Products business in total grew by 1.9%. By geographic region, Japan grew 3.9%, where Fabric and Home Care grew significantly and Skin Care performed well. In Europe, sales grew 11.5%, thanks to the contribution of Bondi Sands, and strong sales of hair care and cosmetics. Americas also went up by 5.1% resulting from the recovery trends starting to be seen from the second quarter. In Asia, on the other hand, sales slowed down sharply in China, especially in cosmetics, and declined by 9.3%. In the total Asian Consumer Products business, excluding China, sales decreased by 2.6%, but profits increased by 40%, though not shown here as a result of a structural change to improve profitability from an ROIC perspective. Sales of the Consumer Products business as a whole, excluding China, grew steadily by 3.7%. In the Chemical Business, sales increased only slightly due to the impact of selling price adjustments caused by the decline in fats and oil prices, but sales volume and profit grew steadily. Please turn to Page 10 for consolidated results by segment. Operating margin in Fabric and Home Care improved by 6.1 percentage points year-on-year to 16.3%. The JPY 12.2 billion increase in operating income of Sanitary products includes a JPY 4.3 billion gain from the transfer of the Pet Care business. The 1.9% increase in the total sales of the consumer products business includes the contribution of 2.7% by selling price adjustments. The Hygiene and Living Care business, in particular, made a significant contribution of 4.8%. The Operating income for Consumer Product business was JPY 42.3 billion, a significant increase of JPY 19.5 billion year-on-year with the Hygiene and Living Care business making a large contribution, growing by JPY 24.1 billion. The operating margin for the Consumer Products business as a whole improved by 3.0 percentage points from 4.0% in the first half of 2023 to 6.9%. Health and Beauty Care contributed to the sales increase in terms of volume. Operating income was JPY 15 billion, a decrease of JPY 1 billion versus the same period last year, with an operating margin of 7.1%, which includes JPY 3.4 billion in restructuring costs in Europe and the U.S. The Life Care business posted an operating loss of JPY 0.5 billion due to the impact of the Health Drink business. The Health Drink business transfer was completed in August. The cosmetics business posted a 2.6% sales decline. Despite selling price adjustments, the operating loss increased due to the significant impact of volume decline in China, resulting in an operating loss of JPY 6.1 billion in the first half. Excluding the impact of China, cosmetics sales increased by 2.1%. As mentioned earlier, sales in the Chemical Business increased only slightly, but the operating margin improved by 2.3 percentage points from 6.0% in 2023 to 8.3%. And operating income increased by JPY 5.6 billion to JPY 16.7 billion. Please move to Page 13. This is an analysis of difference of plus JPY 23.5 billion between core operating incomes of 2023 First half and 2024 First half. In addition to the strong household and Personal Care Products business, the effect of structural reforms made a significant contribution. In addition, in the Chemical Business, gross profit improved due to selling price adjustments resulting from high value-added and differentiated products and recovery in markets. Specifically, drop in raw material prices resulted in an increase of JPY 2.5 billion and selling price adjustments in household and Personal Care and Cosmetics, JPY 60 billion. Gross profit from Chemicals improved by JPY 6.5 billion. Structural reform effects amounted to about JPY 18 billion. Of this, the JPY 16 billion in earning power reforms is included in selling prices in this chart. And JPY 2 billion in the fixed cost reduction of Merries is included in other cost of sales. I will give supplementary explanation of the earning power reforms on the next page. In the JPY 9 billion increase in SG&A expenses, an increase in marketing expenses accounts for about 30%. Other factors include an increase in personnel expenses and an increase in expenses due to Bondi Sands joining the Kao Group. Impact of currency translation other income and expenses was minus JPY 1.6 billion due to onetime expenses, such as JPY 3.4 billion in restructuring costs in Europe and U.S., despite large gains including a JPY 4.3 billion gain on the transfer of business. Next, on Page 14, improvement of profit margins through the progress of earning power reforms. The selling price adjustments through promotion of high value-added products was implemented with progress exceeding the plan, mainly in Japan. Gross margin improved by 3.4 percentage points from 35.2% first half of 2023 to 38.5% in the first half of 2024. We have been monitoring the marginal profit rates for the improvement by business and brand more thoroughly than ever before, which has led to improvement in gross margin. This has also been just as a [indiscernible] implemented in our sales division, which has a direct sales structure and will be further strengthened by including them into KPIs from this fiscal year. Please turn to Page 16. Where you see consolidated fiscal 2024 forecast. The full year forecast of JPY 130 billion in operating income initially announced, has been revised upward to JPY 140 billion, taking into account the strong results in the first half. Therefore, Net income attributable to owners of the parent will be JPY 104 billion, up 21% year-on-year. Earnings per share is expected to be JPY 223.9, almost the same growth rate as the net income. Please turn to Page 18 for forecast of factors in operating income. This shows the analysis difference between the core operating income of JPY 114.7 billion in 2023, and the forecast of JPY 140 billion in 2024, which is JPY 25.3 billion. The structural reform effect is expected to be about JPY 27 billion. Of this, JPY 20.5 billion is from earning reform, which is included in selling price in this chart. The fixed cost reduction effect of JPY 3.5 billion for career support is divided between other cost of sales and SG&A expenses in this chart. The fixed cost reduction effect of JPY 3 billion for Merries is included in other cost of sales. Let me explain a few more details. We expect the JPY 3.5 billion loss for the year due to expected increases in prices of raw materials, such as fats and oils and petrochemical-based packaging materials from the third quarter onwards. On the other hand, selling price increases due to promotion of high value-added parts will continue in the second half, which is expected to total JPY 24 billion for the full year. In the Consumer Products business, Sales volume of Household and Personal Care products is expected to increase by JPY 9.5 billion, while sales volume of cosmetics are expected to decrease by JPY 7 billion due to the slowdown of the market and optimization of distribution inventories in China. In Chemicals, sales are expected to increase by 5.3% and gross profit by JPY 12 billion due to the start of operation of the new facilities of Tertiary Amines and fragrance in Europe, leading to full year contribution ,higher added value in Performance Chemicals and information materials as well as selling price adjustments and volume increases. Other cost of sales includes effects of structural reforms in 2023 for Merries impairment loss and labor cost reductions. The increase in SG&A expense is expected to be about JPY 25 billion, which is accounted for by about less than 50% due to marketing expenses for new measures, about 30% due to higher personnel costs. Other factors include higher logistics costs. We expect a negative JPY 1.6 billion in the first half and positive JPY 3.9 billion in the second half for impact of currency translation, other income and expenses. As a result, operating income is expected to be JPY 140 billion. Please move to the raw material price outlook on Page 19. Year-on-year gain of JPY 2.5 billion was achieved in raw material prices in the first half, but a JPY 6 billion loss over the previous year in the second half is expected. Prices of natural fats and oils are on the rise due to increased demand in anticipation of EUDR or deforestation regulations, which is scheduled to be introduced in Europe next fiscal year. In addition, soaring personnel costs related to packaging and container materials and increased energy costs, including logistics, will be the main price increase factors. Please turn to Page 21, improvement of capital efficiency by business area. As for the ROIC of the entire company, an improvement of 0.2 percentage points from 8.6% to 8.8% is expected due to the upward revision of announced operating income. Including that, we expect a total of 4.7 percentage points improvement from the previous year, and we will strive for further improvement. If you look at the improvement in ROIC for each of the three businesses areas categorized in the business transformation area, ROIC will improve significantly by 8.6 points due to the implementation of structural reforms at Merries, a decrease in invested capital and an increase in [indiscernible]. In the area of stable earnings, ROIC will improve by 3.9 points due to an increase in Fabric and Home Care's profit or an improvement in its profit margin. In the growth driver areas, ROIC is expected to improve by 1.1 points in total due to strong performance in Chemicals and Skincare. Finally, on Page 22, the progress of K27. We have plotted the 2024 plan, which we have explained today. ROIC is expected to be 8.8%, which is higher than the original forecast and EVA is expected to be more than JPY 27 billion. Operating income has been revised upward by JPY 10 billion to JPY 140 billion, a level slightly above the K27 progress. The details of the progress of K27 will be reported at the year-end results briefing. So this concludes my explanation.

I am Hasebe, President of the company. I would like to briefly discuss the progress of our midterm plan, K27. First of all, let me reiterate the framework of K27 strategies. Since last year, we have placed a great importance on these four frameworks. I believe that the three frameworks on the left have been very effective in achieving results, including structural reforms. As a result, I think it is safe to say that the recovery is making a progress at an earlier stage than initially expected. Next, let me show you the progress of K27 midterm plan. Again, I would like to show how we have made a progress from the initial plan and where we are in terms of the final goal. operating income is higher by JPY 10 billion from the original forecast. We believe that ROIC and EVA are also ahead of the original plan. In addition, sales outside of Japan -- The ratio of overseas sales to total sales has increased from the initial forecast, even including the recent fluctuation in exchange rates, we believe that we can achieve more than JPY 700 billion in sales outside of Japan. Next, I will explain the link between structural reforms and the growth strategy. 2024 is an important timing to bridge the gap between structural reforms and growth strategy. The key focus areas are global growth, earning power and organizational culture and human capital. Let me walk through one by one to show the relationship between our measures, structural reforms and growth strategies. First is global growth. As a way of strengthening our business, we have carried out structural reforms in the areas of business portfolio management, adjusting selling price by adding higher value and ROIC management. Going forward, as part of our growth strategy, we will prioritize investment in businesses with global growth that have been selected through business portfolio management. In terms of value enhancement through higher value added products, we have shifted from strategic price hikes in response to soaring raw material prices initially to the introduction of higher value-added products that can be sold on a global scale. We will expand our business areas all at once. And then the earning power. In order for us to grow globally where there's stable expansion, we need to strengthen our products and brand business where there's strong demand and higher value. So we will continue to strengthen them, but the speed and level of expansion to do this by our own strength is not enough. We will need to work together with our co-creation partners. In other words, strong partners to raise the level of this area all at once. In addition, we will not expand only for trials, but the increase repeats and improve loyalty. Against this, since data-driven management style has taken fruits in Japan, we would like to promote loyalty marketing not blindly conducting trials, but steadily increasing loyalty step by step. And the result of that is the targets set out in K27. Please turn to the Page 27. This is the first time I am showing the slide to you, but we have been promoting structural reforms based on this diagram since about two years ago. This is a two-story picture of three areas: Stable Earnings, Growth Drivers and Business Transformation. I would like to divide the picture into two parts, one on the upper level and the other on the lower level. The first one, Fabric and Home Care and Personal Health is a stable earnings area. The same applies to Skin Care Chemicals, which is a growth driver. Among this, the business transformation area, which we had to prioritize as #1 last year was the Sanitary business. Note that the business is trending downward in a remarkable way. But the Sanitary napkins and adult incontinence products as well as paper diapers in the Sanitary business requires significant reforms. Both of these two businesses are equipment industries. We have been in this business for many years and learned how we can improve this business in the future. In the first half of this year, we have changed the pattern of this business, and we are now more confident that it will become a stable, profitable business. And below on the lower level is the sanitary business. We will continue to shift the diaper and sanitary and napkin business from business transformation area to stable earnings area. In the business transformation, there were two brands, which we felt we will not adapt that operation that we were not the best owners of the brand. As Mr. Negoro said earlier, we were able to complete the transfer process of these brands. And hair care business is our extremely important core business. This business is unusually important and that it's absolutely for Kao to grow on a global scale. By establishing a global formation and introducing a full-fledged high premier market, we will be able to achieve global growth as a total Beauty Care business. including cosmetics and skin care. In addition, the cosmetics business is also important. In the cosmetics business, there are some products that are already growth drivers and others for which we still need to take the next steps. There are some that have already been chosen as growth drivers and some that still require us to continue to review the brand portfolio. And let me explain the details more so please refer to Page 28. We must steer our cosmetics business towards global growth brands. For the past 6 years, we have been reorganizing our brand portfolio by dividing into 11 brands that are expected to grow globally in 8 regional brands, and we have placed 19 brands at the center of the portfolio. This was done in order to segregate them from other brands. However, in order to invest in brands that will grow globally in the future, it is necessary to select brands even more clearly. We have divided our brands into four zones: Luxury, High Premium, Premium and Daily Mass, which is to be used by a large number of people. Next to these zones, we have also indicated the general sales channel. SENSAI and MOLTON BROWN, which I've referred to as first runners last year, are luxury brands, which we will grow globally. And KANEBO, which is currently growing very rapidly in Japan is a high premium brand that has strength in department stores. Meanwhile, Curel and KATE, the daily Mass brands that are sold at the drug stores and used by many general consumers are still booming and remain as our core products. A new topic I want to share with you this time is rebranding of SOFINA, let's call it restaging. This is a premium brand mid-price range with strong demand from the drug stores. We used to place SOFINA brand sporadically in the R8 area. We decided to integrate restage brand and compete thirds area with SOFINA. So we will compete globally with these 6 brands. The first runners we announced last year, SENSAI, MOLTON BROWN, Curel are included here. In other words, KANEBO, SOFINA and KATE, which focuses on Asia will be a core growth area in Asia. Please refer to the next page. This is the background behind this decision. We have indicated here the number of operating countries and 3-year sales CAGR. As you can see, SENSAI and MOLTON BROWN have a very large number of countries of operation. This is because luxury brands do not expand significantly in a single country. Once a certain size is obtained, it is necessary to expand from one country to another. Meanwhile, high premium brands need to achieve steady and significant growth in a certain area or a certain country before we can expand it. Of course, Daily Mass products also belong to the same category. As you can see, KANEBO has grown very rapidly over the past 3 years. It is the brand that has grown the most in the first half of the year. In addition, Curel and KATE brands, which have strong demands are already number one in branding in Japan. As a way of expanding this, we have been making a steady progress in the Asia Pacific region. If we add the mispriced SOFINA brand to this lineup, our strong portfolio will be complete. SOFINA has a very strong position in Taiwan. But we believe that the key is to strengthen our core skin care business in the Asia Pacific region as well. What should be emphasized in this portfolio is the shift to loyalty marketing. Rather than simply increasing the number of trials, we will steadily increase loyalty and build a strong branding through dialogue with our customers. We believe that this is an important key point. Next, I would like to talk about the progress of skin protection products. Please turn to Page 30. As you may have noticed, Biore UV care products are gaining a strong share in the Japanese market. This contribution rate of new products to sales has been very high, and this area is growing one after another. The strength of our business is actually underpinned by our technological capabilities. We are now in the process of expanding our brands equipped with this technological strength. I would like to explain our business in Europe, China and United States. In Europe, Biore UV care has been actively expanding through testing. We have expanded from three countries in FY 2023 to 8 countries, and it has been received well. We acquired Bondi Sands last year. Bondi Sands is a self-tanning brand. In Europe, there is a very high demand for people who want to look healthy by self-tanning. In this market, we have gained #1 market share in the United Kingdom. Next is China. In China, the sales growth of Biore UV care products is very high at plus 24%. In addition, Biore UV care has recently been the best-selling daily necessities among inbound sales. This is not applicable to just new products, but also regular Biore UV care. This has become the most active product in the market. Next is the United States. Here, we are carefully expanding ourselves. We have introduced e-commerce ahead of other channels to grow our sales. And in the second half of 2024, we will finally extend our business to the major four change. In addition to self-tanning and JERGENS Natural Glow, which has always been strong, we will add Bondi Sands to our lineup to ensure that #1 market share with an overwhelming number of brands. Not included in the skin protection category, this time our ALLIE and Curel in the technological category. Again, these are different brand categories, but the this UV has a very strong presence in the category. In addition, there are Biore GUARD repellents. We launched this product in Thailand in 2022 and customer demand has been very strong. In 2024, we will see the expansion of this product into Singapore, Taiwan, Hong Kong and Malaysia. We believe that this is a very exciting area for skin protection. Please turn to Page 31 next. Loyalty marketing. Last time, Mr. Murakami of our company made a representation on DX. The system that attracted the most attention was the Digital Clairvoyance, which is featured in the data lake. This is a system that we have been working on for over 5 years and it's a very unique call system that uses data better and translate to value. And I want to show an example of this on Page 32. This slide is the result of global sharp top strategy, which seems to simplify loyalty marketing. From the bottom, the blue areas are loyal users. The lighter blue is the repeat users. This shows how many very strong core customers there are. The trial user is an example of customers who buy once, but is now buying around different brands. Let's look at the example on the left. Attack and Laurel are areas where brand switch is difficult to occur. Here, we are focusing on the loyal users below. It's about how can we increase their loyalty and we're leveraging marketing to do that. I will not be able to share the details of our marketing activities at this time, but the extent to which we are capturing these loyal and repeat users, including those of our competitors, it's actually a guide to the type of marketing strategy that we will be using. Meanwhile, please look at the right side. Brand switches are more likely to occur through marketing. This is an area where people who are much more price-oriented exist. This includes toilet cleaners and makeup removers, called Magiclean and Biore, respectively. Here, loyalty marketing is actually very important. How can we make the price-sensitive users loyal? Here, we steadily look at the database of each and every customer and picking out the direction of how we can make them become loyal users from the data lake. So this indicates the direction. This loyalty marketing will not be limited to this area, of course. Please stay closely tuned to how we will promote marketing and strengthen all of our brand products. Please turn to Page 33. This shows our plan to build a Global Sharp Top Chemical business. I really get to present this slide. So let me take this opportunity to show this to you again. Global Sharp Top's strategy is most widely implemented in the Chemical business. Within the three areas of Oleo Chemicals, Performance Chemicals and Information materials, the businesses that have already become Global Sharp Tops are shown here. In addition to these businesses, these are the priority businesses for development. In Oleo chemicals, It will be agricultural solutions. In Performance Chemicals, we have asphalt road additives. And in Information materials, we have environmentally friendly inkjet and cutting-edge semiconductor chemicals. The dotted line at the bottom of the chart is very important for development because the higher the percentage of sales, higher the profit ratio will be. If the products we develop to become Global Sharp Top, 7% ROIC in 2023 will exceed 11% in the 2027 target. These priority businesses are performing very well right now. Finally, let me explain the key points of focus for the second half of the year and for 2025 at a high level. We will continue to strengthen our earnings power and improve our profitability. We've also established a structure for global growth in the cosmetic business, which is major theme for 2024 and by intensively investing in our core brands and strengthening digital beauty counseling, we hope to achieve global growth in this area in one stroke. And then like I said earlier, the hair care business. We are not just a skin care company or cosmetics company. If we add hair care business here, we will have a very distinctive Beauty Care business in the world. I hope that you will look forward to our full-scale entry into the Japanese high premier market and the establishment of global growth structure this year. I have already mentioned the distinctive digital marketing earlier. This is the true aim of our core precision marketing. If we can accurately crass customer needs and effectively provide exclusive and distinctive value, our global growth will be assured. Page 35 is key highlights, so please skip it. Please turn to Page 36. Next month, we will be holding a briefing on the hair care business strategy, which I said is extremely important to us. I hope you will look forward to it. I would like to end my presentation here. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]