Kao Corporation (4452) Earnings Call Transcript & Summary

Thank you for joining us today for Kao's financial results briefing for the 6 months ended June 30, 2026. Before we begin, we'd like to express our deepest sympathies to everyone affected by the 2026 Kumamoto earthquake. All of us at the Kao Group sincerely pray for the earliest possible recovery of the affected communities. Now let me begin with an overview of our financial results. Please turn to Page 4. These are the key highlights. The first half of fiscal 2026 was a highly significant 6-month period, demonstrating that our reforms to earning power have taken root for a shift to a profitable growth stage. In the GC business, profitability improved through the promotion of high value-added products and total cost reduction or TCR, and our gross margin recovered to above the pre-pandemic level in fiscal 2019. Operating income reached JPY 95.8 billion, a record high for the first half. Even excluding the gain on the sale of land, operating income was JPY 84.3 billion, the highest level since fiscal 2019, confirming that our underlying earning power is steadily strengthening. Based on these first half results, we have raised our full year fiscal '26 operating income forecast by JPY 8 billion to JPY 190 billion. Looking further ahead, we will strengthen our semiconductor-related business, which is capturing demand from generative AI and data centers and our Cosmetics Business, where we are accelerating global expansion as future growth drivers. President and CEO, Hasebe, will provide further details later. Now please turn to Page 6. Let me summarize our financial results for the first half of fiscal '26. Net sales increased 7.8% year-on-year to JPY 871.9 billion. On a like-for-like basis, excluding currency translation effects, sales increased 3.4%, reflecting steady growth in both volume and price. Gross margin improved 1.3 percentage points year-on-year to 39.8%. The benefits of our reforms to earning power, including the promotion of high value-added products and cost improvements are steadily translating into profits. As a result, operating income reached a record high JPY 95.8 billion for the first half, up a significant JPY 26.6 billion year-on-year. Operating margin improved 2.4 percentage points to 11%, even excluding the gain on the sale of land, operating income was JPY 84.3 billion, surpassing the pre-COVID level and confirming the steady improvement in the underlying earning power of our businesses. Net income attributable to owners of the parent was JPY 65.7 billion, while EPS increased 35.9%, steadily translating profit growth into enhanced shareholder value. Next, please turn to Page 8. Let me summarize the key points for the first half of fiscal 2026. We position 2026 as a pivotal year to further enhance our sustainable earning power and accelerate profitable growth. The first half clearly demonstrated that we are making solid progress towards the goal. In addition to net sales and operating income, I explained earlier, ROIC also improved to 10.5%, reflecting continued improvements in both profitability and capital efficiency. By business, growth in the GC business outside Japan was driven by increased sales of Cosmetics and Health Beauty Care in Asia. The Chemical Business also offset the decline in Q1 and achieved profit growth in the first half through capturing demand and selling price adjustments. We achieved both sales volume growth and improved profitability, demonstrating sustainable profit growth. In the second half, we will accelerate growth in focused businesses while transforming businesses facing challenges outside Japan. Although higher raw material prices are expected, we will address them through high value-added products, TCR and price pass-through and aim to achieve our upwardly revised full year forecast. Next, please turn to Page 9. Let me explain our sales performance. In the GC business, Japan continued to drive growth with like-for-like sales increasing 4.1% Sales outside Japan also increased 1.9%, resulting in broader growth across the GC business. Outside Japan, growth continued to be driven by Cosmetics and Health Beauty Care in Asia, while we steadily advanced transformation to drive growth in businesses facing challenges in Europe. In Japan, we achieved growth in both volume and price through the promotion of high value-added products and pricing. The Chemical Business also returned to sales growth in the first half, supported by selling price adjustments in the oleo chemical business during the second quarter and strong demand for electronic materials in Japan and Asia. Overall, in addition to steady growth in Japan, improvements broadened across the GC business outside Japan and the Chemical Business, resulting in well-balanced growth across the company. Next, please turn to Page 10. Performance by segment. In the GC business, continued progress in strengthening earning power and promoting high value-added products resulted in higher profits across all segments. Operating margin improved 1.1 percentage points to 10.1%. In Fabric and Home Care, we maintained a high level of profitability through the promotion of high value-added products and by capturing demand resulting from the Middle East situation. In Health, Beauty Care, Skin Care in the Americas and Asia drove profit growth, offsetting the weak performance in Europe. In the Cosmetics Business, growth outside Japan and the structural reforms drove profitable growth with particularly substantial results for Curel, KATE and SENSAI. The Business Connected Business also continued to perform steadily, mainly driven by products for the food service, lodging and leisure sectors. In the Chemical Business, the lower profit from the time lag in price pass-through during Q1 was recovered through selling price adjustments and capturing demand in growth areas in Q2. Also, the year-on-year impact of the elimination of unrealized profits contributed to higher profits in the first half. Overall, the GC business made further progress in achieving both growth and profitability, while the chemical business returned to a recovery path, further strengthening the company's overall earning power. I will skip Pages 11 and 12 and move to Page 13. This is the analysis of change in operating income. Operating income increased from JPY 69.2 billion to JPY 95.8 billion, up JPY 26.6 billion from the previous year. Even excluding the gain on the sale of land, operating income was JPY 84.3 billion, up JPY 15.1 billion year-on-year, showing that our business earning power continues to strengthen. In the GC business, strengthening earning power through high value-added products, selling price adjustments and GCR cost improvement generated about JPY 10 billion in profit improvement. In addition, sales volume was up 2.7% with volume growth directly contributing to higher profits. We fully absorbed the ongoing growth investments in human capital and marketing and delivered higher profits on a net basis. In the Chemical business, the time lag in price pass-through in the first quarter was recovered through capturing demand and selling price adjustments in the second quarter. The impact of unrealized profits also helped to achieve higher profits in the first half. As a result, operating income, excluding the gain on the sale of land was up JPY 15.1 billion with the JPY 11.5 billion gain on the sale of land added. Operating income reached a record high JPY 95.8 billion, up JPY 26.6 billion from the previous year. Next, please turn to Page 14. This slide highlights the improvement of our earning power. The key message is that our earning power is no longer driven by temporary factors. It has become firmly established as a system. By continuously promoting high value-added products, TCR and product mix improvement, we have established a mechanism that steadily improved gross margin. As a result, company-wide gross margin improved 1.3 percentage points to 39.8%. In the GC business, it improved 1.5 points, again, exceeding our annual target of improving gross margin by at least 1 percentage point every year. Also, GC business gross margin has recovered to above the pre-pandemic level of fiscal '19. This demonstrates that we have established a sustainable mechanism that continues to generate value through the promotion of high value-added products and cost improvements, further enhancing the sustainability of our earning power. Next, please turn to Page 15. In the GC business in Japan, we have enhanced brand loyalty and expanded market share through the continued promotion of high value-added products. In the toiletries market, our market share has exceeded the previous year's level for 12 consecutive quarters, further strengthening our competitive advantage. We continue to gain market share in key categories, including laundry detergents, sunscreens, facial cleansers and in-bath hair care. By creating new value in the premium price segment while maintaining a broad customer base in the mass market, we continue to deliver sustainable profit growth. Our 6 focus brands in the cosmetics business achieved 13% growth despite a contracting market, significantly outperforming the market. Going forward, we will continue to build on this strong domestic business foundation to drive further earnings growth. Page 16. Next, I would like to discuss our priority business outside Japan. Concentrated investment in key brands and key areas is yielding a steady results in each region. In the Cosmetics segment, we are further strengthening the global collaboration and KATE is accelerating the launch of the new product linked to Japan starting in Thailand. We have also launched Curel in Brazil and the Netherlands steadily expanding its global reach. In skin protection, Biore UV sales are expanding at the strategic retail chains in North America and the growth continues in ASEAN driven by the new product launches. In self-tanning, the Bondi Sands continue to grow at a rate exceeding the market average in North America. Laurier is also performing well in Asia, particularly in China. Furthermore, in the Chemical business, electronic materials are growing significantly, primarily in Japan and Asia, driven by the demand for generative AI and the data centers. Our growth model that generates the profits is steadily taking shape overseas. Page 17. I would like to explain the Chemical Business. In the first half, despite the significant changes such as the situation in the Middle East, we minimized the impact by promptly implementing the price revisions and procurement measures. In the oleo chemicals, the effect of the price revision began to appear in the second quarter, leading to the improved profitability. In the consumer care chemicals, the business price revision and increased sales volume also contributed to profitability. In the performance chemicals segment, we maintained a stable supply despite the situation in the Middle East and captured the demand in growth areas such as cleaning agent for the electrical steel used in data centers and chemicals for the lithium-ion batteries. In the information materials segment, electronic materials for the semiconductors and hard disk drives continue to perform well, particularly in Japan and Asia. In the second half of the fiscal year, we will continue to adjust prices in response to the market fluctuation while further expanding sales in high value-added areas such as electronic materials. Page 18. Here, we explain how the reforms to earning power is steadily leading to the improvement in capital efficiency. Company-wide ROIC stood at 10.5%, up by 2.5 percentage points from the previous year. Looking at each business areas, we have achieved steady improvements in sales, profits and ROIC in both our stable earnings areas and our growth driver areas. In particular, the growth drivers areas achieved profit improvement of JPY 11.6 billion, confirming the improvement in both earnings and capital efficiency. Meanwhile, in the business transformation area, while the challenge remain in hair care, improvements are underway in the sanitary products and the business reforms are progressing as planned. Thus, we are making steady progress not only in profit growth, but also in improving the capital efficiency, further strengthening the foundation for the profitable growth targeted under K27. Page 20. Next, I would like to explain our full year earnings forecast. Based on our progress in the first half and outlook for the second half, we are revising our full year 2026 operating income forecast upward by JPY 8 billion from the initial plan of JPY 182 billion to JPY 190 billion. Net sales of JPY 1.8 trillion with an operating margin of 10.6%. Net income attributable to the parent company is expected to reach JPY 135 billion and ROE is projected to improve to 12.3%. Meanwhile, regarding the dividend forecast, excluding the impact of the stock split that we will maintain the annual dividend at JPY 156 as originally planned. This upward revision is not solely due to the onetime factors, but is also based on the first half result that exceeded the initial forecast. Page 21. For 2026, we forecast net sales of JPY 1.8 trillion, representing a 3.8% year-on-year growth. There are 2 major growth drivers. The first is the GC business. In the Cosmetics segment, in particular, that we will accelerate the growth primarily overseas by strengthening global collaboration and rolling out the 3 strategic expansion models. The Hygiene and Living Care and Health and Beauty Care, we will pursue the balance between the price and volume growth. The second is the Chemical Business. While continuing to adjust the prices, we will expand sales in high value-added areas, particularly electronic materials to drive the revenue growth in expanding markets. In this slide, we will achieve the sustainable sales growth, not only through the price adjustment, but also by driving both volume growth and the shift toward high value-added products. Page 22. I would like to explain the upward revision to our operating income forecast. First, in the first half, operating income, excluding the gains on the land sales exceeded initial forecast, confirming that the earning power of our core business is steadily improving. For the second half, we have factored in not only the rising raw materials costs, but also structural reform expenses for overseas businesses facing challenges. On the other hand, we anticipate the profit improvement through the price pass-through, TCR and expanded sales of the high value-added products. After fully offsetting these negative factors, we expect operating income, excluding the gains on land sales to exceed the initial plan of the JPY 182 billion. Furthermore, we will strategically allocate the portion of the gains from the land sales to the structural reforms of our overseas business facing challenges to support the future growth. Consequently, we have revised our operating income forecast upward by JPY 8 billion to JPY 190 billion. This upward revision is not due to the onetime gains, but rather the result of the reforms to enhance our earning power taking root and further strengthening our core business' profitability through growth in the profitable sectors. Page 23. Impact of the raw material prices. We are seeing the upward trend in the prices of key raw materials such as naphtha and oil and fat as the left graph shows. However, we managed our profit and loss based on the cost at the time of the raw materials are actually used rather than on purchase prices. And there is a time lag of approximately 2 to 3 months between the procurement production and sales before the costs are reflected in P&L. Therefore, we currently have raw materials to be used for the third quarter through the end of the fiscal year, and this impact has already been factored into our full year profit forecast. In other words, the projected operating income of JPY 190 billion is based on an assumption of the rising raw material prices, and we believe that we have largely accounted for the impact of the raw material cost through the fourth quarter. Page 24. Next, I will explain the factors contributing to the JPY 26.5 billion increase in the operating income from the 2025 actual figures of the JPY 163.5 billion to 2026 forecast of JPY 190 billion. Of the JPY 15.5 billion increase in the raw material prices, we expected to absorb the JPY 29 billion through the price revision, higher value-added products and TCR, resulting in a profit improvement of over JPY 20 billion as a reflection of the earning power. Furthermore, with a profit improvement of JPY 16.5 billion driven by the volume growth, we anticipated the profit growth of over JPY 9 billion even after accounting for the increased marketing expenses. On the other hand, we have factored in approximately JPY 27 billion, a strategic increase in SG&A expenses, such as investment in human resources and marketing to support future growth. After fully absorbing these cost increases, the operating income is projected to rise by JPY 26.5 billion to JPY 190 billion. Page 25. Finally, I would like to explain the progress of the K27. With this upward revision to our earnings forecast, we now expect the operating income of JPY 190 billion, overseas sales of JPY 800 billion for the fiscal 2026, both of which exceed our initial forecast. In addition, we are maintaining ROIC at 10.5%. And together with the operating income and overseas sales, we are making the steady progress towards achieving all of the key KPIs set out in K27. This upward revision reflects the consolidation of our earning power, which was confirmed in the fiscal half of 2026, and we believe the path toward achieving of the K27 targets has become even more certain. Page 26. If you look at this graph, you will see that Kao has steadily enhanced its profitability over the past few years. In the first half of the 2026, we not only confirmed that consolidated our earning power, but also demonstrated that we can translate it into a sustainable profit growth. The momentum toward achieving the K27 is steadily accelerating. Moving forward, while maintaining our solid earnings base in Japan, we will leverage our overseas GC business, Cosmetics Business and Chemical Business centered on electronic materials as growth drivers. By allocating both profitable growth and capital efficiency, we will achieve the K27 and continue to enhance our corporate value beyond that. This concludes my presentation. Thank you very much for your attention.

Let me explain Kao's value creation model, recent progress and next steps. I will apply our future growth strategy, including specific examples of the technologies supporting it. Let me begin with Kao's circular growth model. Kao addresses 4 major social issues: diversification and personalization, the aging population, new hygiene needs and environmental constraints. These are structural issues that will continue for decades. We address them through technologies with exclusive uniqueness. Kao's strength lies in 3 synergies. These are raw materials and business synergies between the consumer care and the chemical businesses, knowledge synergies across businesses and functions and technology synergies that continuously advance our technologies. These synergies are further accelerated through our goal-oriented execution from activities. I'd like to reiterate that precision interface control technology is at the core of Kao's value creation. This technology has 2 aspects: adaptive technology, which adapts to change and resilient technology, which performs regardless of change. At Kao, we define precision by the scale at which control is achieved. It refers to control at extremely fine scales ranging from micrometers to picometers. In the Chemical Business, this technology delivers stable performance regardless of change. In the consumer care business, it enables us to respond to diverse and personalized needs. Today, I will explain cosmetics and electronic materials represented by semiconductors where our highest levels of precision technology are applied. Let me begin with our cosmetics business. On August 8, we will launch SOFINA BASIC+, marking SOFINA's full-scale entry into the self-selection market. This is a strategically significant step as SOFINA has traditionally focused on the premium segment. The new product features our auto hydration technology and innovative technology centered on water molecules. Building on our core technologies, including ceramide science, this new technology has the potential to redefine conventional skin care. We have named this innovation Water Capturing Skin technology. Please take a look at this graph. With conventional formulations, skin is well moisturized immediately after application, but moisture gradually decreases over time. That has been the conventional understanding. In contrast, with our new formulation, moisture is maintained and even increases over time. We have confirmed that this is achieved through 2 mechanisms working simultaneously, promoting the uptake of moisture from the air into the stratum corneum while significantly suppressing transepidermal water loss. This approach dramatically enhances the skin's own natural ability to regulate and retain moisture. Let me illustrate this concept. Verification at the stratum corneum cell level confirmed that not only the formulation, but also the stratum corneum itself attracts moisture from the surrounding air, increasing its own water content. At the microscopic level, skin treated with the comparative formulation gradually turns white as moisture is lost. As shown here, whitening becomes more pronounced over time, indicating moisture loss. By contrast, with our formulations as shown in blue, the skin continuously captures moisture from the air and the stratum corneum itself acquires the ability to spontaneously absorb and retain moisture. The self-selection skin care in Japan is a big market of about JPY 960 billion. And within this market, the rapidly growing drugstore channel has become a core sales channel. With the launch of SOFINA BASIC+, we will create a trust-building engine to win and build trust in our skin science technologies in the self-selection market. And based on that trust, guide consumers to high-performance skin care. The strategic significance is to achieve high profitability by delivering outstanding perceived quality in a large and growing market. By 2030, we aim to increase global sales by 50% and expand our domestic user base by 70%. Next, let me introduce est SOFINA's Pinnacle brand. Through joint development with Asahi Kasei, we have developed a new product incorporating dispersible microfiber technology. Unlike conventional fiber technologies, this innovation is suitable for everyday use. In addition to forming a dense network structure on the skin, it also triggers new biological responses within the skin. Our research has shown that it acts on RNA associated with skin aging, by identifying aging-related RNA and modulating its expression, this technology opens up new possibility for anti-aging care. The product will be launched this September. From SOFINA BASIC+ to EST, we provide a comprehensive solution tailored to the customers' life stage and skin conditions. Based on the deep skin layer science and precision interface control technology, we will strengthen our foundation centers in Japan and expand these technologies to our global brands subsequently. Our 6 key brands are strategically positioned according to price range, customer needs and region. With a broad portfolio ranging from the luxury self-selection offering, we reached a wide customer base while achieving a high average selling price. Next slide explains the growth performance of the 6 focus brands. Following the structural reform implemented in 2023, our 6 focus brands are growing at a pace that exceeds the initial projections. They are well received by the market, and we will continue to accelerate this growth. Next, the Chemical Business. Our semiconductor-related chemical business leverages the precision interface control technology at the angstrom level to the minus 10 meter with the advent of the AI era, demand for the semiconductors is expanding rapidly and the need for the process materials is also increasing dramatically. We provide the process chemical across the wide range of the fields, including selective extraction of the rare metals, front end and back end of semiconductor processes and hard disk drive, and we hold a world-leading market share for some of our products. In order to avoid any misunderstanding, the front-end semiconductor process consists of 26 categories and 8 in back end. We will sharply cut into this highly segmented market and solidify our business base. Rather than pursuing the broad and shallow presence that we are becoming an indispensable player in the field of advanced electronic materials. This competitive advantage is supported by technologies with exclusive uniqueness cultivated over many years. Semiconductor manufacturing is extremely complex and precise. It requires high material selectivity that acts uniformly in every corner of the structures while causing no damage to the substrate. Our selectivity enables a high processing precision and a stable process, contributing significantly to our customers' improved device performance and yield. This technological advantage ensures our high market share. We are moving to enter the new market, aiming for growth with an eye toward the expansion of the next-generation semiconductor market. We are targeting an advantage annual growth rate of 30% and operating margin of 40%, even on the conservative side, making this the business area with the highest growth potential and profitability within our Chemical Business. With expanding demand of AI and data centers, we believe these ambitious goals are within our reach. I would like to report on our key initiatives during the first half of this year in order to demonstrate how Kao will contribute to society and expand its future business. Logistics is one of the most pressing social issues facing Japan as a whole to ensure the stable delivery of the goods amid the labor shortages, we launched the CODE joint logistics initiative in April of this year, involving the 9 companies from the food, daily necessities, pharmaceuticals and publishing industries. Kao is well positioned to play a central role in data-driven management within the logistics sector. We believe that this innovative cross-industry approach will dramatically improve the logistics efficiency. In recognition of this, we were awarded the top prize of the CLO of the Year 2026. Next, I would like to touch upon our marketing innovation. The Silent Cleaning project in our Home Care business last year with a fresh perspective enhanced brand value through the power of content, which in turn drove business results. This unique marketing approach was highly acclaimed internationally, earning us our first ever Cannes Lions International Festival of Creativity Award. This marketing approach is making a steady contribution to our business and its success inspiring us to take on new challenges in many other categories. Lastly, taking the stock split as an opportunity, we are introducing a new shareholder benefits program designed for individual shareholders. This is not mere a perk. Our goal is to foster a connection with our products and the corporate philosophy, turning shareholders into loyal fans. While dividends are from the basis of our shareholder returns, we hope to deepen our understanding of an attachment to our company through the values provided by our products. This program is available to shareholders as of the end of December 2026. This is our last announcement. We will hold an R&D strategy briefing in mid-September. We will provide a more detailed explanation of the precision interface control technology introduced today, including the technical specifics, further business development and the impact on management. We strongly encourage you to attend this event. This concludes my presentation. Thank you very much for your time and attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]