Kao Corp

TSE:4452

Earnings Call Transcript 2021-Q2

[Kenichi Yamauchi, executive]

This is Kenichi Yamauchi, Executive Officer in charge of Accounting and Finance. Let me present Q2 financial results.

Please turn to the next page. As usual, I'd like to start with the market. In the middle of this slide, you see the market growth rate. The total of household and personal care is 94 versus previous year in Q1, and average in Q2 was 98. First half averaged 96. In Q1, due to the absence of the COVID-19 special demand, the market was not active. In Q2, we thought that it would get better, but it is close to what is happening right now. So it was 98, not reaching the 100. Average was 96. So the market was not so good.

Turning to the cosmetics. It's worse, in Q1, 85, because there was no impact of COVID-19 in Q1 last year. In Q2, it improved to 106. If you turn to the graph at the top, you see it was 115 in April, but it gradually declined to 98. And now we are told not to go out. And the average of Q2 was 106, but still it's challenging. The average of the first half was 95. So it continues to be challenging.

Next page. So I talked about the domestic market. Next is Asia. Now China, Chinese market, continues to expand. So it's good. In the middle, we have Indonesia. Q2 last year was very poor. So it's better. But currently, the status in Indonesia is not very good. So we expect some challenges in the near future. Now Thailand, last year, the results were very poor. So Q2 looks better, but it continues to be sluggish. So ASEAN as a whole, Q3, Q4 probably will be tough.

Now turning to U.S. and Europe. U.S. market is strong, continues to expand. As for U.K., last year, there were lockdowns. So Q2 results were very poor, and it has recovered this year. As for Germany, the similar situation. So Q2, we saw the recovery. So U.S., Europe are strong in general.

Turning to the next page. This is the highlights of consolidated financial results. Net sales, JPY 675.2 billion. There's an effect of currency translation. So it is plus 1.2%. But excluding that, like-for-like growth was minus 0.6% in the first half. Operating income was JPY 70.6 billion, down JPY 3.9 billion year-on-year. I will show you later, looking only at the second quarter, it is improving. So results are not so bad. As for net income number, there were gains on ForEx fluctuation due to the weaker yen, and there was positive from tax. So profit was up. And in terms of the net income attributable to owners of the parent, it was JPY 52.5 billion. Based on this, as for dividend, JPY 72 as planned, JPY 2 per share increase.

Now this slide shows January to June, net sales by segment and geographic region. At the bottom, we show the like-for-like growth.

Now if I may break it down on the next page, it's a bit busy slide. But if you look at the first quarter and second quarter separately, on the right-hand side, we are showing improvements in the second quarter. Having said that, in Q2, hygiene and living care in Japan, it's still minus 0.6%. Last year, home care and sanitary napkins sold so well, and laundry detergent is strong, but we are not at 100%. In Asia, this is Merries, China continues to be weak. But concerning Merries, we decided not to cut the prices and try to maintain the brand value even when the volume goes down. So from June time frame, we are starting to see the year-on-year growth. And in Q3, we'll be launching new products for Merries. So we are hoping that we see the recovery.

Health and beauty care. Japan first, minus 7.4% in Q2. This is the hand soap and hand sanitizers. I'm sure that you are still using the ones that you bought last year. So there are inventories at home, at stores and also at Kao. And it's not normalizing yet. So hand soap and hand sanitizer are the reasons behind this negative number. But in Q4, the things will normalize. So gradually, increase will start. As for Asia, we did not have hygiene-related business last year. So it's starting to show this year. As for Western countries, this is the beauty products for salons, it's getting better. Last year, numbers were very poor. So it's growing now. And so U.S. and Europe, we see major improvements. And we believe that this will continue in Q3 and onwards.

Life care, the top numbers are small. So percentage appears to be high. Washing Systems that we acquired, which is American commercial use hygiene-related products, acquired customers. That is reflected here.

Now the cosmetics that you are interested in, we saw the recovery in Q2, 7.1 plus in Japan. In Asia, it's positive 30.2. If you look at only China, it's 35 positive, so they are going very well. As for Europe, SENSAI, Molton Brown, they are very strong. They are growing significantly. So as for cosmetics, we see a very good trend in Q2.

Next is chemical. In U.S., in the first quarter, it was negative due to the cold wave. There were suspension of operations of our customers. But without those, in all areas, we saw year-on-year growth in Q2. And Q1, as a whole, was not very good, so we haven't fully recovered. But if you only look at Q2, we are making major improvements.

Next slide, please. The top row shows the sales I just mentioned, summarized in a single line by segment. In the first quarter, you see more orange bars. But in the second quarter, many have become blue. The growth rate of cosmetics in the second quarter was 13.9, which means that although we did not completely recover the drop in the first quarter, we have recovered a lot.

Below, you can see the operating income by segment for the first and second quarters. As you can see, cosmetics have improved by JPY 7.6 billion year-on-year since last year. But if you add the first quarter and the second quarter results together, operating income is still in the red at minus JPY 500 million. However, we will continue to make improvements in the third and fourth quarters as well, and we expect that operating income from cosmetics will eventually reach JPY 10 billion to JPY 15 billion. In that sense, I think we are making good progress here.

As you can see, sales in the Hygiene and Living Care business recorded about the same year-on-year decline as in the first quarter. Last year, we were able to sell the products without doing much. But now, there is competition, and we have to deal with that to some extent. So we have been spending money to generate these kinds of sales. That is why it is negative year-on-year. We'd like to make efforts to prevent the negative growth rate from becoming larger. In the Chemical business, profits are steadily increasing. Health and Beauty is getting a little better. I am expecting that it will continue to get better going forward.

This graph shows the aggregate of the first and second quarters. In terms of rate of improvement compared to the previous year, cosmetics and chemicals have managed to show improvement. And we believe that we can make even more improvement in the third quarter and beyond.

Next, please. This is the analysis of operating income. The impact of sales not having caught up with last year's level is about JPY 10 billion. You may think that raw material prices below are quite hurting. But in the first half of the fiscal year, Chemical business have been responding with price increases. So the net impact is 0.

In the second half of the year, the price increase of crude oil is finally starting to show, and we are now seeing more and more applications for price hikes, so we expect a net negative impact of about JPY 8 billion in the second half. At the first quarter results announcement, we said it will be about negative JPY 5 billion for the year. But now we expect it to be about negative JPY 8 billion. The impact of SG&A expenses is positive. We are working on various cost reduction measures. In addition, impact of currency translation, product mix and others have led to this operating income.

Next. As for the forecast for the second half, we have not changed the sales forecast for the full year. But the positive effect of foreign exchange rates has increased a little, so the actual amount has decreased a little. We will have to make up for this by cutting costs somehow.

Now as I mentioned, raw material price impact of negative JPY 8 billion, on a net basis, will materialize going forward. So we are taking measures to reduce fixed cost to make up for that as well. We have some visibility about this, but there are still many things that we need to work on.

At the beginning of the year, TCR was expected to be plus JPY 6 billion, but it has been increased to JPY 8 billion. We will continue to promote cost reduction. We are preparing various measures in addition to cost reduction. With such measures, we hope to achieve the sales and profit targets. Capital expenditure is somewhat delayed due to COVID-19. But for now, we are keeping our plan unchanged from the beginning of the year at JPY 90 billion. We have not changed our operating results forecast, so it is exactly the same as what we announced at the beginning of the year.

Next page. The composition of sales has been modified somewhat with a little higher percentage of chemicals. However, we are going to keep the total unchanged.

Next. This is the outlook going forward, and you see a slight delay from what you saw in the first quarter. This is due to COVID-19. I don't want to say that too much because it would become an excuse, but I must say there is a slight delay. We will work around this by cost cutting and other means to achieve the announced forecast. As Hasebe will explain next, there are quite a few attractive measures for the second half. So including those measures, we'd like to achieve our forecast.

That's all from me. Thank you very much.

[Yoshihiro Hasebe, executive]

I am Hasebe, President and CEO. I would like to explain about the business policies and K25. We just heard from Mr. Yamauchi about the financial overview of the first half. I would like to review the measures taken in first half and also talk about how we will be addressing in second half. In other words, how we will be progressing with K25.

Please go to the next page. This chart illustrates our views of the market and how we will be shifting in terms of sales and operating income in the second half. First half market conditions were explained already. Regarding second half, our forecast of hygiene and living care, health and beauty care and cosmetics markets are to remain the same as last year.

Even with COVID-19, movements of people are becoming quite active. Therefore, market is believed to be the same as year before. Whereas for the sales and the operating income, as you can see, our intention is to raise the sales across all segments. Particularly in hygiene and living care and health and beauty care, higher sales will be driven by new products. Meanwhile, for cosmetics, DX ratio is rising. And for chemicals, hygiene-related products are still in need globally, either for the raw materials, shall contribute to our top line. Regarding the operating income, as we shift to offensive approach, there will be a mix of some remaining flat and some increasing.

Next, please. This slide was also included in our integrated report which depicts Kao's integrated power being used to solve global social issues. This is an earnings call. Therefore, I would like to mainly focus my talk on Reborn Kao on the left side. We have chemicals, hygiene and living care and health and beauty care, which fall under household and personal care and cosmetics. I'd like to explain the measures we took in first half and the tactics in the latter half of this year.

Next, please. First off, household and personal care business in the first half. As you can see here, products for hair salons in Europe and the Americas began to pick up, especially prestige product, Oribe and [ EC ] have been quite successful. Whereas in China, we have been strengthening Laurier brand, which is working out. But unfortunately, in Japan, due to the absence of last year's special demand, global sales decreased compared with the same period of last year.

It was unfortunate that we were slightly behind our plan. Nevertheless, home care products and hand sanitizers, which we had not been able to increase the share, are increasing their shares. Also, aggressive investments were made into core brands, which ramped up laundry detergents and bath additives. I believe that the decisive investment approach is being reflected in the results.

As for Asia, particularly in ASEAN region, infections are spreading, which is a concern. This means hygiene products will be in need. This is where our home care, fabric and hand sanitizers come into the picture. This will be a critical moment for us. Regarding Europe and the Americas, the economy has become quite active since second quarter. So we hope to expand with Oribe, the hair salon product, as the driver. Also the commercial use products in life care has been growing with new customer acquisitions. I have shared some of the first half highlights of household and personal care business.

Next, please. Now our approach in second half. First quarter and second quarter were, in a sense, in line with our plan. Kao is strong in third quarter and fourth quarter, which means we will take offensive from here. Some may still have doubts due to pandemic. But because of the situation we're in, we will be aggressive. Decisive investments in marketing these key brands, as you can see here, will take place to increase market share as well as sales.

Regarding technically innovative products, Magiclean, Essential and Merries, they have been long-standing products. But we reached a point to launch new products. Without any hesitation, investments in marketing will be made to capture market share. Moreover, we will step up our efforts in D2C. DX has been progressing successfully, as I will refer to it later on, so D2C is another growth area for Kao.

Next, please. As for the cosmetics, Mr. Murakami has talked about G11 and R8 strengthening the business by consolidating the brands. Somewhat belatedly, in household and personal care, domestic brands will be combined and reduced from 44 to 32. And globally, consolidation will take place, and some will be divested. We are now working to finalize the plan. So now we have 13 category-leading brands, 4 life design brands and 15 niche segment brands. We will be making concentrated investments in these brands to make them extremely strong.

Next, please. Next is cosmetics business. Unfortunately, there still is an impact of declaration of state of emergency and the pandemic. However, the progress made in the second quarter was remarkable, especially the new offerings for new normal. In China, freeplus and Curel grew more than we expected. And after easing of lockdowns, Molton Brown and SENSAI showed their strengths.

The cosmetics business endured and did their very best in the first half to prepare itself for the second half, especially if you could draw your attention to the right, while e-commerce ratio went up, the growth year-on-year basis and share of sales of G11 and R8. G11 share went up from 61% to 64% and grew 9% year-on-year basis. R8 improvement was astonishing, too. This is in line with our commitment of strengthening in order of G11 followed by R8, and the numbers show the progress is on track. Further improvements will be made in the second half.

The initiatives taken in the first half were mainly the following 3. The first was cosmetics offerings for the new normal. In the severe environment of everyone wearing a mask, pursuing sustainability while not compromising beauty was exactly the kind of offerings the technologies which Kao Group has put its all efforts into had been waiting to provide. Lip makeup that can keep lips moist and does not smudge onto the mask easily even with the mask on. As wearing masks has become a common practice, the skin of the face tends to get damaged significantly. In this context, proposals like DEW skin care, which would take only 3 minutes to permeate and purify the skin and spirit, was so popular as to become out of stock from time to time.

Cultivating prestige brands such as Molton Brown, SENSAI and SUQQU was quite a success. We are convinced that Chinese brands of Curel and freeplus will continue to grow more than expected going forward.

Next, I will discuss our initiatives in the second half. We'll not slow down in our efforts to pursue these initiatives. As this challenging environment reflecting the new normal becomes common, in DEW, SOFINA iP, Curel and KATE, we will come forward with one new proposal after another. We'll not stop our efforts to cultivate prestige brands. We will enhance the profit margin for KANEBO, SUQQU and RMK so that they will be grown to become purpose-driven strong brands, which customers will feel nothing else can work for them.

In China, in addition to the strong-selling Curel and freeplus, in the second half, we plan to expand the first duty-free shopping complex finally opened in Hainan Island. We're hoping to facilitate further growth in the second half so we can achieve a rapid expansion.

Next, I would like to touch on our digital transformation or DX initiatives. They're extremely important initiatives that would lead to what we call Another Kao. We are stepping up our efforts to work with e-commerce platforms. Once we started to work on this, it became quite obvious that maximum effect was produced at minimum marketing costs. Big sales campaigns enabled us to achieve huge results we have never been able to before in beverages, cosmetics and personal care products, showing significant growth.

Furthermore, we started Kao's own e-commerce with est and SENSAI, which is showing very strong results. This initiative is about making loyal customers with which we build a strong bond and keep enhancing the relationship. Though we started our efforts in cosmetics, we hope to roll them out to include other brands to make the platform even stronger. We also made investments in digital technologies and launched a digital communication facility, where our employees can stress the attractiveness of their brands in the form of interactive dialogues with customers. This initiative is being expanded further, and we are seeing results that would surpass our initial expectations.

Last but not least, I will discuss the chemical business. As the beauty market is faced with a bit of a challenge, the industrial business is becoming increasingly strong. Our chemical business is growing in response to that. In this business, sales, operating income and operating margin are growing. The operating margin of 11.1% was exactly the to-be status for the chemical business, and we hope to continue to improve that further.

In automobiles, agriculture, electronics and architecture, we have been seeing a growth. And currently, products for use in printing are the mainstay in the U.S. and Europe where, by enhancing our shares in the market, we hope to strengthen our foundation.

I just discussed initiatives taken in the first half and the goals for the second half, which I believe is the culmination of what I mentioned when I explained about K25 sustainability as the only path for producing the maximum results with minimum investment. Employees got united much more than I had expected to review what they are doing to aim for the maximum output as they try to perform internal reforms while delivering on their promise on the business output at the same time.

I would like to talk about 2 important points described in the integrated report. Conventionally, what we have seen is the linear economy based on volumes and units where you procure raw materials, produce products, have them used and disposed of. We'd like to transform this into a circular economy, which only Kao, with its 2-way business model of having both chemical and consumer businesses, can realize. In this circular economy, instead of Kao acting alone, we will get partners and competitors involved so that the economy will keep circulating without generating waste. I believe that is exactly the way Kao should do business.

Another important point is on the next page. We are a manufacturer of personal care products. As shown on this slide, in what we call life journey or in people's day-to-day lives, we provide products, thereby contributing to society. I would like to draw your attention to the numbers mentioned on this slide. The health care expense in Japan is still on the rise, so is the number of those requiring nursing care. As the Japanese society ages, the working age population needs to work even harder. While the country's population is declining, the number of households remains flat. We're just about to enter an era when we need to live with or be faced with diseases.

It is now time for us to reach out not just to consumers who are living their ordinary lives but to those living or dealing with diseases. In other words, we're also getting involved in patient journey as a company to provide life care as well. And as part of the responsibility of a company, offering life care, we would like to take initiatives to minimize the number of people living with diseases. We're presently working to shift our direction towards digitization. And what we aim for after the digital transformation is to capture all these people struggling in life care and offer them protection.

This is my last slide. I refer to what we call integrated power. We need to get united and prioritize what we will need to do to expedite the execution. This would only be possible for Kao, who has such a large platform, and I believe it is also our responsibility to do so. Contribution to sustainable business through our chemical business, decisive promotion of business in personal care products and facilitation of DX and UX in cosmetics will be pursued and expanded with digital platforms and through our own e-commerce, including digital peer activities. That is how Reborn Kao should be.

That said, however, Reborn Kao is not the only thing we are seeking to achieve. There is also Another Kao. Initiatives such as transforming waste into roads, partnering with other companies to create a path for the waste containers to be reused is what we need to do exactly because we have chemical business and such a broad platform.

I'm hoping that in the next earnings report, we'll have an opportunity to share with you our initiatives in another call. So we anticipate a challenging situation in the second half. We at Kao Group want to get the whole company united to take initiatives to transform this hardship into a positive development in the business in order to transform to build robust business. As declared in K25, we will move ahead with fundamental reforms at the same time.

I would like to conclude my presentation by asking for your kind, continued support. Thank you for your attention.