Kao Corp

TSE:4452

Earnings Call Transcript 2021-Q3

[Kenichi Yamauchi, executive]

This is Yamauchi. I would like to report on the third quarter financial results.

First of all, please turn to Page 3. As always, first, let me share with you the situation of domestic consumer products market. As you can see in the middle of this page where it says '21 Q3, the household and personal care was 99. People refrained from going outside under state of the emergency, so the market was a lackluster. The average for the period between January to September was 97.

Next to it is cosmetics market, which was 100. It was opposite because July was slightly better, but the average for January and September period was 97, which means that the domestic cosmetics market was not so good.

Please turn to the next page. So that was about domestic market. Now Asia, the Americas and Europe. As you can see, China and Indonesia showed signs of slowdown in the third quarter. Those markets are being hit by COVID-19, especially Indonesia is faced with a challenge. Thailand was the most severe out of these markets, as you can see the weak numbers on the slide. Meanwhile, the U.S., the U.K. and Germany are shown at the bottom. The markets have begun to improve since Q2. And the situation in Q3 is also quite favorable.

Please turn to the next page. These are the highlights of consolidated financial results. First of all, net sales was JPY 1.21 trillion, up JPY 15.7 billion from the same period of last year, which is plus 1.6%. That's what the number says, but there was about 2% impact from foreign exchange rates. After subtracting this, the actual real change was minus 0.4%.

Household and personal care did not perform very well. Operating income was JPY 109 billion, down 9.2% from the previous year. And net income attributable to owners of the parent company was JPY 82.1 billion. Due to the foreign exchange gain, the drop was smaller but it was down from the same period of last year.

Please go to the next page. This is the overview. For the household and personal care business, there were some special demand last year. So there is a rebound from that. As you all know, the situation was difficult in July, August and September period due to the voluntary curfew and the declaration of state of emergency. The market environment, both in Asia as well as Japan, where Kao's main focus is, were very severe, which was reflected in the numbers. Also, there were effects of raw material prices.

On the other hand, in the Cosmetics Business, the July-September period saw a year-on-year increase of 5.9%. And although we were aiming for double-digit growth, I think we fared well regardless of the circumstances.

Strong performance in China is continuing and recovery is being observed in Europe. Nevertheless, they could not offset the negative impact in Japan, and therefore, our sales fell short of the plan. Having said that, July, September period was up about 6% year-on-year basis.

In the Chemicals Business, the increase in raw material prices is being passed on to sales price. So prices are being raised. That is why sales are going up. This alone will not have an impact on profit, but the volume of sales is increasing slightly. Products such as toner and toner binders have seen a slight recovery in volume and are doing well.

The impact of changes in raw material prices is stated as minus JPY 6 billion. Up until the second quarter, we were almost on par, but now we are finally seeing the impact and the amount is minus JPY 6 billion.

For Chemicals, 100%, we are passing on 100% of the raw material price hike to the price. So the impact is stronger on H&PC. So given this backdrop, we are well aware that the situation is pretty tough. However, as we go into the months of November and December, the state of the emergency has been lifted, and it will be our final chance to drive our profit as we go into the Christmas season. We will be pushing forward until the very end towards our target without changing the annual forecast.

Page 12, please. On the left are the sales figures for the first half of this fiscal year from January to June. And on the right are the sales figures for the third quarter by geography and by business segment. I have already covered the first half. So I want to focus on this Q3.

Hygiene and Living Care in Japan is struggling significantly, especially with fabric softeners, sanitary napkins and Merries. In addition, detergents for home care, those that were very strong last year are in decline due to the rebound of this year. Asia is in a similar situation.

In Health and Beauty Care segment, hand soaps and hand sanitizers, which were extremely successful last year in Japan are faced with a challenge this year because of the rebound. In addition, the weather was not good this summer, and we thought people would go outside for the Olympics, but instead, they stayed at home to watch the games on TV. We had planned very good summer products such as Biore towels, but our expectation is put off until next year.

The situation is similar in Asia where the makeup removers and the season products, such as UV products were having a hard time. Exception was hair care products for salons in the U.S., Oribe performed very well, and the sales are increasing.

That was about the U.S. market. Whereas in Europe, sales grew in the first 2 quarters but took a bit of a break in the third quarter. Now this is not a particular decline but rather a recovery in progress.

Next to it is Life Care, minus 13.4%. With sluggish sanitizers, disinfectants and other professional use products because of the absence of special demand like last year, and restaurants were not open at all. So those products did not sell well. It was very tough.

Now in Life Care, there's an increase for the U.S. this was same in the first half. This is related to the company WSI that we acquired in the United States, which is a commercial use hygiene-related products company with one additional client. The number would go up.

Right next to it is Cosmetics. Japan is slightly down but Asia, especially China, in Q3, there was more than 40% growth. Other Asian nations are tough but still a positive of 26.7% was recorded.

U.S. and Europe, Molton Brown and SENSAI, those are improving, so that was positive.

As for Chemical, as it was mentioned, we passed on the higher raw material prices and the volume is also coming back up.

Next page. Now from January to September, cumulative numbers shown on the left as net sales. As you can see, those are the percentage. Life Care, Chemicals and Cosmetics are slightly positive. As for the operating income on the right-hand side, Hygiene and Living Care, the sales numbers are down but higher raw material cost, here it says minus JPY 14.8 billion, which is year-on-year change. So I mentioned JPY 6 billion negative impact of the higher raw material cost and about 70% of that is in Hygiene and Living Care.

As for Health and Beauty Care, about 30% of the impact from the raw material cost increase. And Life Care, commercial products were down, so minus JPY 0.7 billion. For Cosmetics, year-on-year change is up by JPY 7.4 billion. So finally, in Q3, we generated JPY 0.1 billion profit. We are in the positive range.

So Q4 is the highest in terms of the earnings, so higher sales will be reflected here. As we mentioned from the beginning of the year, Murakami-san said that it will be JPY 10 billion to JPY 15 billion for Cosmetics, and we are likely to end at that level.

As for Chemicals, the volume is up, and that is shown in this positive number.

So there were some impact of the higher raw material cost, JPY 0.1 billion to JPY 0.2 billion in Cosmetics and Life Care, but those were limited. And the Chemicals for almost 100% reflected on the sales price. So the raw material price increase is on the 2 columns on the left-hand side.

Next page. This is analysis of the change in consolidated operating income. There was a major impact of the lower sales of H&PC, minus JPY 13 billion. Next is the impact from the change in raw material prices, minus JPY 6 billion. In Q4, we expect a similar impact, so minus JPY 6 billion again. So for the full year, impact is expected to be JPY 12 billion or so.

SG&A, plus JPY 2 billion. From the beginning of the year, we mentioned that we will spend about JPY 15 billion for DX and marketing expenses. In order to offset those, we are working on various cost reductions. Through those efforts, this number is positive.

We have already used almost JPY 15 billion for DX. And in other areas, we are reducing costs. We know that we are showing the change in product mix, and ForEx impact is JPY 3 billion, and those are included here. The product mix, for example, include the launch of the Airjet, so higher price range products and higher profitability products. Those are showing the positive result. And in the fluctuation of sales, we are seeing the lower sales of the H&PC and higher sales of the Chemicals.

Next page. So here, we are looking at the progress and results of a decisive brand management. Right now, those are the issues listed. And we have already taken some of the initiatives, and there are some initiatives that we will be taking from now on. Attack and fabric softeners and others, we have a lot of advertising going on from the competitors. So we would like to go against those competitors with different ideas. We have maintained the #1 position of attack. And Magiclean, also, we are seeing new competitors, but we are in the process of recovery with this new product.

As for Merries, we launched new product in China. We are getting good feedback. So that is something that we can expect in the future. As for Cosmetics, KATE has been very successful. Murakami-san is here with us, so maybe he can talk about this further during the Q&A.

Next, now in Q3, many people had to stay at home. So of course, our original plan was to have a double-digit growth for Cosmetics and the positive results for H&PC, but those were the results in Q3.

Now in Q4, we would like to turn them around toward achieving the operating income of JPY 177 billion. As for Chemicals, we are likely to end at this level.

Next, please. Now in Q4, H&PC will continue to be well focused and decisive. And we will be going into the year-end season with those products. And for Cosmetics, the market is recovering. So we would take measures with those products shown here.

Lastly, DX, we have been working on this from the beginning of the year. So these are the things that we are doing. And today, we have Matsuda-san and Murakami-san here with us, who can give you more details during the Q&A. That concludes my presentation. Thank you.

[Mitsuhiro Watanabe, executive]

We will now begin the Q&A session. Ms. Sato from SMBC Nikko Securities.

[佐藤 有, analyst]

This is Sato from SMBC Nikko Securities. Can you hear me?

[Mitsuhiro Watanabe, executive]

I can hear you. It's very clear.

[佐藤 有, analyst]

I understand that it is limited to one question. So I'd like to ask you one question. In the domestic household and personal care business, Kao has been working on the brand management and have decided to consolidate the number of brands from 44 to 32 brands. This was announced when you closed the first half, and I was wondering how the progress is being made. Because looking at the 3 months in third quarter for Japan's fabric, home care, I thought that sales would usually increase towards the second half of the year. But it did not change much from Q2 to Q3, and it appears to me that sales decreased year-on-year basis. So if you could explain this point, taking into account the impact of the brand consolidation?

[Mitsuhiro Watanabe, executive]

Okay. Regarding your question, I will have Matsuda-san answer.

[Tomoharu Matsuda, executive]

I am Matsuda. Thank you for your question. Your question was about the progress of our focused brand strategy for household and personal care business in Japan. If you could show Page 8, as you just mentioned, we have 44 brands in Japan, which we have narrowed down to 32. And among them, we have selected 13 brands that we believe will become leading brands in their respective categories.

In the second half or since July of this year, we have been focusing more on Magiclean and also Attack in the Health and Beauty category essential. We have been shifting our focus to these brands. In September, we launched a new product called AirJet Bath Magiclean brand. It has not contributed to our share fully in the third quarter. But from September, our market share has been on a significant recovery trend. There will be a home cleaning campaign towards the end of the year.

So we would like to continue to drive the overall Magiclean brand until the end of the year with AirJet as one of the pillars. As for laundry detergents, we will focus on Attack, then there is fabric softener. Here, we are currently concentrating on Flair Fragrance and Wide Haiter EX, but the competitors are also aggressively placing ads on TV and enhancing their product offerings in this area.

As I explained earlier, Attack has managed to defend its #1 position. But I believe that the competition will continue to be very intense. Nevertheless, we are determined to drive this leading brand. So we will continue to make continuous investments in Q4 as well. That's all I have to say.

[佐藤 有, analyst]

Thank you very much. So the 32 brands have already been decided. Is it correct to say that you competed in Q3 with that lineup?

[Tomoharu Matsuda, executive]

From those 32 brands, we went further to select 13 leading brands in each category.

[佐藤 有, analyst]

I see. So you've already selected those brands and you've gotten through July-September period. So you're now focusing on October-December period, how I see.

Excuse me. Just one point, how do you see the sales results for the 3 months in Q3? I got the impression that sales were a little weak. Perhaps this was due to the impact of the brand management renewal, which caused a slight drop in sales of some of the brands that were not given a focus. So what is your view of the sales situation?

[Tomoharu Matsuda, executive]

As regards to the Fabric and Home Care business, as I just mentioned, we were in a fierce battle with the competition. The results are not full blown yet.

As for Health and Beauty Care, it was a little different from what we had expected. It rained a lot in August and the seasonal products that we thought were promising were not as good as we had hoped.

Another thing is hand soap and hand sanitizer. Last year, there was a shortage of hand soaps and hand sanitizers in the market, where our strong supply capability was demonstrated. However, this year, competitors have sufficient supply competing for market share. Our sales dropped because the situation turned out to be slightly different than what we anticipated.

[Mitsuhiro Watanabe, executive]

Okay. Next, how about Ms. Kuwahara from JPMorgan.

[クワハラ, analyst]

Can you hear me? This is Kuwahara from JPMorgan. Since you accept one question, I would also like to know more about the status of Hygiene and Living Care. It's on Page 13 or 14, I believe. You have here a change of operating profit year-on-year basis. But what would it look like if you split into sanitary and fabric? If I may comment, fabric is faced with a challenge, but so is sanitary such as Merries and Laurier. I was wondering what is going on. Since the price of raw materials is going up, can you pass this on to the pricing of your products?

[Mitsuhiro Watanabe, executive]

Yamauchi-san, do you care to take this question?

[Kenichi Yamauchi, executive]

The Fabric and Home Care was selling well even without doing anything last year, that is kitchen, detergents, house cleaning products. But this year is without the special demand and the rebound from last year has been significant. So the negative impact of Fabric and Home Care is greater than that of sanitary and Merries. But of course, sanitary products and Merries have also been affected in terms of sales with the onset of the COVID-19. We will once again work on Laurier. Merries has been struggling in Japan, and we don't have special Merries for China. It should settle down soon.

In terms of price, it's far from raising the price. This category is into discount war. We need to work on these products. However, in Japan, we will be launching renewals and new products at which timing we can change the pricing and pass on the raw material increase.

In Europe and the U.S., we are currently preparing for a price increase. This may happen next year. The competitors have already raised their prices in these markets, and we are thinking of following suit.

[クワハラ, analyst]

I understood. But let me confirm, even if that is the case, if the price of raw materials rises, the situation in Japan is not such that you can raise the price. So will you be launching new products and absorb the increase over time? Is this correct understanding?

[Kenichi Yamauchi, executive]

Well, one way is to change the size or the volume of the product. When the product goes through a renewal, quantity can be changed. This happens sometimes. People are very price sensitive. We cannot simply raise the price. There are also competitors. So we have to keep an eye on their move as well.

Therefore, one way is to change the size or the volume, and another way is to shift to value-add products. Recently launched AirJet is one example of higher price range product and Guard's foam-type sanitizer has added value. I believe that in case of Japanese market shift to such higher price points and value-added products are the ways to pass on cost increase.

[Mitsuhiro Watanabe, executive]

Does anybody else have a question? Mr. Yamaguchi from Goldman Sachs Securities.

[Keiko Yamaguchi, analyst]

This is Yamaguchi from Goldman. Can you hear me?

[Mitsuhiro Watanabe, executive]

Yes, we can.

[Keiko Yamaguchi, analyst]

Well, the overall situation seems to be a bit difficult, but your Cosmetics Business in China is continuing to do very well. So I was wondering if you could give me a little more background. All the companies didn't grow in the July-September period due to the impact of Delta variant of COVID-19 and other factors or even if there was an increase, it was at best like 10%. But Kao has grown more than 40%, which clearly has accelerated from the first half this year. So please share with me the background.

And the fact that domestic sales have remained flat is probably better than the market or at least it's on par with the market data that you've published. But once again, it's better than those of your competitors. So if you could elaborate on this point, that will be helpful.

[Yoshihiro Murakami, executive]

I'm Murakami. Let me try to answer your question. First of all, regarding the situation in China, as you mentioned, the business is slowing down a bit in China as a whole. But fortunately, for us, should I say, our price range is more in Masstige than Prestige. And we are focusing on relatively low-to-medium price range. That is one reason why we were less affected than the overall market.

As for Hainan Island, it has also been temporarily affected. But since we have just begun our business there, the scale is limited.

On the other hand, from a brand perspective, these 2 brands, freeplus and Curél have been gaining a lot of strength. And I believe that they will continue to be popular with customers. We also have Double 11 coming up. Deliveries for Double 11 started in September. And in September and October, deliveries have progressed according to the plan. And so I think this is also a contributing factor. So far, yes, we have been able to achieve relatively strong performance in China.

As for Japan, it caused a lot of concern up until the first quarter, and we have explained several times that then as well. We have been holding back a lot of initiatives because the market was still quite severe. But now in the second half, we have been launching new products and conducting promotions on the assumption that the market will come back.

However, the market was not as good as we had expected from July to September, and we would have liked it to go up a little more. Well, the market was tough, but I think the measures we have been taking have started to show some impacts. I think that Japan was able to do relatively better in the July-September period. That's all.

[Keiko Yamaguchi, analyst]

I would like to ask for a supplementary explanation for each of them. I understand that the e-commerce ratio in China is roughly 70%. But could you tell me how much growth there were in e-commerce and offline in the third quarter? Also, I would appreciate if you could tell me how the domestic makeup and skin care business performed in the third quarter?

[Yoshihiro Murakami, executive]

Well, let's see. The online or EC and offline in China, the offline, Watson, as you know, is counted in offline now but Watsons EC is growing now. So they are no longer pure offline. In that sense, if you look at the third quarter of both channels, it's not either one or the other, but both EC and offline ended the third quarter between 130% to 140%.

And for the Japanese makeup and skin care. Last year, there was a huge drop due to the nature of the category. So in contrast to last year's results, there was really no difference. Last year, skincare sale was about 90% of the previous year's level. Foundation sales was 60% and lipstick 30% to 40%. If we compare with last year's numbers, it's safe to say that the percentage has been more or less around 100%.

[Keiko Yamaguchi, analyst]

I thought that since Kao has a higher mix of makeup than other companies, the growth in that area might be the reason why you are better than your competitors?

[Yoshihiro Murakami, executive]

The makeup market has not recovered to that extent. However, even though the market hasn't returned yet, KATE has been quite successful. So as you've just said, part of the recovery has been due to KATE.

[Keiko Yamaguchi, analyst]

Yes, I'm sorry about that. You are quite right with KATE. I see, but in any case, at a high level, both have been flat and the domestic cosmetics was flat.

[Yoshihiro Murakami, executive]

Yes. So was the market.

[Keiko Yamaguchi, analyst]

Okay, I understand now.

[Mitsuhiro Watanabe, executive]

Next, please. Yes. Ms. Sato from Mitsubishi UFJ Morgan Stanley Securities.

[Wakako Sato, analyst]

Yes. This is Sato. Can you hear me?

[Mitsuhiro Watanabe, executive]

Yes, we can hear you. Yes, I can hear you.

[Wakako Sato, analyst]

Yes. I like to ask you about the difference between household and personal care market and Kao's performance. I understand that there were various factors such as weather. But as you can see on Page 3, H&PC was 99 in the July-September period. However, as was mentioned earlier, Q3 was worse than Q2 in many areas of household and personal care.

Yes, I understood that there is competition from what I just heard, but you're continuing to lose. I don't know if there was a time in recent years when Kao continued to lose on so many fronts. I think you should reflect on your strategy and ask yourselves why as a top player, Kao is losing so much compared to the market. I'm sure there were some signs from a while back, I think you should revisit your marketing and new product developments. How are you planning to deal with this?

Also, you have not changed your full year forecast. So I would like to hear some kind of policy that would allow me to be assured that the plan will be reviewed immediately. I would like to know the real reason why Kao is being defeated in this category.

[Mitsuhiro Watanabe, executive]

Matsuda-san will answer to your question.

[Tomoharu Matsuda, executive]

This is Matsuda. Thank you for your question, Mr. Sato. I understand your point. And we are taking this issue with the market share very seriously, especially in Q3. One of the main reasons for the drop in market share is hand soap and hand sanitizer. These have greatly impacted our share. As I mentioned earlier, we won because of the supply last year. And this year, we're missing that part. The competition is ongoing. But the overall share is not so bad at about 35%. Going forward, it will be up to us to figure out how to win. Now this has the biggest influence.

One of the problems I see is shampoo and conditioner or Hair Care category. Then there is fabric softener, where competition is most intensifying among fabric. As you pointed out, we have to take these 2 areas very seriously. For a long time, for example, shampoo and rinse has been attacked by small mass brands since the launch of non-silicone shampoo. And we were determined to fight back. So we launched such small mass brands such as and and, and [indiscernible]. However, since this has not led to any results, we need to make a drastic change in our strategy as soon as possible.

Also, regarding fabric softener, in fact, our competitors have clearly narrowed down their brands, placing mass advertisements and increasing product development and product offerings. Meanwhile, we have diversified our brand strategy into 3 brands, Humming, Flair Fragrance and Wide Haiter. This was extremely inefficient. So we are revisiting our approach. And ultimately, we want to compete on products.

Manufacturing of the products, the 4Ps of marketing are often referred to, and although DX is very popular now, but Kao is going to make a comeback through manufacturing of products, product out of the 4Ps. It's true, as you pointed out earlier, in recent years, Kao has been struggling to come up with unique offerings compared to our competitors. That is what we need to work on as quickly as possible. We would like to develop a unique product that will be recognized by Ms. Sato and surprise the others. That's all I have to say.

[Wakako Sato, analyst]

So, is it correct to understand that at least you are ready to make a comeback in October to December period?

[Tomoharu Matsuda, executive]

One thing is Bath Magiclean AirJet, that I mentioned earlier, which was released in September and has proven to be more successful than expected. We will continue to drive this product by enhancing our Q4 marketing expense to overachieve our assumption. We will make a comeback with a comprehensive Magiclean brand.

[Mitsuhiro Watanabe, executive]

Next, does anybody have a question? From Daiwa Securities, Mr. Hirozumi, please.

[Katsuro Hirozumi, analyst]

This is Hirozumi from Daiwa. Can you hear me?

[Mitsuhiro Watanabe, executive]

Yes, we can hear you.

[Katsuro Hirozumi, analyst]

So let's change our perspective a little bit. Was it Another Kao for Life Care? I'd like to know if there has been any progress. For example, 3 months ago, I think you mentioned that you were going to launch a product in the area of infectious disease prevention in the ASEAN region in the near future, probably within this fiscal year. I understand that you are making investments. So can you share with me the possible developments and what we can expect around Another Kao?

[Mitsuhiro Watanabe, executive]

Okay. Matsuda-san will answer to your question.

[Tomoharu Matsuda, executive]

This is Matsuda. Thank you for your question. Yes, it is about Another Kao. I believe Hasebe-san talked about this challenge of our new collaborative approach through a new business model. As you rightly mentioned, one of them is the repellant in ASEAN region.

We are making steady progress in the preparation of the product. We are planning to launch the product in the ASEAN region within this year. Perhaps full-fledged sales activities will start next year. Other than that, as Life Care -- as Hasebe-san mentioned, Kao has been observing the lives of consumers through its cosmetics, household and personal care products, would like to use this knowledge and expertise to propose a new type of life care that does not rely on medicines or something between personal care and OTC in the age of 100-year life span.

Our business plan is making a progress in 3 to 4 fronts. So the plan is underway, but there are things that Kao alone cannot do. That is why we are now preparing to create a new business scheme that will allow us to promote this Life Care Business together with partners. This is what we have in mind and not everything can be shared with you at this point. I apologize for not being able to give you a clear answer, but this is my answer.

[Katsuro Hirozumi, analyst]

I see. I knew I wouldn't be able to get the answer, but I still asked. The midterm management plan was announced last December. And after January-March financial results, as you make a progress, do you think you'll be able to introduce more initiatives into next year?

[Tomoharu Matsuda, executive]

Yes, we are making all preparations so that we can make an announcement that will meet your expectations. So I hope you will wait until then.

[Katsuro Hirozumi, analyst]

You said that you are working with other companies. Is that why you cannot talk about it yet?

[Tomoharu Matsuda, executive]

I mean -- yes, some more partnerships. And we also have a schedule for developing new digital monitoring tool, which is one of our strengths, inclusive of [ Avis ] I hope to be able to share our initiatives that will meet your expectations in the near future.

[Katsuro Hirozumi, analyst]

So it is not possible at this stage. Can we expect a little more clarity when you announce the annual plan in February next year?

[Tomoharu Matsuda, executive]

I'm sorry, I can't make a commitment today. But I hope to be able to talk to you about it as soon as possible. That was my one question.

[Mitsuhiro Watanabe, executive]

Next, we have Saji-san from Mizuho Securities.

[Hiroshi Saji, analyst]

I'd like to ask a question about DX, which is on Page 20. So your plan is to spend about JPY 15 billion, and you mentioned that you have already used many of it. So 3 things are mentioned on this page. So JPY 15 billion, how are you spending it for which area toward the next year? What kind of results can you expect in terms of the business results? What are your expectations? So current status of DX. And also for the next year, we would expect the similar level of expenses for the DX?

[Kenichi Yamauchi, executive]

Yes, I would like to answer. This is Yamauchi. Let me talk about expenses. Of course, not all the expenses are directly related to the sales. For example, the work on the internal core system, all of those are included in the DX. So not everything would be reflected but we are spending much of it.

[Hiroshi Saji, analyst]

So in terms of contribution to the sales, what kind of efforts are we making?

[Kenichi Yamauchi, executive]

Murakami-san can talk about that.

[Yoshihiro Murakami, executive]

Thank you for your question. This is Murakami. I'm also in charge of DX. On Page 20, this is the area that I'm in charge of. This is the digital transformation of businesses. So when we look at the overall DX investment, as Yamauchi-san said, this include updating the old systems at the corporate-wide level, so improving the efficiency from the corporate perspective. So total expenses are something that Yamauchi-san talked about.

On Page 20, the major activities are shown. We are manufacturer, but these days, the term UX is very much talked about. So it's not just providing products but by using digital technologies, how can we add values. We believe that will be the key to success. So in that sense, a good example, the KATE has been successful. So in addition to just selling the lipsticks and mascaras, we started to combine the digital technology and offered KATE Makeup Lab, which made the experience of the users much more attractive.

So doing this one by one, we want to spend money not only for the monozukuri or manufacturing but also providing the UX.

And in the middle of Page 20 talks about the direct sales. So we have been behind in providing our own e-commerce in the cosmetics. So it's not about only cosmetics but linking the manufacturer with the consumers directly would become more important. So we are making that investment, not only in Japan but also in China and Western countries, so globally. So third thing is also clear. That is a matter of course. We need to merge offline and online. So we are making investments so that this can contribute to the sales. Thank you.

[Hiroshi Saji, analyst]

Just one point. DX is not something that we can see clearly from outside. So you talked about KATE, an example. So in a similar way, any particular results that we will be focusing upon in next year coming from the DX investments?

[Yoshihiro Murakami, executive]

Well, in terms of visibility, in Cosmetics, we are accelerating the business, which is directly linked to the consumer. So especially the Prestige brand, we have finally built our own e-commerce site. So we are expecting to see the good results coming next year and onwards. We have started this scheme or a system. So we are hoping to see the good results coming from next fiscal year.

[Mitsuhiro Watanabe, executive]

We have already passed the fixed time, but there are some more questions. So we'd like to continue the meeting. If you are unable to stay, please leave. So next is Kawamoto-san of UBS Securities.

[Hisae Kawamoto, analyst]

I hope you can hear me.

[Mitsuhiro Watanabe, executive]

Yes.

[Hisae Kawamoto, analyst]

So up to Q3, you mentioned that there was a minus JPY 6 billion impact from the higher raw material costs. What about the gross number?

And you also said that JPY 6 billion is expected for Q4. So that means JPY 12 billion for full year. So there is a negative impact of the raw material cost, about JPY 4 billion in comparison to your plan. So how do you plan to achieve your full year target based on that?

And also in terms of sales and operating income, how much of the difference were there in relation to your plan?

[Mitsuhiro Watanabe, executive]

Yamauchi would answer your questions.

[Kenichi Yamauchi, executive]

This is Yamauchi. So you're asking about the gross number. For the full year, it's about JPY 35 billion expected. Up to Q3, it's about JPY 22 billion. So in terms of net, JPY 6 billion. And of course, in Chemical, we have offset that by reflecting the higher material cost on the sales prices. For the full year, about JPY 35 billion. So it is a big impact.

Could you repeat your second question?

[Hisae Kawamoto, analyst]

Yes. If you -- you expected about JPY 8 billion as a net impact and you have already exceeded that level. So how do you plan to recover from it? And your net sales and your operating income in Q3, was it higher or lower than your plans?

[Kenichi Yamauchi, executive]

Well, yes, we expected JPY 8 billion, and it's going to be about JPY 12 billion. This is what I talked about earlier. So we are shifting toward the higher price range and also do improvements. And when we make improvements, we would review the price.

Now you're asking about the Q3. Of course, we did not expect those negative numbers. So they are lower. And we are hoping to achieve about the flat number from the previous year, so same level, but there were negative figures in Q3. So that means that we have to work very hard in Q4, and we are fully aware of that.

[Hisae Kawamoto, analyst]

Now talking about the raw material cost as our overall business results in Q3, how much of the sales and operating income -- why did you have, which were lower than the plans?

[Kenichi Yamauchi, executive]

In Q3, we had negative results. So if you only look at Q3, it's about JPY 7 billion down year-on-year. So we wanted to have this number down to 0. That was our hope.

[Hisae Kawamoto, analyst]

So JPY 7 billion in terms of operating income?

[Kenichi Yamauchi, executive]

Yes.

[Hisae Kawamoto, analyst]

Okay. So you are JPY 7 billion short in terms of operating income, and you want to recover that in Q4 so that you can achieve JPY 177 billion?

[Kenichi Yamauchi, executive]

Well, we did have higher targets. But yes, that is correct.

[Mitsuhiro Watanabe, executive]

Next, we have Narikiyo-san of Nomura Securities.

[成清 康介, analyst]

Can you hear me?

[Mitsuhiro Watanabe, executive]

Yes.

[成清 康介, analyst]

I am Narikiyo of Nomura Securities. My question is on Hygiene business in Asia. Maybe my calculation is wrong, but excluding Cosmetics, the H&PC in Asia in Q3 it didn't grow that much or a slight increase. And what are the reasons behind this? Earlier, you mentioned there was an absence of last year's special demand in H&PC. Was this the same in Asia? So is this a temporary thing? That's my question.

Also in relation to Asia, in comparison to the P&G performance of the sales in the past several years, we are not totally satisfied. So what are the background behind that?

[Kenichi Yamauchi, executive]

This is Yamauchi speaking. Yes, H&PC in Asia, if you look at the January to September, the cumulative number. The biggest factor was Merries. The Merries in China has been poor. So we are trying to maintain the prices even lowering the volume. And it has settled down finally. And now we launched the new product so that we can recover from it.

I think that's all I can say about Asia. Matsuda-san will add something.

[Tomoharu Matsuda, executive]

Thank you for your questions. As a whole, Merries in China in the first half, we try to avoid brand damage. We try to control the sales volume to protect the brand, as Yamauchi-san said.

In Q3, what we did not expect was the COVID-19 pandemic in ASEAN nations. There were lockdowns of the distributors. We have a large sales in Indonesia and also in Thailand, the fabric. Those were impacted greatly. Also, similar to Japan, the UV care business did not grow as much as expected in the summer. So those are the 2 factors and the reasons behind the differences in Q3.

[成清 康介, analyst]

So you were saying that the environment was not good? So without doing anything, this would recover? Is that what you expect?

[Tomoharu Matsuda, executive]

Well, about Merries, finally, we launched new baby diaper in August in China. So with this, we are trying to maximize the brand value of Merries. And together with the existing Merries, we are trying to recover our sales. So we have already started with this effort. This new diaper responds to the concerns of the Chinese consumers, that is thinness and breathability. So even after the diaper gets wet, the thinness is maintained. So it provides value.

So even the diaper is wet, the total [indiscernible] small children can walk normally. So this diaper can help the growth of children. So that is the branding that we have started for Merries. And we are getting a lot of good reaction feedback for this. So with this brand, we are currently making preparations for Double 11 this year. So that we can revitalize this brand, and we are hoping to get good results on Double 11.

[成清 康介, analyst]

I see. So for Merries, you made a good start based on your plan?

[Tomoharu Matsuda, executive]

Yes. Merries and Laurier, they are doing very well in China.

[Mitsuhiro Watanabe, executive]

Now we'd like to take 2 more questions. Next question is from Miyasako-san of Jefferies.

[Mitsuko Miyasako, analyst]

Miyasako speaking from Jefferies. This question might overlap with the question asked by Kawamoto-san. But I'm thinking that probably shift to high price range might take time and also the status of TCR and other costs down and marketing costs. There is probably an option not to use the digital investment. So including all of those factors, how do you see your target of JPY 117 billion? Excuse me, JPY 177 billion, I should have said.

[Kenichi Yamauchi, executive]

As for the expenses, yes, we would like to watch the sales numbers. And we'll be spending some. And it doesn't mean that we will spend everything because we said so. Also, the shift to the higher price range products, we have been doing this for some time. So for example, in skincare, we have many foam-type products. So that kind of technology and easy-to-use products.

So those are the products that we are shifting toward. And also, the refill products is being increased. So in this way, we are making those efforts. And it's not something that we need to start from the scratch. So we will continue with what we have been doing. And with that, the profitability would come up.

[Mitsuko Miyasako, analyst]

I see. So marketing cost and the DX investment, you will be controlling those?

[Kenichi Yamauchi, executive]

Well, as for the marketing cost expenses, we want to be well focused. So of course, that we shouldn't spend much if we cannot expect a higher sales. So in that sense, we'll be controlling that.

[Mitsuko Miyasako, analyst]

What about DX?

[Yoshihiro Hasebe, executive]

As for DX, we have been doing this for some time. So we are not going to stop this in many areas. And there are some which would be directly linked to sales. And the improvement of the efficiency is also part of the DX investment. So we would proceed as planned.

[Mitsuko Miyasako, analyst]

So based on that, if you look at the next year, the various costs go up, including the raw material costs. So how do you plan to recover from it? So how much of the cost increase can you expect for the next fiscal year?

[Kenichi Yamauchi, executive]

Well, the numbers for next year, that's something that we will be working on from now on. So we cannot really make any additional comments in addition to what you are thinking right now.

[Mitsuko Miyasako, analyst]

I see. So we should expect some toughness or difficulty?

[Kenichi Yamauchi, executive]

Well, we do not expect other expenses or the cost to keep going up.

[Mitsuhiro Watanabe, executive]

Last person is Miura-san of Citigroup.

[Nobuyoshi Miura, analyst]

This is Miura of Citigroup. Yes, I have one question. Why can't you increase the prices of the H&PC in Japan? That's all.

[Mitsuhiro Watanabe, executive]

Thank you. Matsuda-san will answer to your question.

[Tomoharu Matsuda, executive]

This is Matsuda speaking. Thank you very much for your question. Well, I was working in Asia in the past. And even in the H&PC, the prices increase sometimes. So as Yamauchi-san said, one way of dealing with the higher raw material cost is to increase the prices in Asia and in Europe and U.S. But as for Japan, especially the Fabric and Home Care, as we have said today, this is the segment which is -- where we have most intensive competition. So based on that, people are very sensitive about the prices. So it's difficult to start to increase the prices in this area.

[Nobuyoshi Miura, analyst]

Sorry, I would understand that if it was just one product. But you are one of the leaders of the H&PC business. You have many products. And in many of them, you are #1. If that is the case, you have many brands and wide-ranging businesses of H&PC. So it seems that your strategy and the reality, there might be a gap between the 2. What do you think?

[Tomoharu Matsuda, executive]

Well, in household and personal care, we are one of the leading companies. And as you pointed out, our policy for the prices probably need to be reconsidered. Maybe that time is coming. Thank you.

[Nobuyoshi Miura, analyst]

So for example, detergent, say that you have a 50%, 60% market share, that is a solid business. So for example, is there a policy to increase the prices for part of the category?

[Tomoharu Matsuda, executive]

Well, as Yamauchi-san said, Attack ZERO was launched. And with that, average price was increased. And for Bath Magiclean, we launched a new product, AirJet. And by doing so, we would like to improve the added value so that we can increase the average selling price. That is our basic policy.

[Nobuyoshi Miura, analyst]

So if that is the case, if the P&G increases the prices, would you follow?

[Tomoharu Matsuda, executive]

So far, as I mentioned, we want to launch the high price range products and increase the average price.

[Nobuyoshi Miura, analyst]

I see. Finally, now October of Japan and Asia, now with the revenge consumption, we expected that. But in Cosmetics and also H&PC, there has been a delay in Japan.

[Tomoharu Matsuda, executive]

Your question is in relation to the revenge demand. Did you say that?

[Nobuyoshi Miura, analyst]

Well, in October, state of emergency was lifted. And I think that the things are brightening up. So under those circumstances, if you look at the October in Japan, we do not see the V-shaped recovery in H&PC and Cosmetics. We did not see the quick recovery. So if you compare that with overseas, there is a big gap. So is there any special factor in Japan? Do you have anything that you can talk about? That is what I meant.

[Tomoharu Matsuda, executive]

Okay. So I would ask Murakami-san in charge of Cosmetics to talk about that.

[Yoshihiro Murakami, executive]

Yes. October, frankly speaking, we did have a high expectation after the lifting of the state of emergency. And the market is not recovering as much as our expectation. If you look at the SRI data, in June last year, after the end of the state of emergency, there was a double-digit growth. But that was not the case in October this year.

So in comparison to Western nations, Japanese people are very cautious in consumption. So not many people are going out and having big parties, for example. But in November and onwards, there has been the lifting of the time restriction for the restaurants. So we are starting to see the gradual improvement.

So if you look at the number of the customers coming to the sales counter of the department stores, it is increasing gradually. So October was disappointing, as you said. But in November and onwards, we are thinking of stimulating the recovery.

[Nobuyoshi Miura, analyst]

So what about the H&PC?

[Tomoharu Matsuda, executive]

Yes. This is Matsuda speaking. Yes, as Murakami-san said, frankly speaking, after the lifting of the state of emergency in October, we expected the reactivation of the consumption, but people are cautious. But the election is now over. So we hear that many municipalities, local governments are preparing the coupons or vouchers. And also the distributors are preparing different campaigns. So together with them, we want to stimulate the consumption. We have some campaigns prepared. So we will be trying to stimulate the consumption.

[Mitsuhiro Watanabe, executive]

Thank you very much for many questions today. We have run over at our time. But with that, we would like to end this briefing session.

Thank you very much once again for joining us despite your very busy schedule. Thank you.